<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 24, 1997)
$123,750,000
ASSET BACKED NOTES
LIFE FINANCIAL HOME LOAN OWNER TRUST 1997-2
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
SERVICER
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
------------------------
The Life Financial Home Loan Owner Trust 1997-2 (the 'Trust') will be formed
pursuant to a trust agreement to be dated as of September 4, 1997 (the 'Trust
Agreement') and entered into by Bear Stearns Asset Backed Securities, Inc., as
depositor (the 'Depositor'), Wilmington Trust Company, as owner trustee (the
'Owner Trustee'), Norwest Bank Minnesota National Association, as co-owner
trustee (in such capacity, the 'Co-Owner Trustee') and Life Investments
Holdings, Inc. (the 'Transferor'). The Trust will issue $123,750,000 aggregate
principal amount of Asset Backed Notes (the 'Notes') pursuant to an indenture to
be dated as of September 1, 1997 (the 'Indenture'), between the Trust and
Norwest Bank Minnesota, National Association, as indenture trustee (in such
capacity, the 'Indenture Trustee'). The Trust will also issue instruments
evidencing in the aggregate the entire residual interest in the Trust (each a
'Residual Interest'). Only the Notes are offered hereby.
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
NOTES, SEE THE INFORMATION HEREIN UNDER 'RISK FACTORS' BEGINNING ON PAGE S-13
AND IN THE PROSPECTUS BEGINNING ON PAGE 15.
------------------------
THE NOTES REPRESENT INTERESTS IN OR OBLIGATIONS OF THE TRUST ONLY AND DO NOT
REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, TRANSFEROR, SERVICER,
OWNER TRUSTEE, INDENTURE TRUSTEE OR ANY AFFILIATE THEREOF, EXCEPT TO THE EXTENT
PROVIDED HEREIN. NEITHER THE LOANS NOR THE NOTES ARE INSURED OR GUARANTEED BY
ANY GOVERNMENTAL AGENCY.
THE 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.
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
PRINCIPAL INTEREST PRICE TO UNDERWRITING PROCEEDS TO
BALANCE RATE PUBLIC(1) DISCOUNT DEPOSITOR(2)
<S> <C> <C> <C> <C> <C>
Class A-1 Notes............................. $ 29,390,000 6.71% 99.99519% 0.2000% 99.79519%
Class A-2 Notes............................. $ 32,110,000 6.74% 99.99242% 0.3000% 99.69242%
Class A-3 Notes............................. $ 11,710,000 6.96% 99.99162% 0.3500% 99.64162%
Class A-4 Notes............................. $ 16,510,000 7.45% 99.96272% 0.4500% 99.51272%
Class M-1 Notes............................. $ 13,610,000 7.58% 99.95129% 0.5500% 99.40129%
Class M-2 Notes............................. $ 11,140,000 7.73% 99.96949% 0.6500% 99.31949%
Class B Notes............................... $ 9,280,000 7.98% 99.99991% 0.8250% 99.17491%
Total....................................... $123,750,000.00 $123,728,979.58 $494,215.00 $123,234,764.58
</TABLE>
(1) Plus accrued interest, if any, at the applicable rate from September 1,
1997.
(2) Before deducting expenses, estimated to be $300,000.
The Notes are offered by the Underwriter, subject to prior sale, when, as
and if delivered to and accepted by the Underwriter and subject to approval of
certain legal matters by counsel. It is expected that delivery of the Notes will
be made in book-entry form only through the facilities of The Depository Trust
Company (the 'Depository') on or about September 4, 1997.
BEAR, STEARNS & CO. INC.
THE DATE OF THE PROSPECTUS SUPPLEMENT IS AUGUST 25, 1997.
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<PAGE>
The yield to maturity of any Notes may vary from the anticipated yields
to the extent such Notes are purchased at a discount or premium and to the
extent the rate and timing of payments thereof are sensitive to the rate and
timing of principal payments (including prepayments) of the Loans. Noteholders
should consider, in the case of any Notes purchased at a discount, the risk that
a lower than anticipated rate of principal payments could result in an actual
yield that is lower than the anticipated yield and, in the case of any Notes
purchased at a premium, the risk that a faster than anticipated rate of
principal payments could result in an actual yield that is lower than the
anticipated yield.
The Trust will primarily consist of a pool (the "Pool") of home loans
(the "Loans") secured by either mortgages, deeds of trust or other similar
security instruments (the "Mortgages") as described herein under "The Loans."
Loans expected to have an aggregate unpaid principal balance as of the close of
business on August 31, 1997 (the "Initial Cut-Off Date") of approximately
$95,000,000 (the "Initial Loans") will be designated for inclusion in the Pool.
On or prior to November 30, 1997, the Trust may purchase additional loans (the
"Subsequent Loans") having an aggregate unpaid principal balance of up to
$30,000,000 (as adjusted pursuant to the immediately following sentence, the
"Original Pre-Funded Amount") with amounts on deposit in an account (the
"Pre-Funding Account") established for such purpose on the Closing Date. To the
extent that the aggregate unpaid principal balance (as of the Initial Cut-Off
Date) of the Initial Loans actually delivered on the Closing Date is more or
less than the amount set forth in the second preceding sentence, the Original
Pre-Funded Amount will be decreased or increased by a corresponding amount
provided that the amount of any such adjustment shall not exceed $6,250,000.
Distributions on the Notes will be made to the holders of the Notes (the
"Noteholders") on the 25th day of each month or, if such day is not a Business
Day (as defined herein), the next succeeding Business Day (each, a "Distribution
Date"), beginning in October 1997. The Notes are secured by the assets of the
Trust pursuant to the Indenture. On each Distribution Date, the Noteholders will
be entitled to receive, from and to the extent that funds are available therefor
in the Note Distribution Account, distributions with respect to interest and
principal calculated as described herein under "Description of the
Notes--Distributions on the Notes." Distributions of interest on the Class B
Notes will be subordinated in priority to distributions of interest on the Class
M-1 and Class M-2 Notes (together, the "Mezzanine Notes") which, in turn, will
be subordinated in priority to distributions of interest on the Class A-1, Class
A-2, Class A-3 and Class A-4 Notes (the "Senior Notes") as described herein.
Distributions of principal on the Class B Notes will be subordinated in priority
to distributions of principal on the Mezzanine Notes which, in turn, will be
subordinated in priority to distributions of principal of the Senior Notes as
described herein.
Bear, Stearns & Co. Inc. (the "Underwriter") intends to make a secondary
market in the Notes but has no obligation to do so. There is currently no
secondary market for the Notes and there can be no assurance that such a market
will develop or, if it does develop, that it will continue.
The Notes are offered by the Underwriter, subject to prior sale, when, as
and if delivered to and accepted by the Underwriter and subject to approval of
certain legal matters by counsel. It is expected that delivery of the Notes will
be made in book-entry form only through the facilities of The Depository Trust
Company (the "Depository") on or about September 4, 1997.
Certain persons participating in this offering may engage in transactions
that stabilize, maintain, or otherwise affect the price of the Notes. Such
transactions may include stabilizing and the purchase of Notes to cover
syndicate short positions. For a description of these activities, see "Method of
Distribution" herein.
This Prospectus Supplement does not contain complete information about
the offering of the Notes. Additional information is contained in the Prospectus
dated June 24, 1997 (the "Prospectus") which accompanies this Prospectus
Supplement and purchasers are urged to read both this Prospectus Supplement and
the Prospectus in full. Sales of the Notes may not be consummated unless the
purchaser has received both this Prospectus Supplement and the Prospectus.
i
<PAGE>
Upon written request, Life Financial Corp. will make available its most
recent audited financial statements. Requests should be directed to Life
Financial Corp., 10540 Magnolia Avenue, Riverside, California 92505, Attention:
Bruce Mills, Chief Financial Officer.
Until ninety days after the date of this Prospectus Supplement, all
dealers effecting transactions in the Notes, whether or not participating in
this distribution, may be required to deliver a Prospectus Supplement and the
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus Supplement and the Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
To the extent statements contained herein do not relate to historical or
current information, this Prospectus Supplement may be deemed to consist of
forward looking statements that involve risks and uncertainties that may
adversely affect the distributions to be made on, or the yield of, the Notes,
which risks and uncertainties are discussed under "Risk Factors" and "Prepayment
and Yield Considerations." As a consequence, no assurance can be given as to the
actual distributions on, or the yield of, any Class of Notes.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are incorporated herein by reference all documents filed by the
Depositor with the Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934, as amended, on or subsequent to the date of
this Prospectus Supplement and prior to the termination of the offering of the
Notes. The Depositor will provide without charge to each person to whom this
Prospectus Supplement and Prospectus are delivered, on request of such person, a
copy of any or all of the documents incorporated herein by reference other than
the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests should be made in writing
to Jonathan Lieberman, Vice President of Bear Stearns Asset Backed Securities,
Inc., at 245 Park Avenue, 4th Floor, New York, New York 10167.
ii
<PAGE>
SUMMARY
The following summary of certain pertinent information is qualified in
its entirety by reference to the detailed information appearing elsewhere in
this Prospectus Supplement and in the accompanying Prospectus. Certain
capitalized terms used herein are defined elsewhere in the Prospectus Supplement
or in the Prospectus.
<TABLE>
<S> <C>
Trust....................................... Life Financial Home Loan Owner Trust 1997-2 (the "Trust" or the
"Issuer"), a Delaware business trust, will be established
pursuant to a trust agreement to be dated as of September 4,
1997 (the "Trust Agreement"), among the Depositor, the Owner
Trustee, the Co-Owner Trustee and the Transferor.
Depositor................................... Bear Stearns Asset Backed Securities, Inc. (the "Depositor"), a
Delaware corporation. The Depositor is a wholly owned, special
purpose subsidiary of The Bear Stearns Companies Inc. ("The Bear
Stearns Companies Inc.") and an affiliate of the underwriter.
See "The Depositor" in the Prospectus and "Method of
Distribution" herein. None of The Bear Stearns Companies Inc.,
the Depositor, the Servicer, the Indenture Trustee, the
Transferor or any of their respective affiliates has guaranteed
or is otherwise obligated with respect to the Notes.
Servicer.................................... Life Savings Bank, Federal Savings Bank, ("Life" or as servicer,
the "Servicer"), in its capacity as servicer of the Loans.
Transferor.................................. Life Investment Holdings, Inc. (the "Transferor"), a Delaware
corporation, in its capacity as transferor of the Loans to the
Depositor.
Company..................................... Life Financial Corp. (the "Company"), a publicly traded Delaware
corporation organized by Life as an unitary thrift holding
company. The Company owns all of the capital stock of Life.
Owner Trustee and Co-Owner Trustee.......... Wilmington Trust Company, a Delaware banking corporation, as
owner trustee under the Trust Agreement (the "Owner Trustee")
and Norwest Bank Minnesota, National Association, as co-owner
trustee under the Trust Agreement (in such capacity, the
"Co-Owner Trustee").
Indenture Trustee........................... Norwest Bank Minnesota, National Association, a national banking
association, as the indenture trustee (in such capacity, the
"Indenture Trustee") under an indenture to be dated as of
September 1, 1997 (the "Indenture") between the Trust and the
Indenture Trustee.
Custodian................................... Norwest Bank Minnesota, National Association, as the custodian
(the "Custodian") under the Custodial Agreement to be dated as
of
</TABLE>
S-1
<PAGE>
<TABLE>
<S> <C>
September 1, 1997 by and among the Trust, the Depositor, the
Transferor, the Servicer, the Indenture Trustee and the
Custodian.
Closing Date................................ On or about September 4, 1997.
Cut-Off Date................................ With respect to the Initial Loans, the close of business on
August 31, 1997 (the "Initial Cut-Off Date"). With respect to
the Subsequent Loans, the close of business on the date
specified as such in the related Subsequent Transfer Agreement
(as defined herein).
Distribution Date........................... The 25th day of each month or, if such day is not a Business
Day, the next succeeding Business Day, commencing in October
1997 (each, a "Distribution Date").
Due Period.................................. With respect to a Distribution Date the calendar month
immediately preceding such Distribution Date (each, a "Due
Period").
Determination Date.......................... The fourteenth calendar day of each month or, if such day is not
a Business Day, the immediately preceding Business Day (each, a
"Determination Date").
Record Date................................. With respect to each Distribution Date (other than the first
Distribution Date), the close of business on the last Business
Day of the month immediately preceding the month in which each
Distribution Date occurs and, with respect to the first
Distribution Date, the Cut-off Date (each, a "Record Date").
The Notes................................... The Trust will issue the Classes of Notes pursuant to the
Indenture in the respective aggregate initial principal amounts
specified on the cover hereof (each such aggregate principal
amount being the "Original Class Principal Balance" for the
related Class). The Notes will be secured by the assets of the
Trust pursuant to the Indenture and will be senior in right of
payment to the Residual Interests. In addition, as described
herein, the Class A-1, Class A-2, Class A-3 and Class A-4 Notes
(the "Senior Notes") will also be senior in the right to receive
certain payments relative to the Class M-1 and Class M-2 Notes
(together, the "Mezzanine Notes"), which will be senior in the
right to receive certain payments relative to the Class B Notes.
Payments in respect of interest on the Notes will be made prior
to payments of principal of the Notes. Interest will accrue on
each Class of Notes at the
</TABLE>
S-2
<PAGE>
<TABLE>
<S> <C>
following applicable per annum rate (as to each such Class, the
"Note Interest Rate"):
Class A-1 Notes 6.71%
Class A-2 Notes 6.74%
Class A-3 Notes 6.96%
Class A-4 Notes 7.45%
Class M-1 Notes 7.58%
Class M-2 Notes 7.73%
Class B Notes 7.98%
Interest on the Notes will accrue on the basis of a 360-day year
consisting of twelve 30-day months. See "Description of the
Notes--Distributions on the Notes" herein.
Priority of Distributions
Regular Distribution Amount................. The Regular Distribution Amount (as defined herein) will be
distributed on each Distribution Date in the following order of
priority: (i) to pay accrued and unpaid interest on the Senior
Notes, pro rata, based on the amount of interest distributable
in respect of each such Class calculated at the related Note
Interest Rate; (ii) to pay accrued and unpaid interest, first,
on the Class M-1 Notes and, second, on the Class M-2 Notes;
(iii) to pay accrued and unpaid interest on the Class B Notes;
(iv) to pay as principal of the Class A-1, Class A-2, Class A-3
and Class A-4 Notes, in that order, until the respective Class
Principal Balances thereof are reduced to zero, the amount
necessary to reduce the aggregate Class Principal Balance of the
Senior Notes to the Senior Optimal Principal Balance (as defined
herein); (v) to pay as principal of the Class M-1 and Class M-2
Notes, in that order, the amount necessary to reduce the Class
Principal Balances thereof to the Class M-1 and Class M-2
Optimal Principal Balances, respectively; (vi) to pay as
principal of the Class B Notes, the amount necessary to reduce
the Class Principal Balance thereof to zero; (vii) to pay to the
Class M-1, Class M-2 and Class B Notes, in that order, their
respective Loss Reimbursement Deficiencies (as defined herein),
if any; and (viii) to pay any remaining amount to the holders of
the Residual Interests.
Excess Spread............................... The Excess Spread (as defined herein) will be distributed on
each Distribution Date in the following order of priority (after
giving effect to all distributions specified above under
"--Regular Distribution Amount"): (i) prior to the termination
of the Spread Deferral Period (as defined herein), to be
deposited in the Certificate Distribution Account for
distribution to the holders of the Residual Interests; (ii) upon
the termination of the Spread Deferral Period, (A) in an amount
equal to the Overcollateralization Deficiency Amount (as defined
herein), if
</TABLE>
S-3
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<TABLE>
<S> <C>
any, as follows: (1) to pay as principal of the Class A-1, Class
A-2, Class A-3 and Class A-4 Notes, in that order, until the
respective Class Principal Balances thereof are reduced to zero,
the amount necessary to reduce the aggregate Class Principal
Balance of the Senior Notes to the Senior Optimal Principal
Balance; (2) to pay as principal of the Class M-1 and Class M-2
Notes, in that order, the amount necessary to reduce the Class
Principal Balances thereof to the Class M-1 and Class M-2
Optimal Principal Balances, respectively; and (3) to pay as
principal of the Class B Notes, the amount necessary to reduce
the Class Principal Balance thereof to zero; (B) to pay to the
Class M-1, Class M-2 and Class B Notes, in that order, their
respective Loss Reimbursement Deficiencies, if any; and (C) to
pay any remaining amount to the holders of the Residual
Interests.
Final Maturity Dates........................ The Class Principal Balance of each Class of Notes, to the
extent not previously paid, will be payable in full on the Final
Maturity Dates set forth below (each a "Final Maturity Date"),
although it is anticipated that the actual final Distribution
Date for each Class of Notes will occur significantly earlier
than its respective Final Maturity Date.
Final
Maturity Date
-------------
Class A-1 Notes April 25, 2008
Class A-2 Notes June 25, 2012
Class A-3 Notes June 25, 2015
Class A-4 Notes September 25, 2023
Class M-1 Notes September 25, 2023
Class M-2 Notes September 25, 2023
Class B Notes September 25, 2023
Form and Registration of the Notes.......... The Notes will be available in book-entry form. Persons
acquiring beneficial ownership interests in the Notes ("Note
Owners") will hold such Notes through the book-entry facilities
of The Depository Trust Company ("DTC"). Transfers within DTC
will be in accordance with the usual rules and operating
procedures of DTC. So long as each Class of Notes is in
book-entry form, each such Class will be evidenced by one or
more certificates registered in the name of the nominee of DTC.
The interests of the Note Owners will be represented by
book-entries on the records of DTC and participating members
thereof. No Note Owner will be entitled to receive a definitive
certificate representing such person's interest, except in the
event that Definitive Securities are issued under the limited
circumstances described herein. All references in this
Prospectus Supplement to any Class of Notes reflect the rights
of the Note Owners of such Class only as such rights may be
exercised through DTC and its participating members so long as
such Class of Notes is held by DTC. See "The Agreements
--
</TABLE>
S-4
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<TABLE>
<S> <C>
Book-Entry Securities" in the Prospectus and "Description of the
Notes--Book-Entry Registration" herein. The Note Owners'
interests in each Class of Notes will be held only in minimum
denominations of $100,000 and integral multiples of $1,000 in
excess thereof.
Assets of the Trust......................... On the Closing Date, the Trust will purchase from the Depositor
a pool of home loans (the "Initial Loans") expected to have an
aggregate unpaid principal balance of approximately $95,000,000
as of the Initial Cut-Off Date (the actual aggregate unpaid
principal balance (as of the Initial Cut-off Date) of the
Initial Loans, the "Original Pool Principal Balance") pursuant
to a Sale and Servicing Agreement to be dated as of September 1,
1997 (the "Sale and Servicing Agreement") among the Trust, the
Depositor, the Transferor, the Servicer, the Indenture Trustee
and the Co-Owner Trustee. On or prior to November 30, 1997, the
Trust may purchase additional loans (the "Subsequent Loans," and
together with the Initial Loans, the "Loans") having an
aggregate unpaid principal balance of up to approximately
$30,000,000 (as adjusted pursuant to the immediately following
sentence, the "Original Pre-Funded Amount"). To the extent that
the Original Pool Principal Balance is more or less than the
amount set forth in the second preceding sentence, the Original
Pre-Funded Amount will be decreased or increased by a
corresponding amount provided that the amount of any such
adjustment shall not exceed $6,250,000. The Loans will be
secured by mortgages, deeds of trust or other similar security
instruments (the "Mortgages").
The Initial Loans are expected to consist of approximately 2,935
loans, having an Original Pool Principal Balance of
approximately $95,000,000. See "The Loans" herein. The
statistical information presented in this Prospectus Supplement
regarding the Loans is based only on the Initial Loans
identified as of the date of this Prospectus Supplement, and
does not take into account any additional Initial Mortgage Loans
identified after the date of this Prospectus Supplement or any
Subsequent Loans that may be sold to the Trust during the
Pre-Funding Period through application of amounts in the
Pre-Funding Account. In addition, prior to the Closing Date,
Life may remove any of the home loans intended to be sold to the
Trust, substitute comparable loans therefor, or add comparable
loans thereto; however, the aggregate principal balance of such
loans so replaced, added or removed may not exceed 10% of the
Original Pool Principal Balance. If, prior to the Closing Date,
loans are removed (or added) as described herein, an amount
equal to the aggregate principal balances of such loans will be
added to (or deducted from) the Original Pre-Funded Amount on
the Closing Date. As a result of the foregoing, the statistical
information presented herein regarding the Loans expected to be
sold to the Trust as of the date of this Prospectus Supplement
</TABLE>
S-5
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<TABLE>
<S> <C>
(1) does not take into account any (a) additional Initial
Mortgage Loans not identified as of the date of this Prospectus
Supplement and (b) Subsequent Loans that may be sold to the
Trust during the Pre-Funding Period through the application of
amounts in the Pre-Funding Account and (2) may vary in certain
respects from comparable information based on the actual
composition of Loans at the Closing Date or any Subsequent
Transfer Date. See "Risk Factors--Acquisition of Subsequent
Loans" and "The Loans" herein.
The assets of the Trust will consist primarily of the Loans. The
assets of the Trust will also include (i) payments of interest
and principal received in respect of the Loans after the related
Cut-Off Date; (ii) amounts on deposit in the Collection Account,
Note Distribution Account, Pre-Funding Account, Capitalized
Interest Account and Certificate Distribution Account; and (iii)
certain other ancillary or incidental funds, rights and
properties related to the foregoing. See "The Trust--General"
herein. The Trust will include the unpaid principal balance of
each Loan as of its applicable Cut-Off Date (the "Cut-Off Date
Principal Balance"). With respect to any date, the "Pool
Principal Balance" will be equal to the aggregate of the
Principal Balances of all Loans as of the last day of the
immediately preceding Due Period (as defined herein). The
Principal Balance of any Loan will be calculated as described
herein under "The Trust--General."
The Trust will also issue instruments evidencing in the
aggregate the entire residual interest in the assets of the
Trust (each a "Residual Interest"), which is not being offered
hereby. The Residual Interests are subordinate in right of
payment to the Notes.
The Loans................................... All of the Loans will be home loans that are not insured or
guaranteed by a governmental agency the related proceeds of
which were used to finance (i) property improvements, (ii) the
acquisition of personal property such as home appliances or
furnishings, (iii) debt consolidation, (iv) the partial
refinancing of one- to two-family residential properties (which
may include cash-out to the borrower), (v) a combination of
property improvements, debt consolidation and other consumer
purposes or (vi) to purchase the related mortgaged property.
Substantially all of the Mortgages for the Loans will be junior
(i.e., second) in priority to a senior lien on the related
mortgaged properties (each a "Mortgaged Property"), which will
consist primarily of owner-occupied single-family residences.
Substantially all of the 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 exceed
100%) at the time of origination. See "Risk Factors--Adequacy of
the Mortgaged Properties as Security for the
</TABLE>
S-6
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<TABLE>
<S> <C>
Loans" and "The Loans" herein and "The Trust Funds--The Loans"
in the Prospectus.
"Combined Loan-to-Value Ratio" means, with respect to any Loan,
the fraction, expressed as a percentage, the numerator of which
is the principal balance of such Loan at origination plus, in
the case of a junior lien Loan, the aggregate outstanding
principal balance of the related senior liens on the date of
origination of such Loan, and the denominator of which is the
appraised value of the related Mortgaged Property at the time of
origination of such Loan (determined as described herein under
"Life Savings Bank, Federal Savings Bank--Underwriting
Guidelines").
The Initial Loans are expected to consist of approximately 2,935
loans having an Original Pool Principal Balance expected to be
approximately $95,000,000. More or fewer Initial Loans having an
Original Pool Principal Balance of greater or less than such
amount may actually constitute the Initial Loans provided that
the amount of any such variance in the Original Pool Principal
Balance shall not exceed $6,250,000. See "The Loans" herein.
Life and the Transferor will be obligated either to repurchase
any Loan as to which (i) a representation or warranty has been
breached or (ii) a document deficiency exists, which breach or
deficiency remains uncured for a period of 60 days and has a
materially adverse effect on the interests of the Noteholders in
such Loan (each, a "Defective Loan") or to remove such Defective
Loan and substitute a Qualified Substitute Loan. In addition,
Life may at its option purchase or remove from the Trust and, if
not purchased, substitute for such Loan a qualified Substitute
Loan, any Loan that is 90 days or more delinquent and which Life
determines in good faith would otherwise become subject to
foreclosure proceedings so long as the aggregate of such
purchases does not exceed 10% of the Maximum Collateral Amount.
As used herein, a "Qualified Substitute Loan" will have
characteristics that are substantially similar to the
characteristics of the Loan which it replaces. The repurchase of
any Loan (rather than the replacement thereof through
substitution) will result in accelerated payments of principal
distributions on the Notes. See "Life Savings Bank, Federal
Savings Bank--Repurchase or Substitution of Loans" herein.
With respect to any date, the "Maximum Collateral Amount" shall
equal the sum of the (i) the Original Pool Principal Balance and
(ii) the aggregate Cut-Off Date Principal Balances of all
Subsequent Loans transferred to the Trust on or prior to such
date.
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Credit Enhancement ......................... Credit enhancement with respect to the Notes will be provided by
(i) the subordination of distributions in respect of the
Residual Interests (as well as the subordination of certain
Classes of Notes to other Classes of Notes, as described
herein), and (ii) the Overcollateralization Amount which results
from (a) the excess of the sum of the Original Pool Principal
Balance and the Original Pre-Funding Amount over the aggregate
of the Class Principal Balances of all Classes of Notes and (b)
following the Spread Deferral Period, the limited acceleration
of the principal amortization of the Notes relative to the
amortization of the Loans by the application of Excess Spread,
as described herein.
Subordination............................. The rights of the holders of the Class M-1 Notes to receive
distributions of interest on each Distribution Date will be
subordinated to such rights of the holders of the Senior Notes,
the rights of the holders of the Class M-2 Notes to receive
distributions of interest on each Distribution Date will be
subordinated to such rights of the holders of the Class M-1
Notes and the Senior Notes, and the rights of the holders of the
Class B Notes to receive distributions of interest on each
Distribution Date will be subordinated to such rights of the
holders of all other Classes of Notes. In addition, the rights
of the holders of the Class M-1 Notes to receive distributions
of principal on each Distribution Date generally will be
subordinated to such rights of the holders of the Senior Notes,
and the rights of the holders of the Class M-2 Notes to receive
distributions of principal on each Distribution Date generally
will be subordinated to such rights of the holders of the Senior
Notes and the Class M-1 Notes. The rights of the holders of the
Class B Notes to receive distributions of principal on each
Distribution Date generally will be subordinated to such rights
of the holders of all other Classes of Notes. In addition, the
rights of the holders of the Residual Interests to receive any
distributions from amounts available on each Distribution Date
will be subordinated to such rights of the holders of all
Classes of Notes. The subordination described above is intended
to enhance the likelihood of regular receipt by the holders of
the Notes of the full amount of interest and principal
distributions due to such holders and to afford such holders
protection against losses on the Loans. See "Description of
Credit Enhancement--Subordination and Allocation of Losses"
herein.
Overcollateralization..................... As of any date of determination, the "Overcollateralization
Amount" will equal the excess of (A) the sum of (i) the Pool
Principal Balance as of the end of the immediately preceding Due
Period and (ii) the Pre-Funded Amount as of the end of the
immediately preceding Due Period over (B) the aggregate of the
Class Principal Balances of the Notes. On the Closing Date, the
Overcollateralization Amount will be $1,250,000, which is equal
to 1% of the sum of the Original Pool Principal Balance and the
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Original Pre-Funded Amount. As a result of the application of
Excess Spread in reduction of the Class Principal Balances of
the Notes following the end of the Spread Deferral Period, the
Overcollateralization Amount is expected to increase over time
until such amount is equal to the Overcollateralization Target
Amount.
The "Spread Deferral Period" will begin on the Closing Date and
end as soon as Excess Spread in an amount equal to $1,250,000
has been deposited in the Certificate Distribution Account for
distribution to the holders of the Residual Interests. The
"Overcollateralization Target Amount" will equal (A) with
respect to any Distribution Date occurring prior to the Stepdown
Date (as defined herein), the greater of (x) 7% of the Maximum
Collateral Amount and (y) the Net Delinquency Calculation Amount
(as defined herein), and (B) with respect to any other
Distribution Date, the greater of (x) 14% of the Pool Principal
Balance as of the end of the preceding Due Period and (y) the
Net Delinquency Calculation Amount; provided, however, that the
Overcollateralization Target Amount will in no event be less
than .50% of the Maximum Collateral Amount.
While the distribution of Excess Spread following the Spread
Deferral Period to holders of the Notes in reduction of their
respective Class Principal Balances has been designed to produce
and maintain a given level of overcollateralization with respect
to the Notes, there can be no assurance that Excess Spread will
be generated in sufficient amounts to ensure that such
overcollateralization level will be achieved or maintained at
all times. See "Description of Credit Enhancement--Subordination
and Allocation of Losses" and "Risk Factors--Adequacy of Credit
Enhancement" herein.
Application of Allocable Loss
Amounts................................... In the event that (a) the aggregate of the Class Principal
Balances of all Classes of Notes on any Distribution Date (after
giving effect to all distributions on such date) exceeds (b) the
sum of the Pool Principal Balance and the Pre-Funded Amount,
each as of the end of the immediately preceding Due Period (such
excess, an "Allocable Loss Amount"), such Allocable Loss Amount
will be applied, sequentially, in reduction of the Class
Principal Balances of the Class B, Class M-2 and Class M-1
Notes, in that order, until the respective Class Principal
Balances thereof have been reduced to zero. Allocable Loss
Amounts will not be applied to the reduction of the Class
Principal Balance of any Class of Senior Notes. Allocable Loss
Amounts applied to any applicable Class of Notes will entitle
such Class to reimbursement (such entitlement, a "Loss
Reimbursement Deficiency") under the circumstances and
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to the extent provided herein. See "Description of the
Notes--Application of Allocable Loss Amounts" herein.
Fees and Expenses of the Trust.............. As compensation for its services pursuant to the Sale and
Servicing Agreement, the Servicer will be entitled to the
Servicing Fee and the additional compensation described under
"Description of Transfer and Servicing Agreements--Servicing"
(together, the "Servicing Compensation"). As compensation for
their services pursuant to the applicable Transfer and Servicing
Agreements, the Indenture Trustee will be entitled to its
accrued and unpaid fee (the "Indenture Trustee Fee") and the
Owner Trustee will be entitled to its accrued and unpaid fee
(the "Owner Trustee Fee"). The Servicing Compensation, the
Indenture Trustee Fee and the Owner Trustee Fee are collectively
referred to as the "Trust Fees and Expenses."
Pre-Funding Account......................... On the Closing Date, the Original Pre-Funded Amount will be
deposited in the Pre-Funding Account, which account will be in
the name of the Indenture Trustee, will form part of the Trust
and will be used to acquire Subsequent Loans. The Original
Pre-Funded Amount is expected to equal $30,000,000 on the
Closing Date but such account may be increased or decreased to
by an amount equal to the amount by which the Original Pool
Principal Balance falls short of or exceeds $95,000,000;
provided that the amount of any such increase or decrease shall
not exceed $6,250,000. During the Pre-Funding Period (as defined
below), the amount on deposit in the Pre-Funding Account (net of
investment earnings thereon) (the "Pre-Funded Amount") will be
reduced by the amount thereof used to purchase Subsequent Loans
in accordance with the Sale and Servicing Agreement. The
"Pre-Funding Period" is the period commencing on the Closing
Date and ending generally on the earlier to occur of (i) the
date on which the amount on deposit in the Pre-Funding Account
(net of any investment earnings thereon) is less than $50,000
and (ii) November 30, 1997. On the Distribution Date following
the Due Period in which the termination of the Pre-Funding
Period occurs, if the Pre-Funded Amount at the end of the
Pre-Funding Period is less than $50,000, any such Pre-Funded
Amount will be distributed to holders of the Classes of Notes
then entitled to receive principal on such Distribution Date in
reduction of the related Class Principal Balances, thus
resulting in a partial redemption of the related Notes on such
date. On the Distribution Date following the Due Period in which
the termination of the Pre-Funding Period occurs, if the
Pre-Funded Amount at the end of the Pre-Funding Period is
greater than or equal to $50,000 (such event, a "Pre-Funding Pro
Rata Distribution Trigger"), such Pre-Funded Amount will be
distributed to the holders of all Classes of Notes and the
Residual Interests (which initially are represented by the
Overcollateralization Amount on the Closing Date), pro rata,
based on the
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Original Class Principal Balances thereof and the Residual
Interests in relation to the sum of the Original Pool Principal
Balance and the Original Pre-Funded Amount.
Capitalized Interest Account................ On the Closing Date, a portion of the sales proceeds of the
Notes will be deposited in an account (the "Capitalized Interest
Account") for application by the Indenture Trustee on the
Distribution Dates in October 1997, November 1997 and December
1997 to cover shortfalls in interest on the Notes that may arise
due to the utilization of the Pre-Funding Account as described
herein. Any amounts remaining in the Capitalized Interest
Account at the end of the Pre-Funding Period will be paid to
Life.
Optional Termination........................ The holders of Residual Interests exceeding in the aggregate a
50% percentage interest (the "Majority Residual
Interestholders") may, at their option, effect an early
termination of the Trust on or after any Distribution Date on
which the Pool Principal Balance declines to 10% or less of the
Maximum Collateral Amount, by purchasing all of the Loans at a
price equal to or greater than the Termination Price (as defined
herein). The proceeds from any such sale will be distributed in
the amounts and subject to the priorities described herein under
"Description of the Notes--Distributions on the Notes." See
"Description of the Notes--Optional Termination of the Trust"
herein.
Tax Status.................................. In the opinion of Tax Counsel (as defined herein) 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 for Federal income tax purposes.
Alternative characterizations of the Trust are possible, but
would not result in materially adverse tax consequences to
Noteholders. See "Certain Federal Income Tax Consequences"
herein and "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.
ERISA....................................... Subject to the considerations discussed under "ERISA
Considerations" herein and in the Prospectus, plans that are
subject to the requirements of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and the Internal
Revenue Code of 1986, as amended (the "Code"), may purchase the
Notes. Any Plan fiduciary considering whether to purchase the
Notes on behalf of a Plan must determine that the purchase of a
Note is consistent with its fiduciary duties ERISA and does not
result in a nonexempt prohibited transaction as defined in
Section 406 of ERISA or Section 4975 of the Code.
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See "ERISA Considerations" herein and in the Prospectus.
Servicing of the Loans...................... The Servicer will perform the loan servicing functions with
respect to the Loans pursuant to the Sale and Servicing
Agreement and will be entitled to receive a fee (the "Servicing
Fee") and other servicing compensation (collectively, the
"Servicing Compensation"), payable monthly, as described herein
(See "Description of the Transfer and Servicing
Agreements--Servicing" herein). The Servicer may subcontract its
servicing obligations and duties with respect to certain Loans
to certain qualified servicers pursuant to one or more
subservicing agreements (each such servicer, in this capacity, a
"Subservicer"). However, the Servicer will not be relieved of
its servicing obligations and duties with respect to any
subserviced Loans. In addition, the Servicer will be responsible
for paying the fees of any such Subservicer.
Legal Investment............................ The Notes will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"), because some of the Mortgages securing the Loans
are not first mortgages. Accordingly, many institutions with
legal authority to invest in comparably rated securities based
solely on first mortgages may not be legally authorized to
invest in the Notes. See "Legal Investment Matters" herein and
"Legal Investment" in the Prospectus.
Ratings of the Notes........................ It is a condition to the issuance of the Notes that each of the
Senior Notes be rated "AAA" by Fitch Investors Service, L.P.
("Fitch") and "Aaa" by Moody's Investor Service ("Moody's" and
together with Fitch, the "Rating Agencies"), and that the Class
M-1 Notes be rated "AA" by Fitch and "A2" by Moody's, the Class
M-2 Notes be rated "A" by Fitch and "A2" by Moody's and the
Class B Notes be rated "BBB" by Fitch and "Baa3" by Moody's. A
security rating does not address the frequency of principal
prepayments or the corresponding effect on yield to holders of
the Notes. The security rating does not address the ability of
the Trust to acquire Subsequent Loans, any potential redemption
with respect thereto or the effect on yield resulting therefrom.
None of the Depositor, Transferor, Servicer, Indenture Trustee,
Owner Trustee, Co-Owner Trustee or any other person is obligated
to maintain the rating on any Class of Notes.
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RISK FACTORS
Prospective investors in the Notes should consider the following risk
factors (as well as the factors set forth under "Risk Factors" in the
Prospectus) in connection with the purchase of the Notes. These factors are
intended to identify the significant sources of risk affecting an investment in
the Notes. Unless the context indicates otherwise, any numerical or statistical
information presented in this Prospectus Supplement is based upon the
characteristics of the Initial Loans identified as of August 11, 1997 (such
date, the "Statistic Calculation Date").
Difference Between Pool as of the Statistic Calculation Date and the Initial
Cut-Off Date
The statistical information presented in this Prospectus Supplement
concerning the Initial Loans is based on the characteristics of a portion of
such Initial Loans as of Statistic Calculation Date. Such portion aggregated
$70,526,172.73 as of the Statistic Calculation Date. Life expects that the
actual aggregate principal balance of the Initial Loans as of the Initial
Cut-Off Date will be approximately $95,000,000. The additional Initial Loans
will represent Loans originated by or on behalf of Life or purchased and
re-underwritten by Life in accordance with Life's program on or prior to the
Initial Cut-Off Date. Moreover, certain Initial Loans included as of the
Statistic Calculation Date may prepay in full, or may be determined not to meet
the eligibility requirements for the Loans, and thus not be included as Initial
Loans. As a result of the foregoing, the statistical distribution of
characteristics as of the Initial Cut-Off Date for the Initial Loans will vary
somewhat from the statistical distribution of such characteristics as of the
Statistic Calculation Date as presented in this Prospectus Supplement, although
such variance will not be material.
Variation in Credit Quality and Subsequent Loans
The ability of Life to acquire or originate loans subsequent to the
Closing Date and on or prior to November 30, 1997 that meet the requirements for
transfer during the Pre-Funding Period under the Sale and Servicing Agreement is
and will be affected by a variety of factors, including interest rates,
employment levels, the rate of inflation and consumer perception of economic
conditions generally. On the Distribution Date following the Due Period in which
the termination of the Pre-Funding Period occurs, if the Pre-Funded Amount at
the end of the Pre-Funding Period is less than $50,000, any such Pre-Funded
Amount will be distributed to holders of the Classes of Notes then entitled to
receive principal on such Distribution Date in reduction of the related Class
Principal Balances, thus resulting in a partial redemption of the related Notes
on such date. On the Distribution Date following the Due Period in which the
termination of the Pre-Funding Period occurs, if the Pre-Funded Amount at the
end of the Pre-Funding Period is greater than or equal to $50,000 (such event, a
"Pre-Funding Pro Rata Distribution Trigger"), such Pre-Funded Amount will be
distributed to the holders of all Classes of Notes and the Residual Interests
(which initially represent the Overcollateralization Amount on the Closing
Date), pro rata, based on the Original Class Principal Balances of the Notes and
original balance of the Residual Interests in relation to the sum of the
Original Pool Principal Balance and the Original Pre-Funded Amount.
Any conveyance of Subsequent Loans is subject to the conditions set
forth in the Sale and Servicing Agreement, which conditions include among
others: (i) each Subsequent Loan must satisfy the representations and warranties
specified in the Sale and Servicing Agreement; (ii) Life will not select
Subsequent Loans in a manner that it believes is adverse to the interests of the
Noteholders; and (iii) as of the related Cut-Off Date, all of the Loans,
including the Subsequent Loans to the conveyed to the Trust by the Transferor as
of such Cut-Off Date, must satisfy certain statistical criteria set forth in the
Sale and Servicing Agreement. Although each Subsequent Loan must satisfy the
eligibility criteria referred to above at the time of its transfer to the Trust,
the Subsequent Loans may have been originated or purchased by Life using credit
criteria different from those which were applied to the Initial Loans and may be
of a different credit quality and have different loan characteristics from the
Initial Loans. After the transfer of the Subsequent Loans to the Trust, the
aggregate statistical characteristics of the Loan Pool may vary from those of
the Initial Loans that have been identified as of the Statistic Calculation Date
as described herein. See "The Loans -- Initial Loan Statistics", and" --
Conveyance of Subsequent Loans" herein.
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Prepayment and Yield Considerations
All of the Loans may be prepaid in whole or in part at any time;
however, with respect to certain Loans, a prepayment charge, as permitted by
applicable law, may apply to full and partial prepayments during the first three
years after origination as described below under "Prepayment and Yield
Considerations." Home loans, such as the Loans, have been originated in
significant volume only during the past few years and neither the Depositor nor
the Servicer is aware of any publicly available studies or statistics on the
rate of prepayment of such loans. The Trust's prepayment experience may be
affected by a wide variety of factors, including general economic conditions,
interest rates, the availability of alternative financing, homeowner mobility
and the Combined Loan-to-Value Ratios of the Loans. In addition, substantially
all of the Loans contain due-on-sale provisions and the Servicer intends to
enforce such provisions unless (i) the Servicer, in a manner consistent with
accepted servicing practices, permits the purchaser of the related Mortgaged
Property to assume the Loan or (ii) such enforcement is not permitted by
applicable law. To the extent permitted by applicable law, such assumption will
not release the original borrower from its obligation under any such Loan. See
"Certain Legal Aspects of the Loans--Due-on-Sale Clauses in Mortgage Loans" in
the Prospectus.
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 Loan. In such event, the Servicer will generally require the
borrower to make a partial prepayment in reduction of the principal balance of
the Loan to the extent that the borrower has received proceeds from the sale of
the prior residence that will not be applied to the purchase of the new
residence.
The extent to which the yield to maturity of a Note 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 distributions to
holders thereof is sensitive to scheduled payments, prepayments, liquidations,
defaults, delinquencies, substitutions, modifications and repurchases of Loans
and to the distribution of Excess Spread and (iii) the application of Allocable
Loss Amounts to certain Classes of Notes as specified herein. In the case of any
Note purchased at a discount, an investor should consider the risk that a slower
than anticipated rate of principal distributions to the holder of such Note
(including without limitation principal prepayments on the Loans) could result
in an actual yield to such investor that is lower than the anticipated yield
and, in the case of any Note purchased at a premium, the risk that a faster than
anticipated rate of principal distributions to the holder of such Note
(including without limitation principal prepayments on the Loans) could result
in an actual yield to such investor that is lower than the anticipated yield. On
each Distribution Date following the Spread Deferral Period and until the
Overcollateralization Amount is at least equal to the Overcollateralization
Target Amount, the allocation of the Excess Spread for such Distribution Date as
an additional distribution of principal of the Notes will accelerate the
amortization of the Notes relative to the amortization of the Loans. Further, in
the event that significant distributions of principal are made to holders of the
Notes as a result of prepayments, liquidations, repurchases and purchases of the
Loans or distributions of Excess Spread, there can be no assurance that holders
of the Notes will be able to reinvest such distributions in a comparable
alternative investment having a comparable yield. See "Risk Factors--Prepayment
and Yield Considerations" herein.
Adequacy of Credit Enhancement
Credit enhancement with respect to the Notes will be provided by (i)
the subordination of distributions in respect of the Residual Interests (as well
as the subordination of certain Classes of Notes to other Classes of Notes, as
described herein), and (ii) the Overcollateralization Amount which results from
(a) the excess of the sum of the Original Pool Principal Balance and the
Original Pre-Funded Amount over the aggregate of the Class Principal Balances
for all Classes as of Notes and (b) following the Spread Deferral Period, the
limited acceleration of the principal amortization of the Notes relative to the
amortization of the Loans by the application of Excess Spread, as described
herein. If the Loans experience higher rates of delinquencies, defaults and
losses than initially anticipated in connection with the ratings of the Notes,
or if the Loan Rates on those Initial Loans which have
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adjustable interest rates ("Adjustable Rate Loans") decrease, the amounts
available from the credit enhancement may not be adequate to cover the delays or
shortfalls in distributions to the holders of the Notes that result from such
higher delinquencies, defaults and losses. If the amounts available from the
credit enhancement are inadequate, the holders of the Notes will bear the risk
of any delays and losses resulting from the delinquencies, defaults and losses
on the Loans.
The rights of the holders of the Class M-1 Notes to receive
distributions of interest on each Distribution Date generally will be
subordinated to such rights of the holders of the Senior Notes, the rights of
the holders of the Class M-2 Notes to receive distributions of interest on each
Distribution Date generally will be subordinated to such rights of the holders
of the Class M-1 Notes and the Senior Notes, and the rights of the holders of
the Class B Notes to receive distributions of interest on each Distribution Date
generally will be subordinated to such rights of the holders of all other
Classes of Notes. In addition, the rights of the holders of the Class M-1 Notes
to receive distributions of principal on each Distribution Date generally will
be subordinated to such rights of the holders of the Senior Notes, and the
rights of the holders of the Class M-2 Notes to receive distributions of
principal on each Distribution Date generally will be subordinated to such
rights of the holders of the Senior Notes and the Class M-1 Notes. Further,
distributions of principal of the Class B Notes generally will be subordinated
in priority of payment to all other Classes of Notes. See "Description of Credit
Enhancement--Subordination and Allocation of Losses" herein.
While the distribution of Excess Spread to the holders of the Notes in
the manner specified herein has been designed to produce and maintain a given
level of overcollateralization with respect to the Notes, there can be no
assurance that Excess Spread will be generated in sufficient amounts to ensure
that such overcollateralization level will be achieved or maintained at all
times. In particular, as a result of delinquencies on the Loans during any Due
Period, the amount of interest received on the Loans during such Due Period may
be less than the amount of interest distributable on the Notes on the related
Distribution Date. Such an occurrence will cause the Class Principal Balances of
the Classes of Notes to decrease at a slower rate relative to the Pool Principal
Balance, resulting in a reduction of the Overcollateralization Amount and, in
some circumstances, an Allocable Loss Amount.
The holders of the Residual Interests will not be required to refund
any amounts previously distributed to them pursuant to the Transfer and
Servicing Agreements, including any distributions of Excess Spread, regardless
of whether there are sufficient funds on a subsequent Distribution Date to make
a full distribution to holders of the Notes.
Adequacy of the Mortgaged Properties as Security for the Loans
As of the Statistic Calculation Date, the Combined Loan-to-Value Ratios
for the Initial Loans ranged from approximately 42.94% to 125.00%, with
approximately 92.35% of the Statistic Principal Balance consisting of Loans
having Combined-Loan-to-Value Ratios in excess of 90%. As of the Statistic
Calculation Date the weighted average Combined Loan-to-Value Ratio of the
Initial Loans was 108.08%. As a result of the foregoing, the Mortgaged
Properties may not provide adequate security for the Loans. Even assuming that a
Mortgaged Property provides adequate security for the related Loan, substantial
delays could be encountered in connection with the liquidation of a Loan that
would result in current shortfalls in distributions to the Noteholders to the
extent such shortfalls are not covered by the credit enhancement described
herein. In addition, liquidation expenses relating to any Liquidated Loan (such
as legal fees, real estate taxes, and maintenance and preservation expenses)
would reduce the liquidation proceeds otherwise payable to the Noteholders. In
the event that any Mortgaged Property fails to provide adequate security for the
related Loan, any losses in connection with such Loan will be borne by
Noteholders as described herein to the extent that the credit enhancement
described herein is insufficient to absorb all such losses.
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Adjustable Rate Loans
While all of the Notes are fixed rate obligations, as of the Statistic
Calculation Date, Initial Loans representing approximately 5.19% of the
Statistic Principal Balance, are Adjustable Rate Loans. Should the Loan Rates on
the Adjustable Rate Loans decrease, the amount of Excess Spread available for
deposit to the Certificate Distribution Account to cause the termination of the
Spread Deferral Period and then to make payments to achieve the required
Overcollateralization Amount will be lessened. See "Prepayment and Yield
Considerations--Excess Spread and Reduction of Overcollateralization Amount."
Recent Origination of Loans
None of the Initial Loans was 30 days or more delinquent in its
scheduled monthly payments of principal and interest as of the Initial Cut-Off
Date; however, Initial Loans representing approximately 73.883% of the Statistic
Principal Balance consists of Initial Loans that have a first scheduled monthly
payment due date occurring after August 1, 1997 and, therefore, it was not
possible for such Initial Loans to have had a scheduled monthly payment that was
30 days or more delinquent as of the Initial Cut-Off Date.
Book-Entry Registration of Notes
Issuance of the Notes in book-entry form may reduce the liquidity of
such Notes in the secondary trading market because investors may be unwilling to
purchase Notes for which they cannot obtain physical certificates. Moreover,
because transactions in the Notes can be effected only through DTC,
participating organizations, indirect participants and certain banks, the
ability of a beneficial owner of a Note to pledge its interest in a Note to
persons or entities that do not participate in the DTC system, or otherwise to
take actions in respect of such Note, may be limited due to lack of a physical
certificate representing such Note.
Additional Factors Affecting Delinquencies, Defaults and Losses on Loans
Underwriting Guidelines
Pursuant to the underwriting guidelines of Life's Liberator Series and
Portfolio Series programs, the assessment of the creditworthiness of the related
borrowers is the primary consideration in underwriting the Loans. See "Life
Savings Bank, Federal Savings Bank --Underwriting Guidelines" herein. The
evaluation of the adequacy of the value of the related Mortgaged Property in
relation to the Loan, together with the amount of all liens senior to the Loan,
is given less and in some cases no consideration in underwriting the Loans.
Although the creditworthiness of the related borrowers is the primary
consideration in the underwriting of the Loans, no assurance can be given that
such creditworthiness of the borrowers will not deteriorate as a result of
future economic and social factors, which deterioration may result in a
delinquency or default by such borrowers on the related Loans. In general, the
credit quality of the borrowers on the Loans as well as the Loans is lower than
that of borrowers and mortgage loans conforming to the FNMA or FHLMC
underwriting guidelines for first-lien, single-family mortgage loans.
Accordingly, the Loans are likely to experience higher rates of delinquencies,
defaults and losses (which rates could be substantially higher) than those rates
that would be experienced by similar types of loans underwritten in a manner
which is more similar to the FNMA or FHLMC underwriting guidelines.
In response to changes and developments in the consumer finance area as
well as the refinement of Life's credit evaluation methodology, Life's
underwriting requirements for certain types of home loans may change from time
to time, which in certain instances may result in more stringent and, in other
instances, less stringent underwriting requirements. Depending upon the date on
which the Loans were originated or purchased by Life, such Loans may have been
originated or purchased by Life under different underwriting requirements, and
accordingly, certain Loans may be of a different credit quality and have
different characteristics than other Loans. Furthermore, to the extent that
certain Loans were originated or purchased by Life under less stringent
underwriting
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requirements, such Loans may be more likely to experience higher rates of
delinquencies, defaults and losses than those Loans originated or purchased
under more stringent underwriting requirements.
Geographic Concentration
Approximately 16.62%, 8.75%, 8.38%, 8.28%, 7.77%, 6.87%, 5.87% and
4.43% of the Statistic Principal Balance consisted of Initial Loans that are
secured by Mortgaged Properties located in the States of California, Virginia,
Maryland, Alabama, North Carolina, Oklahoma, Florida and Georgia, respectively.
Because of the relative geographic concentration of the Loans within these
States, delinquencies and losses on the Loans may be higher than would be the
case if the Loans were more geographically diversified. Adverse economic
conditions in these States or geographic regions (which may or may not affect
real property values) may affect the ability of the related borrowers to make
timely payments of their scheduled monthly payments of principal and interest
and, accordingly, the actual rates of delinquencies, defaults and losses on such
Loans could be higher than those currently experienced in the home lending
industry for similar types of loans. In addition, with respect to the Loans in
these States, certain of the Mortgaged Properties 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 one or more of the related residential real estate
markets may adversely affect the values of the Mortgaged Properties securing
such Loans such that the outstanding principal balances of such Loans, together
with the outstanding principal amount of any senior lien mortgage loans on such
Mortgaged Properties, will exceed the value of such Mortgaged Properties to an
increasing degree. Accordingly, the actual rates of delinquencies, foreclosures
and losses on such Loans could be higher than those currently experienced in the
home lending industry in general.
Reloading of Debt
With respect to Loans which in combination with superior liens have
loan-to-value ratios in excess of 100%, there is a risk that if the related
borrowers relocate, such borrowers will be unable to discharge the Loans in full
from the sale proceeds of the related Mortgaged Properties and any other funds
available to these borrowers, in which case the pool of Loans sold to the Trust
could experience higher rates of delinquencies, defaults and losses. With
respect to 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 Loans.
Acquisitions from Third Parties
Substantially all of the Loans will have been either originated by or
on behalf of Life or purchased and re-underwritten by Life in accordance with
Life's Liberator Series and Portfolio Series programs. A significant portion of
the Loans will have been acquired by Life through purchases from a network of
correspondent lenders or through a portfolio acquisition program. See "The
Loans--General" herein. All of such Loans will have been re-underwritten and
reviewed for compliance with Life's underwriting guidelines. Life may have
acquired certain Loans which were originated by originators that, at the time of
origination thereof, were not approved FHA lenders or approved FNMA or FHLMC
seller/servicers, and therefore did not have an internal quality control program
substantially similar to the FNMA or FHLMC required quality control programs
with respect to the underwriting and origination of such Loans. Such Loans may
be subject to a higher incidence of delinquency or default. As described herein,
Life will make certain representations and warranties regarding each Loan and,
in the event of a breach of any such representation or warranty that materially
and adversely affects the Noteholders, Life will be required either to cure such
breach, repurchase the related Loan or Loans or substitute one or more Qualified
Substitute Loans therefor.
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No Servicer Delinquency Advances
In the event of a delinquency or a default with respect to a Loan, the
Servicer will have no obligation to advance scheduled monthly payments of
principal or interest with respect to such Loan. As a result of the foregoing,
the amount of interest received on the Loans during any Due Period may be less
than the amount of interest distributable on the Notes on the related
Distribution Date. Such an occurrence will cause the Class Principal Balances of
the Classes of Notes to decrease at a slower rate relative to the Pool Principal
Balance, resulting in a reduction of the Overcollateralization Amount and, in
some circumstances, an Allocable Loss Amount. However, the Servicer will make
such reasonable and customary expense advances with respect to the Loans as
generally would be required in accordance with its servicing practices. See
"Description of the Transfer and Servicing Agreements--Servicing" herein.
Dependence on Servicer for Servicing Loans
Pursuant to the Sale and Servicing Agreement, the Servicer will perform
the daily loan servicing functions for the Loans that include, without
limitation, the collection of payments from the Loans, the remittance of funds
from such collections for distribution to the holders of the Notes, the
bookkeeping and accounting for such collections, all other servicing activities
relating to the Loans, the preparation of the monthly servicing and remittance
reports pursuant to the Sale and Servicing Agreement and the maintenance of all
records and files pertaining to such servicing activities. Upon the Servicer's
failure to remedy an Event of Default under the Sale and Servicing Agreement, a
majority of the holders of the Notes or the Indenture Trustee or the Owner
Trustee on behalf of the Trust may remove the Servicer and appoint a successor
servicer pursuant to the terms of the Sale and Servicing Agreement. Absent such
a replacement, the holders of the Notes 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 Loans. The manner in which the Servicer, and each Subservicer, as
applicable, performs its servicing obligations will affect the amount and timing
of the principal and interest payments received on the Loans. The principal and
interest payments received on the Loans are the sole source of funds for the
distributions due to the holders of the Notes under the Sale and Servicing
Agreement. Accordingly, the holders of the Notes will be dependent upon the
Servicer to adequately and timely perform its servicing obligations and such
performance will affect the amount and timing of distributions to the holders of
the Notes. See "Life Savings Bank, Federal Savings Bank --The Servicer" and
"Life Savings Bank, Federal Savings Bank --Delinquency and Loan Loss Experience"
herein.
Realization upon Defaulted Loans
Substantially all of the Loans are secured by junior liens, and the
related loans secured by senior liens are not included in the Pool. The primary
risk with respect to any Loan secured by a junior lien is the possibility that
adequate funds will not be received in connection with a foreclosure of the
related Mortgaged Property to satisfy fully both any loan(s) secured by senior
lien(s) and the Loan. In accordance with the loan servicing practices of the
Servicer for home loans secured by junior liens, the Servicer may, in connection
with any Defaulted Loan, (i) pursue the foreclosure of a Defaulted Loan, (ii)
satisfy the senior mortgage(s) at or prior to the foreclosure sale of the
Mortgaged Property, or (iii) advance funds to keep the senior mortgage(s)
current. The Trust will have no source of funds to satisfy the senior
mortgage(s) or make payments due to the senior mortgagee(s), and, therefore,
holders of the Notes should not expect that any senior mortgage(s) will be
satisfied or kept current by the Trust for the purpose of protecting any junior
lien Loan. See "Certain Legal Aspects of the Loans--Junior Mortgages; Rights of
Senior Mortgages" in the Prospectus. Furthermore, it is unlikely that any of the
foregoing methods of realizing upon a defaulted junior lien Loan will be an
economically viable alternative with respect to any Loans having a Combined
Loan-to-Value Ratio that exceeds 100% at the time of default. As a result, the
Servicer may, in accordance with accepted servicing procedures, pursue
alternative methods of servicing Defaulted Loans to maximize proceeds therefrom,
including without limitation, the modification of Defaulted Loans, which, among
other things, may include the abatement of accrued interest or the reduction of
a portion of the outstanding Principal
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Balance of such Defaulted Loans. The costs incurred in the collection and
liquidation of Defaulted Loans in relation to the smaller Principal Balances
thereof are proportionately higher than with respect to first-lien single-family
mortgage loans, and because substantially all of the Loans will have Combined
Loan-to-Value Ratios at the time of origination that exceed 100%, losses
sustained from Defaulted Loans are likely to be more severe (and could be total
losses) in relation to the outstanding Principal Balance of such Defaulted
Loans. In fact, no assurance can be given that any proceeds, or a significant
amount of proceeds will be recovered from the liquidation of Defaulted Loans.
Limited Historical Delinquency, Loss and Prepayment Information
Since January 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 entire
portfolio of loans and in particular with respect to such increased volume.
Accordingly, it is possible that neither the delinquency experience and loan
loss and liquidation experience set forth under " Life Savings Bank, Federal
Savings Bank -- Delinquency and Loss Experience" herein nor the prepayment
scenarios set forth under "Prepayment and Yield Considerations -- Weighted
Average Lives of the Notes" herein will be indicative of the performance of the
Loans. Prospective investors should make their investment determination based on
the Loan underwriting criteria, the availability of the credit enhancement
described herein, the characteristics of the Initial Loans and other information
provided herein, and not based on any prior delinquency experience and loan loss
and liquidation experience information set forth herein or any rate of
prepayments assumed herein.
Economic Conditions
For the limited period of time during which loans in the nature of the
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 Loans; however, because of lenders' limited experience
with loans similar to the 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 Loans. Because borrowers under the 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 Notes, in particular the Class B Notes, the Class M-2 Notes and the
Class M-1 Notes. See "--Adequacy of the Mortgaged Properties as Security for the
Loans" and "--Additional Factors Affecting Delinquencies, Defaults and Losses on
Loans" and "--Prepayment and Yield Considerations" above.
Legal Considerations
The Initial Loans have been transferred from Life to the Transferor, an
affiliate of Life and transferred from the Transferor to the Depositor. Each
such transfer will be treated by Life, the Transferor and the Depositor, as
applicable, as a sale of the Initial Loans. Life has warranted that its transfer
to the Transferor is a sale of Life's interest in the Loans. The Transferor has
warranted that its transfer to the Depositor is a sale of the Transferor's
interest in the Initial Loans. In the event of an insolvency of Life or the
Transferor, the receiver or bankruptcy trustee of such entity may attempt to
recharacterize the related sale of the Initial Loans as a borrowing by such
entity secured by a pledge of the Initial Loans and possible reductions could
occur in the amounts thereof available for distribution on the Notes. The
Depositor has warranted in the Sale and Servicing Agreement that the transfer of
the Initial Loans to the Trust is a valid transfer of all of the Depositor's
right, title and interest in the Initial Loans to the Trust.
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Certain Other Legal Considerations
The underwriting, origination, servicing and collection of the Loans
are subject to a variety of State and Federal laws, public policies and
principles of equity. For example, the Federal District Court for the Eastern
District of Virginia recently announced a decision indicating that Federal law
prohibited lenders from paying independent mortgage brokers a premium for loans
with above-market interest rates. Depending on the provisions of applicable law
and the specific facts and circumstances involved, violations of these laws,
policies or principles may limit the ability of the Servicer to collect all or
part of the principal or interest on the Loans, may entitle the borrower to a
refund of amounts previously paid, and, in addition, could subject the Servicer
to damages and administrative sanctions. If the Servicer is unable to collect
all or part of the principal or interest on any Loans because of a violation of
the aforementioned laws, public policies or general principles of equity, then
the Trust may be delayed or unable to make all distributions owed to the holders
of the Notes to the extent any related losses are not otherwise covered by
amounts available from the credit enhancement provided for the Notes.
Furthermore, depending upon whether damages and sanctions are assessed against
the Servicer or the Transferor, such violations may materially impact (i) the
financial ability of the Servicer to continue to act in such capacity or (ii)
the ability of the Transferor or Life to repurchase or replace Defective Loans.
See "Risk Factors--Consumer Protection Laws" in the Prospectus. Life will be
required to repurchase or replace any Loan which did not comply with applicable
State and Federal laws and regulations as of the Closing Date. See
"--Limitations on Repurchase or Replacement of Defective Loans" below.
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 indicated that it may
recommend that debtors in proceedings under Chapter 13 of the Bankruptcy Code be
permitted to treat the portion of any mortgage debt that exceeds the value of
the real property securing such debt as an unsecured claim if such mortgage is
not a first lien mortgage. If such a 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 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 Loans, and the
likelihood that the Trust Fund would recover any amounts in respect of the
related Loans would be remote.
The Bankruptcy Commission is required to submit a report on its
findings, including recommendations for legislation to effect changes to the
Bankruptcy Code, to the President and Congress no later than October 20, 1997.
The Bankruptcy Commission's recommendations will be advisory only; any change in
the Bankruptcy Code must be effected through Congressional action.
Non-recordation of Assignments
Subject to confirmation by the Rating Agencies, with respect to the
Loans secured by Mortgaged Properties located in certain states where Life has
been advised by counsel that recordation of an assignment of mortgage is not
necessary in order to perfect an interest in a Loan, Life will not be required
to record assignments to the Indenture Trustee of the Mortgages in the real
property records of these states for such Loans, but rather Life, in its
capacity as the Servicer, will retain record title to such Mortgages on behalf
of the Indenture Trustee and the Noteholders. See "Description of the Transfer
and Servicing Agreements -- Sale and Assignment of the Loans" herein.
Although the recordation of the assignments of the Mortgages in favor
of the Indenture Trustee is not necessary to effect a transfer of the Loans to
the Indenture Trustee, if Life or the Transferor were to sell, assign, satisfy
or discharge any Loan prior to recording the related assignment in favor of the
Indenture Trustee, the other parties to such sale, assignment, satisfaction or
discharge may have rights superior to those of the Indenture Trustee. In some
states, in the absence of such recordation of the assignments of the Mortgages,
the transfer to the Indenture
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Trustee of the Loans may not be effective against certain creditors or
purchasers from Life or a trustee in bankruptcy of Life. If such other parties,
creditors or purchasers have rights to the Loans that are superior to those of
the Indenture Trustee, then the Noteholders could lose the right to future
payments of principal and interest from such Loans and could suffer a loss of
principal and interest to the extent that such loss is not otherwise covered by
amounts available from the credit enhancement provided for such Notes.
Limitations on Repurchase or Replacement of Defective Loans
Pursuant to the Sale and Servicing Agreement, each of the Transferor
and Life has agreed to cure in all material respects any breach of its
respective representations and warranties set forth in the Sale and Servicing
Agreement with respect to Defective Loans. If the Transferor or Life cannot cure
such breach within a specified period of time, it will be required to repurchase
such Defective Loans from the Trust or substitute other loans for such Defective
Loans. Although a significant portion of the Loans will have been acquired from
unaffiliated correspondent lenders, the Transferor and Life will make the
representations and warranties with respect to each Loan. For a summary
description of the Transferor's or Life's representations and warranties, See
"The Agreements--Assignment of Primary Assets" in the Prospectus.
No assurance can be given that, at any particular time, the Transferor
or Life will be capable, financially or otherwise, of repurchasing or replacing
any Defective Loan(s) in the manner described above. If the Transferor or Life
repurchases, or is obligated to repurchase, any defective home loan(s) from any
other series of asset backed securities, its financial ability to repurchase any
Defective Loan(s) from the Trust may be adversely affected. In addition, other
events relating to the Transferor or Life and its home lending can occur that
would adversely affect its financial ability to repurchase Defective Loans from
the Trust, including, without limitation, the sale or other disposition of all
or any significant portion of its assets. If the Transferor or Life is unable to
repurchase or replace a Defective Loan, then the Servicer, on behalf of the
Trust, will utilize customary servicing practices to recover the maximum amount
possible with respect to such Defective Loan, and any resulting loss will be
borne by the holders of the Notes to the extent that such loss is not otherwise
covered by amounts available from the credit enhancement provided for the Notes.
Life, in its capacity as seller of the Loans to the Transferor, has agreed to be
bound by the same requirements as the Transferor with respect to Defective
Loans. See "Life Savings Bank, Federal Savings Bank" herein.
Dissolution of Trust Due to Certain Events of Insolvency
On the Closing Date, a special purpose affiliate of Life will purchase
instruments representing approximately 1% of the Residual Interest. Unless and
until legislation is passed that clarifies the status of the Trust under
California tax law, the Trust Agreement will provide that if any of certain
events of insolvency with respect to such special purpose affiliate occurs,
subject to certain conditions, the Trust will dissolve.
Life has taken certain steps in structuring the transactions
contemplated hereby that are intended to help ensure that no such event of
insolvency will occur. These steps include the formation of the affiliate as a
separate limited-purpose entity pursuant to formation documents that certain
limitations (including restrictions on the nature of the affiliate's business
and restriction on the affiliate's ability to commence a voluntary case or
proceeding under the United States Bankruptcy Code or similar applicable state
laws). Nevertheless, Life cannot assure that the activities of the affiliate
will not result in such events of insolvency. If any such event of insolvency
with respect to the affiliate occurs, and certain other conditions set forth in
the Trust Agreement are satisfied, the Indenture Trustee will promptly sell,
dispose of or otherwise liquidate the Loans in a commercially reasonable manner
on commercially reasonable terms. The proceeds from any such sale, disposition
or liquidation of the Loans will be treated as collections on the Loans,
deposited in the Collection Account and paid to the Noteholders in accordance
with the terms and priority of payment described herein.
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THE TRUST
General
The Trust, Life Financial Home Loan Owner Trust 1997-2, will be a
business trust formed under the laws of the State of Delaware pursuant to the
Trust Agreement for the transactions described in this Prospectus Supplement.
After its formation, the Trust will not engage in any activity other than (i)
acquiring, holding and managing the Loans and the other assets of the Trust and
proceeds therefrom, (ii) issuing the Notes and any Residual Interest, (iii)
making payments on the Notes and any Residual Interest and (iv) engaging in
other activities that are necessary, suitable or convenient to accomplish the
foregoing or are incidental thereto or in connection therewith.
The Residual Interests in the aggregate represent the entire residual
interest in the assets of the Trust. The Residual Interests, together with the
Notes, will be delivered by the Trust to the Depositor as consideration for the
delivery of the Initial Loans and the deposit of the Original Pre-Funded Amount
pursuant to the Sale and Servicing Agreement.
On the Closing Date, the Trust will purchase Initial Loans expected to
have an aggregate principal balance of approximately $95,000,000 as of the
Initial Cut-Off Date (the actual aggregate unpaid principal balance (as of the
Initial Cut-Off Date) of the Initial Loans, the "Original Pool Principal
Balance") from the Depositor pursuant to a sale and servicing agreement dated as
of September 1, 1997 (the "Sale and Servicing Agreement"), among the Trust, the
Depositor, the Transferor, the Servicer, the Indenture Trustee and the Co-Owner
Trustee. On or prior to November 30, 1997, the Trust may purchase additional
loans (the "Subsequent Loans" and together with the Initial Loans, the "Loans")
having an aggregate unpaid principal balance of up to $30,000,000 (as adjusted
pursuant to the immediately following sentence, the "Original Pre-Funded
Amount"). To the extent that the Original Pool Principal Balance is more or less
than the amount set forth in the second preceding sentence, the Original
Pre-Funded Amount will be decreased or increased by a corresponding amount
provided that the amount of any such adjustment shall not exceed $6,250,000.
The assets of the Trust will consist primarily of the Loans secured by
Mortgages. See "The Loans" herein. The assets of the Trust will also include (i)
payments of interest and principal received after the applicable Cut-Off Date in
respect of the Loans; (ii) amounts on deposit in the Collection Account
(excluding investment earnings thereon), Note Distribution Account, Pre-Funding
Account, Capitalized Interest 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 Loan as of
its applicable Cut-Off Date (the "Cut-Off Date Principal Balance"). With respect
to any date, the "Pool Principal Balance" will be equal to the aggregate of the
Principal Balances of all Loans as of the last day of the preceding Due Period.
The "Principal Balance" of a Loan on any day is equal to the outstanding unpaid
principal balance of the Loan as of the close of business on the last day of the
preceding Due Period (after giving effect to all payments received thereon and
the allocation of any Net Loan Losses thereto pursuant to clause (B) of the
definition thereof); provided, however, that any Loan that became a Liquidated
Loan during the preceding Due Period shall have a Principal Balance of zero.
With respect to any Distribution Date, any Loans repurchased in the month of
such Distribution Date prior to the related Determination Date in such month
shall be deemed (i) to have been repurchased during the related Due Period and
(ii) to have a Principal Balance of zero as of the end of such related Due
Period.
The Servicer will service the Loans pursuant to the Sale and Servicing
Agreement (collectively with the Indenture, the Administration Agreement 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.
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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 19890-0001.
Certain functions of the Owner Trustee under the Trust Agreement and
the Sale and Servicing Agreement will be performed by Norwest Bank Minnesota,
Association, in its capacity as Co-Owner Trustee under the Trust Agreement and
the Sale and Servicing Agreement, including maintaining the Certificate
Distribution Account and making distributions therefrom. However, upon the
occurrence and continuation of an event of default under the Indenture, the
Co-Owner Trustee will resign and the Owner Trustee will assume the duties of the
Co-Owner Trustee under the Trust Agreement and the Sale and Servicing Agreement.
THE LOANS
General
All of the Loans will be home loans (i.e., not insured or guaranteed by
a governmental agency) for which the related proceeds were used to finance (i)
property improvements, (ii) the acquisition of personal property such as home
appliances or furnishings, (iii) debt consolidation, (iv) the refinancing of
one- to four-family residential properties (which may include cash-out to the
borrower) or (v) a combination of property improvements, debt consolidation and
other consumer purposes. Substantially all of the Mortgages for the Loans will
be junior (i.e., second, third, etc.) in priority to one or more senior liens on
the related Mortgaged Properties, which will consist primarily of owner-occupied
single-family residences. As of the Statistic Calculation Date, approximately
92.35% of the Loans will be secured by liens on Mortgaged Properties in which
the borrowers have little or no equity therein (i.e., the related Combined
Loan-to-Value Ratios equal or exceed 90%) at the time of origination of such
Loans. The characteristics of the Initial Loans actually delivered on the
Closing Date are not expected to vary materially from the characteristics of
those of such Loans that have been identified on the Statistic Calculation Date
and the characteristics of the Subsequent Loans are not expected to vary
materially from those of the Initial Loans.
Life originates and purchases loans principally through its nationwide
network of correspondents, other third party originators and independent
mortgage brokers.
For a description of the underwriting criteria applicable to the Loans,
See "Life Savings Bank, Federal Savings Bank--Underwriting Guidelines" herein.
All of the Initial Loans will be sold by Life to the Transferor and by the
Transferor to the Depositor, whereupon the Depositor will sell the Loans to the
Trust pursuant to the Sale and Servicing Agreement. All of the Subsequent Loans
will be sold by Life to the Transferor and by the Transferor to the Trust
pursuant to a Subsequent Transfer Agreement. Pursuant to the Indenture, the
Trust will pledge and assign the Loans to the Indenture Trustee for the benefit
of the holders of the Notes. The Trust will be entitled to all payments of
interest and principal received in respect of the Loans after the applicable
Cut-Off Dates.
Payments on the Loans
The Loans generally provide for a schedule of payments which, if timely
paid, will be sufficient to amortize fully the principal balance of the related
Loan on or before its maturity date. The Loans have scheduled monthly payment
dates which occur throughout a month. Interest with respect to the Loans will
accrue on an "actuarial interest" method. No Loan provides for deferred interest
or negative amortization.
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The actuarial interest method provides that interest is charged and
payments are due as of a scheduled day of each month which is fixed at the time
of origination, and payments received after a grace period following such
scheduled day are subject to late charges. For example, a scheduled payment on a
Loan received either earlier or later (other than delinquent) than the scheduled
due date thereof will not affect the amortization schedule or the relative
application of such payment to principal and interest in respect of such Loan.
Characteristics of Loans
The following is a brief description of certain terms of those of the
Initial Loans that have been identified as of the Statistic Calculation Date.
Neither the characteristics of the Initial Loans as of the Closing Date nor the
characteristics of the Subsequent Loans are expected to vary materially from the
characteristics of those of the Initial Loans that have been identified as of
the Statistic Calculation Date.
The Initial Loans will have the characteristics set forth below and in
the tables that follow.
This description does not take into account any (a) Initial Loans not
identified as of the date of this Prospectus Supplement and (b) Subsequent Loans
that may be sold to the Trust during the Pre-Funding Period through the
application of amounts on deposit in the Pre-Funding Account. In addition, prior
to the Closing Date, Life may remove any of the Initial Loans intended to be
transferred to the Trust, substitute comparable loans therefor, or add
comparable loans thereto; provided, however, that the aggregate principal
balance of Initial Loans so replaced, added or removed will not exceed 10% of
the Original Pool Principal Balance. To the extent that, prior to the Closing
Date, Loans are removed from or sold to the Trust, an amount equal to the
aggregate principal balances of such Loans will be added to or deducted from,
respectively, the Original Pre-Funding Amount on the Closing Date; provided that
the amount of any such adjustment may not exceed $6,250,000. As a result, the
statistical information presented below regarding the characteristics of the
Initial Loans expected to be sold to the Trust as of the date of this Prospectus
Supplement may vary in certain respects from comparable information based on the
actual Initial Loans sold to the Trust on the Closing Date. In addition, after
the August 31, 1997 Cut-Off Date, the characteristics of the actual Loans may
vary from the information below due to a number of factors, including
prepayments after the August 31, 1997 Cut-Off Date or the purchase of any
Subsequent Loans after the Closing Date. See "-- Conveyance of Subsequent Loans"
below. A schedule of the Initial Loans sold to the Trust as of the Closing Date
will be attached to the Sale and Servicing Agreement. A current report on Form
8-K containing a description of the Loans as of the end of the Pre-Funding
Period will be filed with the Commission.
Initial Loan Statistics
As of the Statistic Calculation Date, the Initial Loans consisted of
2,179 Loans secured by mortgages or deeds of trust on Mortgaged Properties
located in 40 States and the District of Columbia. As of the Statistic
Calculation Date, the aggregate of the Principal Balances of the Initial Loans
was approximately $70,526,172.73 (the "Statistic Principal Balance"). As of the
Statistic Calculation Date, Initial Loans representing 0.06% of the Statistic
Principal Balance were secured by first liens, Initial Loans representing
approximately 99.94% of the Statistic Principal Balance were secured by second
liens. As of the Statistic Calculation Date, Adjustable Rate Loans represented
5.19% of the Statistic Principal Balance and the remainder of the Initial Loans
have fixed Loan Rates ("Fixed Rate Loans"). The lowest Statistic Calculation
Date principal balance of any Initial Loan was $9,948.12 and the highest was
$114,532.25. The average Statistic Calculation Date principal balance of the
Initial Loans was approximately $32,366.30. The weighted average remaining term
to stated maturity of the Initial Loans as of the Statistic Calculation Date was
approximately 226 months. As of the Statistic Calculation Date, the weighted
average number of months that have elapsed since origination of the Initial
Loans was approximately 1 month. The lowest and highest Combined Loan-to-Value
Ratios of the Initial Loans at origination were 42.94% and 125%, respectively.
As of the Statistic Calculation Date approximately 165 Loans representing
approximately 7.65% of the Statistic Principal Balance had a combined
Loan-to-Value Ratio of less than 90%. The weighted average Combined
Loan-to-Value Ratio of the Initial Loans as of the Statistic Calculation Date
was approximately 108.08%.
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Each Adjustable Rate Loan bears interest at an adjustable rate. The
interest rate borne by each Adjustable Rate Loan first adjusts on the date set
forth in the related Note for the Adjustable Rate Loans and then every six
months thereafter (each such date thereafter, a "Change Date"). The Loan Rate
with respect to each Adjustable Rate Loan will adjust on each applicable Change
Date to equal the sum of (i) the London Interbank Offered Rate for six-month
U.S. dollar deposits (the "LIBOR Index") either as announced by FNMA, and
available as of the date 45 days before each Change Date, or as published in The
Wall Street Journal generally on a day of the month preceding the month of the
Change Date and (ii) the gross margin (the "Gross Margin") set forth in the
related Note subject to rounding and to the effects of the Periodic Rate Cap (as
defined below), the applicable Lifetime Cap (as defined below) and the
applicable Lifetime Floor (as defined below).
The Initial Loans that are Fixed Rate Loans bear interest at fixed Loan
Rates that ranged from approximately 8.50% to approximately 17.75% per annum as
of the Statistic Calculation Date. The weighted average Loan Rate for the
Initial Loans that are Fixed Rate Loans was approximately 13.885% per annum as
of the Statistic Calculation Date.
As of the Statistic Calculation Date, the Loan Rates for the Adjustable
Rate Loans ranged from 9.125% to 14.250% and the Gross Margins for the
Adjustable Rate Loans ranged from 4.63% to 8.85%. As of the Statistic
Calculation Date, the weighted average Loan Rate of the Adjustable Rate Loans
was 11.47% and the weighted average Gross Margin of the Adjustable Rate Loans
was approximately 6.58%. The "Periodic Rate Cap" limits changes in the Rate for
each Adjustable Rate Loan on each Change Date to 100 to 150 basis points in the
case of Adjustable Rate Loans based on a LIBOR Index. The "Lifetime Cap" for
each Adjustable Rate Loan is the rate which is generally 600 to 700 basis points
greater than the initial Loan Rate for such Adjustable Rate Loan, and the
Lifetime Floor is the lowest rate to which the Loan Rate can adjust for such
Adjustable Rate Loan. As of the Statistic Calculation Date the Lifetime Caps of
the Adjustable Rate Loans ranged from 15.13% to 20.25% and the Lifetime Floors
of the Adjustable Rate Loans ranged from 9.13% to 14.25%. As of the Statistic
Calculation Date, the weighted average Lifetime Cap of the Adjustable Rate Loans
was approximately 17.47% and the weighted average Lifetime Floor was
approximately 11.47%. As of the Statistic Calculation Date, the number of months
to the next Change Date of the Adjustable Rate Loans ranged from two months to
six months. As of the Statistic Calculation Date, the weighted average months to
next Change Date was approximately 4.24 months. The Adjustable Rate Loans do not
provide for negative amortization.
As of the Statistic Calculation Date, approximately 1.37% by principal
balance of the Initial Loans (each of which was a Fixed Rate Loan) had final
payments substantially in excess of the other monthly payments (the "Balloon
Loans") and the remainder of the Initial Loans were fully amortizing loans
having original stated maturities of not more than 30 years. As of the Statistic
Calculation Date, no Initial Loan was scheduled to mature later than September
2022.
As of the Closing Date, no Initial Loan will be 30 or more days past
due.
As of the Statistic Calculation Date, 99.83% of the Mortgaged
Properties by principal balance of the related Loan were owner-occupied (based
on representations of the related borrowers at origination). As of the Statistic
Calculation Date, the obligors on Initial Loans representing approximately
89.08% of the Statistic Principal Balance had "A", "A+", "Ax" or "A-" credit
ratings, under Life's programs, the obligors on Initial Loans representing
approximately 10.82% of the Statistic Principal Balance had "B" or "B+" credit
ratings under Life's programs and the obligors on Initial Loans representing
approximately 0.10% of the Statistic Principal Balance had "C" or "Cx" credit
ratings under Life's programs.
The following tables are based on certain statistical characteristics
with respect to those of the Initial Loans that have been identified as of the
Statistic Calculation Date. The sum of the percentages in the following tables
may not equal the total due to rounding.
S-25
<PAGE>
FIXED RATE LOANS
Geographic Distribution of the Mortgaged Properties
<TABLE>
<CAPTION>
% of Aggregate
Number of Aggregate Principal
Initial Principal Balance of Fixed
State Loans Balance Rate Loans
- ---------------------------------------------- ------------------- ---------------------- -------------------------
<S> <C> <C> <C>
Alabama..................................... 192 $ 5,796,169.98 8.67%
Arkansas.................................... 2 53,953.86 0.08
Arizona..................................... 7 198,787.75 0.30
California.................................. 308 10,813,773.69 16.17
Colorado.................................... 34 1,022,563.65 1.53
Connecticut................................. 7 226,817.18 0.34
District of Columbia........................ 6 261,040.47 0.39
Delaware.................................... 1 39,977.39 0.06
Florida..................................... 124 4,046,469.11 6.05
Georgia..................................... 95 3,062,675.49 4.58
Hawaii ..................................... 19 815,029.67 1.22
Idaho....................................... 20 620,970.19 0.93
Illinois.................................... 38 1,163,105.34 1.74
Indiana..................................... 22 693,786.21 1.04
Iowa........................................ 2 64,897.55 0.10
Kansas...................................... 34 962,839.92 1.44
Kentucky.................................... 5 130,737.80 0.20
Massachusetts............................... 17 587,847.93 0.88
Maryland.................................... 173 5,912,297.23 8.84
Michigan.................................... 29 866,252.27 1.30
Minnesota................................... 3 113,557.19 0.17
Missouri.................................... 9 271,945.90 0.41
Montana..................................... 34 977,890.66 1.46
North Carolina.............................. 172 5,362,321.03 8.02
New Jersey.................................. 16 475,047.15 0.71
New Mexico.................................. 8 240,953.07 0.36
Nevada...................................... 47 1,430,866.69 2.14
New York.................................... 3 98,944.31 0.15
Ohio........................................ 62 1,873,084.90 2.80
Oklahoma.................................... 157 4,817,064.57 7.20
Oregon...................................... 27 844,493.91 1.26
Pennsylvania................................ 52 1,694,731.00 2.53
Rhode Island................................ 11 339,855.92 0.51
South Carolina.............................. 42 1,286,079.95 1.92
Tennessee................................... 24 784,071.60 1.17
Utah........................................ 35 1,236,609.75 1.85
Virginia.................................... 182 6,137,861.07 9.18
Washington.................................. 26 853,601.45 1.28
Wisconsin................................... 8 285,809.50 0.43
West Virginia............................... 1 37,880.72 0.06
Wyoming..................................... 13 361,387.56 0.54
------------------- ---------------------- -------------------------
Total.............................. 2,067 $ 66,864,050.58 100.00%
=================== ====================== =========================
</TABLE>
S-26
<PAGE>
Loan Rates
<TABLE>
<CAPTION>
% of
Aggregate
Principal
Number Aggregate Balance of
of Initial Principal Fixed Rate
Range of Loan Rates Loans Balance Loans
- ----------------------------------- ------------------ ------------------------ ----------------------
<S> <C> <C> <C>
8.000% to 8.999%................ 1 $ 37,220.59 0.06%
9.000% to 9.999%................ 9 310,198.03 0.46
10.000% to 10.999%............... 16 651,286.75 0.97
11.000% to 11.999%............... 57 2,078,675.84 3.11
12.000% to 12.999%............... 310 10,322,460.63 15.44
13.000% to 13.999%............... 712 23,638,699.18 35.35
14.000% to 14.999%............... 610 18,994,529.18 28.41
15.000% to 15.999%............... 290 9,040,769.93 13.52
16.000% to 16.999%............... 56 1,622,747.04 2.43
17.000% to 17.999%............... 6 167,463.41 0.25
------------------ ------------------------ ----------------------
Total 2,067 $66,864,050.58 100.00%
================== ======================== ======================
</TABLE>
As of the Statistic Calculation Date, the weighted average Loan Rate of the
Initial Loans that are Fixed Rate Loans was approximately 13.885% per annum.
Mortgaged Property Types
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
Initial Principal Principal Balance of
Mortgaged Property Types Loans Balance Fixed Rate Loans
- ---------------------------------------------- --------------------- ------------------------- -----------------------------
<S> <C> <C> <C>
One Family.................................. 1,865 $60,164,737.38 89.98%
Two- to Four- Family........................ 17 608,141.63 0.91
Condominium................................. 121 3,814,361.81 5.70
PUD......................................... 64 2,276,809.77 3.41
--------------------- ------------------------- -----------------------------
Total.............................. 2067 $ 66,864,050.58 100.00%
===================== ========================= =============================
</TABLE>
S-27
<PAGE>
Combined Loan-to-Value Ratios
<TABLE>
<CAPTION>
Number Average % of Aggregate
Range of Combined of Initial Aggregate Principal Principal Balance of
Loan-to-Value Ratios Loans Principal Balance Balance Fixed Rate Loans
- ------------------------------- ---------------- ------------------------ ---------------------- --------------------------
<S> <C> <C> <C> <C>
less than or equal to 49.99%. 2 $ 79,399.55 $39,699.77 0.12%
50.00% to 59.99%............ 1 39,466.36 39,466.36 0.06
60.00% to 69.99%............ 10 593,629.38 59,362.94 0.89
70.00% to 79.99%............ 35 1,082,540.77 30,929.74 1.62
80.00% to 89.99%............ 107 3,286,335.02 30,713.41 4.91
90.00% to 99.99%............ 636 19,199,340.95 30,187.64 28.71
100.00% to 109.99%........... 312 9,764,205.32 31,295.53 14.60
110.00% to 119.99%........... 431 14,045,537.03 32,588.25 21.01
120.00% to 125.00%........... 533 18,773,596.21 35,222.51 28.08
---------------- ------------------------ ---------------------- --------------------------
Total............... 2,067 $ 66,864,050.58 $ 32,348.36 100.00%
================ ======================== ====================== ==========================
</TABLE>
As of the Statistic Calculation Date, the weighted average combined
loan-to-value ratio of the Initial Loans that are Fixed Rate Loans was 108.33%.
FICO Scores
<TABLE>
<CAPTION>
% of
Aggregate
Principal
Number of Weighted Balance of
Initial Aggregate Principal Average FICO Fixed Rate
Range of FICO Scores Loans Balance Scores Loans
- ---------------------------------- ---------------- ----------------------------- -------------------- --------------------
<S> <C>
600 to 619 ....................... 66 $ 1,855,953.55 612.65 2.78%
620 to 639 ....................... 227 6,559,713.57 630.26 9.81
640 to 659 ....................... 565 17,172,766.70 649.40 25.68
660 to 679 ....................... 450 14,815,409.83 669.37 22.16
680 to 699 ....................... 343 12,277,074.31 689.36 18.36
700 to 719 ....................... 224 7,822,050.87 708.37 11.70
720 to 739 ....................... 117 3,906,469.37 729.38 5.84
740 to 759 ....................... 48 1,480,284.21 748.05 2.21
760 to 779 ....................... 21 754,571.48 768.06 1.13
780 to 799 ....................... 4 151,034.52 789.22 0.23
800 to 819 ....................... 2 68,722.18 800.84 0.10
---------------- ----------------------------- -------------------- --------------------
Total ................... 2,067 $ 66,864,050.58 673.83 100.00%
================ ============================= ==================== ====================
</TABLE>
As of the Statistic Calculation Date, the weighted average FICO scores
of the Initial Loans that are Fixed Rate Loans was 673.83.
S-28
<PAGE>
Occupancy
<TABLE>
<CAPTION>
% of Aggregate
Number Principal Balance
of Initial Aggregate of Fixed Rate
Loans Principal Balance Loans
- ----------------------------- ---------------- -------------------------- ---------------------------
<S> <C> <C> <C>
Non-Owner-Occupied 4 $ 121,443.78 0.18%
Owner-Occupied 2,063 66,742,606.80 99.82
---------------- -------------------------- ---------------------------
Total 2,067 $ 66,864,050.58 100.00%
================ ========================== ===========================
</TABLE>
Purpose of Loan
<TABLE>
<CAPTION>
% of Aggregate
Number Aggregate Principal Balance
of Initial Principal of Fixed Rate
Purpose of Loan Loans Balance Loans
- ------------------------- ---------------- ------------------------ -------------------------
<S> <C> <C> <C>
Cash Out 2,041 $ 65,983,262.97 98.68%
Purchase 21 736,875.52 1.10
Refinance 5 143,912.10 0.22
---------------- ------------------------ -------------------------
Total 2,067 $ 66,864,050.58 100.00%
================ ======================== =========================
</TABLE>
S-29
<PAGE>
Principal Balances
<TABLE>
<CAPTION>
% of Aggregate
Number of Principal
Initial Aggregate Balance of Fixed
Range of Principal Balances Loans Principal Balance Rate Loans
- --------------------------------------- ------------------ ---------------------------------- -----------------------
<S> <C> <C> <C>
less than or equal to $15,000.00..... 65 $ 870,441.32 1.30%
$15,000.01 to $20,000.00............. 188 3,419,111.88 5.11
$20,000.01 to $25,000.00............. 389 9,249,958.13 13.83
$25,000.01 to $30,000.00............. 321 9,072,245.18 13.57
$30,000.01 to $35,000.00............. 597 20,346,007.61 30.43
$35,000.01 to $40,000.00............. 198 7,718,650.18 11.54
$40,000.01 to $45,000.00............. 67 2,880,631.47 4.31
$45,000.01 to $50,000.00............. 107 5,207,115.15 7.79
$50,000.01 to $55,000.00............. 45 2,397,807.09 3.59
$55,000.01 to $60,000.00............. 57 3,346,813.57 5.01
$60,000.01 to $65,000.00............. 4 254,880.09 0.38
$65,000.01 to $70,000.00............. 22 1,511,584.24 2.26
$70,000.01 to $75,000.00............. 1 73,561.69 0.11
$75,000.01 to $80,000.00............. 4 315,765.43 0.47
$80,000.01 to $85,000.00............. 1 84,945.29 0.13
greater than or equal to
$85,000.01........................... 1 114,532.25 0.17
------------------ ---------------------------------- -----------------------
Total....................... 2,067 $ 66,864,050.58 100.00%
================== ================================== =======================
</TABLE>
S-30
<PAGE>
Remaining Terms to Maturity
<TABLE>
<CAPTION>
% of Aggregate
Principal
Number Balance of
Range of Remaining Terms of Initial Aggregate Fixed Rate
to Maturity Loans Principal Balance Loans
- ------------------------------------ ------------------ ------------------------- -------------------------
<S> <C> <C> <C>
less than or equal to 149
Months............................ 15 $ 454,363.50 0.68%
150 to 179 Months................. 633 19,344,958.49 28.93
180 to 209 Months................. 478 14,755,942.00 22.07
210 to 239 Months................. 235 7,744,699.76 11.58
240 to 269 Months................. 164 5,571,230.00 8.33
270 to 299 Months................. 292 10,099,282.83 15.10
300 to 329 Months................. 250 8,893,574.00 13.30
------------------ ------------------------- -------------------------
Total.................... 2,067 $ 66,864,050.58 100.00%
================== ========================= =========================
</TABLE>
As of the Statistic Calculation Date, the weighted average original term to
maturity of the Initial Loans that are Fixed Rate Loans was 228.19 months.
As of the Statistic Calculation Date, the weighted average remaining term to
maturity of the Initial Loans that are Fixed Rate Loans was 224.61 months.
S-31
<PAGE>
ADJUSTABLE RATE LOANS
Geographic Distribution of the Mortgaged Properties
<TABLE>
<CAPTION>
% of
Aggregate
Principal
Balance of
Number of Adjustable
Initial Aggregate Principal Rate
State Loans Balance Loans
- ---------------------------------------------- ------------------ --------------------------- ------------------
<S> <C> <C> <C>
Alabama..................................... 2 $ 44,491.36 1.21%
Arizona..................................... 1 27,200.00 0.74
California.................................. 26 907,983.67 24.79
Colorado.................................... 5 128,666.22 3.51
Florida..................................... 4 91,517.09 2.50
Georgia..................................... 2 61,637.85 1.68
Illinois.................................... 3 138,280.67 3.78
Indiana..................................... 1 34,917.64 0.95
Kansas...................................... 10 274,018.76 7.48
Michigan.................................... 6 214,948.79 5.87
Missouri.................................... 25 783,996.22 21.41
North Carolina.............................. 4 114,150.64 3.12
Nevada...................................... 4 140,988.87 3.85
New York.................................... 1 39,953.26 1.09
Ohio........................................ 1 51,316.22 1.40
Oklahoma.................................... 1 24,959.73 0.68
Oregon...................................... 3 132,356.34 3.61
Rhode Island................................ 1 21,000.00 0.57
Utah........................................ 7 252,960.45 6.91
Virginia.................................... 1 31,900.00 0.87
Washington.................................. 3 109,878.36 3.00
Wisconsin................................... 1 35,000.00 0.96
Total.............................. 112 $ 3,662,122.15 100.00%
================== =========================== ==================
</TABLE>
S-32
<PAGE>
Loan Rates (as of the Statistic Calculation Date)
-------------------------------------------------
<TABLE>
<CAPTION>
% of
Aggregate
Principal
Number of Aggregate Balance of
Initial Principal Adjustable
Loan Rate Loans Balance Rate Loans
- -------------------------------- --------------------- ----------------------- ----------------------
<S> <C> <C> <C>
9.000% to 9.999% 12 $ 397,759.04 10.86%
10.000% to 10.999% 20 656,020.38 17.91
11.000% to 11.999% 45 1,472,153.95 40.20
12.000% to 12.999% 28 948,446.75 25.90
13.000% to 13.999% 6 162,782.30 4.45
14.000% to 14.999% 1 24,959.73 0.68
--------------------- ----------------------- ----------------------
TOTAL 112 $ 3,662,122.15 100.00%
===================== ======================= ======================
</TABLE>
As of the Statistic Calculation Date, the weighted average Loan Rate of the
Initial Loans that are Adjustable Rate Loans was 11.47%.
Gross Margins
<TABLE>
<CAPTION>
% of Aggregate
Aggregate Principal Balance
Number of Principal of Adjustable Rate
Margin Loans Balance Loans
- --------------------------------- --------------------- ----------------------- ----------------------------
<S> <C> <C> <C>
4.000% to 4.999% 6 $ 193,491.65 5.28%
5.000% to 5.999% 25 909,000.02 24.82
6.000% to 6.999% 41 1,298,339.74 35.45
7.000% to 7.999% 32 1,013,111.36 27.66
8.000% to 8.999% 8 248,179.38 6.78
--------------------- ----------------------- ----------------------------
TOTAL 112 $ 3,662,122.15 100.00%
===================== ======================= ============================
</TABLE>
As of the Statistic Calculation Date, the weighted average Gross Margin for the
Initial Loans that are Adjustable Rate Loans was 6.58%.
S-33
<PAGE>
Lifetime Caps
<TABLE>
<CAPTION>
% of Aggregate
Aggregate Principal Balance
Number of Principal of Adjustable Rate
Lifetime Cap Initial Loans Balance Loans
- ----------------------------- ---------------------- ----------------------- ----------------------------
<S> <C> <C> <C>
15.001% to 16.000% 12 397,759.04 10.86
16.001% to 17.000% 22 743,181.38 20.29
17.001% to 18.000% 43 1,384,992.95 37.82
18.001% to 19.000% 29 973,435.62 26.58
19.001% to 20.000% 5 137,793.43 3.76
greater than 20.00% 1 24,959.73 0.68
---------------------- ----------------------- ----------------------------
TOTAL 112 $3,662,122.15 100.00%
====================== ======================= ============================
</TABLE>
As of the Statistic Calculation Date, the weighted average Lifetime Cap for the
Initial Loans that are Adjustable Rate Loans was 17.47%.
Lifetime Floors
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Number of Principal Principal Balance
Lifetime Floor Initial Loans Balance of Adjustable Rate
- ---------------------------- --------------------- ------------------------ ---------------------------
<S> <C> <C> <C>
less than or equal to 34 $ 1,140,940.42 31.16%
11.000%
11.001% to 12.000% 43 1,384,992.95 37.82
12.001% to 13.000% 29 973,435.62 26.58
13.001% to 14.000% 5 137,793.43 3.76
greater than 14.000% 1 24,959.73 0.68
--------------------- ------------------------ ---------------------------
TOTAL 112 $ 3,662,122.15 100.00%
===================== ======================== ===========================
</TABLE>
As of the Statistic Calculation Date, the weighted average Lifetime Floor for
the Initial Loans that are Adjustable Rate Loans was 11.47%.
S-34
<PAGE>
Mortgaged Property Types
<TABLE>
<CAPTION>
% of Aggregate
Number of Aggregate Principal Balance of
Initial Principal Adjustable Rate
Mortgaged Property Types Loans Balance Loans
- ---------------------------------------------- --------------------- ------------------------- -----------------------------
<S> <C> <C> <C>
One Family.................................. 97 $ 3,119,977.94 85.20%
Two- to Four- Family........................ 3 106,713.48 2.91
Condominium................................. 12 435,430.73 11.89
--------------------- ------------------------- -----------------------------
Total..................................... 112 $ 3,662,122.15 100.00%
===================== ========================= =============================
</TABLE>
Combined Loan-to-Value Ratios
<TABLE>
<CAPTION>
% of
Aggregate
Principal
Number Balance of
of Aggregate Average Adjustable
Range of Combined Initial Principal Principal Rate
Loan-to-Value Ratios Loans Balance Balance Loans
- ---------------------------- ---------------- ---------------------- -------------------------- ------------------
<S> <C> <C> <C> <C>
70.00% to 79.99%......... 3 $ 92,550.00 $ 30,850.00 2.53%
80.00% to 89.99%......... 7 220,588.20 31,512.60 6.02
90.00% to 99.99%......... 53 1,619,121.34 30,549.46 44.21
100.00% to 109.99%........ 20 697,504.54 34,875.23 19.05
110.00% to 119.99%........ 15 546,172.07 36,411.47 14.91
120.00% to 125.00%........ 14 486,186.00 34,727.57 13.28
---------------- ---------------------- -------------------------- ------------------
Total................... 112 $ 3,662,122.15 $ 32,697.52 100.00%
================ ====================== ========================== ==================
</TABLE>
As of the Statistic Calculation Date, the weighted average Combined
Loan-to-Value Ratio of the Initial Loans that are Adjustable Rate Loans was
103.51%.
S-35
<PAGE>
FICO Scores
<TABLE>
<CAPTION>
% of
Aggregate
Weighted Principal
Number Average Balance of
of Initial Aggregate Principal FICO Adjustable
Range of FICO Scores Loans Balance Scores Rate Loans
- ---------------------------------- ------------------ ------------------------------ ----------- --------------
<S> <C> <C> <C> <C>
600 to 619...................... 2 $ 67,981.61 606.23 1.86%
620 to 639...................... 18 514,904.93 627.46 14.06
640 to 659...................... 30 934,665.07 650.67 25.52
660 to 679...................... 24 882,260.43 669.07 24.09
680 to 699...................... 13 450,112.58 690.54 12.29
700 to 719...................... 10 291,492.29 710.16 7.96
720 to 739...................... 7 268,298.98 726.25 7.33
740 to 759...................... 3 99,804.44 744.00 2.73
760 to 779...................... 4 101,285.60 768.14 2.77
800 to 819...................... 1 51,316.22 800.00 1.40
------------------ ------------------------------ ----------- --------------
Total 112 $ 3,662,122.15 674.07 100.00
================== ============================== =========== ==============
</TABLE>
As of the Statistic Calculation Date, the weighted average FICO scores
of the Initial Loans that are Adjustable Rate Loans was 674.07.
Occupancy
The Mortgaged Property relating to each of the Adjustable Rate Loans
was, based on representations made by the borrower at the closing of the Loan,
owner occupied.
S-36
<PAGE>
Purpose of Loan
<TABLE>
<CAPTION>
% of Aggregate
Number Aggregate Principal Balance
of Initial Principal of Adjustable
Purpose of Loan Loans Balance Rate Loans
- -------------------------- ---------------- ------------------------- --------------------------
<S> <C> <C> <C>
Cash Out 105 $ 3,413,379.04 93.21%
Purchase 6 198,743.11 5.43
Refinance 1 50,000.00 1.37
---------------- ------------------------- --------------------------
Total 112 $ 3,662,122.15 100.00%
================ ========================= ==========================
</TABLE>
Principal Balances
<TABLE>
<CAPTION>
% of Aggregate
Principal
Number of Aggregate Balance of
Initial Principal Adjustable Rate
Range of Principal Balances Loans Balance Loans
- --------------------------------------- --------------------- ----------------------- ------------------------
<S> <C> <C> <C>
less than or equal to $20,000.00..... 17 $ 272,483.23 7.44%
20,000.01 to 30,000.00............... 36 913,101.46 24.93
30,000.01 to 40,000.00............... 41 1,477,741.99 40.35
40,000.01 to 50,000.00............... 8 382,118.54 10.43
greater than 50,000.00 10 616,676.93 16.84
--------------------- ----------------------- ------------------------
112 $ 3,662,122.15 100.00%
===================== ======================= ========================
</TABLE>
S-37
<PAGE>
Remaining Terms to Maturity
<TABLE>
<CAPTION>
% of Aggregate
Number Principal
of Balance of
Range of Remaining Terms to Initial Aggregate Adjustable
Maturity Loans Principal Balance Rate Loans
- ----------------------------------------- ---------------- -------------------------- -----------------------
<S> <C> <C> <C>
less than or equal to 179 months....... 21 $ 680,844.01 18.59%
180 to 209............................. 25 720,200.00 19.67
210 to 239............................. 4 128,772.81 3.52
240 to 269............................. 6 159,400.00 4.35
270 to 299............................. 27 981,045.33 26.79
300 to 329............................. 29 991,860.00 27.08
---------------- -------------------------- -----------------------
112 $ 3,662,122.15 100.00%
================ ========================== =======================
</TABLE>
As of the Statistic Calculation Date, the weighted average original
term to maturity for the Initial Loans that are Adjustable Rate Loans
was 249.25 months.
As of the Statistic Calculation Date, the weighted average remaining
term for the Initial Loans that are Adjustable Rate Loans was 248.58
months.
S-38
<PAGE>
Conveyance of Subsequent Loans
The Sale and Servicing Agreement permits the Trust to purchase from
Life, subsequent to the Closing Date and prior to November 30, 1997, Subsequent
Loans in an amount not to exceed the Original Pre-Funded Amount in aggregate
principal balance for inclusion in the Trust. Accordingly, the statistical
characteristics of the Loans after giving effect to the acquisition of any
Subsequent Loans will likely differ from the information specified above (which
is based exclusively on the Initial Loans as of the Statistic Calculation Date).
The date or dates on which the Trust acquires the Subsequent Loans are referred
to herein as "Subsequent Transfer Dates." Any Subsequent Loans conveyed to the
Trust Fund will be subject to the approval of and must satisfy criteria
established by the Rating Agencies and are not expected to cause the
characteristics of the Loans to vary materially in the aggregate from the
characteristics of the Initial Loans.
LIFE FINANCIAL CORP.
Life Financial Corp. is a Delaware corporation organized by Life as a
unitary thrift holding company. The Company owns all of the capital stock of
Life. At June 30, 1997, Life Financial Corp. had total assets of $195.3 million,
total liabilities of $153.6 million and total equity of $41.7 million.
LIFE SAVINGS BANK, FEDERAL SAVINGS BANK
General
The business entity now known as Life Savings Bank, Federal Savings
Bank ("Life") was originally chartered under the name Life Savings and Loan
Association as a stock savings and loan association under the laws of the State
of California in 1983 and changed its name to Life Savings Bank, Federal Savings
Bank and became a federally chartered stock savings bank in 1991. Life conducts
its business from its home office in San Bernardino, California, a mortgage
financing office in Riverside, California, a loan center in Jacksonville,
Florida and a recently established loan center in Denver, Colorado.
Life reorganized its lending operations in 1994, changing strategies
from a lending strategy which emphasized traditional mortgage banking operations
and traditional portfolio lending to a financial services operation strategy
which focuses on the origination and purchase primarily for sale of Portfolio
Series loans, Liberator Series loans and commercial and multifamily loans. In
addition, Life has hired management and other personnel experienced in the types
of lending in which Life now engages. To date, Life has originated Portfolio
Series and Liberator Series loans primarily through its nationwide network of
correspondents, other third party originators and mortgage brokers.
Life's Portfolio Series Loans are targeted as debt consolidation loans
for repeat or frequent borrowers with generally strong credit ratings. Such
loans may have a combined loan to value ratio of up to 125%. Lending decisions
for these loans are based on an analysis of the prospective borrower's
documented cash flow and credit history supplemented by a collateral evaluation
deemed appropriate by Life.
Life's Liberator Series loans, which may be either fixed rate or
adjustable rate loans, are targeted for the purchase or refinance of residential
real property by borrowers who are considered sub-prime borrowers because of
prior credit problems or the absence of a credit history or who otherwise have
characteristics which do not conform to FNMA or FHLMC underwriting guidelines.
These loans have loan to value ratios which generally are 80% or less, but such
ratio may be as high as 90%. Lending decisions, subject to certain limited
exceptions, are based on an analysis of the prospective borrower's documented
cash flow and credit history combined with an evaluation of the value of the
collateral.
S-39
<PAGE>
Recently, Life has begun to originate or purchase floating rate home
equity lines of credit that have a maximum combined loan to value ratio of 125%.
Also, Life recently has commenced originating and purchasing a limited amount of
multifamily and commercial real estate loans ranging from $50,000 to $1.5
million. Such loans are secured by multifamily properties or properties used for
commercial business purposes.
At June 30, 1997 Life had approximately 176 employees. Life's
headquarters are located at 10540 Magnolia Avenue, Riverside, California 92505
and its telephone number is (888) 388-5433. Life's servicing office is located
at 4110 Tigris Way, Riverside, California 92503 and its telephone number is
(909) 280-4100.
Restructuring
General
In order to increase operating flexibility and provide a broader range
of services to its customers, the management of Life determined (i) to
reorganize into the holding company form of organization, (ii) to form separate
holding company subsidiaries, (iii) to restructure Life by forming separate
operating subsidiaries in order to realize possible future values from such
subsidiaries, and (iv) to raise additional capital to fund operations and
expansion.
The Reorganization and the Public Offering
The Board of Directors of Life and the Company unanimously approved and
entered into a plan of reorganization pursuant to which Life was reorganized
into a holding company structure and became the wholly owned subsidiary of the
Company and each share of common stock of Life outstanding immediately prior to
the Reorganization was converted into three shares of common stock of the
Company.
The plan of reorganization (the "Reorganization") was approved by the
affirmative vote of the holders of a majority of the outstanding shares of Life
common stock eligible cast at the adjourned annual meeting of stockholders held
on June 20, 1997. The Reorganization was consummated immediately prior to the
offering for sale by the Company of 2,900,000 shares of its common stock (the
"Public Offering"). The terms of the public offering are contained in the
Company's offering document dated June 24, 1997.
Loan Originations
Life originates and purchases loans underwritten to Life's guidelines.
Life's loans are principally originated for Life by or purchased by Life from
its nationwide network of correspondents, other third party originators and
mortgage brokers. Each correspondent has an audited net worth in excess of
$250,000, an errors and omissions insurance policy in a minimum amount of
$1,000,000, a warehouse line of credit for the funding of loan production, and
at least a two-year business history. Each other third party originator and
junior correspondent has an unaudited net worth of at least $50,000 and
$100,000, respectively. Each must have a two-year business history, and junior
corespondents must have an errors and omissions insurance policy of $300,000 and
a warehouse line of credit. Brokers generally have no significant net worth but
have demonstrated an ability to originate and process mortgage and consumer
loans. Their personal standing in the lending community is verified with
acceptable credit and finance industry references.
Correspondents, third party originators, junior correspondents and
brokers are identified through existing personal relationships with Life and its
officers, extensive marketing by Life in various media venues or referral to
Life.
As of June 30, 1997, Life had business relationships with 138
correspondents and junior correspondents and 906 mortgage brokers and other
third party originators.
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Underwriting Guidelines
General. Life attempts to maintain its interest rates and other charges
at a level competitive with those of other lending institutions and finance
companies. Generally, Life's Portfolio Series loans are made at fixed rates for
fixed terms, are fully amortized over their term and may extend for a term of up
to thirty (30) years. Life's Liberator Series loans are offered both at fixed
rates and at adjustable rates, and for fixed terms which may extend up to thirty
(30) years. While the majority of Liberator Series loans fully amortize over
their term, they may provide for balloon payments. In all instances, Life
permits borrowers to prepay such loans. Where permitted by applicable law, Life
may impose a prepayment fee. Whether a prepayment fee is imposed and the amount
of such penalty, if any, is negotiated between Life and the individual borrower
prior to closing the loan. In the majority of cases, Life does not impose a
prepayment fee.
Underwriting Procedures. The following is a brief description of
certain of the underwriting standards and procedures used by Life to underwrite
loans. Life conducts its own underwriting review of each loan, including those
loans originated for Life by or purchased by Life from, its correspondents,
other third party originators and brokers. This underwriting process is intended
to assess both the prospective borrower's ability to repay the loan and the
adequacy of the real property security as collateral for the loan granted,
tailored to the general nature of the loans. In certain cases deemed appropriate
by Life, loans may be made outside of Life's general guidelines with the prior
approval of pre-designated senior officers.
Each prospective borrower is required to complete a mortgage loan
application that may include (depending on the program requirement) information
detailing the applicant's liabilities, income, credit history, employment
history and personal information. Since most of the loan applications are
presented through Life's network of correspondents, other third party
originators and brokers, Life completes an additional credit report on all
applications received. Such report typically contains information relating to
such matters as credit history with local and national merchants and lenders,
installment debt payments and any record of defaults, bankruptcies,
repossessions or judgments. This credit report is obtained through a
sophisticated computer program that accesses the most appropriate credit bureau
in a particular ZIP code and combines that information with a credit risk score.
This application and review procedure is used by Life to analyze the
applicant's creditworthiness (i.e., a determination of the applicant's ability
to repay the loan). Creditworthiness is assessed by examination of a number of
factors, including calculating a debt-to-income ratio obtained by dividing a
borrower's fixed monthly debt by the borrower's gross monthly income. Fixed
monthly debt generally includes (i) the monthly payment under any related prior
mortgages (which generally includes an escrow for real estate taxes), (ii) the
monthly payment on the loan applied for and (iii) other installment debt,
including, in the case of revolving debt, the required monthly payment thereon,
or, if no such payment is specified, 5% of the balance as of the date of
calculation. Fixed monthly debt does not include any debt (other than revolving
credit debt) described above that matures within less than 10 months of the date
of calculation.
Several procedures are used to verify information obtained from an
applicant. The applicant's outstanding balance and payment history on any senior
mortgage may be verified by calling the senior mortgage lender. If the senior
mortgage lender cannot be reached by telephone to verify this information, Life
or other originator may rely upon information provided by the applicant, such as
a recent statement from the senior lender and verification of payment, such as
canceled checks, or upon information provided by national credit bureaus. In
order to verify an applicant's employment status, Life or other originator may
obtain from the applicant recent tax returns or other tax forms (e.g., W-2
forms) or current pay stubs or may telephone the applicant's employer or obtain
written verification from the employer. If the employer will not verify
employment history over the telephone, Life or the other originator may rely
solely on the other information provided by the applicant. However, Life does
offer certain Liberator Series loans at reduced loan-to-value ratios in lieu of
documenting cash flow of the borrower.
Debt-to-income ratios for Portfolio Series loans generally do not
exceed 45%, but in certain instances, where deemed appropriate by Life, the
ratio may go as high as 50%. For Liberator Series loans, debt to income
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<PAGE>
ratios may vary depending upon a number of other factors used to ascertain the
creditworthiness of the related borrower.
Life has adopted policies that set forth specified lending requirements
for the Liberator Series loans as they relate to the underwriting and property
appraisal of loans to sub-prime borrowers. These policies include an analysis
based on five classes of such loans, designated Ax, A-, B, C and Cx loans. Class
Ax denominated loans generally relate to borrowers who have no or limited
adverse incidents in their credit histories (typically conforming loans),
whereas Class A-, B, C and Cx loans relate to descending degrees of sub-prime
borrowers. Factors which are considered in evaluating a borrower in this regard
are the presence or absence of a credit history, prior delinquencies in the
payment of mortgage and consumer credit and personal bankruptcies. Class A-
loans generally relate to borrowers with overall good credit who have had
minimal adverse credit issues with less than 25% of their outstanding credit
exhibiting some form of 30-day delinquency in the past 24 months. Class B loans
generally relate to borrowers who have credit delinquencies in their credit
histories, are currently past due on consumer debt payments, have 30 to 60 day
delinquencies related to mortgage payment or have been at their current
employment for less than one year or have a history of late payments on consumer
debt payments and mortgage payments. Class C borrowers have shown a willingness
to pay their obligations in a timely manner with no more than 70% of their
previous obligations reporting a derogatory credit history and currently no
obligation is more than 60 days past due at application. Class Cx borrowers have
many adverse incidents in their credit histories and are generally considered to
have a bad credit history. Although Life will originate Class Cx loans, the vast
majority of the Liberator Series loans originated or purchased by Life are Class
Ax through Class C loans. For adjustable rate Liberator Series loans, Life
qualifies the borrower based on the initial loan rate, which can be a "teaser
rate" up to 200 basis points below the fully indexed rate, if the loan-to-value
ratio is not greater than 70%. For adjustable rate Liberator Series loans having
a loan-to-value ratio of greater than 70% (up to 90%), Life qualifies the
borrower at a rate that is 2% above the initial loan rate.
All mortgaged properties relating to mortgage loans where collateral
assessment is a critical part of the evaluation process are appraised by
licensed or certified appraisers. All of the appraisals are either performed or
reviewed by Life's approved appraisers. Life requires the appraiser to address
neighborhood conditions, site and zoning status and the condition and valuation
of improvements. Following each appraisal, the appraiser prepares a report which
(when appropriate) includes a reproduction cost analysis based on the current
cost of constructing a similar home and a market value analysis based on recent
sales of comparable homes in the area. Title insurance policies are required on
all first lien mortgage loans, with a limited judgment lien report required on
all junior lien loans under $100,000.
Because of the sub-prime creditworthiness of the borrowers under
Liberator Series loans, the evaluation of the mortgaged properties securing such
loans and the ratio of the loans secured by such property to its value become of
greater importance in the underwriting process. The specific procedures and
criteria utilized in the appraisal process may include a desk review, a field
review, or a second appraisal, depending on the size of the loan and its
loan-to-value ratio.
Because Portfolio Series loans have a high mortgage loan-to-value
ratios, the value of the related mortgaged properties have lesser importance.
Borrowers under Portfolio Series loans frequently have little or no equity in
the mortgaged property available to repay the loan if it is in default. For
Portfolio Series loans, Life accepts the homeowner/mortgagee's "as stated" value
on loans to $25,000. On loans in excess of $25,000, to a maximum of $50,000,
Life requires a current tax assessment, a broker price opinion, a statistical
appraisal or a HUD-1 conformed closing statement if the subject property has
been purchased within the previous 12 months. For loans in excess of $50,000, a
drive-by appraisal including comparable analysis on a FHLMC Form 704 is
required.
Terms of the Fixed Rate Loans. Each Fixed Rate Loan originated or
purchased by Life bears interest at a fixed rate as indicated on the related
mortgage note. Interest with respect to each Fixed Rate Loan accrues on an
actuarial interest method. The actuarial interest method provides that interest
is charged and payments are due as of a scheduled day of each month which is
fixed at the time of origination. Scheduled monthly payments on such
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Loans received either earlier or later (other than delinquent) than the
scheduled due dates thereof will not affect the amortization schedule of the
relative application of such payments to principal and interest. Approximately
98.56% of Initial Loans that are the Fixed Rate Loans are fully amortizing in
accordance with their terms. The remainder of the Fixed Rate Loans are not fully
amortizing over their terms but instead require substantial balloon payments on
their maturity dates. Payments received on a Loan are applied first to interest
accrued to the date of payment, then to late fees and other charges and then to
reduce the unpaid principal balance of the related loan.
The Fixed Rate Loan provides the holder with the right to require the
borrower to make immediate payment of the entire principal balance plus all
accrued but unpaid interest under the loan agreement if, among other things, the
borrower fails to make any payment under the loan agreement when due (subject to
a grace period or right to cure a default required by state law), or, where
permitted by applicable law, if the borrower transfers any interest in the
property securing the loan agreement.
In the event of default on a mortgage that is senior to a Fixed Rate
Loan, the junior mortgagee has the right in many states to satisfy the defaulted
senior mortgage in full, or to cure such default and make the defaulted senior
mortgage current as to payment, in either event adding any amounts expended in
connection with such satisfaction or cure to the then current principal balance
for such Loan. In such an event of default, the Servicer will either take the
actions described above, take other appropriate actions, or refrain from taking
any action based upon the Servicer's practices in connection with servicing
loans for itself and others. See "Certain Legal Aspects of the Loans--Mortgages"
in the Prospectus.
Terms of the Adjustable Rate Loans. All of the Adjustable Rate Loans
are Liberator Series loans. The aggregate of the Cut-Off Date Principal Balances
of the Initial Loans that are Adjustable Rate Loans as of the Statistic
Calculation Date was $3,662,122.15.
Each Adjustable Rate Loan bears interest at an adjustable rate. The
interest rate borne by each Adjustable Rate Loan first adjusts on the date set
forth in the related Note for the Adjustable Rate Loans and then every six
months thereafter (each such date thereafter a "Change Date"). The Loan Rate
with respect to each Adjustable Rate Loan will adjust on each applicable Change
Date to equal the sum of (i) the London Interbank Offered Rate for six-month
U.S. dollar deposits (the "LIBOR Index") either as announced by FNMA, and
available as of the date 45 days before each Change Date, or as published in The
Wall Street Journal generally on a day of the month preceding the month of the
Change Date and (ii) the gross margin (the "Gross Margin") set forth in the
related Note subject to rounding and to the effects of the Periodic Rate Cap (as
defined below), the applicable Lifetime Cap (as defined below) and the
applicable Lifetime Floor (as defined below).
The Servicer
Life, in its capacity as servicer of the Loans under the Sale and
Servicing Agreement (in such capacity, the "Servicer"), will be required to
service the Loans with the same degree of skill and care it exercises with
respect to all comparable loans and assets that it services for its own account.
See "Description of the Transfer and Servicing Agreements--Servicing" herein.
The Servicer's loan servicing activities include (i) the collection and
remittance of mortgage loan payments, (ii) accounting for principal and interest
and other collections and expenses, (iii) holding and disbursing escrow or
impound funds for real estate taxes and insurance premiums, (iv) inspecting
properties when appropriate, (v) contacting delinquent borrowers, and (vi)
acting as fiduciary in foreclosing on and disposing of mortgaged properties. As
of June 30, 1997, the Servicer serviced 9,770 loans having an aggregate
outstanding principal balance of approximately $448.1 million, of which
approximately 71.3%, based on aggregate outstanding principal balance, were
serviced for others.
The following information briefly describes certain aspects of the
Servicer's servicing process. Borrowers are sent payment coupon books that
specify the fixed payment due and the late payment amount, if any. Due dates
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<PAGE>
predominantly occur on the first day of each calendar month. If a payment is not
received within fifteen days of the due date, an initial collection effort is
made both by telephone and mail in an attempt to bring the delinquent account
current. The various stages of delinquency are monitored and evaluated on a
weekly basis.
Means of contacting delinquent borrowers include, but are not limited
to, telephone calls and collection letters. When an account is 17 or more days
past due, the collection supervisor analyzes the account to determine the
appropriate course of action. If a borrower is experiencing difficulty in making
payments on time, the Servicer may modify the payment schedule (insofar as
permitted by the Agreement) but will not remove the loan from a delinquency
status.
The course of action selected by the Servicer is dependent upon a
number of factors including the borrower's payment history, the amount of
equity, if any, in the related mortgage property and the reason for the
borrower's current inability to make timely payments.
When a loan is 59 days past due, the related mortgaged property is
reassessed to determine its current value with the results being evaluated by
the Servicer to determine a course of action. Foreclosure regulations and
practices and the rights of the owner in default vary from state to state, but
procedures may generally be initiated if: (i) the loan is 45 days or more
delinquent; (ii) a notice of default on a senior lien is received; or (iii) the
Servicer discovers circumstances indicating potential loss exposure. During the
foreclosures process, expenses incurred by the Servicer may be added to the
amount owed by the borrower, as permitted by applicable law. Upon completion of
the foreclosure, the property may be sold to an outside bidder, or pass to the
mortgagee, in which case the Servicer proceeds to liquidate the asset.
The Servicer may not foreclose on the property securing a junior
mortgage loan unless it forecloses subject to the related senior mortgage(s). In
such cases, the Servicer will pay the amount due on the senior mortgage(s) to
the senior mortgagee(s), only if the Servicer considers such action appropriate.
In the event that foreclosure proceedings have been instituted on a senior
mortgage prior to the initiation of the Servicer's foreclosure action, the
Servicer will either satisfy such mortgage at the time of the foreclosure sale
or take other appropriate action.
Servicing and charge-off policies and collection practices may change
over time in accordance with the Servicer's business judgment, changes in its
real estate loan portfolio and applicable laws and regulations, as well as other
considerations.
Regulations and practices regarding the liquidation of properties
(e.g., foreclosure) and the rights of the borrower in default vary greatly from
state to state. Only if a delinquency cannot otherwise be cured will the
Servicer decide that liquidation is the appropriate course of action. If, the
Servicer determines that purchasing a property securing a mortgage loan will
minimize the loss associated with such defaulted loan, the Servicer may bid at
the foreclosure sale for such property or accept from the borrower a deed in
lieu of foreclosure.
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Delinquency and Loan Loss Experience
The following tables set forth information relating to the delinquency
and loan loss experience on the mortgage loans included in the Servicer's
servicing portfolio for the periods shown. The delinquency and loan loss
experience represents the historical experience of the Servicer, and there can
be no assurance that the future experience on the Loans in the Trust will be the
same as, or more favorable than, that of the total mortgage loans in the
Servicer's servicing portfolio. See "Risk Factors--Additional Factors Affecting
Delinquencies, Defaults and Losses on Loans -- Limited Historical Delinquency,
Loss and Prepayment Information."
Delinquency and Foreclosure Experience
(Dollars in Thousands)
<TABLE>
<CAPTION>
At December 31, 1995 At December 31, 1996
--------------------------------------------- ---------------------------------------------
Number % of % of Number % of % of
Delinquency of Loans Loans Amount Amount of Loans Loans Amount Amount
Status (1) Serviced Serviced Serviced Serviced Serviced Serviced Serviced Serviced
---------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
30 to 59 22 0.74% $ 2,118 0.83% 10 0.26% $ 860 0.36%
60 to 89 9 0.30 482 0.19 0 0.00 0 0.00
90 + (2) 10 0.33 762 0.30 3 0.08 143 0.06
Bankruptcy 2 0.07 288 0.11 9 0.24 778 0.33
Foreclosure 7 0.23 793 0.31 56 1.48 6,279 2.64
REO (3) 8 0.27 1,221 0.48 9 0.24 1,197 0.50
- -------------------------------------------------------------------------------------------------------------
Total 58 1.94% $ 5,664 2.22% 87 2.30% $ 9,257 3.89%
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1997
-----------------------------------------------
Number of % of % of
Delinquency Loans Loans Amount Amount
Status (1) Serviced Serviced Serviced Serviced
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
30 to 59 98 1.01% $ 2,203 0.49%
60 to 89 26 0.27 518 0.12
90 + (2) 17 0.17 736 0.16
Bankruptcy 21 0.21 1,068 0.24
Foreclosure 81 0.83 7,826 1.75
REO (3) 18 0.18 1,751 0.39
- ------------------------------------------------------------------
Total 261 2.67% $ 14,102 3.15%
</TABLE>
- ---------------------------
(1) The past due period is based on the actual number of days that
a payment is contractually past due. A loan as to which a
monthly payment was due 60-89 days prior to the reporting
period is considered 60-89 days past due, etc.
(2) Statistic for 90+ delinquencies does not include loans in
bankruptcy or forclosure.
(3) An "REO Property" is a property acquired and held as a result
of foreclosure or deed in lieu of foreclosure.
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<PAGE>
Total Servicing Portfolio
(Dollars in Thousands)
<TABLE>
<CAPTION>
At Or For The At Or For The
Year Ended Year Ended At Or For The
December 31, December 31, Six Months
------------ ------------ Ended
1995 1996 June 30, 1997
---- ---- -------------
<S> <C> <C> <C>
Servicing portfolio at period end $ 253,714 $ 237,958 $ 448,133
Average outstanding (1) $ 146,242 $ 218,166 $ 341,166
Number of loans outstanding 2,986 3,781 9,770
</TABLE>
Owned Portfolio and
Loan Charge-Off Experience
(Dollars in Thousands)
<TABLE>
<CAPTION>
At Or For The At Or For The At Or For The
Year Ended Year Ended Six Months
December 31, December 31, June 30, 1997
------------ ------------ -------------
1995 1996
---- ----
<S> <C> <C> <C>
Owned portfolio at period end $ 63,381 $ 67,913 $ 133,021
Average outstanding owned $ 65,521 $ 72,556 $ 111,213
portfolio
Loan charge-offs 914 734 529
Loan recoveries 65 219 9
Net loan charge-offs 849 515 520
Net loan charge-offs as a 1.30% 0.71% 0.47%
percentage of the average
outstanding (2)
Net loan charge-offs as a 1.34% 0.76% 0.39%
percentage of the portfolio at
period end (2)
</TABLE>
- ---------------------------
(1) "Average outstanding" presented is the arithmetic average of the end of
month principal balances of the loans in Life's servicing portfolio
outstanding at the close of business for each period.
(2) Percentages presented are for the Servicer's owned portfolio only. The
loss percentages for loans serviced for others is not available because
in many instances the servicing client handles the disposition of
foreclosed property.
While the above delinquency and foreclosure and loan charge-off
experience reflect the Servicer's historical experiences at the dates and for
the periods indicated, there can be no assurance that the delinquency and
foreclosure and loan charge-off experience of the Loans will be similar. See
"Risk Factors--Additional Factors Affecting Delinquencies, Defaults and Losses
on Loans -- Limited Historical Delinquency, Loss and Prepayment Information."
Accordingly, the information should not be considered to reflect the credit
quality of the Loans included in the Trust or used as a basis of assessing the
likelihood, amount or severity of losses on the Loans. The statistical data in
the
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tables are based on all of the loans in the Servicer's servicing portfolio. The
Loans are likely to have characteristics which distinguish them from the
majority of the loans in the Servicer's servicing portfolio.
The Servicer may resign its obligations to service the Loans only in
accordance with the terms of the Sale and Servicing Agreement. No removal or
resignation will become effective until the Indenture Trustee or a successor
servicer has assumed the Servicer's responsibilities and obligations in
accordance therewith.
The Servicer may not assign its obligations under the Sale and
Servicing Agreement unless it first obtains the written consent of the Indenture
Trustee; provided, however, that any assignee must meet the eligibility
requirements for a successor servicer set forth in the Sale and Servicing
Agreement. Notwithstanding anything in the preceding sentence to the contrary,
the Servicer may delegate certain of its obligations to a sub-servicer pursuant
to one or more sub-servicing agreements. A sub-servicer must meet certain
eligibility requirements, as set forth in the Sale and Servicing Agreement, and
each sub-servicing agreement shall require servicing of the Loans consistent
with the terms of the Sale and Servicing Agreement.
Repurchase or Substitution of Loans
Each of Life and 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 any Loan or any document
deficiency with respect to any Loan (each, a "Defective Loan") or (ii) on or
before the Determination Date next succeeding the end of such 60-day period, to
repurchase such Defective Loan at a price (the "Purchase Price") equal to the
Principal Balance of such Defective Loan as of the date of repurchase, plus all
accrued and unpaid interest on such Defective Loan to but not including the due
date in the Due Period relating to the Distribution Date on which such Purchase
Price is to be distributed, computed at the Loan Rate. In addition, Life may at
its option purchase from the Trust any Loan that is 90 days or more delinquent
and which Life determines in good faith would otherwise become subject to
foreclosure proceedings so long as the aggregate of such purchases does not
exceed 10% of the Maximum Collateral Amount. In lieu of repurchasing a Defective
Loan, each of Life and the Transferor may replace such Defective Loan with one
or more Qualified Substitute Loans. If the aggregate outstanding principal
balance of the Qualified Substitute Loan(s) is less than the outstanding
Principal Balance of the Defective Loan(s), either Life or the Transferor will
also remit for distribution to the holders of the Notes an amount (a
"Substitution Adjustment") equal to such shortfall, which will result in a
prepayment of principal on the Notes for the amount of such shortfall. As used
herein, a "Qualified Substitute Loan" is a home loan that (i) has an interest
rate which differs by no more than two percentage points from the Loan Rate for
the Defective Loan which it replaces (each, a "Deleted Loan"), (ii) 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 Loan as of such date, (iii) has a lien priority no lower than that of
the Deleted Loan, (iv) complies as of the date of substitution with each
representation and warranty set forth in the Sale and Servicing Agreement with
respect to the Loans, and (v) has a borrower with a credit grade classification
comparable to that of the borrower with respect to the Deleted Loan.
No assurance can be given that, at any particular time, Life will be
capable, financially or otherwise, of repurchasing Defective Loans or
substituting Qualified Substitute Loans for Defective Loans in the manner
described above. If Life or the Transferor repurchases, or is obligated to
repurchase, Defective Loans from any additional series of asset backed
securities, its financial ability to repurchase Defective Loans from the Trust
may be adversely affected. In addition, other events relating to the Transferor,
Life and Life's mortgage lending and consumer finance operations can occur that
would adversely affect the financial ability of Life or the Transferor to
repurchase Defective Loans from the Trust, including without limitation the sale
or other disposition of all or any significant portion of its assets. If Life or
the Transferor is unable to repurchase or replace a Defective Loan, 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
Loan. If the Servicer is unable to collect all amounts due to the Trust with
respect to such Defective Loan, the resulting loss will be borne by the holders
of the Notes to the extent that such loss is not otherwise covered by amounts
available from the credit enhancement provided for the Notes. See "Risk Factors
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<PAGE>
- --Adequacy of Credit Enhancement" and "Risk Factors--Additional Factors
Affecting Delinquencies, Defaults and Losses on Loans "Limitations on Repurchase
or Replacement of Defective Loans" herein.
DESCRIPTION OF CREDIT ENHANCEMENT
Credit enhancement with respect to the Notes will be provided by (i)
the subordination of distributions in respect of the Residual Interests (as well
as the subordination of certain Classes of Notes to other Classes of Notes, as
described herein), and (ii) the Overcollateralization Amount which results from
(a) the excess of the sum of the Original Pool Principal Balance and the
Original Pre-Funded Amount over the aggregate of the Class Principal Balances
for all Classes as of Notes and (b) following the Spread Deferral Period, the
limited acceleration of the principal amortization of the Notes relative to the
amortization of the Loans by the application of Excess Spread, as described
herein.
Subordination and Allocation of Losses
Distributions of interest on the Notes will be made first to the Senior
Notes and then to the Class M-1, Class M-2 and Class B Notes, in that order,
such that no interest will be paid on the Class B Notes until all required
interest payments have been made on the Mezzanine and Senior Notes and no
interest will be paid on the Mezzanine Notes until all required interest
payments have been made on the Senior Notes. In addition, distributions of
principal of the Notes will be made first to the Senior Notes, then to the Class
M-1, Class M-2 Notes and Class B Notes, in that order. Any distributions of
principal to the Classes of Senior Notes will be made sequentially in the order
of increasing numerical Class designations. All Allocable Loss Amounts applied
in reduction of the Class Principal Balances of the Mezzanine Notes will be
applied first to the Class M-2 Notes and then to the Class M-1 Notes, until
their respective Class Principal Balances have been reduced to zero. In
addition, no Allocable Loss Amounts will be applied in reduction of the Class
Principal Balance of any Class of Mezzanine Notes until the Class Principal
Balance of the Class B Notes has been reduced to zero. Further, no Allocable
Loss Amounts will be applied in reduction of the Class Principal Balance of the
Class B Notes until the Overcollateralization Amount has been reduced to zero.
No Allocable Loss Amounts will be applied to the Classes of Senior Notes. The
rights of the holders of the Residual Interests to receive any distributions on
any Distribution Date generally will be subordinated to the rights of the
holders of the Notes. The subordination described above is intended to enhance
the likelihood of the regular receipt of interest and principal due to the
holders of the Classes of Notes and to afford such holders protection against
losses on the Loans, with the greatest amount of such enhancement and protection
being provided to the Classes of Senior Notes, a lesser amount of such
enhancement and protection being provided to the Class M-1 and, in particular,
the Class M-2 Notes, and the least amount of such enhancement and protection
being provided to the Class B Notes. See "Risk Factors--Adequacy of Credit
Enhancement" herein.
On each Distribution Date, the "Allocable Loss Amount" will be equal to
the excess, if any, of (a) the aggregate of the Class Principal Balances of all
Classes of Notes (after giving effect to all distributions on such Distribution
Date) over (b) the sum of the Pool Principal Balance and the Pre-Funded Amount
as of the end of the immediately preceding Due Period.
On each Distribution Date, the "Net Loan Losses" will be equal to the
sum of (A) with respect to the Loans that will have become Liquidated Loans
during the immediately preceding Due Period, an amount (but not less than zero)
determined as of the related Determination Date equal to: (i) the aggregate
uncollected Principal Balances of such Liquidated Loans as of the last day of
such Due Period, minus (ii) the aggregate amount of any recoveries attributable
to principal from whatever source received during any Due Period, with respect
to such Liquidated Loans, including any Due Period subsequent to the Due Period
wherein such Loan became a Liquidated Loan, and including without limitation any
Net Liquidation Proceeds, any Insurance Proceeds, any Released Mortgaged
Property Proceeds, any post-liquidation proceeds, any payments from the related
Obligor and any payments made in connection with the repurchase of or
substitution for a Defective Loan, less the amount of any expenses incurred
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in connection with such recoveries; and (B) any reduction to the Principal
Balances of any Loans resulting from an order issued by a court of appropriate
jurisdiction in an insolvency proceeding.
Overcollateralization
As of any Distribution Date, the "Overcollateralization Amount" will
equal the excess of the sum of the Pool Principal Balance as of the end of the
immediately preceding Due Period and the Pre-Funded Amount as of the end of the
immediately preceeding Due Period over the aggregate of the Class Principal
Balances of all Classes of Notes (after giving effect to all distributions of
the Regular Distribution Amount on such Distribution Date). On the Closing Date,
the Overcollateralization Amount is expected to equal $1,250,000. Following the
termination of the Spread Deferral Period, limited acceleration of the principal
amortization of the Notes relative to the principal amortization of the Loans
has been designed to increase the Overcollateralization Amount over time by
making additional distributions of principal to the holders of the Notes from
the distribution of Excess Spread until the Overcollateralization Amount is at
least equal to the Overcollateralization Target Amount.
The "Spread Deferral Period" will begin on the Closing Date and end as
soon as Excess Spread in an amount equal to $1,250,000 has been deposited in the
Certificate Distribution Account for distribution to the holders of the Residual
Interests. The "Overcollateralization Target Amount" will equal (A) with respect
to any Distribution Date occurring prior to the Stepdown Date, the greater of
(x) 7% of the Maximum Collateral Amount and (y) the Net Delinquency Calculation
Amount, and (B) with respect to any other Distribution Date, the greater of (x)
14% of the Pool Principal Balance as of the end of the related Due Period and
(y) the Net Delinquency Calculation Amount; provided, however, that the
Overcollateralization Target Amount will in no event be less than .50% of the
Maximum Collateral Amount.
If on any Distribution Date an Overcollateralization Deficiency (as
defined herein) exists, distributions of Excess Spread, if any, will be made as
an additional distribution of principal to the holders of the Notes, to be
allocated among the Classes of Notes in the order of priority set forth under
"Description of the Notes--Distributions on the Notes" herein. Such
distributions of Excess Spread are intended to accelerate the amortization of
the Class Principal Balances of all Classes of Notes relative to the
amortization of the Loans, thereby increasing the Overcollateralization Amount.
The relative percentage of the aggregate of the Class Principal Balances of the
Classes of Notes to the sum of the Pool Principal Balance and Pre-Funded Amount
will decrease as a result of the application of Excess Spread to reduce such
Class Principal Balances.
On any Distribution Date (i) prior to the termination of the Spread
Deferral Period or (ii) with respect to which the Overcollateralization
Deficiency Amount is equal to zero, all or a portion of the Excess Spread may be
distributed to the holders of the Residual Interests rather than as principal to
the holders of the Notes, thereby ceasing the acceleration of principal
amortization of the Notes in relation to the principal amortization of the
Loans, until such time as the Overcollateralization Deficiency Amount is greater
than zero (i.e., due to a reduction in the Overcollateralization Amount as a
result of Net Loan Losses or delinquencies or due to an increase in the
Overcollateralization Target Amount as a result of the failure to satisfy
certain delinquency criteria).
While the application of Excess Spread in the manner specified above
has been designed to produce and maintain a given level of
overcollateralization, there can be no assurance that Excess Spread will be
generated in sufficient amounts to ensure that such overcollateralization level
will be achieved or maintained at all times. In particular, a high rate of
delinquencies on the Loans during any Due Period could cause the amount of
interest received on the Loans during such Due Period to be less than the amount
of interest distributable on the Notes on the related Distribution Date. In such
a case, the Class Principal Balances of the Classes of Notes would decrease at a
slower rate relative to the Pool Principal Balance, resulting in a reduction of
the Overcollateralization Amount and, in some circumstances, an Allocable Loss
Amount. In addition, Net Loan Losses will reduce the Overcollateralization
Amount to zero before Allocable Loss Amounts are applied in reduction of the
Class Principal Balances of certain Classes of Notes. See "Risk
Factors--Adequacy of Credit Enhancement" herein.
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DESCRIPTION OF THE NOTES
General
The Life Financial Home Loan Owner Trust 1997-2 (the "Trust") will
issue seven Classes of Asset Backed Notes (collectively, the "Notes") having the
designations and aggregate initial principal amounts specified on the cover
hereof pursuant to an Indenture to be dated as of September 1, 1997 (the
"Indenture"), between the Trust and the Indenture Trustee. The Trust will also
issue instruments representing the residual interest (each a "Residual
Interest") in the Trust pursuant to the terms of a Trust Agreement dated as of
September 4, 1997 (the "Trust Agreement"), among the Depositor, the Transferor,
the Co-Owner Trustee and the Owner Trustee. The Notes are secured by the assets
of the Trust pursuant to the Indenture.
The Notes offered hereby will be issued pursuant to the terms of the
Indenture. The following summary describes certain terms of the Notes and the
Indenture. It does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the Notes and
the Indenture.
Beneficial ownership interests in each Class of Notes will be held in
minimum denominations of $100,000 and integral multiples of $1,000 in excess
thereof in book-entry form only. Persons acquiring beneficial interests in the
Notes will hold their interests through DTC.
Book-Entry Registration
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to Section 17A of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). DTC accepts securities for deposit
from its participating organizations ("Participants") and facilitates the
clearance and settlement of transactions in such securities between Participants
through electronic book-entry changes in accounts of its Participants, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks and trust companies and clearing
corporations and may include certain other organizations. Indirect access to the
DTC system is also available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("Indirect Participants").
Noteholders which are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of Notes may do so only
through Participants or Indirect Participants (unless and until Definitive
Securities (as defined herein) are issued). In addition, Noteholders will
receive all distributions of principal and interest on the Notes through DTC and
its Participants. Under a book-entry format, Noteholders may experience some
delay in their receipt of payments, since such payments will be forwarded by the
Indenture Trustee to Cede & Co. ("Cede"), as nominee for DTC. DTC will forward
such payments to its Participants which thereafter will forward them to Indirect
Participants or Noteholders. Noteholders will not be recognized by the Indenture
Trustee as Noteholders, as such term will be used in the Indenture, and
Noteholders will only be permitted to exercise the rights of Noteholders
indirectly through DTC and its Participants. Noteholders will not receive or be
entitled to receive Definitive Securities representing their respective
interests in the Notes, except under the limited circumstances described below.
While the Notes are outstanding (except under the circumstances
described below), under the rules, regulations and procedures creating and
affecting DTC and its operations (the "Rules"), DTC will be required to make
book-entry transfers among Participants on whose behalf it acts with respect to
the Notes and will be required to receive and transmit distributions of
principal and interest on the Notes. Participants and Indirect Participants with
which Noteholders have accounts with respect to the Notes will similarly be
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Noteholders.
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Because DTC can only act on behalf of Participants, which in turn act
on behalf of Indirect Participants, the ability of a Noteholder to pledge Notes
to persons or entities that do not participate in the DTC system, or otherwise
take actions in respect of such Notes, may be limited due to the lack of
physical certificates for such Notes.
Unless and until Definitive Securities are issued, Noteholders which
are not Participants may transfer ownership of Notes only through Participants
by instructing such Participants to transfer such Notes, by book-entry transfer,
through DTC for the account of the purchasers of such Notes, which account is
maintained with their respective Participants. Under the Rules and in accordance
with DTC's normal procedures, transfer of ownership of Notes will be executed
through DTC and the accounts of the respective Participants at DTC will be
debited and credited. Similarly, the respective Participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Noteholders.
DTC has advised the Issuer and the Indenture Trustee that, unless and
until Definitive Securities are issued, DTC will take any action permitted to be
taken by a Noteholder under the Indenture only at the direction of one or more
Participants to whose DTC accounts the Notes are credited. DTC may take
conflicting actions with respect to different undivided interests as a result of
different directions from Participants whose holdings include such undivided
interests.
Neither the Issuer nor the Indenture Trustee will have any liability
for any aspect of the records relating to or payments made on account of
beneficial ownership interests of the Notes held by Cede, as nominee for DTC, or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
Definitive Securities
Under certain circumstances set forth in the Indenture, the Notes will
be issued in fully registered, certificated form ("Definitive Securities") to
the Noteholders of a given series or their nominees, rather than to DTC or its
nominee, only if (i) the Servicer, in respect of the Notes, advises the
Indenture Trustee in writing that DTC is no longer willing or able to discharge
properly its responsibilities as depository with respect to such Notes, and the
Servicer is unable to locate a qualified successor, (ii) the Servicer, at its
option advises the Indenture Trustee in writing that it elects to terminate the
book-entry system through DTC or (iii) after the occurrence of an Event of
Default under the Indenture Noteholders representing beneficial interests
aggregating at least a majority of the outstanding amount of the Notes advise
the DTC in writing that the continuation of the book-entry system through DTC
(or a successor thereto) is no longer in the best interests of the Noteholders.
Upon the occurrence of any event described in the immediately preceding
paragraph, DTC will be required to notify all Noteholders and the Indenture
Trustee of the availability of Definitive Notes. Upon surrender to the Indenture
Trustee of the typewritten Notes representing book-entry Notes and receipt of
instructions for registration, the Issuer shall execute and the Indenture
Trustee shall authenticate the Definitive Notes in accordance with the
instructions of DTC.
Distributions of principal of, and interest on, such Notes will
thereafter be made by the Indenture Trustee in accordance with the procedures
set forth in the Indenture directly to Noteholders in whose names the Definitive
Notes were registered at the close of business on the applicable Record Date
specified for such Notes.
Distributions on the Notes
For the definitions of certain of the defined terms used in the
following subsections, See "--Related Definitions" below.
On the 25th day of each month or, if such day is not a Business Day,
the first Business Day immediately following, commencing in October 1997 (each
such date, a "Distribution Date"), the Indenture Trustee or its
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designee will distribute to the persons in whose names the Notes are registered
on the related Record Date the portion of the aggregate distribution to be made
to each Noteholder as described below. The "Record Date" with respect to any
Distribution Date shall be the close of business on the last Business Day of the
month preceding the month in which such Distribution Date occurs. Prior to any
termination of the book-entry provisions, distributions on the book-entry Notes
will be made to beneficial owners of interests therein only through DTC and its
Participants. See "Description of the Notes--Book-Entry Registration" herein.
Available Collection Amount. Distributions on the Notes on each
Distribution Date will be made from the Available Collection Amount. The
Servicer will calculate the Available Collection Amount on the fourteenth
calendar day of each month or, if such day is not a Business Day, then the
immediately preceding Business Day (each such day, a "Determination Date"). With
respect to each Distribution Date, the "Available Collection Amount" is the sum
of (i) all amounts received on the Loans or required to be paid by Life or the
Transferor during the related Due Period (exclusive of such amounts not required
to be deposited by the Servicer in the Collection Account and amounts permitted
to be withdrawn by the Indenture Trustee from the Collection Account) 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 Distribution Date for the Class B Notes or an early redemption or
termination of the Notes pursuant to the Sale and Servicing Agreement, the
Termination Price; (iii) the Purchase Price paid for any Loans required to be
purchased and the Substitution Adjustment to be deposited to the Collection
Account in connection with any substitution, in each case prior to the related
Determination Date; and (iv) the Capitalized Interest Requirement (as defined
herein), if any, with respect to such Distribution Date.
Distributions of Interest. Interest on the Class Principal Balance of
each Class of Notes will accrue thereon at the applicable Note Interest Rate,
and will be payable to the holders of such Class of Notes monthly on each
Distribution Date, commencing in October 1997. Interest on each Class of Notes
will be calculated on the basis of a 360-day year of twelve 30-day months.
With respect to any Distribution Date, interest distributions on the
Notes will be made from the Available Collection Amount (plus, if applicable,
the amount, if any, of Pre-Funding Earnings and, on the Distribution Date
relating to the Due Period in which the termination of the Pre-Funding Period
occurred, the amount on deposit in the Pre-Funding Account at such time) net of
the Trust Fees and Expenses (the "Available Distribution Amount"). Interest
payments will be made, first, to the Classes of Senior Notes, pro rata, based on
the amount of interest distributable in respect of each such Class calculated at
the related Note Interest Rate, second, to the Classes of Mezzanine Notes,
sequentially, in the order of their numerical Class designation, and then to the
Class B Notes. Under certain circumstances, the amount available for interest
payments could be less than the amount of interest payable on all Classes of
Notes on any Distribution Date. In such event, each affected Class will receive
its ratable share (based upon the aggregate amount of interest due to such
Class) of the remaining amount available to be distributed as interest after the
payment of all interest due on each Class having a higher interest payment
priority. In addition, any such interest deficiency will be carried forward as a
Noteholders' Interest Carry-Forward Amount for such Class and will be
distributed to holders of each such Class of Notes on subsequent Distribution
Dates to the extent that sufficient funds are available. Any such interest
deficiency could occur, for example, if delinquencies or losses realized on the
Loans were exceptionally high or were concentrated in a particular month. No
interest will accrue on any Noteholders' Interest Carry-Forward Amount for any
Class.
Distributions of Principal. Principal distributions will be made to the
holders of the Notes on each Distribution Date in an amount generally equal to
the sum of (i) the Regular Principal Distribution Amount (less, in certain
circumstances, the excess of the Overcollateralization Amount over the
Overcollateralization Target Amount) and (ii) to the extent of the
Overcollateralization Deficiency Amount, any Excess Spread for such Distribution
Date.
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Distribution Priorities.
A. On each Distribution Date, the Regular Distribution Amount will be
distributed in the following order of priority:
(i) to the holders of the Senior Notes, the Senior
Noteholders' Interest Distributable Amount for such Distribution Date
allocated to each Class of Senior Notes, pro rata, based on the amount
of interest distributable in respect of each such Class calculated at
the related Note Interest Rate;
(ii) sequentially, to the holders of the Class M-1 and Class
M-2 Notes, in that order, the Class M-1 Noteholders' Interest
Distributable Amount and the Class M-2 Noteholders' Interest
Distributable Amount, respectively, for such Distribution Date;
(iii) to the holders of the Class B Notes, the Class B
Noteholders' Interest Distributable Amount for such Distribution Date;
(iv) if with respect to such Distribution Date the Pre-Funding
Pro Rata Distribution Trigger has occurred, the amount on deposit in
the Pre-Funding Account at the end of the Pre--Funding Period will be
distributed as principal to all Classes of Notes and the Residual
Interests (which initially represent the Overcollateralization Amount
on the Closing Date), pro rata, based on the Original Class Principal
Balances thereof and the Residual Interests in relation to the sum of
the Original Pool Principal Balance and the Original Pre-Funded Amount;
(v) to the holders of the Class A-1, Class A-2, Class A-3 and
Class A-4 Notes, in that order, until the respective Class Principal
Balances thereof are reduced to zero, in an amount necessary to reduce
the aggregate Class Principal Balance of the Senior Notes to the Senior
Optimal Principal Balance for such Distribution Date,
(vi) sequentially, to the holders of the Class M-1 and Class
M-2 Notes, in that order, in an amount necessary to reduce the Class
Principal Balances thereof to the Class M-1 Optimal Principal Balance
and the Class M-2 Optimal Principal Balance, respectively, for such
Distribution Date;
(vii) to the holders of the Class B Notes, in an amount
necessary to reduce the Class Principal Balance thereof to zero;
(viii) sequentially, to the Class M-1, Class M-2 and Class B
Notes, in that order, until their respective Loss Reimbursement
Deficiencies have been paid in full; and
(ix) any remaining amount to the holders of the Residual
Interests.
B. On each Distribution Date, the Indenture Trustee shall distribute
the Excess Spread, if any, in the following order of priority (in each case
after giving effect to all payments specified in paragraph A. above):
(i) prior to the termination of the Spread Deferral Period, to
the Certificate Distribution Account for distribution to the holders of
the Residual Interests;
(ii) upon the termination of the Spread Deferred Period, (A)
in an amount equal to the Overcollateralization Deficiency Amount, if
any, as follows:
(1) to the holders of the Class A-1, Class A-2, Class
A-3 and Class A-4 Notes, in that order, until the respective
Class Principal Balances thereof are reduced to zero, in an
amount necessary to
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reduce the aggregate Class Principal Balance of the Senior
Notes to the Senior Optimal Principal Balance for such
Distribution Date;
(2) sequentially, to the holders of the Class M-1 and
Class M-2 Notes, in that order, until the respective Class
Principal Balances thereof have been reduced to the Class M-1
Optimal Principal Balance and Class M-2 Optimal Principal
Balance, respectively, for such Distribution Date; and
(3) to the holders of the Class B Notes until the
Class Principal Balance thereof has been reduced to zero; and
(B) sequentially, to the Class M-1, Class M-2 and Class B
Notes, in that order, until their respective Loss Reimbursement
Deficiencies, if any, have been paid in full; and
(C) any remaining amount to the holders of the Residual
Interests.
Notwithstanding the priorities specified above, on any Distribution
Date as to which the Class Principal Balances of each of the Class M-1, Class
M-2 and Class B Notes and the Overcollateralization Amount have been reduced to
zero, distributions of principal on the Classes of Senior Notes on such
Distribution Date will be applied to such Classes pro rata based on their
respective Class Principal Balances.
Related Definitions
For purposes hereof, the following terms shall have the following
meanings:
Business Day: Any day other than (i) a Saturday or a 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.
Class A Excess Spread Distribution Amount: With respect to any
Distribution Date, the least of (i) the excess of (x) the Class Principal
Balance of all Senior Notes (after giving effect to all distributions of the
Regular Distribution Amount) over (y) the Senior Optimal Principal Balance for
such Distribution Date, (ii) the Over-collateralization Deficiency Amount for
such Distribution Date, and (iii) the Excess Spread for such Distribution Date.
Class A Principal Distribution Amount: With respect to any Distribution
Date, the lesser of (i) the Regular Principal Distribution Amount and (ii) the
excess of (x) the aggregate Class Principal Balance of all Senior Notes (prior
to giving effect to distributions on such Distribution Date, other than any
distributions in respect of the Pre-Funded Amount on the Distribution Date on
which a Pre-Funding Pro Rata Distribution Trigger has occurred) over (y) the
Senior Optimal Principal Balance for such Distribution Date.
Class B Noteholders' Interest Carry-Forward Amount: With respect to any
Distribution Date and the Class B Notes, the excess of (A) the Class B
Noteholders' Monthly Interest Distributable Amount for the preceding
Distribution Date and any outstanding Class B Noteholders' Interest
Carry-Forward Amount for such preceding Distribution Date over (B) the amount in
respect of interest that is actually distributed to such Notes on such preceding
Distribution Date.
Class B Noteholders' Interest Distributable Amount: With respect to any
Distribution Date and the Class B Notes, the sum of the Class B Noteholders'
Monthly Interest Distributable Amount for such Distribution Date and the Class B
Noteholders' Interest Carry-Forward Amount for such Distribution Date.
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Class B Noteholders' Monthly Interest Distributable Amount: With
respect to each Distribution Date and the Class B Notes, the aggregate amount of
interest accrued during the related Interest Period at the Class B Note Interest
Rate on the sum of (i) the Class Principal Balance of the Class B Notes
immediately preceding such Distribution Date and (ii) any Class B Noteholders'
Interest Carry-Forward Amount remaining outstanding for such Distribution Date.
Class M-1 Noteholders' Interest Carry-Forward Amount: With respect to
any Distribution Date and the Class M--1 Notes, the excess of (A) the Class M-1
Noteholders' Monthly Interest Distributable Amount for the preceding
Distribution Date and any outstanding Class M-1 Noteholders' Interest
Carry-Forward Amount for such preceding Distribution Date over (B) the amount in
respect of interest that is actually distributed to such Notes on such preceding
Distribution Date.
Class M-1 Noteholders' Interest Distributable Amount: With respect to
any Distribution Date and the Class M--1 Notes, the sum of the Class M-1
Noteholders' Monthly Interest Distributable Amount for such Distribution Date
and the Class M-1 Noteholders' Interest Carry-Forward Amount for such
Distribution Date.
Class M-1 Noteholders' Monthly Interest Distributable Amount: With
respect to each Distribution Date and the Class M-1 Notes, the aggregate amount
of interest accrued during the related Interest Period at the Class M-1 Note
Interest Rate on the sum of (i) the Class Principal Balance of the Class M-1
Notes immediately preceding such Distribution Date and (ii) any Class M-1
Noteholders' Interest Carry-Forward Amount remaining outstanding for such
Distribution Date.
Class M-1 Optimal Principal Balance: With respect to any Distribution
Date prior to the Stepdown Date, zero; and with respect to any other
Distribution Date, the Pool Principal Balance as of the preceding Determination
Date minus the sum of (i) the aggregate Class Principal Balance of the Senior
Notes (after taking into account distributions made on such Distribution Date in
reduction of the Class Principal Balances of the Classes of Senior Notes made
prior to such determination) and (ii) the greater of (x) the sum of (1) 33% of
the Pool Principal Balance as of the preceding Determination Date and (2) the
Overcollateralization Target Amount for such Distribution Date (calculated
without giving effect to the proviso in the definition thereof) and (y) 0.50% of
the Maximum Collateral Amount; provided, however, that the Class M-1 Optimal
Principal Balance shall never be less than zero or greater than the Original
Class Principal Balance of the Class M-1 Notes.
Class M-2 Noteholders' Interest Carry-Forward Amount: With respect to
any Distribution Date and the Class M-2 Notes, the excess of (A) the Class M-2
Noteholders' Monthly Interest Distributable Amount for the preceding
Distribution Date and any outstanding Class M-2 Noteholders' Interest
Carry-Forward Amount for such preceding Distribution Date over (B) the amount in
respect of interest that is actually distributed to such Notes on such preceding
Distribution Date.
Class M-2 Noteholders' Interest Distributable Amount: With respect to
any Distribution Date and the Class M-2 Notes, the sum of the Class M-2
Noteholders' Monthly Interest Distributable Amount for such Distribution Date
and the Class M-2 Noteholders' Interest Carry-Forward Amount for such
Distribution Date.
Class M-2 Noteholders' Monthly Interest Distributable Amount: With
respect to each Distribution Date (other than the first Distribution Date) and
the Class M-2 Notes, the aggregate amount of interest accrued during the related
Interest Period at the Class M-2 Note Interest Rate on the sum of (i) the Class
Principal Balance of the Class M-2 Notes immediately preceding such Distribution
Date and (ii) any Class M-2 Noteholders' Interest Carry-Forward Amount remaining
outstanding for such Distribution Date.
Class M-2 Optimal Principal Balance: With respect to any Distribution
Date prior to the Stepdown Date, zero; and with respect to any other
Distribution Date, the Pool Principal Balance as of the preceding Determination
Date minus the sum of (i) the aggregate Class Principal Balance of the Senior
Notes (after taking into account any distributions made on such Distribution
Date in reduction of the Class Principal Balances of the Classes of Senior
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Notes made prior to such determination) plus the Class Principal Balance of the
Class M-1 Notes (after taking into account any distributions made on such
Distribution Date in reduction of the Class Principal Balance of the Class M-1
Notes prior to such determination) and (ii) the greater of (x) the sum of (1)
15% of the Pool Principal Balance as of the preceding Determination Date and (2)
the Overcollateralization Target Amount for such Distribution Date (without
giving effect to the proviso in the definition thereof) and (y) 0.50% of the
Maximum Collateral Amount; provided, however, that the Class M-2 Optimal
Principal Balance shall never be less than zero or greater than the Original
Class Principal Balance of the Class M-2 Notes.
Excess Spread: With respect to any Distribution Date, the excess of (a)
the Available Distribution Amount over (b) the Regular Distribution Amount.
Insurance Proceeds: With respect to any Loan, the proceeds paid to the
Servicer by any insurer pursuant to any insurance policy covering a Loan,
Mortgaged Property or REO Property or any other insurance policy that relates to
a Loan, net of any expenses which are incurred by the Servicer in connection
with the collection of such proceeds and not otherwise reimbursed to the
Servicer, but excluding the proceeds of any insurance policy that are to be
applied to the restoration or repair of the Mortgaged Property or released to
the borrower in accordance with accepted loan servicing procedures.
Interest Period: With respect to any Distribution Date and each Class
of Notes, the calendar month preceding the month of such Distribution Date based
on a 360-day year consisting of twelve 30-day months.
Liquidated Loan: With respect to any date of determination and any 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
earliest of: (a) the liquidation of the related Mortgaged Property acquired
through foreclosure or similar proceedings, (b) the Servicer's determination in
accordance with customary accepted practices that no further amounts are
collectible from the Loan and (c) any portion of a scheduled monthly payment of
principal and interest is past due in excess of 180 days.
Loss Reimbursement Deficiency: As of any date of determination and as
to the Class M-1 Notes, Class M-2 Notes or Class B Notes, the amount of
Allocable Loss Amounts, together with interest thereon, applied to the reduction
of the Class Principal Balance of such Class and not reimbursed pursuant to the
Sale and Servicing Agreement.
Net Delinquency Calculation Amount: With respect to any Distribution
Date, the excess, if any, of (x) the product of 2.5 and the Six-Month Rolling
Delinquency Average over (y) the aggregate of the amounts of Excess Spread for
the three preceding Distribution Dates.
Net Liquidation Proceeds: With respect to any Distribution Date, any
cash amounts received from Liquidated Loans during the related Due Period,
whether through trustee's sale, foreclosure sale, disposition of Mortgaged
Properties 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 Loans, in each case,
net of any reimbursements made to the Servicer from such amounts for any
unreimbursed Servicing Compensation and Servicing Advances (including
nonrecoverable Servicing Advances) made and any other fees and expenses paid by
the Servicer in connection with the foreclosure, conservation and liquidation of
the related Liquidated Loans or Mortgaged Properties pursuant to the Sale and
Servicing Agreement.
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Note Interest Rate: With respect to each Class of Notes, the interest
rate per annum set forth or described below:
Class A-1: 6.71%
Class A-2: 6.74%
Class A-3: 6.96%
Class A-4: 7.45%
Class M-1: 7.58%
Class M-2: 7.73%
Class B: 7.98%
Noteholders' Interest Carry-Forward Amount: With respect to any
Distribution Date, any of the Senior Noteholders' Interest Carry-Forward Amount,
the Class M-1 Interest Carry-Forward Amount, the Class M-2 Interest
Carry-Forward Amount or the Class B Interest Carry-Forward Amount.
Noteholders' Interest Distributable Amount: With respect to any
Distribution Date, the sum of the Senior Noteholders' Interest Distributable
Amount, the Class M-1 Interest Distributable Amount, the Class M-2 Interest
Distributable Amount and the Class B Interest Distributable Amount.
Overcollateralization Amount: With respect to any Distribution Date,
the amount equal to the excess of (a) the sum of the Pool Principal Balance as
of the end of the immediately preceding Due Period and the Pre-Funded Amount as
of such Distribution Date over (b) the aggregate of the Class Principal Balances
of the Classes of Notes (after giving effect to distributions on the Notes and
the Residual Interests on such Distribution Date).
Overcollateralization Deficiency Amount: With respect to any date of
determination, the excess, if any, of the Overcollateralization Target Amount
over the Overcollateralization Amount (such Overcollateralization Amount to be
calculated after giving effect to all payments of the Regular Distribution
Amount on the Notes and the Residual Interests on such Distribution Date).
Overcollateralization Target Amount: (A) With respect to any
Distribution Date occurring prior to the Stepdown Date, an amount equal to the
greater of (x) 7% of the Maximum Collateral Amount and (y) the Net Delinquency
Calculation; and (B) with respect to any other Distribution Date, an amount
equal to the greater of (x) 14% of the Pool Principal Balance as of the end of
the related Due Period and (y) the Net Delinquency Calculation Amount; provided,
however, that the Overcollateralization Target Amount shall in no event be less
than .50% of the Maximum Collateral Amount.
Regular Distribution Amount: With respect to any Distribution Date, the
lesser of (a) the Available Distribution Amount and (b) the sum of (i) the
aggregate of the Noteholders' Interest Distributable Amounts, (ii) the Regular
Principal Distribution Amount and (iii) if such Distribution Date relates to the
Due Period in which the Pre-Funding Period ended and at the termination of such
Pre-Funding Period a Pre-Funding Pro Rata Distribution Trigger had occurred, the
amount on deposit in the Pre-Funding Account on such date.
Regular Principal Distribution Amount: On each Distribution Date, an
amount equal to the lesser of:
(A) the sum of (i) each payment of principal collected by the Servicer
during the related Due Period, (ii) all partial and full principal prepayments
applied by the Servicer during such related Due Period, (iii) the principal
portion of all Net Liquidation Proceeds, Insurance Proceeds and Released
Mortgaged Property Proceeds received during the related Due Period, (iv) that
portion of the purchase price of any repurchased Loan which represents
principal, (v) the principal portion of any Substitution Adjustments required to
be deposited in the Collection Account as of the related Determination Date,
(vi) on the Distribution Date in which the Trust is to be terminated pursuant to
the Sale and Servicing Agreement, that portion of the Termination Price to be
applied to the payment of principal of the Notes and (v) if such Distribution
Date relates to the Due Period in which the Pre-
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Funding Period ended and at the termination of such Pre-Funding Period a
Pre-Funding Pro Rata Distribution Trigger had not occurred, the amount on
deposit in the Pre-Funding Account on such date; and
(B) the aggregate of the Class Principal Balances of the Classes of
Notes immediately prior to such Distribution Date.
Released Mortgaged Property Proceeds: With respect to any Distribution
Date, the proceeds received by the Servicer in connection with (i) a taking of
an entire Mortgaged Property by exercise of the power of eminent domain or
condemnation or (ii) any release of part of the Mortgaged Property from the lien
of the related Mortgage, whether by partial condemnation, sale or otherwise,
which in either case are not released to the related borrower in accordance with
applicable law, accepted mortgage servicing procedures and the Sale and
Servicing Agreement.
Senior Noteholders' Interest Carry-Forward Amount: With respect to any
Distribution Date and the Senior Notes, the excess of (A) the Senior
Noteholders' Monthly Interest Distributable Amount for the preceding
Distribution Date and any outstanding Senior Noteholders' Interest Carry-Forward
Amount for such preceding Distribution Date over (B) the amount in respect of
interest that is actually distributed to such Notes on such preceding
Distribution Date.
Senior Noteholders' Interest Distributable Amount: With respect to any
Distribution Date and the Senior Notes, the sum of the Senior Noteholders'
Monthly Interest Distributable Amount for such Distribution Date and the Senior
Noteholders' Interest Carry-Forward Amount for such Distribution Date.
Senior Noteholders' Monthly Interest Distributable Amount: With respect
to each Distribution Date and the Classes of Senior Notes, the aggregate amount
of interest accrued during the related Interest Period at the respective Note
Interest Rates on the sum of (i) the Class Principal Balance of the Classes of
Senior Notes immediately preceding such Distribution Date and (ii) any Senior
Noteholders' Interest Carry-Forward Amount remaining outstanding for such
Distribution Date.
Senior Optimal Principal Balance: With respect to any Distribution Date
prior to the Stepdown Date, zero; with respect to any other Distribution Date,
an amount equal to the Pool Principal Balance as of the preceding Determination
Date minus the greater of (a) the sum of (1) 55.0% of the Pool Principal Balance
as of the preceding Determination Date and (2) the Overcollateralization Target
Amount for such Distribution Date (without giving effect to the proviso in the
definition thereof) and (b) 0.50% of the Maximum Collateral Amount; provided,
however, that the Senior Optimal Principal Balance shall never be less than zero
or greater than aggregate Class Principal Balance of the Senior Notes as of the
Closing Date.
Six-Month Rolling Delinquency Average: With respect to any Distribution
Date, the average of the applicable 60-Day Delinquency Amounts for each of the
six immediately preceding Due Periods, where the 60-Day Delinquency Amount for
any Due Period is the aggregate of the Principal Balances of all Loans that are
60 or more days delinquent, in foreclosure or REO Property as of the end of such
Due Period.
Spread Deferral Period: The period beginning on the Closing Date and
ending as soon as Excess Spread in an amount equal to $1,250,000 has been
deposited in the Certificate Distribution Account for distribution to the
holders of the Residual Interests.
Stepdown Date: The first Distribution Date occurring after September
2000 as to which all of the following conditions exist:
(1) the Pool Principal Balance has been reduced to an amount less than
or equal to 50% of the Maximum Collateral Amount;
(2) the Net Delinquency Calculation Amount is less than 8% of the
Maximum Collateral Amount; and
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(3) the aggregate Class Principal Balance of the Senior Notes (after
giving effect to distributions of principal on such Distribution Date) will be
able to be reduced on such Distribution Date (such determination to be made by
the Indenture Trustee prior to making actual distributions on such Distribution
Date) to an amount equal to the excess of (i) the Pool Principal Balance as of
the preceding Determination Date over (ii) the greater of (a) the sum of (1)
55.0% of the Pool Principal Balance as of the preceding Determination Date and
(2) the Overcollateralization Target Amount for such Distribution Date (such
Overcollateralization Target Amount calculated without giving effect to the
proviso in the definition thereof and calculated pursuant only to clause (B) in
the definition thereof) and (b) 0.50% of the Maximum Collateral Amount.
Application of Allocable Loss Amounts
Following any reduction of the Overcollateralization Amount to zero,
any Allocable Loss Amounts will be applied, sequentially, in reduction of the
Class Principal Balances of the Class B, Class M-2 and Class M-1 Notes, in that
order, until their respective Class Principal Balances have been reduced to
zero. The Class Principal Balances of the Classes of Senior Notes will not be
reduced by any application of Allocable Loss Amounts. The reduction of the Class
Principal Balance of any applicable Class of Notes by the application of
Allocable Loss Amounts entitles such Class to reimbursement in an amount equal
to the Loss Reimbursement Deficiency. Each such Class of Notes will be entitled
to receive its Loss Reimbursement Deficiency, or any portion thereof, in
accordance with the payment priorities specified herein. Payment in respect of
Loss Reimbursement Deficiencies will not reduce the Class Principal Balance of
each related Class. The Loss Reimbursement Deficiency with respect to any Class
will remain outstanding until the earlier of (x) the payment in full of such
amount to the holders of such Class and (y) the occurrence of the applicable
Final Maturity Date (although there is no guarantee that such amounts will be
paid on such date).
Pre-Funding Account
On the Closing Date, $30,000,000 (as adjusted pursuant to the
immediately following sentence, the "Original Pre-Funded Amount") will be
deposited in an account (the "Pre-Funding Account"), which account will be in
the name of the Indenture Trustee and shall be part of the Trust and be used to
acquire Subsequent Loans. To the extent that the Original Pool Principal Balance
is more or less than $95,000,000, the Original Pre-Funded Amount will be
decreased or increased by a corresponding amount provided that the amount of any
such adjustment shall not exceed $6,250,000. During the Pre-Funding Period, the
amount on deposit in the Pre-Funding Account (net of investment earnings
thereon) (the "Pre-Funded Amount") will be reduced by the amount thereof used to
purchase Subsequent Loans in accordance with the Sale and Servicing Agreement.
The "Pre-Funding Period" is the period commencing on the Closing Date and ending
generally on the earlier to occur of (i) the date on which the amount on deposit
in the Pre-Funding Account (net of any investment earnings thereon) is less than
$50,000 and (ii) November 30, 1997. On the Distribution Date following the Due
Period in which the termination of the Pre-Funding Period occurs, if the
Pre-Funded Amount at the end of the Pre-Funding Period is less than $50,000, any
such Pre-Funded Amount will be distributed to holders of the Classes of Notes
then entitled to receive principal on such Distribution Date in reduction of the
related Class Principal Balances, thus resulting in a partial redemption of the
related Notes on such date. On the Distribution Date following the Due Period in
which the termination of the Pre-Funding Period occurs, if the Pre-Funded Amount
at the end of the Pre-Funding Period is greater than or equal to $50,000 (such
event, a "Pre-Funding Pro Rata Distribution Trigger"), such Pre-Funded Amount
will be distributed to the holders of all Classes of Notes and the Residual
Interests (which initially represent the Overcollateralization Amount on the
Closing Date), pro rata, based on the Original Class Principal Balances thereof
and the Residual Interests in relation to the sum of the Original Pool Principal
Balance and the Original Pre-Funded Amount.
Amounts on deposit in the Pre-Funding Account will be invested in
eligible investments. All interest and any other investment earnings on amounts
on deposit in the Pre-Funding Account will be deposited in the Note Distribution
Account.
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Capitalized Interest Account
On the Closing Date, a portion of the sales proceeds of the Notes will
be deposited in an account (the "Capitalized Interest Account") for application
by the Indenture Trustee on the Distribution Dates in October 1997, November
1997 and December 1997 to cover shortfalls in interest on the Notes that may
arise due to the utilization of the Pre-Funding Account as described herein. Any
amounts remaining in the Capitalized Interest Account at the end of the
Pre-Funding Period will be paid to Life.
Optional Termination of the Trust
The holders of an aggregate percentage interest in the Residual
Interests in excess of 50% (the "Majority Residual Interestholders") may, at
their option, effect an early termination of the Trust on or after any
Distribution Date on which the Pool Principal Balance declines to 10% or less of
the Maximum Collateral Amount, by purchasing all of the Loans at a price equal
to or greater than the Termination Price. The "Termination Price" shall be an
amount equal to the sum of (i) the then outstanding Principal Balances of the
Loans plus all accrued and unpaid interest thereon, (ii) any Trust Fees and
Expenses due and unpaid on such date and (iii) any unreimbursed Servicing
Advances including such Servicing Advances deemed to be nonrecoverable. The
proceeds from such sale will be distributed in the order and priority set forth
above under "--Distribution Priorities".
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes certain terms of the Indenture, the
Sale and Servicing Agreement, the Administration Agreement, the Custodial
Agreement and the Trust Agreement (collectively, the "Transfer and Servicing
Agreements"). Forms of certain of the Transfer and Servicing Agreements have
been filed as exhibits to the Registration Statement. Copies of the Transfer and
Servicing Agreements will be filed with the Commission following the issuance of
the Notes. 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" in the Prospectus, to which description reference is hereby
made.
Sale and Assignment of the Loans
On the Closing Date, the Depositor will sell, convey, transfer and
assign the Initial Loans to the Trust. The Trust, concurrently with the sale,
conveyance, transfer and assignment of the Initial Loans, will deliver (or cause
to be delivered) to the Depositor the Notes in exchange for the Loans. The Trust
will pledge and assign the Loans (including any rights it may acquire from time
to time in the Subsequent Loans) to the Indenture Trustee in exchange for the
Notes. Each Loan will be identified in a schedule appearing as an exhibit to the
Sale and Servicing Agreement delivered to the Indenture Trustee as such Schedule
may from time to time be amended (the "Loan Schedule").
In addition, the Depositor will deliver (or cause to be delivered), as
to each Loan, to the Indenture Trustee or to the Custodian, the related Note
endorsed in blank or 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 blank or in the name
of the Indenture Trustee, in recordable form, and any intervening assignments of
the Mortgage (collectively, as to each Loan, an "Indenture Trustee's Loan
File"). Subject to confirmation by the Rating Agencies, with respect to Loan
secured by Mortgaged Properties located in certain states where Life has been
advised by counsel that recordation of an assignment of mortgage is not
necessary in order to perfect an interest in a Loan, assignments of Mortgage
will not be filed to reflect the transfer of the Loans to the Trust and the
pledge of the Loans to Indenture Trustee. Rather, Life in its capacity as the
Servicer will retain record title to such mortgages on behalf of the
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Indenture Trustee and the Noteholders. See "Risk Factors--Additional Factors
Affecting Delinquencies, Defaults and Losses on Loans--Non-recordation of
Assignments". In all other cases, assignments to the Indenture Trustee of the
Mortgages will be recorded in order to protect the Trust and the Indenture
Trustee's interest in the Loans against the claims of certain creditors of Life
or subsequent purchasers. Life will deliver or cause to be delivered to the
Indenture Trustee after recordation the assignments of the Mortgages and the
Mortgages. In the event that Life cannot deliver the Mortgage or any assignment
with evidence of recording thereon concurrently with the conveyance thereof
under the Sale and Servicing Agreement because it has or they have not yet been
returned by the public recording office or because such office retains the
original thereof, then Life will deliver or cause to be delivered to the
Indenture Trustee or the Custodian a certified true photocopy of such Mortgage
or assignment. Life will deliver or cause to be delivered to the Indenture
Trustee or the Custodian any such Mortgage or assignment with evidence of
recording indicated thereon upon receipt thereof from the public recording
office. The Indenture Trustee or the Custodian will agree, for the benefit of
the holders of the Notes, to review (or cause to be reviewed) each Indenture
Trustee's Loan File within 30 days after the conveyance of the related Loan to
the Trust to ascertain that all required documents have been executed and
received, subject to the applicable cure period in the Transfer and Servicing
Agreements.
Trust Fees and Expenses
As compensation for its services pursuant to the Sale and Servicing
Agreement, the Servicer is entitled to the Servicing Fee and additional
servicing compensation and reimbursement as described under "Servicing" below.
As compensation for their services pursuant to the applicable Transfer and
Servicing Agreements, the Indenture Trustee is entitled to the Indenture Trustee
Fee and the Owner Trustee is entitled to the Owner Trustee Fee.
Servicing
In consideration for the performance of the daily loan servicing
functions for the Loans, the Servicer is entitled to a monthly fee (the
"Servicing Fee") equal to 1.00% (100 basis points) per annum (the "Servicing Fee
Rate") of the Pool Principal Balance as of the first day of the immediately
preceding Due Period. See "Risk Factors-- Additional Factors Affecting
Delinquencies, Defaults and Losses on Loans - Dependence on Servicer for
Servicing Loans" herein. The Servicer will pay the fees of any Subservicer out
of the amounts it receives as the Servicing Fee. 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, late payment charges and any other servicing-related penalties
and fees (such additional compensation and Servicing Fee, collectively the
"Servicing Compensation").
In the event of a delinquency or a default with respect to a Loan, the
Servicer will have no obligation to advance scheduled monthly payments of
principal or interest with respect to such Loan. However, the Servicer will make
reasonable and customary expense advances with respect to the Loans (each, a
"Servicing Advance") in accordance with their servicing obligations under the
Sale and Servicing Agreement and will be entitled to receive reimbursement for
such Servicing Advances as described herein. For example, with respect to a
Loan, such Servicing Advances may include costs and expenses advanced for the
preservation, restoration and protection of any Mortgaged Property, including
advances to pay delinquent real estate taxes and assessments. Any Servicing
Advances previously made and determined by the Servicer to be nonrecoverable, in
accordance with accepted servicing procedures will be reimbursable from amounts
in the Collection Account prior to distributions to Noteholders.
Collection Account, Note Distribution Account and Certificate Distribution
Account
The Servicer is required to use its best efforts to deposit in a
segregated account (the "Collection Account"), within two Business Days of
receipt, all payments received after the Cut-Off Date on account of principal
and interest, all Net Liquidation Proceeds, Insurance Proceeds, Released
Mortgaged Property Proceeds, post-liquidation proceeds, any amounts payable in
connection with the repurchase or substitution of any Loan and any amount
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required to be deposited in the Collection Account in connection with the
termination of the Notes. The foregoing requirements for deposit in the
Collection Account will be exclusive of payments on account of principal and
interest collected on the 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 (including the payment of
Servicing Compensation). The Collection Account may be maintained at any
depository institution which satisfies the requirements set forth in the
definition of "Eligible Account" in the Sale and Servicing Agreement.
The Servicer will establish and maintain with the Indenture Trustee an
account, in the name of the Indenture Trustee on behalf of the Noteholders, into
which amounts released from the Collection Account for distribution to the
Noteholders will be deposited and from which all distributions to the
Noteholders will be made (the "Note Distribution Account").
On the Business Day prior to each Distribution Date, the Indenture
Trustee will deposit the Available Collection Amount into the Note Distribution
Account by making the appropriate withdrawals from the Collection Account. On
each Distribution Date, the Indenture Trustee will make withdrawals from the
Note Distribution Account for application of the amounts specified below in the
following order of priority:
(i) to provide for the payment of certain fees of the Trust in
the following order: (a) to the Indenture Trustee, an amount equal to
the Indenture Trustee Fee and all unpaid Indenture Trustee Fees from
prior Due Periods and (b) to the Servicer on behalf of the Owner
Trustee, an amount equal to the Owner Trustee Fee and all unpaid Owner
Trustee Fees from prior Due Periods; and
(ii) to provide for the payments to the holders of the Notes,
the holders of the Residual Interests and the Servicer of the amounts
specified herein under "Description of the Notes--Distributions on the
Notes."
Income from Accounts
So long as no Event of Default shall have occurred and be continuing,
amounts on deposit in the Note Distribution Account (together with the
Collection Account, the "Accounts") will be invested by the Indenture Trustee,
as directed by the Servicer, in one or more Permitted Investments (as defined in
the Sale and Servicing Agreement) bearing interest or sold at a discount. No
such investment in any Account will mature later than the Business Day
immediately preceding the next Distribution Date. All income or other gain from
investments in any Account will be deposited in such Account immediately on
receipt, unless otherwise specified herein. Income from investments of amounts
on deposit in the Note Distribution Account will be for the benefit of and
withheld by the Indenture Trustee.
Withdrawals from the Collection Account
The Indenture Trustee, at the direction of the Servicer, shall make the
following withdrawals from the Collection Account, in no particular order of
priority: (i) to withdraw any amount not required to be deposited in the
Collection Account or deposited therein in error; (ii) on each Distribution
Date, to pay to the Servicer any accrued and unpaid Servicing Compensation not
otherwise withheld as permitted by the Sale and Servicing Agreement; (iii) on
each Distribution Date, to pay to the Servicer any unreimbursed Servicing
Advances; provided, however, that, except as set forth in clause (iv) below, the
Servicer's right to reimbursement for unreimbursed Servicing Advances shall be
limited to late collections on the related Loans, including, without limitation,
late collections constituting Liquidation Proceeds, Released Mortgaged Property
Proceeds, Insurance Proceeds, post-liquidation proceeds and such other amounts
as may be collected by the Servicer from the related Obligor or otherwise
relating to the Loan in respect of which such unreimbursed amounts are owed;
(iv) on each Distribution Date, to reimburse the Servicer for any Servicing
Advances determined by the Servicer in good faith to have become nonrecoverable
Servicing Advances; and (v) make payments as set forth in the Sale and Servicing
Agreement.
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The Owner Trustee and the Indenture Trustee
The Owner Trustee, the Indenture Trustee and any of their respective
affiliates may hold Notes in their own names or as pledgees. For the purpose of
meeting the legal requirements of certain jurisdictions, the Servicer, the Owner
Trustee and the Indenture Trustee acting jointly (or in some instances, the
Owner Trustee or the Indenture Trustee acting alone) will have the power to
appoint co-trustees or separate trustees of all or any part of the Trust. In the
event of such an appointment, all rights, powers, duties and obligations
conferred or imposed upon the Owner Trustee by the Trust Agreement and upon the
Indenture Trustee by the Sale and Servicing Agreement and 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 the Indenture Trustee will
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 Owner Trustee or the Indenture
Trustee, respectively.
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 remove the Owner Trustee or the Indenture Trustee if either ceases
to be eligible to continue as such under the Trust Agreement, the Sale and
Servicing Agreement or the Indenture, as the case may be, or 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 the Indenture
Trustee and appointment of a successor thereto will not become effective until
acceptance of the appointment by such successor. Upon the occurrence and
continuation of an event of default under the Indenture, the Co-Owner Trustee
will resign and the Owner Trustee will assume the duties of the Co-Owner Trustee
under the Trust Agreement and the Sale and Servicing Agreement.
The Trust Agreement and Indenture will provide that the Owner Trustee
and the Indenture Trustee will be entitled to indemnification by the Transferor
or Life, and will be held harmless against, any loss, liability or expense
incurred by the Owner Trustee or the Indenture Trustee not resulting from its
own willful misfeasance, bad faith or negligence (other than by reason of a
breach of any of its representations or warranties to be set forth in the Trust
Agreement, the Indenture or the Sale and Servicing Agreement, as the case may
be).
Duties of the Owner Trustee and the Indenture Trustee
The Owner Trustee will make no representations as to the validity or
sufficiency of the Trust Agreement, the Notes or of any Loans or related
documents, and will not be accountable for the use or application by the
Depositor or the Servicer of any funds paid to the Depositor or the Servicer in
respect of the Notes, the Loans, or the investment of any monies by the Servicer
before such monies are deposited into the Accounts. 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 or the Sale and
Servicing Agreement which failure constitutes an Event of Default unless the
Owner Trustee obtains actual knowledge of such failure as will be specified in
the Trust Agreement or the Sale and Servicing Agreement.
The Indenture Trustee will make no representations as to the validity
or sufficiency of the Indenture, the Sale and Servicing Agreement, the Notes
(other than the execution and authentication thereof) or of any Loans or related
documents, and will not be accountable for the use or application by the
Depositor or the Servicer of any funds paid to the Depositor or the Servicer in
respect of the Notes or the Loans, or the investment of any monies by the
Servicer before such monies are deposited into any of the Accounts. So long as
no Event of Default under the Indenture or the Sale and Servicing Agreement has
occurred and is continuing, the Indenture Trustee will be required to perform
only those duties specifically required of it under the Indenture or the Sale
and Servicing
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Agreement. Generally, those duties will be limited to the receipt of the various
certificates, reports or other instruments required to be furnished to the
Indenture Trustee under the Indenture, in which case it will only be required to
examine them to determine whether they conform to the requirements of the
Indenture. The Indenture Trustee will not be charged with knowledge of a failure
by the Servicer to perform its duties under the Trust Agreement, Sale and
Servicing Agreement or Administration Agreement which failure constitutes an
Event of Default under the Indenture or the Sale and Servicing Agreement unless
the Indenture Trustee obtains actual knowledge of such failure as will be
specified in the Indenture or the Sale and Servicing Agreement.
The Indenture Trustee will be under no obligation to exercise any of
the rights or powers vested in it by the Indenture or the Sale and Servicing
Agreement or to make any investigation of matters arising thereunder or to
institute, conduct or defend any litigation thereunder or in relation thereto at
the request, order or direction of any of the 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 or the
Sale and Servicing Agreement to institute any proceeding with respect to the
Indenture or the Sale and Servicing Agreement, unless such holder previously
shall have 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 Class of Notes, acting together as a single class,
shall have made written request upon the Indenture Trustee to institute such
proceeding in its own name as the Indenture Trustee thereunder and offered to
the Indenture Trustee reasonable indemnity and the Indenture Trustee for 30 days
shall have neglected or refused to institute any such proceedings.
PREPAYMENT AND YIELD CONSIDERATIONS
Except as otherwise provided herein, no principal distributions will be
made on any Class of Senior Notes until the Class Principal Balance of each
Class of Senior Notes having a lower numerical designation has been reduced to
zero, and no principal distributions will be made on the Mezzanine Notes until
all required principal distributions have been made in respect of the Senior
Notes. In addition, except as otherwise provided, no distributions of principal
with respect to the Class B Notes will be made until the required principal
distributions have been made in respect of all Classes of Senior Notes and
Mezzanine Notes. See "Description of the Notes--Distributions on the Notes"
herein. As the rate of payment of principal of each Class of Notes depends
primarily on the rate of payment (including prepayments) of the Loans, final
payment of any Class of Notes could occur significantly earlier than its Final
Maturity Date. Holders of the Notes will bear the risk of being able to reinvest
principal payments on the Notes at yields at least equal to the yields on their
respective Notes. No prediction can be made as to the rate of prepayments on the
Loans in either stable or changing interest rate environments. Any reinvestment
risk resulting from the rate of prepayment of the Loans and the distribution of
such payments to the holders of the Notes will be borne entirely by the holders
of the Notes.
The subordination of the Class B Notes to the Senior Notes and
Mezzanine Notes will provide limited protection to the holders of the Senior and
Mezzanine Notes against losses on the Loans. Accordingly, the yield on the Class
B Notes (and to a lesser extent, the Mezzanine Notes and Senior Notes) will be
extremely sensitive to the delinquency and loss experience of the Loans, the
timing of any such delinquencies and losses, the weighted average coupon of the
Loans (including the Adjustable Rate Loans) as well as the amount of Excess
Spread from time to time. If the actual rate and amount of delinquencies and
losses experienced by the Loans exceed the rate and amount of such delinquencies
and losses assumed by an investor or the actual weighted average coupon of the
Loans (including the Adjustable Rate Loans) is less than the weighted average
coupon assumed by an investor, the yield to maturity on the Notes may be lower
than anticipated.
The effective yield to the holders of any Class of Notes will be lower
than the yield otherwise produced by the applicable Note Interest Rate, because
the distribution of the interest accrued during each Interest Period (a calendar
month consisting of thirty days) will not be made until the Distribution Date
occurring in the month following such Due Period. See "Description of the
Notes--Distributions on the Notes" herein. This delay will
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<PAGE>
result in funds being passed through to the holders of the Notes approximately
25 days after the end of the monthly accrual period, during which 25-day period
no interest will accrue on such funds. As discussed in greater detail below,
greater than anticipated distributions of principal can also affect the yield on
Notes purchased at a price greater or less than par.
The rate of principal payments on the Notes, the aggregate amount of
each interest payment on the Notes and the yield to maturity on the Notes will
be directly related to and affected by the rate and timing of principal
reductions on the Loans, the application of Excess Spread to reduce the Class
Principal Balances of the Notes to the extent described herein under
"Description of Credit Enhancement--Overcollateralization," and, under certain
circumstances, the delinquency rate experienced by and the weighted average
coupon of the Loans. The reductions in principal of such Loans may be in the
form of scheduled amortization payments or unscheduled payments or reductions,
which may include prepayments, repurchases and liquidations or write-offs due to
default, casualty, insurance or other dispositions. On or after any Distribution
Date on which the Pool Principal Balance declines to 10% or less of the Maximum
Collateral Amount, the Majority Residual Interestholders may effect an early
termination of the Trust, resulting in a redemption of the Notes. See
"Description of the Notes--Optional Termination of the Trust" herein.
The "weighted average life" of a Note refers to the average amount of
time that will elapse from September 4, 1997 (the "Closing Date") to the date on
which each dollar in respect of principal of such Note will have repaid. The
weighted average lives of the Notes will be influenced by, among other factors,
the rate at which principal reductions occur on the Loans, the extent to which
high rates of delinquencies on the Loans during any Due Period result in
interest collections on the Loans in amounts less than the amount of interest
distributable on the Notes, the rate at which Excess Spread is distributed to
holders of the Notes as described herein, and the extent to which any reduction
of the Overcollateralization Amount is paid to the holders of the Residual
Interests as described herein. If substantial principal prepayments on the Loans
are received from unscheduled prepayments, liquidations or repurchases, then the
distributions to the holders of the Notes resulting from such prepayments may
significantly shorten the actual average lives of the Notes. If the Loans
experience delinquencies and certain defaults in the payment of principal, then
the holders of the Notes will similarly experience a delay in the receipt of
principal distributions attributable to such delinquencies and default, which in
certain instances may result in longer actual average lives of the Notes than
would otherwise be the case. However, to the extent that the Principal Balances
of Liquidated Loans are included in the principal distributions on the Notes,
then the holders of the Notes will experience an acceleration in the receipt of
principal distributions which in certain instances may result in shorter actual
average lives of the Notes than would otherwise be the case. Interest shortfalls
on the Loans due to principal prepayments in full and in part and any resulting
shortfall in amounts distributable on the Notes will be covered to the extent of
amounts available from the credit enhancement provided for the Notes. See "Risk
Factors--Adequacy of Credit Enhancement" herein.
The rate and timing of principal reductions on the 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. Each of the Loans
may be assumed, with the Servicer's consent, upon the sale of the related
Mortgaged Property. Certain of the Loans are subject to prepayment penalties,
which may reduce the amount or the likelihood of prepayments on such Loans. The
remaining Loans may be prepaid in full or in part at any time without penalty.
As with fixed rate obligations, generally, the rate of prepayment on a pool of
loans is likely to be affected by prevailing market interest rates for similar
types of loans of a comparable term and risk level. If prevailing interest rates
were to fall significantly below the respective Loan Rates on the Loans, the
rate of prepayment (and refinancing) would be expected to increase. Conversely,
if prevailing interest rates were to rise significantly above the respective
Loan Rates on the Loans, the rate of prepayment on the Loans would be expected
to decrease. In addition, depending on prevailing market interest rates, the
future outlook for market interest rates and economic conditions generally, some
borrowers may sell or refinance mortgaged properties in order to realize their
equity in the mortgaged properties, if any, to meet cash flow needs
S-65
<PAGE>
or to make other investments. In addition, any future limitations on the rights
of borrowers to deduct interest payments on mortgage loans for Federal income
tax purposes may result in a higher rate of prepayment on the Loans. Life makes
no representations as to the particular factors that will affect the prepayment
of the Loans, as to the relative importance of such factors, or as to the
percentage of the Principal Balances of the Loans that will be paid as of any
date.
Distributions of principal to holders of the Notes at a faster rate
than anticipated will increase the yields on Notes purchased at discounts but
will decrease the yields on Notes purchased at premiums, which distributions of
principal may be attributable to scheduled payments and prepayments of principal
as a result of repurchases and liquidations or write-offs due to default,
casualty or insurance on the Loans and to the application of Excess Spread. The
effect on an investor's yield due to distributions of principal to the holders
of the Notes (including, without limitation, prepayments on the Loans) occurring
at a rate that is faster (or slower) than the rate anticipated, by the investor
during any period following the issuance of the Notes will not be offset
entirely by a subsequent like reduction (or increase) in the rate of such
distributions of principal during any subsequent period.
The rate of delinquencies and defaults on the Loans and the recoveries,
if any, on Defaulted Loans and foreclosed properties will also affect the rate
and timing of principal payments on the Loans, and accordingly, the weighted
average lives of the Notes, and could cause a delay in the payment of principal
or a slower rate of principal amortization to the holders of Notes. Certain
factors may influence such delinquencies and defaults, including origination and
underwriting standards, Combined 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 few data are available with respect to the rate
of default on home loans similar to the Loans. The rate of default on Loans with
high Combined Loan-to-Value Ratios, secured by junior liens may be higher than
that on home loans with lower Combined Loan-to-Value Ratios or secured by first
liens on comparable properties. Furthermore, the rate and timing of prepayments,
defaults and liquidations on the Loans will be affected by the general economic
conditions of the regions of the country in which the related Mortgaged
Properties are located or the related borrower is residing. See "The Loans"
herein. The risk of delinquencies and loss is greater and voluntary principal
prepayments are less likely in regions where a weak or deteriorating economy
exists, as may be evidenced by, among other factors, increasing unemployment or
falling property values.
Because principal distributions generally are paid to certain Classes
of Notes before other Classes, holders of the Class B Notes and, to a lesser
extent, the Classes of Mezzanine Notes bear a greater risk of losses from
delinquencies and defaults on the Loans than holders of the Classes of Notes
having higher priorities for payment of principal. See "Description of Credit
Enhancement--Subordination and Allocation of Losses" herein.
Although some 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 Loans and such data may not be
reflective of conditions applicable to the Loans. No prepayment history is
generally available with respect to the types of Loans included in the Pool or
similar types of loans, and there can be no assurance that the Loans will
achieve or fail to achieve any particular rate of principal prepayment. A number
of factors suggest that the prepayment experience of the 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 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 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 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 Pool include general economic conditions, the amounts of and interest
rates on the underlying senior mortgage loans, and the tendency of borrowers to
use real property mortgage loans as long-term financing for home purchase and
junior liens as shorter-term financing for a variety of purposes, which may
include the direct or
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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 origination a substantial
majority of the Loans had combined loan-to-value ratios that exceeded 100%, the
related borrowers for these Loans will generally have significantly less
opportunity to refinance the indebtedness secured by the related Mortgaged
Properties and, therefore, a lower prepayment rate may be experienced by the
Pool than for a pool of mortgage (including first or junior lien) loans that
have combined loan-to-value ratios less than 100%. Given these characteristics,
the Loans may experience a higher or lower rate of prepayment than first-lien
mortgage loans.
Excess Spread and Reduction of Overcollateralization Amount
An overcollateralization feature has been designed to accelerate the
principal amortization of the Notes relative to the principal amortization of
the Loans. If on any Distribution Date following the termination of the Spread
Deferral Period, the Overcollateralization Target Amount exceeds the
Overcollateralization Amount, any Excess Spread will be distributed to the
holders of the Classes of Notes in the order and amounts specified herein under
"Description of the Notes--Distributions on the Notes--Distribution Priorities."
Prior to the termination of the Spread Deferral Period or if the
Overcollateralization Amount equals the Overcollateralization Target Amount for
such Distribution Date, Excess Spread otherwise distributable to the holders of
the Notes as described above will instead be distributed in respect of Loss
Reimbursement Deficiencies, if any, and thereafter to the holders of the
Residual Interests. On the Stepdown Date and on each Distribution Date
thereafter as to which the Overcollateralization Amount is or, after taking into
account all other distributions to be made on such Distribution Date, would be
at least equal to the Overcollateralization Target Amount, amounts otherwise
distributable as principal to the holders of the Notes on such Distribution Date
in reduction of their Class Principal Balances may, under certain circumstances,
instead be distributed in respect of the applicable Classes in payment of their
respective Loss Reimbursement Deficiencies and thereafter to the holders of the
Residual Interests, thereby reducing the rate of and under certain circumstances
delaying the principal amortization with respect to the Notes, until the
Overcollateralization Amount is reduced to the Overcollateralization Target
Amount.
While all of the Notes are fixed rate obligations, 5.19% of the
Original Pool Principal Balance consists of Adjustable Rate Loans. If the Loan
Rates on the Adjustable Rate Loans decrease, the amount of the Excess Spread
available (i) to cause the termination of the Spread Deferral Period and then
(ii) to achieve the required Overcollateralization Amount will be lessened.
In addition, high rates of delinquencies on the Loans during any Due
Period may cause the amount of interest received on the Loans during such Due
Period to be less than the amount of interest distributable on the Notes on the
related Distribution Date. Such an occurrence will cause the Class Principal
Balances of the Notes to decrease at a slower rate relative to the Pool
Principal Balance, resulting in a reduction of the Overcollateralization Amount
and, in some circumstances, an Allocable Loss Amount. As described herein, the
yield to maturity on a Note purchased at a premium or a discount will be
affected by the extent to which any amounts are paid to the holders of the
Residual Interests in lieu of payment to the holders of the Classes of Notes in
reduction of their Class Principal Balances. If the actual distributions of any
such amounts to the holders of the Residual Interests occur sooner than
anticipated by an investor who purchases a Note at a discount, the actual yield
to such investor may be lower than such investor's anticipated yield. If the
actual distributions of any such amounts to the holders of the Residual
Interests occur later than anticipated by an investor who purchases a Note at a
premium, the actual yield to such investor may be lower than such investor's
anticipated yield. The amount payable to the holders of the Residual Interests
in reduction of the Overcollateralization Amount, if any, on any Distribution
Date will be affected by the Overcollateralization Target Amount and by the
actual default and delinquency experience of the Pool and the principal
amortization of the Pool.
Reinvestment Risk
The reinvestment risk with respect to an investment in the Notes will
be affected by the rate and timing of principal payments (including prepayments)
in relation to the prevailing interest rates at the time of receipt of
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<PAGE>
such principal payments. For example, during periods of falling interest rates,
holders of the Notes are likely to receive an increased amount of principal
payments from the Loans at a time when such holders may be unable to reinvest
such payments in investments having a yield and rating comparable to those of
the Notes. Conversely, during periods of rising interest rates, holders of the
Notes are likely to receive a decreased amount of principal prepayments from the
Loans at a time when such holders may have an opportunity to reinvest such
payments in investments having a higher yield than, and a comparable rating to,
those of the Notes.
Final Maturity Dates
The "Final Maturity Date" for each Class of Notes as set forth in the
"Summary of Terms" herein has been calculated as the thirteenth Distribution
Date following the Due Period in which the Class Principal Balance of such Class
of Notes would be reduced to zero assuming no losses or prepayments and that no
Excess Spread is applied to reduce the principal balance of such Class of Notes.
The actual maturity of any Class of Notes may be substantially earlier than its
Final Maturity Date set forth herein.
Weighted Average Lives of the Notes
The following information is given solely to illustrate the effect of
prepayments of the Loans on the weighted average lives of the Notes under
certain stated assumptions and is not a prediction of the prepayment rate that
might actually be experienced by the 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 Notes will be influenced by the rate at which
principal of the Loans is paid, which may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
reductions of principal, including without limitation those resulting from
unscheduled full or partial prepayments, refinancings, liquidations and
write-offs due to defaults, casualties, insurance or other dispositions,
substitutions and repurchases by or on behalf of the Transferor or Life), the
rate at which Excess Spread is distributed to holders of the Notes as described
herein, the delinquency rate of the Loans from time to time and the extent to
which any amounts are distributed to the holders of the Residual Interests as
described herein.
Prepayments on loans such as the Loans are commonly measured relative
to a prepayment standard or model. The model used in this Prospectus Supplement
is the prepayment assumption (the "Prepayment Assumption"), which represents an
assumed rate of prepayment each month relative to the then outstanding principal
balance of the pool of loans for the life of such loans. A 100% Prepayment
Assumption assumes a constant prepayment rate ("CPR") of 2.0% per annum of the
outstanding principal balance of such loans in the first month of the life of
the loans and an additional approximate 0.90909% (expressed as a percentage per
annum) in each month thereafter until the twelfth month; beginning in the
twelfth month and in each month thereafter during the life of the loans, a CPR
of 12.0% 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). Correspondingly, 75% Prepayment Assumption assumes
prepayment rates equal to 75% of the Prepayment Assumption, and so forth. The
Prepayment Assumption does not purport to be a historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of loans, including the Loans. None of Life, the Transferor or 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 and interest payments on the Loans
are timely received on the first day of a Due Period, which will begin
on the first day of each month and end on the last day of the month
(with the first Due Period commencing on September 1, 1997), no
delinquencies or losses occur on the Loans and all Loans have a first
payment date that occurs thirty (30) days after the origination
thereof; it is assumed that the scheduled payments of interest include
30 days' accrued interest;
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<PAGE>
(ii) the scheduled payments on the Loans have been calculated
on the outstanding Principal Balance (prior to giving effect to
prepayments), the Loan Rate and the remaining term to stated maturity
such that the Loans (other than the Balloon Loans) will fully amortize
by their remaining term to stated maturity and the Balloon Loans will
amortize according to their terms and the balloon payment will be made
on the final payment date;
(iii) all scheduled payments of interest and principal in
respect of the Loans have been made through the applicable Cut-Off Date
for purposes of calculating remaining term to stated maturity;
(iv) all Loans prepay monthly at the specified percentages of
the Prepayment Assumption, no optional or other early termination of
the Notes occurs (except with respect to the calculation of the
"Weighted Average Life - To Call (Years)" figures in the following
tables) and no substitutions or repurchases of the Loans occur;
(v) all prepayments in respect of the Loans are received on
the last day of each month commencing in the month of the Closing Date
and include 30 days of interest thereon;
(vi) the Closing Date for the Notes is September 4, 1997 and
each year will consist of 360 days;
(vii) cash distributions are received by the holders of the
Notes on the 25th day of each month, commencing in October 1997;
(viii) the Overcollateralization Target Amount will be as
defined herein;
(ix) the Pre-Funding Pro Rata Distribution Trigger does not
occur;
(x) the Note Interest Rate for each Class of Notes is as set
forth herein;
(xi) the additional fees deducted from the interest
collections in respect of the Loans include the Indenture Trustee Fee,
the Custodian Fee, the Owner Trustee Fee and the Servicing Fee;
(xii) no reinvestment income from any Account is earned and
available for distribution;
(xiii) Sub-Pools 11, 12 and 13 (specified in the table below)
are transferred to the Trust in October 1997 with principal payments on
such Loans being received by the Servicer in October 1997 and passed
through to holders of the Notes on the Distribution Date in November
1997;
(xiv) sufficient funds will be available in the Capitalized
Interest Account to cover any shortfalls in interest due to the
Pre-Funding Account and the transfer of Loans described in clause
(xiii);
(xv) interest will accrue on the Notes for each related
Distribution Date at the related Note Interest Rate and based on the
related Interest Period;
(xvi) all of the Original Pre-Funded Amount is used to acquire
Subsequent Loans as set forth in clause (xiii); and
(xvii) each Adjustable Rate Loan adjusts every six months
following its initial adjustment date and the Pool consists of thirteen
Loans having the following additional characteristics:
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<PAGE>
Assumed Loan Characteristics
<TABLE>
<CAPTION>
Number of
Remaining Months to
Original Term to Final Months to
Sub- Cut-Off Date Term Maturity Balloon Gross Lifetime Lifetime Periodic Next
Pool Loan Rate Principal Balance (Months) (Months) Payment Margin Cap Floor Cap Adjustment
- ------- ----------- ------------------- --------- ----------- ---------- ---------- --------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 14.210% $ 1,460,191.86 153 151 N/A N/A N/A N/A N/A N/A
2 13.846 43,916,689.98 180 179 N/A N/A N/A N/A N/A N/A
3 13.987 17,983,847.18 241 240 N/A N/A N/A N/A N/A N/A
4 13.988 25,408,676.73 300 299 N/A N/A N/A N/A N/A N/A
5 11.374 1,297,651.05 360 358 178 N/A N/A N/A N/A N/A
6 10.723 58,822.13 300 297 N/A 5.880 16.723 10.723 1.500 2
7 11.178 1,156,766.35 263 261 N/A 6.179 17.178 11.178 1.341 3
8 11.718 1,564,753.15 244 243 N/A 6.758 17.468 11.718 1.444 4
9 11.390 1,823,727.21 244 244 N/A 6.559 17.390 11.390 1.444 5
10 11.864 328,874.36 249 249 N/A 7.347 14.407 11.874 1.105 6
11 13.921 28,032,443.92 226 226 N/A N/A N/A N/A N/A N/A
12 11.374 409,784.54 360 360 180 N/A N/A N/A N/A N/A
13 11.468 1,557,771.54 249 249 N/A 6.578 17.158 13.469 1.398 6
</TABLE>
The tables on the following pages indicate the weighted average lives
of each Class of Notes corresponding to the specified percentages of the
Prepayment Assumption.
These tables have been prepared based on the Modeling Assumptions
(including the assumptions regarding the characteristics and performance of the
Loans which may differ from the actual characteristics and performance thereof)
and should be read in conjunction therewith.
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<PAGE>
Percent of Original Class Principal Balance Outstanding
at the Following Percentages of Prepayment Assumption(1)
<TABLE>
<CAPTION>
Class A-1 Notes: $29,390,000
------------------------------------------------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
---- --- ---- ---- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percent................. 100 100 100 100 100 100
September 1998........... 74 59 51 44 36 28
September 1999........... 62 23 4 0 0 0
September 2000........... 54 0 0 0 0 0
September 2001........... 46 0 0 0 0 0
September 2002........... 36 0 0 0 0 0
September 2003........... 24 0 0 0 0 0
September 2004........... 11 0 0 0 0 0
September 2005........... 0 0 0 0 0 0
Weighted Average Life --
To Maturity (Years) 3.67 1.41 1.16 1.01 0.92 0.86
</TABLE>
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The weighted average life of a Class is determined by (a) multiplying
the amount of each distribution of principal thereof by the number of
years from the date of issuance to the related Distribution Date, (b)
summing the results and (c) dividing the sum by the aggregate
distributions of principal referred to in clause (a) and rounding to
one decimal place.
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<PAGE>
Percent of Original Class Principal Balance Outstanding
at the Following Percentages of Prepayment Assumption(1)
<TABLE>
<CAPTION>
Class A-2 Notes: $32,110,000
--------------------------------------------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
---- --- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Initial Percent................. 100 100 100 100 100 100
September 1998........... 100 100 100 100 100 100
September 1999........... 100 100 100 87 70 54
September 2000........... 100 95 69 45 22 0
September 2001........... 100 69 37 8 0 0
September 2002........... 100 45 8 0 0 0
September 2003........... 100 21 0 0 0 0
September 2004........... 100 0 0 0 0 0
September 2005........... 96 0 0 0 0 0
September 2006........... 80 0 0 0 0 0
September 2007........... 62 0 0 0 0 0
September 2008........... 41 0 0 0 0 0
September 2009........... 17 0 0 0 0 0
September 2010........... 0 0 0 0 0 0
Weighted Average Life --
To Maturity (Years) 10.55 4.91 3.72 3.00 2.53 2.19
</TABLE>
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The weighted average life of a Class is determined by (a) multiplying
the amount of each distribution of principal thereof by the number of
years from the date of issuance to the related Distribution Date, (b)
summing the results and (c) dividing the sum by the aggregate
distributions of principal referred to in clause (a) and rounding to
one decimal place.
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<PAGE>
Percent of Original Class Principal Balance Outstanding
at the Following Percentages of Prepayment Assumption(1)
<TABLE>
<CAPTION>
Class A-3 Notes: $11,710,000
-----------------------------------------------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
---- --- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Initial Percent................. 100 100 100 100 100 100
September 1998........... 100 100 100 100 100 100
September 1999........... 100 100 100 100 100 100
September 2000........... 100 100 100 100 100 100
September 2001........... 100 100 100 100 48 13
September 2002........... 100 100 100 32 4 0
September 2003........... 100 100 48 4 0 0
September 2004........... 100 97 13 0 0 0
September 2005........... 100 37 0 0 0 0
September 2006........... 100 12 0 0 0 0
September 2007........... 100 0 0 0 0 0
September 2008........... 100 0 0 0 0 0
September 2009........... 100 0 0 0 0 0
September 2010........... 71 0 0 0 0 0
September 2011........... 14 0 0 0 0 0
September 2012........... 0 0 0 0 0 0
Weighted Average Life --
To Maturity (Years) 13.44 8.02 6.21 5.00 4.17 3.58
==================================================================================================================================
</TABLE>
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The weighted average life of a Class is determined by (a) multiplying
the amount of each distribution of principal thereof by the number of
years from the date of issuance to the related Distribution Date, (b)
summing the results and (c) dividing the sum by the aggregate
distributions of principal referred to in clause (a) and rounding to
one decimal place.
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<PAGE>
Percent of Original Class Principal Balance Outstanding
at the Following Percentages of Prepayment Assumption(1)
<TABLE>
<CAPTION>
Class A-4 Notes: $16,510,000
-----------------------------------------------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
---- --- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Initial Percent................. 100 100 100 100 100 100
September 1998........... 100 100 100 100 100 100
September 1999........... 100 100 100 100 100 100
September 2000........... 100 100 100 100 100 100
September 2001........... 100 100 100 100 100 100
September 2002........... 100 100 100 100 100 87
September 2003........... 100 100 100 100 85 69
September 2004........... 100 100 100 87 69 55
September 2005........... 100 100 95 74 57 43
September 2006........... 100 100 82 62 46 34
September 2007........... 100 96 70 51 36 26
September 2008........... 100 83 59 41 29 20
September 2009........... 100 71 49 33 22 15
September 2010........... 100 59 39 26 17 11
September 2011........... 100 48 31 19 12 7
September 2012........... 88 35 22 14 8 5
September 2013........... 76 29 18 10 6 3
September 2014........... 64 23 13 8 4 2
September 2015........... 51 17 10 5 3 1
September 2016........... 35 11 6 3 2 0
September 2017........... 26 8 4 2 0 0
September 2018........... 21 6 3 1 0 0
September 2019........... 17 4 2 0 0 0
September 2020........... 12 3 1 0 0 0
September 2021........... 6 1 0 0 0 0
September 2022........... 0 0 0 0 0 0
Weighted Average Life --
To Maturity (Years) 18.59 14.55 12.65 10.97 9.55 8.39
</TABLE>
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The weighted average life of a Class is determined by (a) multiplying
the amount of each distribution of principal thereof by the number of
years from the date of issuance to the related Distribution Date, (b)
summing the results and (c) dividing the sum by the aggregate
distributions of principal referred to in clause (a) and rounding to
one decimal place.
S-74
<PAGE>
Percent of Original Class Principal Balance Outstanding
at the Following Percentages of Prepayment Assumption(1)
<TABLE>
<CAPTION>
Class M-1 Notes: $13,610,000
----------------------------------------------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
---- --- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Initial Percent................. 100 100 100 100 100 100
September 1998........... 100 100 100 100 100 100
September 1999........... 100 100 100 100 100 100
September 2000........... 100 100 100 100 100 100
September 2001........... 100 100 100 100 100 91
September 2002........... 100 100 100 100 86 73
September 2003........... 100 100 100 86 71 58
September 2004........... 100 100 91 73 58 46
September 2005........... 100 100 80 62 47 36
September 2006........... 100 91 69 52 38 28
September 2007........... 100 80 59 43 31 22
September 2008........... 100 70 49 35 24 16
September 2009........... 100 60 41 28 19 12
September 2010........... 100 50 33 22 14 9
September 2011........... 92 40 26 16 10 6
September 2012........... 73 30 18 11 7 4
September 2013........... 64 24 15 9 5 3
September 2014........... 54 19 11 6 4 2
September 2015........... 42 14 8 4 2 0
September 2016........... 30 9 5 3 0 0
September 2017........... 22 6 3 1 0 0
September 2018........... 18 5 3 0 0 0
September 2019........... 14 4 1 0 0 0
September 2020........... 10 2 0 0 0 0
September 2021........... 5 0 0 0 0 0
September 2022........... 0 0 0 0 0 0
Weighted Average Life --
To Maturity (Years) 17.86 13.65 11.72 10.09 8.76 7.67
</TABLE>
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The weighted average life of a Class is determined by (a) multiplying
the amount of each distribution of principal thereof by the number of
years from the date of issuance to the related Distribution Date, (b)
summing the results and (c) dividing the sum by the aggregate
distributions of principal referred to in clause (a) and rounding to
one decimal place.
S-75
<PAGE>
Percent of Original Class Principal Balance Outstanding
at the Following Percentages of Prepayment Assumption(1)
<TABLE>
<CAPTION>
Class M-2 Notes: $11,140,000
----------------------------------------------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
---- --- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Initial Percent................. 100 100 100 100 100 100
September 1998........... 100 100 100 100 100 100
September 1999........... 100 100 100 100 100 100
September 2000........... 100 100 100 100 100 100
September 2001........... 100 100 100 100 100 91
September 2002........... 100 100 100 100 86 73
September 2003........... 100 100 100 86 71 58
September 2004........... 100 100 91 73 58 46
September 2005........... 100 100 80 62 47 36
September 2006........... 100 91 69 52 38 28
September 2007........... 100 80 59 43 31 22
September 2008........... 100 70 49 35 24 16
September 2009........... 100 60 41 28 19 12
September 2010........... 100 50 33 22 14 9
September 2011........... 92 40 26 16 10 6
September 2012........... 73 30 18 11 7 4
September 2013........... 64 24 15 9 5 2
September 2014........... 54 19 11 6 4 0
September 2015........... 42 14 8 4 1 0
September 2016........... 30 9 5 2 0 0
September 2017........... 22 6 3 0 0 0
September 2018........... 18 5 1 0 0 0
September 2019........... 14 4 0 0 0 0
September 2020........... 10 1 0 0 0 0
September 2021........... 5 0 0 0 0 0
September 2022........... 0 0 0 0 0 0
Weighted Average Life --
To Maturity (Years) 17.86 13.63 11.69 10.07 8.74 7.65
</TABLE>
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The weighted average life of a Class is determined by (a) multiplying
the amount of each distribution of principal thereof by the number of
years from the date of issuance to the related Distribution Date, (b)
summing the results and (c) dividing the sum by the aggregate
distributions of principal referred to in clause (a) and rounding to
one decimal place.
S-76
<PAGE>
Percent of Original Class Principal Balance Outstanding
at the Following Percentages of Prepayment Assumption(1)
<TABLE>
<CAPTION>
Class B Notes: $9,280,000
--------------------------------------------------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
---- --- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Initial Percent................ 100 100 100 100 100 100
September 1998.......... 100 100 100 100 100 100
September 1999.......... 100 100 100 100 100 100
September 2000.......... 100 100 100 100 100 100
September 2001.......... 100 100 100 100 100 91
September 2002.......... 100 100 100 100 86 73
September 2003.......... 100 100 100 86 71 58
September 2004.......... 100 100 91 73 58 46
September 2005.......... 100 100 80 62 47 36
September 2006.......... 100 91 69 52 38 28
September 2007.......... 100 80 59 43 31 22
September 2008.......... 100 70 49 35 24 16
September 2009.......... 100 60 41 28 19 12
September 2010.......... 100 50 33 22 14 9
September 2011.......... 92 40 26 16 10 5
September 2012.......... 73 30 18 11 7 1
September 2013.......... 64 24 15 9 3 0
September 2014.......... 54 19 11 6 0 0
September 2015.......... 42 14 8 2 0 0
September 2016.......... 30 9 3 0 0 0
September 2017.......... 22 6 0 0 0 0
September 2018.......... 18 3 0 0 0 0
September 2019.......... 14 0 0 0 0 0
September 2020.......... 10 0 0 0 0 0
September 2021.......... 3 0 0 0 0 0
September 2022.......... 0 0 0 0 0 0
Weighted Average Life --
To Maturity (Years) 17.84 13.56 11.64 10.02 8.68 7.59
</TABLE>
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The weighted average life of a Class is determined by (a) multiplying
the amount of each distribution of principal thereof by the number of
years from the date of issuance to the related Distribution Date, (b)
summing the results and (c) dividing the sum by the aggregate
distributions of principal referred to in clause (a) and rounding to
one decimal place.
S-77
<PAGE>
The amortization scenarios for the Notes set forth in the foregoing
tables are subject to significant uncertainties and contingencies (including
those discussed above under "Prepayment and Yield Considerations"). As a result,
there can be no assurance that any of the foregoing amortization scenarios and
the Modeling Assumptions on which they were made will prove to be accurate or
that the actual weighted average lives of the Notes will not vary from those set
forth in the foregoing tables, which variations may be shorter or longer, and
which variations may be greater with respect to later years. Furthermore, it is
unlikely that the Loans will prepay at a constant rate or that all of the Loans
will prepay at the same rate. Moreover, the Loans actually included in the Pool,
the payment experience of such Loans and certain other factors affecting the
distributions on the Notes will not conform to the Modeling Assumptions made in
preparing the above tables. In fact, the characteristics and payment experience
of the Loans will differ in many respects from such Modeling Assumptions. See
"The Loans" herein. To the extent that the Loans actually included in the Pool
have characteristics and a payment experience that differ from those assumed in
preparing the foregoing tables, the Notes are likely to have weighted average
lives that are shorter or longer than those set forth in the foregoing tables.
See "Risk Factors--Prepayment and Yield Considerations" herein.
In light of the uncertainties inherent in the foregoing paydown
scenarios, the inclusion of the weighted average lives of the Notes in the
foregoing tables should not be regarded as a representation by the Servicer, the
Depositor, the Underwriter, the Transferor or any other person that such
weighted average lives will be achieved or that any of the foregoing paydown
scenarios will be experienced.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material anticipated
federal income tax considerations to investors of the purchase, ownership and
disposition of the securities offered hereby. The discussion is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change. The discussion below does not purport to deal with all federal tax
considerations applicable to all categories of investors, some of which may be
subject to special rules. Investors should consult their own tax advisors in
determining the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of the Notes.
Treatment of the Notes as Indebtedness. The Transferor agrees, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for all federal, state and local income tax purposes. There are no regulations,
published rulings or judicial decisions involving the characterization for
federal income tax purposes of securities with terms substantially the same as
the Notes. In general, whether instruments such as the Notes constitute
indebtedness for federal income tax purposes is a question of fact, the
resolution of which is based primarily upon the economic substance of the
instruments and the transaction pursuant to which they are issued rather than
merely upon the form of the transaction or the manner in which the instruments
are labeled. The Internal Revenue Service (the "IRS") and the courts have set
forth various factors to be taken into account in determining, for federal
income tax purposes, whether or not an instrument constitutes indebtedness and
whether a transfer of property is a sale because the transferor has relinquished
substantial incidents of ownership in the property or whether such transfer is a
borrowing secured by the property. On the basis of its analysis of such factors
as applied to the facts and its analysis of the economic substance of the
contemplated transaction, Dewey Ballantine, tax counsel to Life ("Tax Counsel")
will conclude that, for federal income tax purposes, the Notes will be treated
as indebtedness of the Trust, and not as an ownership interest in the Loans, or
an equity interest in the Trust or in a separate association taxable as a
corporation or other taxable entity.
If the Notes are characterized as indebtedness, interest paid or
accrued on a Note will be treated as ordinary income to the Noteholders and
principal payments on a Note will be treated as a return of capital to the
extent of the Noteholder's basis in the Note allocable thereto. An accrual
method taxpayer will be required to include in income interest on the Notes when
earned, even if not paid, unless it is determined to be uncollectible. The Trust
will report to Noteholders of record and the Internal Revenue Service (the
"IRS") in respect of the interest paid and original issue discount, if any,
accrued on the Notes to the extent required by law.
S-78
<PAGE>
Although, as described above, it is the opinion of Tax Counsel that,
for federal income tax purposes, the Notes will be characterized as debt, such
opinion is not binding on the IRS and thus no assurance can be given that such a
characterization will prevail. If the IRS successfully asserted that one or more
Classes of the Notes did not represent debt for federal income tax purposes,
holders of the Notes would likely be treated as owning an interest in a
partnership and not an interest in an association (or publicly traded
partnership) taxable as a corporation. If the Noteholders were treated as owning
an equitable interest in a partnership, the partnership itself would not be
subject to federal income tax; rather each partner would be taxed individually
on their respective distributive share of the partnership's income, gain, loss,
deductions and credits. The amount, timing and characterization of items of
income and deductions for a Noteholder would differ if the Notes were held to
constitute partnership interests, rather than indebtedness and would cause a
tax-exempt entity subject to tax on unrelated business taxable income ("UBTI")
(including an individual retirement account) to recognize UBTI under the Code.
Since the parties will treat the Notes as indebtedness for federal income tax
purposes, none of the Servicer, the Indenture Trustee or the Owner Trustee will
attempt to satisfy the tax reporting requirements that would apply under this
alternative characterization of the Notes. Investors that are foreign persons
are strongly advised to consult their own tax advisors in determining the
federal, state, local and other tax consequences to them of the purchase,
ownership and disposition of the Notes.
Original Issue Discount. It is anticipated that the Notes will not have
any original issue discount ("OID") other than possibly OID within a de minimis
exception and that accordingly the provisions of sections 1271 through 1273 and
1275 of the Internal Revenue Code of 1986, as amended (the "Code"), generally
will not apply to the Notes. OID will be considered de minimis if it is less
than 0.25% of the principal amount of a Note multiplied by its expected weighted
average life. The prepayment assumption that will be used for purpose of
computing original issue discount, if any, for federal income tax purposes is
100% of the Prepayment Assumption.
Market Discount. A subsequent purchaser who buys a Note for less than
its principal amount may be subject to the "market discount" rules of Section
1276 through 1278 of the Code. If a subsequent purchaser of a Note disposes of
such Note (including certain nontaxable dispositions such as a gift), or
receives a principal payment, any gain upon such sale or other disposition will
be recognized, or the amount of such principal payment will be treated, as
ordinary income to the extent of any "market discount" accrued for the period
that such purchaser holds the Note. Such holder may instead elect to include
market discount in income as it accrues with respect to all debt instruments
acquired in the year of acquisition of the Notes and thereafter. Market discount
generally will equal the excess, if any, of the then current unpaid principal
balance of the Note over the purchaser's basis in the Note immediately after
such purchaser acquired the Note. In general, market discount on a Note will be
treated as accruing over the term of such Note in the ratio of interest for the
current period over the sum of such current interest and the expected amount of
all remaining interest payments, or at the election of the holder, under a
constant yield method (taking into account the Prepayment Assumption). At the
request of a holder of a Note, information will be made available that will
allow the holder to compute the accrual of market discount under the first
method described in the preceding sentence.
The market discount rules also provide that a holder who incurs or
continues indebtedness to acquire a Note at a market discount may be required to
defer the deduction of all or a portion of the interest on such indebtedness
until the corresponding amount of market discount is included in income.
Notwithstanding the above rules, market discount on a Note will be
considered to be zero if it is less than a de minimis amount, which is 0.25% of
the remaining principal balance of the Note multiplied by its expected weighted
average remaining life. If OID or market discount is de minimis, the actual
amount of discount must be allocated to the remaining principal distributions on
the Notes and, when each such distribution is received, capital gain equal to
the discount allocated to such distribution will be recognized.
Market Premium. A subsequent purchaser who buys a Note for more than
its principal amount generally will be considered to have purchased the Note at
a premium. Such holder may amortize such premium, using a constant yield method,
over the remaining term of the Note and, except as future regulations may
otherwise provide,
S-79
<PAGE>
may apply such amortized amounts to reduce the amount of interest reportable
with respect to such Note over the period from the purchase date to the date of
maturity of the Note. Legislative history to the Tax Reform Act of 1986
indicates that the amortization of such premium on an obligation that provides
for partial principal payments prior to maturity should be governed by the
methods for accrual of market discount on such an obligation (described above).
Proposed regulations implementing the provisions of the Tax Reform Act of 1986
provide for the use of the constant yield method to determine the amortization
of premiums. Such proposed regulations will apply to bonds acquired on or after
60 days after the final regulations are published. A holder that elects to
amortize premium must reduce the tax basis in the related obligation by the
amount of the aggregate deductions (or interest offsets) allowable for
amortizable premium. If a debt instrument purchased at a premium is redeemed in
full prior to its maturity, a purchaser who has elected to amortize premium
should be entitled to a deduction for any remaining unamortized premium in the
taxable year of redemption.
Sale or Redemption of Notes. If a Note is sold or retired, the seller
will recognize gain or loss equal to the difference between the amount realized
on the sale and such holder's adjusted basis in the Note. Such adjusted basis
generally will equal the cost of the Note to the seller, increased by any
original issue discount included in the seller's gross income in respect of the
Note (and by any market discount which the taxpayer elected to include in income
or was required to include in income), and reduced by payments other than
payments of qualified stated interest in respect of the Note received by the
seller and by any amortized premium. Similarly, a holder who receives a payment
other than a payment of qualified stated interest in respect of a Note, either
on the date on which such payment is scheduled to be made or as a prepayment,
will recognize gain equal to the excess, if any, of the amount of the payment
over his adjusted basis in the Note allocable thereto. A Noteholder who receives
a final payment which is less than his adjusted basis in the Note will generally
recognize a loss in the amount of the shortfall on the last day of his taxable
year. Generally, any such gain or loss realized by an investor who holds a Note
as a "capital asset" within the meaning of Code Section 1221 should be capital
gain or loss, except as described above in respect of market discount and except
that a loss attributable to accrued but unpaid interest may be an ordinary loss.
Taxation of Certain Foreign Investors. Interest payments (including
OID) on the Notes made to a Noteholder who is a nonresident alien individual,
foreign corporation or other non-United States person (a "foreign person")
generally will be "portfolio interest" which is not subject to United States tax
if such payments are not effectively connected with the conduct of a trade or
business in the United States by such foreign person and if the Trust (or other
person who would otherwise be required to withhold tax from such payments) is
provided with an appropriate statement that the beneficial owner of the Note
identified on the statement is a foreign person.
Backup Withholding. Distributions of interest and principal as well as
distributions of proceeds from the sale of the Notes, may be subject to the
"backup withholding tax" under Section 3406 of the Code at rate of 31% if
recipients of such distributions fail to furnish to the payor certain
information, including their taxpayer identification numbers, or otherwise fail
to establish an exemption from such tax. Any amounts deducted and withheld from
a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax. Furthermore, certain penalties may be imposed by
the IRS on a recipient of distributions that is required to supply information
but does not do so in the proper manner.
STATE AND LOCAL TAX CONSIDERATIONS
Potential Noteholders should consider the state and local income tax
consequences of the purchase, ownership and disposition of the Notes. State and
local income tax laws 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 Noteholders should
consult their own tax advisors with respect to the various state and local tax
consequences of an investment in the Notes.
S-80
<PAGE>
STATE TAX CONSEQUENCES
In addition to the Federal income tax consequences described in
"Certain Federal Income Tax Consequences" herein, potential investors should
consider the state income tax consequences of the acquisition, ownership, and
disposition of the Notes. State income tax law may differ substantially from the
corresponding Federal tax law, and this discussion does not purport to describe
any aspect of the income tax laws of any state. Therefore, potential investors
should consult their own tax advisors with respect to the various tax
consequences of investments in the Notes.
ERISA CONSIDERATIONS
Section 406 of ERISA and Section 4975 of the Code prohibit a pension,
profit sharing, or other employee benefit plan from engaging in certain
transactions involving "plan assets" with persons that are "parties in interest"
under ERISA or "disqualified persons" under the Code with respect to the plan.
ERISA also imposes certain duties on persons who are fiduciaries of plans
subject to ERISA and prohibits certain transactions between a plan and parties
in interest with respect to such plans. Under ERISA, any person who exercises
any authority or control respecting the management or disposition of the assets
of a plan is considered to be a fiduciary of such plan (subject to certain
exceptions not here relevant). A violation of these "prohibited transaction"
rules may generate excise tax and other liabilities under ERISA and the Code for
such persons.
In addition to the matters described below, purchasers of Notes 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 Trust and Savings
Bank, 114 S.Ct. 517 (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 A Notes.
Certain transactions involving the Issuer might be deemed to constitute
prohibited transactions under ERISA and the Code if assets of the Issuer were
deemed to be "plan assets" of an employee benefit plan subject to ERISA or the
Code, or an individual retirement account (an "IRA"), or any entity whose
underlying assets are deemed to be assets of an employee benefit plan or an IRA
by reason of such employee benefit plan's or such IRA's investment in such
entity (each a "Benefit Plan"). Under a regulation issued by the United States
Department of Labor (the "Plan Assets Regulation"), the assets of the Issuer
would be treated as plan assets of a Benefit Plan for the purposes of ERISA and
the Code only if the Benefit Plan acquires an "equity interest" in the Issuer
and none of the exceptions contained in the Plan Assets Regulation is
applicable. An equity interest is defined under the Plan Assets Regulation as an
interest other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features. Life believes
that the Class A Notes should be treated as indebtedness without substantial
equity features for purposes of the Plan Assets Regulation. This determination
is based in part upon the traditional debt features of the Notes, including the
reasonable expectation of purchasers of Notes that the Notes will be repaid when
due, as well as the absence of conversion rights, warrants and other typical
equity features. The debt treatment of the Notes for ERISA purposes could change
if the Issuer incurred losses. However, without regard to whether the Notes are
treated as an equity interest for such purposes, the acquisition or holding of
Notes by or on behalf of a Benefit Plan could be considered to give rise to a
prohibited transaction if certain parties to the transaction are or become, or
any of their respective affiliates is or becomes, a party in interest or a
disqualified person with respect to such Benefit Plan. In such case, certain
exemptions from the prohibited transaction rules could be applicable depending
on the type and circumstances of the plan fiduciary making the decision to
acquire a Note. Included among these exemptions are: Prohibited Transaction
Class Exemption ("PTCE") 90-1, regarding investments by insurance company pooled
separate accounts; PTCE 95-60, regarding investments by insurance company
general accounts; PTCE 91-38, regarding investments by bank collective
investment funds; PTCE 96-23, regarding transactions by in-house asset managers;
and PTCE 84-14, regarding transactions by "qualified professional asset
managers."
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<PAGE>
Employee plans that are government plans (as defined in Section 3(32)
of ERISA) and certain church plans (as defined in Section 3(53) of ERISA are not
subject to ERISA; however, such plans may be subject to comparable state law
restrictions.
Any Benefit Plan fiduciary considering the purchase of a Note should
consult with its counsel with respect to the potential applicability of ERISA
and the Code to such investment. Moreover, each Benefit Plan fiduciary should
determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the Notes is appropriate for the Benefit
Plan, taking into account the overall investment policy of the Benefit Plan and
the composition of the Benefit Plan's investment portfolio.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Depositor and Bear, Stearns & Co. Inc. (an affiliate of
the Depositor), the Depositor has agreed to sell to the Underwriter, and the
Underwriter has agreed to purchase from the Depositor, the principal amount of
the Notes set forth on the cover hereof. Distribution of the Notes will be made
by the Underwriter from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. In connection with the sale
of the Notes, the Underwriter may be deemed to have received compensation from
the Depositor in the form of underwriting discounts.
The Depositor has been advised by the Underwriter that it intends to
make a market in the Notes; however, the Underwriter has no obligation to do so.
Accordingly, there can be no assurance that a secondary market for the Notes
will develop or, if it does develop, that it will continue.
The Underwriter proposes to offer the Notes in part directly to
purchasers at the initial public offering prices set forth on the cover page of
this Prospectus Supplement and in part to certain securities dealers at such
prices less concessions not to exceed 0.1000%, 0.1500%, 0.1750%, 0.2250%,
0.2750, 0.3250% and 0.4125% of the respective Class Principal Balances of the
Class A-1, Class A-2, Class A-3, Class A-4, Class M-1, Class M-2 and Class B
Notes. The Underwriter may allow, and such dealers may reallow, concessions not
to exceed 0.0700%, 0.1250%, 0.1250%, 0.1250%, 0.2000%, 0.2500% and 0.3000% of
the respective Class Principal Balances of the Class A-1, Class A-2, Class A-3,
Class A-4, Class M-1, Class M-2 and Class B Notes to certain brokers and
dealers. After the Notes are released for sale to the public, the offering price
and other selling terms may be varied by the Underwriter.
Until the distribution of the Notes, is completed, rules of the
Commission may limit the ability of the Underwriter and certain selling group
members to bid for and purchase the Notes. As an exception to these rules, the
Underwriter is permitted to engage in certain transactions that stabilize the
price of the Notes. Such transactions consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of the Notes.
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 the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the Notes. In addition, neither the
Depositor nor the Underwriter makes any representation that the Underwriter will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
After the initial public offering of the Notes, the public offering
price and such concessions may be changed.
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<PAGE>
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities, including
liabilities under the Securities Act of 1933, as amended.
An affiliate of the Underwriter and the Depositor has significant
contractual relations with Life and provides periodic funding of its origination
of mortgage loans, including the Loans. Accordingly, a portion of the proceeds
payable to Life will be paid to such affiliate in connection with the sale of
the Loans.
LEGAL INVESTMENT MATTERS
The Notes will not constitute "mortgage related securities" under the
Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") because a
substantial number of the Loans are secured by liens on real estate that are not
first liens. Accordingly, many institutions with legal authority to invest in
"mortgage related securities" may not be legally authorized to invest in the
Notes.
There may be restrictions on the ability of certain investors,
including depository institutions, either to purchase the Notes or to purchase
Notes representing more than a specified percentage of the investor's assets.
Investors should consult their own legal advisors in determining whether and to
what extent the Notes constitute legal investments for such investors.
LEGAL MATTERS
Certain legal matters will be passed upon for the Underwriter by Brown
& Wood LLP, New York, New York. Certain legal matters will be passed upon for
the Depositor and for Life by Dewey Ballantine, New York, New York.
RATINGS
It is a condition to the issuance of the Notes that each of the Class
A-1, Class A-2, Class A-3, and Class A-4 Notes be rated "AAA" by Fitch and "Aaa"
by Moody's; and that the Class M-1 Notes be rated "AA" by Fitch and "A2" by
Moody's, the Class M-2 Notes be rated "A" by Fitch and "A2" by Moody's and the
Class B Notes be rated "BBB" by Fitch and "Baa3" by Moody's.
The ratings on the Notes address the likelihood of the receipt by the
holders of the Notes of all distributions on the Loans to which they are
entitled. The ratings on the Notes also address the structural, legal and
issuer-related aspects associated with the Notes, including the nature of the
Loans. In general, the ratings on the Notes address credit risk and not
prepayment risk. The ratings on the Notes do not represent any assessment of the
likelihood that principal prepayments of the 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 Notes
do not address the possibility that holders of the Notes might suffer a lower
than anticipated yield in the event of principal payments on the Notes resulting
from rapid prepayments of the Loans or the application of Excess Spread as
described herein, or in the event that the Trust is terminated prior to the
Final Maturity Date of the Classes of Notes. The ratings on the Notes do not
address the ability of the Trust to acquire Subsequent Loans, any potential
redemption with respect thereto or the effect on yield resulting therefrom.
The Depositor has not solicited ratings on the Notes with any rating
agency other than the Rating Agencies. However, there can be no assurance as to
whether any other rating agency will rate the Notes, or, if it does, what rating
would be assigned by any such other rating agency. Any rating on the Notes by
another rating agency, if assigned at all, may be lower than the ratings
assigned to the Notes by the Rating Agencies.
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<PAGE>
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to any of the Notes by the Rating Agencies are subsequently
lowered for any reason, no person or entity is obligated to provide any
additional support or credit enhancement with respect to such Notes.
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<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.
(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.
June 24, 1997
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(Continued from previous page)
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.
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.
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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.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the Trust Fund referred
to in the accompanying Prospectus Supplement with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended (the 'Exchange Act'), after the date of this Prospectus and prior to the
termination of any offering of the Securities issued by such Trust Fund shall be
deemed to be incorporated by reference in this Prospectus and to be a part of
this Prospectus from the date of the filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for all purposes of this
Prospectus to the extent that a statement contained herein (or in the
accompanying Prospectus Supplement) or in any other subsequently filed document
which also is or is deemed to be incorporated by reference modifies or replaces
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Depositor on behalf of any Trust Fund will provide without charge to
each person to whom this Prospectus is delivered, on the written or oral request
of such person, a copy of any or all of the documents referred to above that
have been or may be incorporated by reference in this Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
this Prospectus incorporates). Such requests should be directed to the Depositor
at 245 Park Avenue, New York, New York 10167.
4
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each Series of Securities contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of Securities of such Series. Capitalized terms used and not otherwise
defined herein or in the related Prospectus Supplement shall have the meanings
set forth in the 'GLOSSARY OF TERMS' herein.
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Securities Offered............ Asset-Backed Certificates (the 'Certificates') and Asset-Backed Notes
(the 'Notes'). Certificates are issuable from time to time in Series
pursuant to a Pooling and Servicing Agreement or Trust Agreement.
Each Certificate of a Series will evidence an interest in the Trust
Fund for such Series, or in an Asset Group specified in the related
Prospectus Supplement. Notes are issuable from time to time in Series
pursuant to an Indenture. Each Series of Securities will consist of
one or more Classes, one or more of which may be Classes of Compound
Interest Securities, Planned Amortization Class ('PAC') Securities,
Variable Interest Securities, Zero Coupon Securities, Principal Only
Securities, Interest Only Securities, Participating Securities,
Senior Securities or Subordinate Securities. Each Class may differ
in, among other things, the amounts allocated to and the priority of
principal and interest payments, Final Scheduled Distribution Dates,
Distribution Dates and interest rates. The Securities of each Class
will be issued in fully registered form in the denominations
specified in the related Prospectus Supplement. If so specified in
the related Prospectus Supplement, the Securities or certain Classes
of such Securities offered thereby may be available in book-entry
form only.
Depositor..................... Bear Stearns Asset Backed Securities, Inc. (the 'Depositor') was
incorporated in the State of Delaware in June 1995, and is a wholly-
owned, special purpose subsidiary of The Bear Stearns Companies Inc.
None of The Bear Stearns Companies Inc. nor any other affiliate of
the Depositor, the Servicer, the Trustee or the Seller has guaranteed
or is otherwise obligated with respect to the Securities of any
Series. See 'THE DEPOSITOR.'
Interest Payments............. Interest payments on the Securities of a Series entitled by their
terms to receive interest will be made on each Distribution Date, to
the extent set forth in, and at the applicable rate specified in (or
determined in the manner set forth in), the related Prospectus
Supplement. The interest rate on Securities of a Series may be
variable or change with changes in the rates of interest on the
related Loans or Underlying Loans relating to the Private Securities,
as applicable and/or as prepayments occur with respect to such Loans
or Underlying Loans, as applicable. Interest Only Securities may be
assigned a 'Notional Amount' set forth in the related Prospectus
Supplement which is used solely for convenience in expressing the
calculation of interest and for certain other purposes and does not
represent the right to receive any distributions allocable to
principal. Principal Only Securities may not be entitled to receive
any interest payments or may be entitled to receive only nominal
interest payments. Interest payable on the Securities of a Series on
a Distribution Date will include all interest accrued during the
period
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specified in the related Prospectus Supplement. See 'DESCRIPTION OF
THE SECURITIES--Payments of Interest.'
Principal Payments............ All payments of principal of a Series of Securities will be made in
an aggregate amount determined as set forth in the related Prospectus
Supplement and will be paid at the times and will be allocated among
the Classes of such Series in the order and amounts, and will be
applied either on a pro rata or a random lot basis among all
Securities of any such Class, all as specified in the related
Prospectus Supplement.
Final Scheduled Distribution
Date of the Securities...... The Final Scheduled Distribution Date with respect to each Class of
Notes is the date no later than which principal thereof will be fully
paid and with respect to each Class of Certificates is the date after
which no Certificates of such Class are expected to remain
outstanding, in each case calculated on the basis of the assumptions
applicable to such Series described in the related Prospectus
Supplement. The Final Scheduled Distribution Date of a Class may
equal the maturity date of the Primary Asset in the related Trust
Fund which has the latest stated maturity or will be determined as
described herein and in the related Prospectus Supplement.
The actual final Distribution Date of the Securities of a Series will
depend primarily upon the rate of payment (including prepayments,
liquidations due to default, the receipt of proceeds from casualty
insurance policies and repurchases) of the Loans or Underlying Loans
relating to the Private Securities, as applicable, in the related
Trust Fund. Unless otherwise specified in the related Prospectus
Supplement, the actual final Distribution Date of any Security is
likely to occur earlier and may occur substantially earlier or may
occur later than its Final Scheduled Distribution Date as a result of
the application of prepayments to the reduction of the principal
balances of the Securities and as a result of defaults on the Primary
Assets. The rate of payments on the Loans or Underlying Loans
relating to the Private Securities, as applicable, in the Trust Fund
for a Series will depend on a variety of factors, including certain
characteristics of such Loans or Underlying Loans, as applicable, and
the prevailing level of interest rates from time to time, as well as
on a variety of economic, demographic, tax, legal, social and other
factors. No assurance can be given as to the actual prepayment
experience with respect to a Series. See 'RISK FACTORS--Yield May
Vary' and 'DESCRIPTION OF THE SECURITIES-- Weighted Average Life of
the Securities' herein.
Optional Termination.......... One or more Classes of Securities of any Series may be redeemed or
repurchased in whole or in part, at the Depositor's or the Servicer's
option, at such time and under the circumstances specified in the
related Prospectus Supplement, at the price set forth therein. If so
specified in the related Prospectus Supplement for a Series of
Securities, the Depositor, the Servicer, or such other entity that is
specified in the related Prospectus Supplement, may, at its option,
cause an early termination of the related Trust Fund by repurchasing
all of the Primary Assets remaining in the Trust Fund on or after a
specified date, or on or after such time as the aggregate principal
balance of the Securities of the Series or the Primary Assets
relating
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to such Series, as specified in the related Prospectus Supplement, is
less than the amount or percentage specified in the related
Prospectus Supplement. See 'DESCRIPTION OF THE SECURITIES--Optional
Redemption, Purchase or Termination.'
In addition, the Prospectus Supplement may provide other
circumstances under which Holders of Securities of a Series could be
fully paid significantly earlier than would otherwise be the case if
payments or distributions were solely based on the activity of the
related Primary Assets.
The Trust Fund................ The Trust Fund for a Series of Securities will consist of one or more
of the assets described below, as described in the related Prospectus
Supplement.
A. Primary Assets........... The Primary Assets for a Series may consist of any combination of the
following assets, to the extent and as specified in the related
Prospectus Supplement. The Primary Assets will be purchased from the
Seller or may be purchased by the Depositor in the open market or in
privately negotiated transactions, including transactions with
entities affiliated with the Depositor.
(1) Loans................ Primary Assets for a Series will consist, in whole or in part, of
Loans. Some Loans may be delinquent or non-performing as specified in
the related Prospectus Supplement. Loans may be originated by or
acquired from an affiliate of the Depositor and an affiliate of the
Depositor may be an obligor with respect to any such Loan. The Loans
will be conventional contracts or contracts insured by the Federal
Housing Administration ('FHA') or partially guaranteed by the
Veterans Administration ('VA'). See 'The Trust Funds--The Loans' for
a discussion of such guarantees. To the extent provided in the
related Prospectus Supplement, additional Loans may be periodically
added to the Trust Fund, or may be removed from time to time if
certain asset value tests are met, as described in the related
Prospectus Supplement.
The 'Loans' for a Series will consist of (i) closed-end home equity
loans (the 'Mortgage Loans') and (ii) home improvement installment
sales contracts and installment loan agreements (the 'Home
Improvement Contracts'). The Mortgage Loans and the Home Improvement
Contracts are collectively referred to herein as the 'Loans.' Loans
may, as specified in the related Prospectus Supplement, have various
payment characteristics, including balloon or other irregular payment
features, and may accrue interest at a fixed rate or an adjustable
rate.As specified in the related Prospectus Supplement, the Mortgage
Loans will and the Home Improvement Contracts may be secured by
mortgages and deeds of trust or other similar security instruments
creating a lien on a Mortgaged Property, which may be subordinated to
one or more senior liens on the Mortgaged Property, as described in
the related Prospectus Supplement. As specified in the related
Prospectus Supplement, Home Improvement Contracts may be unsecured or
secured by purchase money security interests in the Home Improvements
financed thereby. The Mortgaged Properties and the Home Improvements
are collectively referred to herein as the 'Properties.'
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The related Prospectus Supplement will describe certain
characteristics of the Loans for a Series, including, without
limitation, and to the extent relevant: (a) the aggregate unpaid
principal balance of the Loans (or the aggregate unpaid principal
balance included in the Trust Fund for the related Series); (b) the
range and weighted average Loan Rate on the Loans and in the case of
adjustable rate Loans, the range and weighted average of the Current
Loan Rates and the Lifetime Rate Caps, if any; (c) the range and the
average outstanding principal balance of the Loans; (d) the weighted
average original and remaining term-to-stated maturity of the Loans
and the range of original and remaining terms-to-stated maturity, if
applicable; (e) the range and Combined Loan-to-Value Ratios or
Loan-to-Value Ratios, as applicable, of the Loans, computed in the
manner described in the related Prospectus Supplement; (f) the
percentage (by principal balance as of the Cut-off Date) of Loans
that accrue interest at adjustable or fixed interest rates; (g) any
enhancement relating to the Loans; (h) the percentage (by principal
balance as of the Cut-off Date) of Loans that are secured by
Mortgaged Properties, Home Improvements or are unsecured; (i) the
geographic distribution of any Mortgaged Properties securing the
Loans; (j) the use and type of each Mortgaged Property securing a
Loan; (k) the lien priority of the Loans; and (l) the delinquency
status and year of origination of the Loans.
(2) Private Securities... Primary Assets for a Series may consist, in whole or in part, of
Private Securities which include (a) pass-through certificates
representing beneficial interests in loans of the type that would
otherwise be eligible to be Loans (the 'Underlying Loans') or (b)
collateralized obligations secured by Underlying Loans. Such
pass-through certificates or collateralized obligations will have
previously been (a) offered and distributed to the public pursuant to
an effective registration statement or (b) purchased in a transaction
not involving any public offering from a person who is not an
affiliate of the issuer of such securities at the time of sale (nor
an affiliate thereof at any time during the three preceding months);
provided a period of three years has elapsed since the later of the
date the securities were acquired from the issuer or an affiliate
thereof. Although individual Underlying Loans may be insured or
guaranteed by the United States or an agency or instrumentality
thereof, they need not be, and the Private Securities themselves will
not be so insured or guaranteed. See 'THE TRUST FUNDS-- Private
Securities.' Unless otherwise specified in the Prospectus Supplement
relating to a Series of Securities, payments on the Private
Securities will be distributed directly to the Trustee as registered
owner of such Private Securities.
The related Prospectus Supplement for a Series will specify (such
disclosure may be on an approximate basis, as described above and
will be as of the date specified in the related Prospectus
Supplement) to the extent relevant and to the extent such information
is reasonably available to the Depositor and the Depositor reasonably
believes such information to be reliable: (i) the aggregate
approximate principal amount and type of any Private Securities to be
included in the Trust Fund for such Series; (ii) certain
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characteristics of the Underlying Loans including (A) the payment
features of such Underlying Loans (i.e., whether they are fixed rate
or adjustable rate and whether they provide for fixed level payments,
negative amortization or other payment features), (B) the approximate
aggregate principal amount of such Underlying Loans which are insured
or guaranteed by a governmental entity, (C) the servicing fee or
range of servicing fees with respect to such Underlying Loans, (D)
the minimum and maximum stated maturities of such Underlying Loans at
origination, (E) the lien priority of such Underlying Loans, and (F)
the delinquency status and year of origination of such Underlying
Loans; (iii) the maximum original term-to-stated maturity of the
Private Securities; (iv) the weighted average term-to-stated maturity
of the Private Securities; (v) the pass-through or certificate rate
or ranges thereof for the Private Securities; (vi) the sponsor or
depositor of the Private Securities (the 'PS Sponsor'), the servicer
of the Private Securities (the 'PS Servicer') and the trustee of the
Private Securities (the 'PS Trustee'); (vii) certain characteristics
of enhancement, if any, such as reserve funds, insurance policies,
letters of credit or guarantees, relating to the Loans underlying the
Private Securities, or to such Private Securities themselves; (viii)
the terms on which the Underlying Loans may, or are required to, be
repurchased prior to stated maturity; and (ix) the terms on which
substitute Underlying Loans may be delivered to replace those
initially deposited with the PS Trustee. See 'THE TRUST
FUNDS--Additional Information' herein.
B. Collection and
Distribution Accounts.... Unless otherwise provided in the related Prospectus Supplement, all
payments on or with respect to the Primary Assets for a Series will
be remitted directly to an account (the 'Collection Account') to be
established for such Series with the Trustee or the Servicer, in the
name of the Trustee. Unless otherwise provided in the related
Prospectus Supplement, the Trustee shall be required to apply a
portion of the amount in the Collection Account, together with
reinvestment earnings from eligible investments specified in the
related Prospectus Supplement, to the payment of certain amounts
payable to the Servicer under the related Agreement and any other
person specified in the Prospectus Supplement, and to deposit a
portion of the amount in the Collection Account into a separate
account (the 'Distribution Account') to be established for such
Series, each in the manner and at the times established in the
related Prospectus Supplement. All amounts deposited in such
Distribution Account will be available, unless otherwise specified in
the related Prospectus Supplement, for (i) application to the payment
of principal of and interest on such Series of Securities on the next
Distribution Date, (ii) the making of adequate provision for future
payments on certain Classes of Securities and (iii) any other purpose
specified in the related Prospectus Supplement. After applying the
funds in the Collection Account as described above, any funds
remaining in the Collection Account may be paid over to the Servicer,
the Depositor, any provider of Enhancement with respect to such
Series (an 'Enhancer') or any other person entitled thereto
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in the manner and at the times established in the related Prospectus
Supplement.
C. Pre-Funding and
Capitalized Interest
Accounts................. If specified in the related Prospectus Supplement, a Trust Fund will
include one or more segregated trust accounts (each, a 'Pre-Funding
Account') established and maintained with the Trustee for the related
Series. If so specified, on the closing date for such Series, a
portion of the proceeds of the sale of the Securities of such Series
(such amount, the 'Pre-Funded Amount') will be deposited in the
Pre-Funding Account and may be used to purchase additional Primary
Assets during the period of time, not to exceed six months, specified
in the related Prospectus Supplement (the 'Pre-Funding Period'). The
Primary Assets to be so purchased will be required to have certain
characteristics specified in the related Prospectus Supplement. If
any Pre-Funded Amount remains on deposit in the Pre-Funding Account
at the end of the Pre-Funding Period, such amount will be applied in
the manner specified in the related Prospectus Supplement to prepay
the Notes and/or the Certificates of the applicable Series. The
amount initially deposited in a pre-funding account for a Series of
Securities will not exceed fifty percent of the aggregate principal
amount of such Series of Securities.
If a Pre-Funding Account is established, one or more segregated trust
accounts (each, a 'Capitalized Interest Account') may be established
and maintained with the Trustee for the related Series. On the
closing date for such Series, a portion of the proceeds of the sale
of the Securities of such Series will be deposited in the Capitalized
Interest Account and used to fund the excess, if any, of (x) the sum
of (i) the amount of interest accrued on the Securities of such
Series and (ii) if specified in the related Prospectus Supplement,
certain fees or expenses during the Pre-Funding Period such as
trustee fees and credit enhancement fees, over (y) the amount of
interest available therefor from the Primary Assets in the Trust
Fund. Any amounts on deposit in the Capitalized Interest Account at
the end of the Pre-Funding Period that are not necessary for such
purposes will be distributed to the person specified in the related
Prospectus Supplement.
Enhancement................... If stated in the Prospectus Supplement relating to a Series, the
Depositor will obtain an irrevocable letter of credit, surety bond,
certificate insurance policy, insurance policy or other form of
credit support (collectively, 'Enhancement') in favor of the Trustee
on behalf of the Holders of such Series and any other person
specified in such Prospectus Supplement from an institution
acceptable to the rating agency or agencies identified in the related
Prospectus Supplement as rating such Series of Securities
(collectively, the 'Rating Agency') for the purposes specified in
such Prospectus Supplement. The Enhancement will support the payments
on the Securities and may be used for other purposes, to the extent
and under the conditions specified in such Prospectus Supplement. See
'ENHANCEMENT.' Enhancement for a Series may include one or more of
the following types of Enhancement, or such other type of Enhancement
specified in the related Prospectus Supplement.
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A. Subordinate Securities... If stated in the related Prospectus Supplement, Enhancement for a
Series may consist of one or more Classes of Subordinate Securities.
The rights of Holders of such Subordinate Securities to receive
distributions on any Distribution Date will be subordinate in right
and priority to the rights of holders of Senior Securities of the
Series, but only to the extent described in the related Prospectus
Supplement.
B. Insurance................ If stated in the related Prospectus Supplement, Enhancement for a
Series may consist of special hazard insurance policies, bankruptcy
bonds and other types of insurance supporting payments on the
Securities.
C. Reserve Funds............ If stated in the Prospectus Supplement, the Depositor may deposit
cash, a letter or letters of credit, short-term investments, or other
instruments acceptable to the Rating Agency in one or more reserve
funds to be established in the name of the Trustee (each a 'Reserve
Fund'), which will be used, as specified in such Prospectus
Supplement, by the Trustee to make required payments of principal of
or interest on the Securities of such Series, to make adequate
provision for future payments on such Securities or for any other
purpose specified in the Agreement, with respect to such Series, to
the extent that funds are not otherwise available. In the alternative
or in addition to such deposit, a Reserve Fund for a Series may be
funded through application of all or a portion of the excess cash
flow from the Primary Assets for such Series, to the extent described
in the related Prospectus Supplement.
D. Minimum Principal Payment
Agreement................ If stated in the Prospectus Supplement relating to a Series of
Securities, the Depositor will enter into a minimum principal payment
agreement (the 'Minimum Principal Payment Agreement') with an entity
meeting the criteria of the Rating Agency, pursuant to which such
entity will provide funds in the event that aggregate principal
payments on the Primary Assets for such Series are not sufficient to
make certain payments, as provided in the related Prospectus
Supplement. See 'ENHANCEMENT-- Minimum Principal Payment Agreement.'
E. Deposit Agreement........ If stated in the Prospectus Supplement, the Depositor and the Trustee
will enter into a guaranteed investment contract or an investment
agreement (the 'Deposit Agreement') pursuant to which all or a
portion of amounts held in the Collection Account, the Distribution
Account or in any Reserve Fund will be invested with the entity
specified in such Prospectus Supplement. The Trustee will be entitled
to withdraw amounts so invested, plus interest at a rate equal to the
Assumed Reinvestment Rate, in the manner specified in the Prospectus
Supplement. See 'ENHANCEMENT--Deposit Agreement.'
Servicing..................... The Servicer will be responsible for servicing, managing and making
collections on the Loans for a Series. In addition, the Servicer, if
so specified in the related Prospectus Supplement, will act as
custodian and will be responsible for maintaining custody of the
Loans and related documentation on behalf of the Trustee. Advances
with respect to delinquent payments of principal or
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interest on a Loan will be made by the Servicer only to the
extent described in the related Prospectus Supplement. Such
advances will be intended to provide liquidity only and, unless
otherwise specified in the related Prospectus Supplement,
reimbursable to the Servicer from scheduled payments of principal
and interest, late collections, or from the proceeds of liquidation
of the related Loans or from other recoveries relating to such
Loans (including any insurance proceeds or payments from other
credit support). In performing these functions, the Servicer will
exercise the same degree of skill and care that it customarily
exercises with respect to similar receivables or Loans owned or
serviced by it. Under certain limited circumstances, the Servicer
may resign or be removed, in which event either the Trustee or a
third-party servicer will be appointed as successor servicer. The
Servicer will receive a periodic fee as servicing compensation (the
'Servicing Fee') and may, as specified herein and in the related
Prospectus Supplement, receive certain additional compensation. See
'SERVICING OF LOANS-- Servicing Compensation and Payment of
Expenses' herein.
Federal Income Tax
Considerations
A. Debt Securities and REMIC
Residual Securities...... If (i) an election is made to treat all or a portion of a Trust Fund
for a Series as a 'real estate mortgage investment conduit' (a
'REMIC') or (ii) so provided in the related Prospectus Supplement, a
Series of Securities will include one or more Classes of taxable debt
obligations under the Internal Revenue Code of 1986, as amended (the
'Code'). Stated interest with respect to such Classes of Securities
will be reported by a Holder in accordance with the Holder's method
of accounting except that, in the case of Securities constituting
'regular interests' in a REMIC ('Regular Interests'), such interest
will be required to be reported on the accrual method regardless of a
Holder's usual method of accounting. Securities that are Compound
Interest Securities, Zero Coupon Securities or Interest Only
Securities will, and certain other Classes of Securities may, be
issued with original issue discount that is not de minimis. In such
cases, the Holder will be required to include original issue discount
in gross income as it accrues, which may be prior to the receipt of
cash attributable to such income. If a Security is issued at a
premium, the Holder may be entitled to make an election to amortize
such premium on a constant yield method.
In the case of a REMIC election, a Class of Securities may be treated
as REMIC 'residual interests' ('Residual Interest'). A Holder of a
Residual Interest will be required to include in its income its pro
rata share of the taxable income of the REMIC. In certain
circumstances, the Holder of a Residual Interest may have REMIC
taxable income or tax liability attributable to REMIC taxable income
for a particular period in excess of cash distributions for such
period or have an after-tax return that is less than the after-tax
return on comparable debt instruments. In addition, a portion (or, in
some cases, all) of the income from a Residual Interest (i) may
not be subject to offset by losses from other activities or
investments, (ii) for a Holder that is subject to tax under the Code
on unrelated business taxable income, may be treated as unrelated
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business taxable income and (iii) for a foreign holder, may not
qualify for exemption from or reduction of withholding. In addition,
(i) Residual Interests are subject to transfer restrictions and (ii)
certain transfers of Residual Interests will not be recognized for
federal income tax purposes. Further, individual holders are subject
to limitations on the deductibility of expenses of the REMIC. See
'CERTAIN FEDERAL INCOME TAX CONSIDERATIONS.'
B. Non-REMIC Pass-Through
Securities............... If so specified in the related Prospectus Supplement, the Trust Fund
for a Series will be treated as a grantor trust and will not be
classified as an association taxable as a corporation for federal
income tax purposes and Holders of Securities of such Series
('Pass-Through Securities') will be treated as owning directly rights
to receive certain payments of interest or principal, or both on the
Primary Assets held in the Trust Fund for such Series. All income
with respect to a Stripped Security (as defined herein) will be
accounted for as original issue discount and, unless otherwise
specified in the related Prospectus Supplement, will be reported by
the Trustee on an accrual basis, which may be prior to the receipt of
cash associated with such income.
C. Owner Trust Securities... If so specified in the Prospectus Supplement, the Trust Fund will be
treated as a partnership for purposes of federal and state income
tax. Each Noteholder, by the acceptance of a Note of a given Series,
will agree to treat such Note as indebtedness, and each
Certificateholder, by the acceptance of a Certificate of a given
Series, will agree to treat the related Trust as a partnership in
which such Certificateholder is a partner for federal income and
state tax purposes. Alternative characterizations of such Trust and
such Certificates are possible, but would not result in materially
adverse tax consequences to Certificateholders. See 'CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS.'
ERISA Considerations.......... A fiduciary of any employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended ('ERISA'), or the
Code should carefully review with its own legal advisors whether the
purchase or holding of Securities could give rise to a transaction
prohibited or otherwise impermissible under ERISA or the Code. See
'ERISA CONSIDERATIONS.'
Legal Investment.............. Unless otherwise specified in the related Prospectus Supplement,
Securities of each Series offered by this Prospectus and the related
Prospectus Supplement will not constitute 'mortgage related
securities' under the Secondary Mortgage Market Enhancement Act of
1984 ('SMMEA'). Investors whose investment authority is subject to
legal restrictions should consult their own legal advisors to
determine whether and to what extent the Securities constitute legal
investments for them. See 'LEGAL INVESTMENT.'
Use of Proceeds............... The Depositor will use the net proceeds from the sale of each Series
for one or more of the following purposes: (i) to purchase the
related Primary Assets, (ii) to repay indebtedness which has been
incurred to obtain funds to acquire such Primary Assets, (iii) to establish
any Reserve Funds described in the related Prospectus Supplement and
(iv) to pay costs of structuring and issuing such Securities,
including
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the costs of obtaining Enhancement, if any. If so specified
in the related Prospectus Supplement, the purchase of the Primary
Assets for a Series will be effected by an exchange of Securities
with the Seller of such Primary Assets. See 'USE OF PROCEEDS.'
Ratings....................... It will be a requirement for issuance of any Series that the
Securities offered by this Prospectus and the related Prospectus
Supplement be rated by at least one Rating Agency in one of its four
highest applicable rating categories. The rating or ratings
applicable to Securities of each Series offered hereby and by the
related Prospectus Supplement will be as set forth in the related
Prospectus Supplement. A securities rating should be evaluated
independently of similar ratings on different types of securities. A
securities rating is not a recommendation to buy, hold or sell
securities and does not address the effect that the rate of
prepayments on Loans or Underlying Loans relating to Private
Securities, as applicable, for a Series may have on the yield to
investors in the Securities of such Series. See 'RISK
FACTORS--Ratings Are Not Recommendations.'
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
NO SECONDARY MARKET
There will be no market for the Securities of any Series prior to the
issuance thereof, and there can be no assurance that a secondary market will
develop or, if it does develop, that it will provide Holders with liquidity of
investment or will continue for the life of the Securities of such Series. The
Underwriter(s) specified in the related Prospectus Supplement, expects to make a
secondary market in the Securities, but has no obligation to do so.
PRIMARY ASSETS ARE ONLY SOURCE OF REPAYMENT
The Depositor does not have, nor is it expected to have, any significant
assets. The Securities of a Series will be payable solely from the assets of the
Trust Fund for such Securities. There will be no recourse to the Depositor or
any other person for any default on the Notes or any failure to receive
distributions on the Certificates. Further, unless otherwise stated in the
related Prospectus Supplement, at the times set forth in the related Prospectus
Supplement, certain Primary Assets and/or any balance remaining in the
Collection Account or Distribution Account immediately after making all payments
due on the Securities of such Series and other payments specified in the related
Prospectus Supplement, may be promptly released or remitted to the Depositor,
the Servicer, the Enhancer or any other person entitled thereto and will no
longer be available for making payments to Holders. Consequently, Holders of
Securities of each Series must rely solely upon payments with respect to the
Primary Assets and the other assets constituting the Trust Fund for a Series of
Securities, including, if applicable, any amounts available pursuant to any
Enhancement for such Series, for the payment of principal of and interest on the
Securities of such Series.
Holders of Notes will be required under the Indenture to proceed only
against the Primary Assets and other assets constituting the related Trust Fund
in the case of a default with respect to such Notes and may not proceed against
any assets of the Depositor. There is no assurance that the market value of the
Primary Assets or any other assets for a Series will at any time be equal to or
greater than the aggregate principal amount of the Securities of such Series
then outstanding, plus accrued interest thereon. Moreover, upon an event of
default under the Indenture for a Series of Notes and a sale of the assets in
the Trust Fund or upon a sale of the assets of a Trust Fund for a Series of
Certificates, the Trustee, the Servicer, if any, the Enhancer and any other
service provider specified in the related Prospectus Supplement generally will
be entitled to receive the proceeds of any such sale to the extent of unpaid
fees and other amounts owing to such persons under the related Agreement prior
to distributions to Holders of Securities. Upon any such sale, the proceeds
thereof may be insufficient to pay in full the principal of and interest on the
Securities of such Series.
The only obligations, if any, of the Depositor with respect to the
Securities of any Series will be pursuant to certain representations and
warranties. See 'THE AGREEMENTS--Assignment of Primary Assets' herein. The
Depositor does not have, and is not expected in the future to have, any
significant assets with which to meet any obligation to repurchase Primary
Assets with respect to which there has been a breach of any representation or
warranty. If, for example, the Depositor were required to repurchase a Primary
Asset, its only sources of funds to make such repurchase would be from funds
obtained from the enforcement of a corresponding obligation, if any, on the part
of the originator of the Primary Assets, the Servicer or the Seller, as the case
may be, or from a Reserve Fund established to provide funds for such
repurchases.
LIMITED PROTECTION AGAINST LOSSES
Although any Enhancement is intended to reduce the risk of delinquent
payments or losses to holders of Securities entitled to the benefit thereof, the
amount of such Enhancement will be limited, as set forth in the related
Prospectus Supplement, and will decline and could be depleted under certain
circumstances prior to the payment in full of the related Series of Securities,
and as a result Holders may suffer losses. See 'ENHANCEMENT.'
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YIELD MAY VARY
The yield to maturity experienced by a Holder of Securities may be affected
by the rate of payment of principal of the Loans or Underlying Loans relating to
the Private Securities, as applicable. The timing of principal payments of the
Securities of a Series will be affected by a number of factors, including the
following: (i) the extent of prepayments of the Loans or Underlying Loans
relating to the Private Securities, as applicable, which prepayments may be
influenced by a variety of factors; (ii) the manner of allocating principal
payments among the Classes of Securities of a Series as specified in the related
Prospectus Supplement; and (iii) the exercise by the party entitled thereto of
any right of optional termination. See 'DESCRIPTION OF THE SECURITIES--Weighted
Average Life of Securities.' Prepayments may also result from repurchases of
Loans or Underlying Loans, as applicable, due to material breaches of the
Seller's or the Depositor's warranties.
Interest payable on the Securities of a Series on a Distribution Date will
include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues during the calendar month
prior to a Distribution Date, the effective yield to Holders will be reduced
from the yield that would otherwise be obtainable if interest payable on the
Security were to accrue through the day immediately preceding each Distribution
Date, and the effective yield (at par) to Holders will be less than the
indicated coupon rate. See 'DESCRIPTION OF THE SECURITIES--Payments of
Interest.'
PROPERTY VALUES MAY BE INSUFFICIENT
If the Mortgages in a Trust Fund are primarily junior liens subordinate to
the rights of the mortgagee under the related senior mortgage or mortgages, the
proceeds from any liquidation, insurance or condemnation proceedings will be
available to satisfy the outstanding balance of such junior mortgage only to the
extent that the claims of such senior mortgagees have been satisfied in full,
including any related foreclosure costs. In addition, a junior mortgagee may not
foreclose on the Property securing a junior mortgage unless it forecloses
subject to the senior mortgages, in which case it must either pay the entire
amount due on the senior mortgages to the senior mortgagees at or prior to the
foreclosure sale or undertake the obligation to make payments on the senior
mortgages in the event the mortgagor is in default thereunder. The Trust Fund
will not have any source of funds to satisfy the senior mortgages or make
payments due to the senior mortgagees.
There are several factors that could adversely affect the value of
Properties such that the outstanding balance of the related Loan, together with
any senior financing on the Properties, would equal or exceed the value of the
Properties. Among the factors that could adversely affect the value of the
Properties are an overall decline in the residential real estate market in the
areas in which the Properties are located or a decline in the general condition
of the Properties as a result of failure of borrowers to maintain adequately the
Properties or of natural disasters that are not necessarily covered by
insurance, such as earthquakes and floods. Any such decline could extinguish the
value of a junior interest in a Property before having any effect on the related
senior interest therein. If such a decline occurs, the actual rates of
delinquencies, foreclosure and losses on the junior Loans could be higher than
those currently experienced in the mortgage lending industry in general.
PRE-FUNDING MAY ADVERSELY AFFECT INVESTMENT
If a Trust Fund includes a Pre-Funding Account and the principal balance of
additional Loans delivered to the Trust Fund during the Pre-Funding Period is
less than the original Pre-Funded Amount, the Holders of the Securities of the
related Series will receive a prepayment of principal as and to the extent
described in the related Prospectus Supplement. Any such principal prepayment
may adversely affect the yield to maturity of the applicable Securities. Since
prevailing interest rates are subject to fluctuation, there can be no issuance
that investors will be able to reinvest such a prepayment at yields equaling or
exceeding the yields on the related Securities. It is possible that the yield on
any such reinvestment will be lower, and may be significantly lower, than the
yield on the related Securities.
The ability of a Trust Fund to invest in subsequent Loans during the
related Pre-Funding Period will be dependant on the ability of the Seller to
originate or acquire Loans that satisfy the requirements for transfer to the
Trust Fund. The ability of the Seller to originate or acquire such Loans will be
affected by a variety of social and economic factors, including the prevailing
level of market interest rates, unemployment levels and consumer perceptions of
general economic conditions.
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Although subsequent Loans must satisfy the characteristics described in the
related Prospectus Supplement, such Loans may have been originated more recently
than the Loans originally transferred to the Trust Fund and may be of a lesser
credit quality. As a result, the addition of subsequent Loans may adversely
affect the performance of the related Securities.
POTENTIAL LIABILITY FOR ENVIRONMENTAL CONDITIONS
Real property pledged as security to a lender may be subject to certain
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the costs of clean-
up. In several states, such a lien has priority over the lien of an existing
mortgage or owner's interest against such property. In addition, under the laws
of some states and under the federal Comprehensive Environmental Response,
Compensation, and Liability Act of 1980 ('CERCLA'), a lender may be liable, as
an 'owner' or 'operator,' for costs of addressing releases or threatened
releases of hazardous substances that require remedy at a property, if agents or
employees of the lender have become sufficiently involved in the operations of
the borrower, regardless of whether or not the environmental damage or threat
was caused by a prior owner. A lender also risks such liability on foreclosure
of the Mortgaged Property.
CONSUMER PROTECTION LAWS MAY AFFECT LOANS
Applicable state laws generally regulate interest rates and other charges
and require certain disclosures. In addition, other state laws, public policy
and general principles of equity relating to the protection of consumers, unfair
and deceptive practices and debt collection practices may apply to the
origination, servicing and collection of the Loans. Depending on the provisions
of the applicable law and the specific facts and circumstances involved,
violations of these laws, policies and principles may limit the ability of the
Servicer to collect all or part of the principal of or interest on the Loans,
may entitle the borrower to a refund of amounts previously paid and, in
addition, could subject the owner of the Loan to damages and administrative
enforcement.
The Loans are also subject to Federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers
regarding the terms of the Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of
public assistance or the exercise of any right under the Consumer
Credit Protection Act, in the extension of credit; and
(iii) the Fair Credit Reporting Act, which regulates the use and reporting
of information related to the borrower's credit experience.
The Home Improvement Contracts are also subject to the Preservation of
Consumers' Claims and Defenses regulations of the Federal Trade Commission and
other similar federal and state statutes and regulations (collectively, the
'Holder in Due Course Rules'), which protect the homeowner from defective
craftsmanship or incomplete work by a contractor. These laws permit the obligor
to withhold payment if the work does not meet the quality and durability
standards agreed to by the homeowner and the contractor. The Holder in Due
Course Rules have the effect of subjecting any assignee of the seller in a
consumer credit transaction to all claims and defenses which the obligor in the
credit sale transaction could assert against the seller of the goods.
Violations of certain provisions of these Federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Loans and in addition could subject the Trust Fund to damages and
administrative enforcement. See 'CERTAIN LEGAL ASPECTS OF THE LOANS.'
CONTRACTS WILL NOT BE STAMPED
In order to give notice of the right,title and interest of Securityholders
to the Home Improvement Contracts, the Depositor will cause a UCC-1 financing
statement to be executed by the Depositor or the Seller identifying the Trustee
as the secured party and identifying all Home Improvement Contracts as
collateral. Unless otherwise specified in the related Prospectus Supplement, the
Home Improvement Contracts will not be stamped or
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otherwise marked to reflect their assignment to the Trust Fund. Therefore, if,
through negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the Home Improvement Contracts without notice of such
assignment, the interest of Securityholders in the Home Improvement Contracts
could be defeated. See 'CERTAIN LEGAL ASPECTS OF THE LOANS--The Home Improvement
Contracts.'
RATINGS ARE NOT RECOMMENDATIONS
It will be a condition to the issuance of a Series of Securities that they
be rated in one of the four highest rating categories by the Rating Agency
identified in the related Prospectus Supplement. Any such rating would be based
on, among other things, the adequacy of the value of the Primary Assets and any
Enhancement with respect to such Series. Such rating should not be deemed a
recommendation to purchase, hold or sell Securities, inasmuch as it does not
address market price or suitability for a particular investor. There is also no
assurance that any such rating will remain in effect for any given period of
time or may not be lowered or withdrawn entirely by the Rating Agency if in its
judgment circumstances in the future so warrant. In addition to being lowered or
withdrawn due to any erosion in the adequacy of the value of the Primary Assets,
such rating might also be lowered or withdrawn, among other reasons, because of
an adverse change in the financial or other condition of an Enhancer or a change
in the rating of such Enhancer's long term debt.
DESCRIPTION OF THE SECURITIES
GENERAL
Each Series of Notes will be issued pursuant to an indenture (the
'Indenture') between the related Trust Fund and the entity named in the related
Prospectus Supplement as trustee (the 'Trustee') with respect to such Series. A
form of Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. The Certificates will also be issued in
Series pursuant to separate agreements (each, a 'Pooling and Servicing
Agreement' or a 'Trust Agreement') among the Depositor, the Servicer, if the
Series relates to Loans, and the Trustee. A form of Pooling and Servicing
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part. A Series may consist of both Notes and
Certificates.
The Seller may agree to reimburse the Depositor for certain fees and
expenses of the Depositor incurred in connection with the offering of the
Securities.
The following summaries describe certain provisions in the Agreements
common to each Series of Securities. The summaries do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, the
provisions of the Agreements and the Prospectus Supplement relating to each
Series of Securities. Where particular provisions or terms used in the
Agreements are referred to, the actual provisions (including definitions of
terms) are incorporated herein by reference as part of such summaries.
Each Series of Securities will consist of one or more Classes of
Securities, one or more of which may be Compound Interest Securities, Variable
Interest Securities, PAC Securities, Zero Coupon Securities, Principal Only
Securities, Interest Only Securities or Participating Securities. A Series may
also include one or more Classes of Subordinate Securities. The Securities of
each Series will be issued only in fully registered form, without coupons, in
the authorized denominations for each Class specified in the related Prospectus
Supplement. Upon satisfaction of the conditions, if any, applicable to a Class
of a Series, as described in the related Prospectus Supplement, the transfer of
the Securities may be registered and the Securities may be exchanged at the
office of the Trustee specified in the Prospectus Supplement without the payment
of any service charge other than any tax or governmental charge payable in
connection with such registration of transfer or exchange. If specified in the
related Prospectus Supplement, one or more Classes of a Series may be available
in book-entry form only.
Unless otherwise provided in the related Prospectus Supplement, payments of
principal of and interest on a Series of Securities will be made on the
Distribution Dates specified in the Prospectus Supplement relating to such
Series by check mailed to Holders of such Series, registered as such at the
close of business on the record date specified in the related Prospectus
Supplement applicable to such Distribution Dates at their addresses appearing on
the security register, except that (a) payments may be made by wire transfer (at
the expense of the Holder requesting payment by wire transfer) in certain
circumstances described in the related Prospectus Supplement and (b) final
payments of principal in retirement of each Security will be made only upon
presentation and surrender of such Security at the office of the Trustee
specified in the Prospectus Supplement.
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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
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.
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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.
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
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rate at which the amount financed under the Loans or Underlying Loans relating
to the Private Securities, as applicable, included in the Trust Fund for a
Series is paid, which may be in the form of scheduled amortization or
prepayments.
Prepayments on loans and other receivables can be measured relative to a
prepayment standard or model. The Prospectus Supplement for a Series of
Securities will describe the prepayment standard or model, if any, used and may
contain tables setting forth the projected weighted average life of each Class
of Securities of such Series and the percentage of the original principal amount
of each Class of Securities of such Series that would be outstanding on
specified Distribution Dates for such Series based on the assumptions stated in
such Prospectus Supplement, including assumptions that prepayments on the Loans
or Underlying Loans relating to the Private Securities, as applicable, included
in the related Trust Fund are made at rates corresponding to various percentages
of the prepayment standard or model specified in such Prospectus Supplement.
There is, however, no assurance that prepayment of the Loans or Underlying
Loans relating to the Private Securities, as applicable, included in the related
Trust Fund will conform to any level of any prepayment standard or model
specified in the related Prospectus Supplement. The rate of principal
prepayments on pools of loans may be influenced by a variety of factors,
including job related factors such as transfers, layoffs or promotions and
personal factors such as divorce, disability or prolonged illness. Economic
conditions, either generally or within a particular geographic area or industry,
also may affect the rate of principal prepayments. Demographic and social
factors may influence the rate of principal prepayments in that some borrowers
have greater financial flexibility to move or refinance than do other borrowers.
The deductibility of mortgage interest payments, servicing decisions and other
factors also affect the rate of principal prepayments. As a result, there can be
no assurance as to the rate or timing of principal prepayments of the Loans or
Underlying Loans either from time to time or over the lives of such Loans or
Underlying Loans.
The rate of prepayments of conventional housing loans and other receivables
has fluctuated significantly in recent years. In general, however, if prevailing
interest rates fall significantly below the interest rates on the Loans or
Underlying Loans relating to the Private Securities, as applicable, for a
Series, such loans are likely to prepay at rates higher than if prevailing
interest rates remain at or above the interest rates borne by such loans. In
this regard, it should be noted that the Loans or Underlying Loans, as
applicable, for a Series may have different interest rates. In addition, the
weighted average life of the Securities may be affected by the varying
maturities of the Loans or Underlying Loans relating to the Private Securities,
as applicable. If any Loans or Underlying Loans relating to the Private
Securities, as applicable, for a Series have actual terms-to-stated maturity of
less than those assumed in calculating the Final Scheduled Distribution Date of
the related Securities, one or more Classes of the Series may be fully paid
prior to their respective Final Scheduled Distribution Date, even in the absence
of prepayments and a reinvestment return higher than the Assumed Reinvestment
Rate.
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THE TRUST FUNDS
GENERAL
The Notes of each Series will be secured by the pledge of the assets of the
related Trust Fund, and the Certificates of each Series will represent interests
in the assets of the related Trust Fund. The Trust Fund of each Series will
include assets purchased from the Seller composed of (i) the Primary Assets,
(ii) amounts available from the reinvestment of payments on such Primary Assets
at the Assumed Reinvestment Rate, if any, specified in the related Prospectus
Supplement, (iii) any Enhancement, (iv) any Property that secured a Loan but
which is acquired by foreclosure or deed in lieu of foreclosure or repossession
and (v) the amount, if any, initially deposited in the Collection Account or
Distribution Account for a Series as specified in the related Prospectus
Supplement.
The Securities will be non-recourse obligations of the related Trust Fund.
The assets of the Trust Fund specified in the related Prospectus Supplement for
a Series of Securities, unless otherwise specified in the related Prospectus
Supplement, will serve as collateral only for that Series of Securities. Holders
of a Series of Notes may only proceed against such collateral securing such
Series of Notes in the case of a default with respect to such Series of Notes
and may not proceed against any assets of the Depositor or the related Trust
Fund not pledged to secure such Notes.
The Primary Assets for a Series will be sold by the Seller to the Depositor
or purchased by the Depositor in the open market or in privately negotiated
transactions, which may include transactions with affiliates and will be
transferred by the Depositor to the Trust Fund. Loans relating to a Series will
be serviced by the Servicer, which may be the Seller, specified in the related
Prospectus Supplement, pursuant to a Pooling and Servicing Agreement, with
respect to a Series of Certificates or a servicing agreement (each, a 'Servicing
Agreement') between the Trust Fund and Servicer, with respect to a Series of
Notes.
As used herein, 'Agreement' means, with respect to a Series of
Certificates, the Pooling and Servicing Agreement or Trust Agreement, and with
respect to a Series of Notes, the Indenture and the Servicing Agreement, as the
context requires.
If so specified in the related Prospectus Supplement, a Trust Fund relating
to a Series of Securities may be a business trust formed under the laws of the
state specified in the related Prospectus Supplement pursuant to a trust
agreement (each, a 'Trust Agreement') between the Depositor and the trustee of
such Trust Fund specified in the related Prospectus Supplement
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or liabilities.
No Trust Fund is expected to engage in any activities other than acquiring,
managing and holding the related Primary Assets and other assets contemplated
herein and in the related Prospectus Supplement and the proceeds thereof,
issuing Securities and making payments and distributions thereon and certain
related activities. No Trust Fund is expected to have any source of capital
other than its assets and any related Enhancement.
Primary Assets included in the Trust Fund for a Series may consist of any
combination of Loans and Private Securities, to the extent and as specified in
the related Prospectus Supplement.
THE LOANS
Mortgage Loans. The Primary Assets for a Series may consist, in whole or
in part, of closed-end home equity loans (the 'Mortgage Loans') secured by
mortgages primarily on Single Family Properties which may be subordinated to
other mortgages on the same Mortgaged Property. The Mortgage Loans may have
fixed interest rates or adjustable interest rates and may provide for other
payment characteristics as described below and in the related Prospectus
Supplement.
Unless otherwise described in the related Prospectus Supplement, the full
principal amount of a Mortgage Loan is advanced at origination of the loan and
generally is repayable in equal (or substantially equal) installments of an
amount sufficient to fully amortize such loan at its stated maturity. As more
fully described in the related Prospectus Supplement, interest on each Mortgage
Loan is calculated on the basis of the outstanding
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principal balance of such loan multiplied by the Loan Rate thereon and further
multiplied by a fraction, the numerator of which is the number of days in the
period elapsed since the preceding payment of interest was made and the
denominator is the number of days in the annual period for which interest
accrues on such loan. Unless otherwise described in the related Prospectus
Supplement the original terms to stated maturity of Mortgage Loans will not
exceed 360 months.
The Mortgaged Properties will include Single Family Property (i.e., one- to
four-family residential housing, including Condominium Units and Cooperative
Dwellings) and mixed-use property. Mixed-use properties will consist of
structures of no more than three stories, which include one to four residential
dwelling units and space used for retail, professional or other commercial uses.
Such uses, which will not involve more than 50% of the space in the structure,
may include doctor, dentist or law offices, real estate agencies, boutiques,
newstands, convenience stores or other similar types of uses intended to cater
to individual customers as specified in the related Prospectus Supplement. The
properties may be located in suburban or metropolitan districts. Any such
non-residential use will be in compliance with local zoning laws and
regulations. The Mortgaged Properties may consist of detached individual
dwellings, individual condominiums, townhouses, duplexes, row houses, individual
units in planned unit developments and other attached dwelling units. Each
Single Family Property will be located on land owned in fee simple by the
borrower or on land leased by the borrower for a term at least ten years (unless
otherwise provided in the related Prospectus Supplement) greater than the term
of the related Loan. Attached dwellings may include owner-occupied structures
where each borrower owns the land upon which the unit is built, with the
remaining adjacent land owned in common or dwelling units subject to a
proprietary lease or occupancy agreement in a cooperatively owned apartment
building.
Unless otherwise specified in the related Prospectus Supplement, Mortgages
on Cooperative Dwellings consist of a lien on the shares issued by such
Cooperative Dwelling and the proprietary lease or occupancy agreement relating
to such Cooperative Dwelling.
The aggregate principal balance of Mortgage Loans secured by Mortgaged
Properties that are owner-occupied will be disclosed in the related Prospectus
Supplement. Unless otherwise specified in the Prospectus Supplement, the sole
basis for a representation that a given percentage of the Mortgage Loans are
secured by Single Family Property that is owner-occupied will be either (i) the
making of a representation by the Mortgagor at origination of the Mortgage Loan
either that the underlying Mortgaged Property will be used by the Mortgagor for
a period of at least six months every year or that the Mortgagor intends to use
the Mortgaged Property as a primary residence, or (ii) a finding that the
address of the underlying Mortgaged Property is the Mortgagor's mailing address
as reflected in the Servicer's records. To the extent specified in the related
Prospectus Supplement, the Mortgaged Properties may include non-owner occupied
investment properties and vacation and second homes.
Unless otherwise specified in the related Prospectus Supplement, the
initial Combined Loan-to-Value Ratio of a Loan is computed in the manner
described in the related Prospectus Supplement, taking into account the amounts
of any related senior mortgage loans.
Home Improvement Contracts. The Primary Assets for a Series may consist,
in whole or part, of home improvement installment sales contracts and
installment loan agreements (the 'Home Improvement Contracts') originated by a
home improvement contractor in the ordinary course of business. As specified in
the related Prospectus Supplement, the Home Improvement Contracts will either be
unsecured or secured by the Mortgages primarily on Single Family Properties
which are generally subordinate to other mortgages on the same Mortgaged
Property or by purchase money security interests in the Home Improvements
financed thereby. Unless otherwise specified in the applicable Prospectus
Supplement, the Home Improvement Contracts will be fully amortizing and may have
fixed interest rates or adjustable interest rates and may provide for other
payment characteristics as described below and in the related Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement, the home
improvements (the 'Home Improvements') securing the Home Improvement Contracts
include, but are not limited to, replacement windows, house siding, new roofs,
swimming pools, satellite dishes, kitchen and bathroom remodeling goods and
solar heating panels. The initial Loan-to-Value Ratio of a Home Improvement
Contract will be computed in the manner described in the related Prospectus
Supplement.
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Additional Information. The selection criteria which will apply with
respect to the Loans, including, but not limited to, the Combined Loan-to-Value
Ratios or Loan-to-Value Ratios, as applicable, original terms to maturity and
delinquency information, will be specified in the related Prospectus Supplement.
The Loans for a Series may include Loans that do not amortize their entire
principal balance by their stated maturity in accordance with their terms and
require a balloon payment of the remaining principal balance at maturity, as
specified in the related Prospectus Supplement. As further described in the
related Prospectus Supplement, the Loans for a Series may include Loans that do
not have a specified stated maturity.
The Loans will be conventional contracts or contracts insured by the
Federal Housing Administration ('FHA') or partially guaranteed by the Veterans
Administration ('VA'). Loans designated in the related Prospectus Supplement as
insured by the FHA will be insured by the FHA as authorized under the United
States Housing Act of 1937, as amended. Such Loans will be insured under various
FHA programs. These programs generally limit the principal amount and interest
rates of the mortgage loans insured. Loans insured by the FHA generally require
a minimum down payment of approximately 5% of the original principal amount of
the loan. No FHA-insured Loans relating to a Series may have an interest rate or
original principal amount exceeding the applicable FHA limits at the time of
origination of such loan.
The insurance premiums for Loans insured by the FHA are collected by
lenders approved by the Department of Housing and Urban Development ('HUD') and
are paid to the FHA. The regulations governing FHA single-family mortgage
insurance programs provide that insurance benefits are payable either upon
foreclosure (or other acquisition of possession) and conveyance of the mortgaged
premises to HUD or upon assignment of the defaulted Loan to HUD. With respect to
a defaulted FHA-insured Loan, the Servicer is limited in its ability to initiate
foreclosure proceedings. When it is determined, either by the Servicer or HUD,
that default was caused by circumstances beyond the mortgagor's control, the
Servicer is expected to make an effort to avoid foreclosure by entering, if
feasible, into one of a number of available forms of forbearance plans with the
mortgagor. Such plans may involve the reduction or suspension of regular
mortgage payments for a specified period, with such payments to be made upon or
before the maturity date of the mortgage, or the recasting of payments due under
the mortgage up to or beyond the maturity date. In addition, when a default
caused by such circumstances is accompanied by certain other criteria, HUD may
provide relief by making payments to the Servicer in partial or full
satisfaction of amounts due under the Loan (which payments are to be repaid by
the mortgagor to HUD) or by accepting assignment of the loan from the Servicer.
With certain exceptions, at least three full monthly installments must be due
and unpaid under the Loan and HUD must have rejected any request for relief from
the mortgagor before the Servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The Servicer of each FHA-insured Loan will be obligated
to purchase any such debenture issued in satisfaction of such Loan upon default
for an amount equal to the principal amount of any such debenture.
The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal amount of the defaulted Loan adjusted to reimburse the
Servicer for certain costs and expenses and to deduct certain amounts received
or retained by the Servicer after default. When entitlement to insurance
benefits results from foreclosure (or other acquisition of possession) and
conveyance to HUD, the Servicer is compensated for no more than two-thirds of
its foreclosure costs, and is compensated for interest accrued and unpaid prior
to such date but in general only to the extent it was allowed pursuant to a
forbearance plan approved by HUD. When entitlement to insurance benefits results
from assignment of the Loan to HUD, the insurance payment includes full
compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA-insured Loan, bears
interest from a date 30 days after the mortgagor's first uncorrected failure to
perform any obligation to make any payment due under the Loan and, upon
assignment, from the date of assignment to the date of payment of the claim, in
each case at the same interest rate as the applicable HUD debenture interest
rate as described above.
Loans designated in the related Prospectus Supplement as guaranteed by the
VA will be partially guaranteed by the VA under the Serviceman's Readjustment
Act of 1944, as amended (a 'VA Guaranty'). The Serviceman's Readjustment Act of
1944, as amended, permits a veteran (or in certain instances the spouse of a
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veteran) to obtain a mortgage loan guaranty by the VA covering mortgage
financing of the purchase of a one- to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires no
down payment from the purchaser and permits the guarantee of mortgage loans of
up to 30 years' duration.
The maximum guaranty that may be issued by the VA under a VA guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 1803(a), as amended. The
liability on the guaranty is reduced or increased pro rata with any reduction or
increase in the amount of indebtedness, but in no event will the amount payable
on the guaranty exceed the amount of the original guaranty. The VA may, at its
option and without regard to the guaranty, make full payment to a mortgage
holder of unsatisfied indebtedness on a mortgage upon its assignment to the VA.
With respect to a defaulted VA guaranteed Loan, the Servicer is, absent
exceptional circumstances, authorized to announce its intention to foreclose
only when the default has continued for three months. Generally, a claim for the
guaranty is submitted after liquidation of the Mortgaged Property.
The amount payable under the guaranty will be the percentage of the
VA-insured Loan originally guaranteed applied to indebtedness outstanding as of
the applicable date of computation specified in the VA regulations. Payments
under the guaranty will be equal to the unpaid principal amount of the loan,
interest accrued on the unpaid balance of the loan to the appropriate date of
computation and limited expenses of the mortgagee, but in each case only to the
extent that such amounts have not been recovered through liquidation of the
Mortgaged Property. The amount payable under the guaranty may in no event exceed
the amount of the original guaranty.
The related Prospectus Supplement for each Series will provide information
with respect to the Loans that are Primary Assets as of the Cut-off Date,
including, among other things, and to the extent relevant: (a) the aggregate
unpaid principal balance of the Loans; (b) the range and weighted average Loan
Rate on the Loans, and, in the case of adjustable rate Loans, the range and
weighted average of the current Loan Rates and the Lifetime Rate Caps, if any;
(c) the range and average outstanding principal balance of the Loans; (d) the
weighted average original and remaining term-to-stated maturity of the Loans and
the range of original and remaining terms-to-stated maturity, if applicable; (e)
the range and weighted average of Combined Loan-to-Value Ratios or Loan-to-Value
Ratios for the Loans, as applicable; (f) the percentage (by outstanding
principal balance as of the Cut-off Date) of Loans that accrue interest at
adjustable or fixed interest rates; (g) any special hazard insurance policy or
bankruptcy bond or other enhancement relating to the Loans; (h) the percentage
(by principal balance as of the Cut-off Date) of Loans that are secured by
Mortgaged Properties, Home Improvements or are unsecured; (i) the geographic
distribution of any Mortgaged Properties securing the Loans; (j) the percentage
of Loans (by principal balance as of the Cut-off Date) that are secured by
Single Family Properties, shares relating to Cooperative Dwellings, Condominium
Units, investment property and vacation or second homes; (k) the lien priority
of the Loans; and (l) the delinquency status and year of origination of the
Loans. The related Prospectus Supplement will also specify any other limitations
on the types or characteristics of Loans for a Series.
If information of the nature described above respecting the Loans is not
known to the Depositor at the time the Securities are initially offered,
approximate or more general information of the nature described above will be
provided in the Prospectus Supplement and additional information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related Series and to be filed with the Commission within 15
days after the initial issuance of such Securities.
PRIVATE SECURITIES
General. Primary Assets for a Series may consist, in whole or in part, of
Private Securities which include pass-through certificates representing
beneficial interests in loans of the type that would otherwise be eligible to be
Loans (the 'Underlying Loans') or (b) collateralized obligations secured by
Underlying Loans. Such pass-through certificates or collateralized obligations
will have previously been (a) offered and distributed to the public pursuant to
an effective registration statement or (b) purchased in a transaction not
involving any public offering from a person who is not an affiliate of the
issuer of such securities at the time of sale (nor an affiliate thereof at any
time during the three preceding months); provided a period of three years
elapsed since the later of the date the securities were acquired from the issuer
or an affiliate thereof. Although individual Underlying Loans
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may be insured or guaranteed by the United States or an agency or
instrumentality thereof, they need not be, and Private Securities themselves
will not be so insured or guaranteed.
Private Securities will have been issued pursuant to a pooling and
servicing agreement, a trust agreement or similar agreement (a 'PS Agreement').
The seller/servicer of the Underlying Loans will have entered into the PS
Agreement with the trustee under such PS Agreement (the 'PS Trustee'). The PS
Trustee or its agent, or a custodian, will possess the Underlying Loans.
Underlying Loans will be serviced by a servicer (the 'PS Servicer') directly or
by one or more sub-servicers who may be subject to the supervision of the PS
Servicer.
The sponsor of the Private Securities (the 'PS Sponsor') will be a
financial institution or other entity engaged generally in the business of
lending; a public agency or instrumentality of a state, local or federal
government; or a limited purpose corporation organized for the purpose of, among
other things, establishing trusts and acquiring and selling loans to such
trusts, and selling beneficial interests in such trusts. If so specified in the
Prospectus Supplement, the PS Sponsor may be an affiliate of the Depositor. The
obligations of the PS Sponsor will generally be limited to certain
representations and warranties with respect to the assets conveyed by it to the
related trust. Unless otherwise specified in the related Prospectus Supplement,
the PS Sponsor will not have guaranteed any of the assets conveyed to the
related trust or any of the Private Securities issued under the PS Agreement.
Additionally, although the Underlying Loans may be guaranteed by an agency or
instrumentality of the United States, the Private Securities themselves will not
be so guaranteed.
Distributions of principal and interest will be made on the Private
Securities on the dates specified in the related Prospectus Supplement. The
Private Securities may be entitled to receive nominal or no principal
distributions or nominal or no interest distributions. Principal and interest
distributions will be made on the Private Securities by the PS Trustee or the PS
Servicer. The PS Sponsor or the PS Servicer may have the right to repurchase the
Underlying Loans after a certain date or under other circumstances specified in
the related Prospectus Supplement.
The Underlying Loans may be fixed rate, level payment, fully amortizing
loans or adjustable rate loans or loans having balloon or other irregular
payment features. Such Underlying Loans will be secured by mortgages on
Mortgaged Properties.
Credit Support Relating to Private Securities. Credit support in the form
of Reserve Funds, subordination of other private securities issued under the PS
Agreement, guarantees, letters of credit, cash collateral accounts, insurance
policies or other types of credit support may be provided with respect to the
Underlying Loans or with respect to the Private Securities themselves. The type,
characteristics and amount of credit support will be a function of certain
characteristics of the Underlying Loans and other factors and will have been
established for the Private Securities on the basis of requirements of the
nationally recognized statistical rating organization that rated the Private
Securities.
Additional Information. The Prospectus Supplement for a Series for which
the Primary Assets include Private Securities will specify (such disclosure may
be on an approximate basis and will be as of the date specified in the related
Prospectus Supplement), to the extent relevant and to the extent such
information is reasonably available to the Depositor and the Depositor
reasonably believes such information to be reliable: (i) the aggregate
approximate principal amount and type of the Private Securities to be included
in the Trust Fund for such Series; (ii) certain characteristics of the
Underlying Loans including (A) the payment features of such Underlying Loans
(i.e., whether they are fixed rate or adjustable rate and whether they provide
for fixed level payments or other payment features), (B) the approximate
aggregate principal balance, if known, of such Underlying Loans insured or
guaranteed by a governmental entity, (C) the servicing fee or range of servicing
fees with respect to the Underlying Loans, (D) the minimum and maximum stated
maturities of such Underlying Loans at origination, (E) the lien priority of
such Underlying Loans, and (F) the delinquency status and year of origination of
such Underlying Loans; (iii) the maximum original term-to-stated maturity of the
Private Securities; (iv) the weighted average term-to-stated maturity of the
Private Securities; (v) the pass-through or certificate rate or ranges thereof
for the Private Securities; (vi) the PS Sponsor, the PS Servicer (if other than
the PS Sponsor) and the PS Trustee for such Private Securities; (vii) certain
characteristics of credit support if any, such as Reserve Funds, insurance
policies, letters of credit or guarantees relating to such Loans underlying the
Private Securities or to such Private Securities themselves; (viii) the terms on
which Underlying Loans may, or are required to, be purchased prior to their
stated maturity or the stated maturity of the Private Securities; and
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(ix) the terms on which Underlying Loans may be substituted for those originally
underlying the Private Securities.
If information of the nature described above representing the Private
Securities is not known to the Depositor at the time the Securities are
initially offered, approximate or more general information of the nature
described above will be provided in the Prospectus Supplement and the additional
information, if available, will be set forth in a Current Report on Form 8-K to
be available to investors on the date of issuance of the related Series and to
be filed with the Commission within 15 days of the initial issuance of such
Securities.
COLLECTION AND DISTRIBUTION ACCOUNTS
A separate Collection Account will be established by the Trustee or the
Servicer, in the name of the Trustee, for each Series of Securities for receipt
of the amount of cash, if any, specified in the related Prospectus Supplement to
be initially deposited therein by the Depositor, all amounts received on or with
respect to the Primary Assets and, unless otherwise specified in the related
Prospectus Supplement, income earned thereon. Certain amounts on deposit in such
Collection Account and certain amounts available pursuant to any Enhancement, as
provided in the related Prospectus Supplement, will be deposited in a related
Distribution Account, which will also be established by the Trustee for each
such Series of Securities, for distribution to the related Holders. Unless
otherwise specified in the related Prospectus Supplement, the Trustee will
invest the funds in the Collection and Distribution Accounts in Eligible
Investments maturing, with certain exceptions, not later, in the case of funds
in the Collection Account, than the day preceding the date such funds are due to
be deposited in the Distribution Account or otherwise distributed and, in the
case of funds in the Distribution Account, than the day preceding the next
Distribution Date for the related Series of Securities. Eligible Investments
include, among other investments, obligations of the United States and certain
agencies thereof, federal funds, certificates of deposit, commercial paper,
demand and time deposits and banker's acceptances, certain repurchase agreements
of United States government securities and certain guaranteed investment
contracts, in each case, acceptable to the Rating Agency.
Notwithstanding any of the foregoing, amounts may be deposited and
withdrawn pursuant to any Deposit Agreement or Minimum Principal Payment
Agreement as specified in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, a Trust Fund will
include one or more segregated trust accounts (each, a 'Pre-Funding Account')
established and maintained with the Trustee for the related Series. If so
specified, on the closing date for such Series, a portion of the proceeds of the
sale of the Securities of such Series (such amount, the 'Pre-Funded Amount')
will be deposited in the Pre-Funding Account and may be used to purchase
additional Primary Assets during the period of time specified in the related
Prospectus Supplement (the 'Pre-Funding Period'). The Primary Assets to be so
purchased will be required to have certain characteristics specified in the
related Prospectus Supplement. If any Pre-Funded Amount remains on deposit in
the Pre-Funding Account at the end of the Pre-Funding Period, such amount will
be applied in the manner specified in the related Prospectus Supplement to
prepay the Notes and/or the Certificates of the applicable Series.
If a Pre-Funding Account is established, one or more segregated trust
accounts (each, a 'Capitalized Interest Account') may be established and
maintained with the Trustee for the related Series. On the closing date for such
Series, a portion of the proceeds of the sale of the Securities of such Series
will be deposited in the Capitalized Interest Account and used to fund the
excess, if any, of the sum of (i) the amount of interest accrued on the
Securities of such Series and (ii) if specified in the related Prospectus
Supplement, certain fees or expenses during the Pre-Funding Period, over the
amount of interest available therefor from the Primary Assets in the Trust Fund.
Any amounts on deposit in the Capitalized Interest Account at the end of the
Pre-Funding Period that are not necessary for such purposes will be distributed
to the person specified in the related Prospectus Supplement.
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ENHANCEMENT
If stated in the Prospectus Supplement relating to a Series of Securities,
simultaneously with the Depositor's assignment of the Primary Assets to the
Trustee, the Depositor will obtain an irrevocable letter of credit, surety bond
or insurance policy, issue Subordinate Securities or obtain any other form of
enhancement or combination thereof (collectively, 'Enhancement') in favor of the
Trustee on behalf of the Holders of the related Series or designated Classes of
such Series from an institution or by other means acceptable to the Rating
Agency. The Enhancement will support the payment of principal and interest on
the Securities, and may be applied for certain other purposes to the extent and
under the conditions set forth in such Prospectus Supplement. Enhancement for a
Series may include one or more of the following forms, or such other form as may
be specified in the related Prospectus Supplement. If so specified in the
related Prospectus Supplement, any of such Enhancement may be structured so as
to protect against losses relating to more than one Trust Fund, in the manner
described therein.
SUBORDINATE SECURITIES
If specified in the related Prospectus Supplement, Enhancement for a Series
may consist of one or more Classes of Subordinate Securities. The rights of
holders of such Subordinate Securities to receive distributions on any
Distribution Date will be subordinate in right and priority to the rights of
Holders of Senior Securities of the Series, but only to the extent described in
the related Prospectus Supplement.
INSURANCE
If stated in the related Prospectus Supplement, Enhancement for a Series
may consist of special hazard insurance policies, bankruptcy bonds and other
types of insurance relating to the Primary Assets, as described below and in the
related Prospectus Supplement.
Pool Insurance Policy. If so specified in the Prospectus Supplement
relating to a Series of Securities, the Depositor will obtain a pool insurance
policy for the Loans in the related Trust Fund. The pool insurance policy will
cover any loss (subject to the limitations described in a related Prospectus
Supplement) by reason of default. but will not cover the portion of the
principal balance of any Loan that is required to be covered by any primary
mortgage insurance policy. The amount and terms of any such coverage will be set
forth in the related Prospectus Supplement.
Special Hazard Insurance Policy. Although the terms of such policies vary
to some degree, a special hazard insurance policy typically provides that, where
there has been damage to Property securing a defaulted or foreclosed Loan (title
to which has been acquired by the insured) and to the extent such damage is not
covered by the standard hazard insurance policy or any flood insurance policy,
if applicable, required to be maintained with respect to such Property, or in
connection with partial loss resulting from the application of the coinsurance
clause in a standard hazard insurance policy, the special hazard insurer will
pay the lesser of (i) the cost of repair or replacement of such Property or (ii)
upon transfer of such Property to the special hazard insurer, the unpaid
principal balance of such Loan at the time of acquisition of such Property by
foreclosure or deed in lieu of foreclosure, plus accrued interest to the date of
claim settlement and certain expenses incurred by the Servicer with respect to
such Property. If the unpaid principal balance plus accrued interest and certain
expenses is paid by the special hazard insurer, the amount of further coverage
under the special hazard insurance policy will be reduced by such amount less
any net proceeds from the sale of such Property. Any amount paid as the cost of
repair of such Property will reduce coverage by such amount. Special hazard
insurance policies typically do not cover losses occasioned by war, civil
insurrection, certain governmental actions, errors in design, faulty workmanship
or materials (except under certain circumstances), nuclear reaction, flood (if
the mortgaged property is in a federally designated flood area), chemical
contamination and certain other risks.
Restoration of the Property with the proceeds described under (i) above is
expected to satisfy the condition under any pool insurance policy that such
Property be restored before a claim under such pool insurance policy may be
validly presented with respect to the defaulted Loan secured by such Property.
The payment described under (ii) above will render unnecessary presentation of a
claim in respect of such Loan under any pool insurance policy. Therefore, so
long as such pool insurance policy remains in effect, the payment by the special
hazard insurer of the cost of repair or of the unpaid principal balance of the
related Loan plus accrued interest and certain
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expenses will not affect the total insurance proceeds paid to Holders of the
Securities, but will affect the relative amounts of coverage remaining under the
special hazard insurance policy and pool insurance policy.
Bankruptcy Bond. In the event of a bankruptcy of a borrower, the
bankruptcy court may establish the value of the Property securing the related
Loan at an amount less than the then-outstanding principal balance of such Loan.
The amount of the secured debt could be reduced to such value, and the holder of
such Loan thus would become an unsecured creditor to the extent the outstanding
principal balance of such Loan exceeds the value so assigned to the Property by
the bankruptcy court. In addition, certain other modifications of the terms of a
Loan can result from a bankruptcy proceeding. See 'CERTAIN LEGAL ASPECTS OF
LOANS.' If so provided in the related Prospectus Supplement, the Depositor or
other entity specified in the related Prospectus Supplement will obtain a
bankruptcy bond or similar insurance contract (the 'bankruptcy bond') covering
losses resulting from proceedings with respect to borrowers under the Bankruptcy
Code. The bankruptcy bond will cover certain losses resulting from a reduction
by a bankruptcy court of scheduled payments of principal of and interest on a
Loan or a reduction by such court of the principal amount of a Loan and will
cover certain unpaid interest on the amount of such a principal reduction from
the date of the filing of a bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount specified
in the related Prospectus Supplement for all Loans in the Trust Fund for such
Series. Such amount will be reduced by payments made under such bankruptcy bond
in respect of such Loans, unless otherwise specified in the related Prospectus
Supplement, and will not be restored.
RESERVE FUNDS
If so specified in the Prospectus Supplement relating to a Series of
Securities, the Depositor will deposit into one or more funds to be established
with the Trustee as part of the Trust Fund for such Series or for the benefit of
any Enhancer with respect to such Series (the 'Reserve Funds') cash, a letter or
letters of credit, cash collateral accounts, Eligible Investments, or other
instruments meeting the criteria of the Rating Agency rating any Series of the
Securities in the amount specified in such Prospectus Supplement. In the
alternative or in addition to such deposit, a Reserve Fund for a Series may be
funded over time through application of all or a portion of the excess cash flow
from the Primary Assets for such Series, to the extent described in the related
Prospectus Supplement. If applicable, the initial amount of the Reserve Fund and
the Reserve Fund maintenance requirements for a Series of Securities will be
described in the related Prospectus Supplement.
Amounts withdrawn from any Reserve Fund will be applied by the Trustee to
make payments on the Securities of a Series, to pay expenses, to reimburse any
Enhancer or for any other purpose, in the manner and to the extent specified in
the related Prospectus Supplement.
Amounts deposited in a Reserve Fund will be invested by the Trustee, in
Eligible Investments maturing no later than the day specified in the related
Prospectus Supplement.
MINIMUM PRINCIPAL PAYMENT AGREEMENT
If stated in the Prospectus Supplement relating to a Series of Securities,
the Depositor will enter into a Minimum Principal Payment Agreement with an
entity meeting the criteria of the Rating Agency pursuant to which such entity
will provide certain payments on the Securities of such Series in the event that
aggregate scheduled principal payments and/or prepayments on the Primary Assets
for such Series are not sufficient to make certain payments on the Securities of
such Series, as provided in the Prospectus Supplement.
DEPOSIT AGREEMENT
If specified in a Prospectus Supplement, the Depositor and the Trustee for
such Series of Securities will enter into a Deposit Agreement with the entity
specified in such Prospectus Supplement on or before the sale of such Series of
Securities. The purpose of a Deposit Agreement would be to accumulate available
cash for investment so that such cash, together with income thereon, can be
applied to future distributions on one or more Classes of Securities. The
Prospectus Supplement for a Series of Securities pursuant to which a Deposit
Agreement is used will contain a description of the terms of such Deposit
Agreement.
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SERVICING OF LOANS
GENERAL
Customary servicing functions with respect to Loans comprising the Primary
Assets in the Trust Fund will be provided by the Servicer directly pursuant to
the related Servicing Agreement or Pooling and Servicing Agreement, as the case
may be, with respect to a Series of Securities.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The Servicer will make reasonable efforts to collect all payments required
to be made under the Loans and will, consistent with the terms of the related
Agreement for a Series and any applicable Enhancement, follow such collection
procedures as it follows with respect to comparable loans held in its own
portfolio. Consistent with the above, the Servicer may, in its discretion, (i)
waive any assumption fee, late payment charge, or other charge in connection
with a Loan and (ii) to the extent provided in the related Agreement arrange
with an obligor a schedule for the liquidation of delinquencies by extending the
Due Dates for Scheduled Payments on such Loan.
If specified in the related Prospectus Supplement, the Servicer, to the
extent permitted by law, will establish and maintain escrow or impound accounts
('Escrow Accounts') with respect to Loans in which payments by obligors to pay
taxes, assessments, mortgage and hazard insurance premiums, and other comparable
items will be deposited. Loans may not require such payments under the loan
related documents, in which case the Servicer would not be required to establish
any Escrow Account with respect to such Loans. Withdrawals from the Escrow
Accounts are to be made to effect timely payment of taxes, assessments and
mortgage and hazard insurance, to refund to obligors amounts determined to be
overages, to pay interest to obligors on balances in the Escrow Account to the
extent required by law, to repair or otherwise protect the property securing the
related Loan and to clear and terminate such Escrow Account. The Servicer will
be responsible for the administration of the Escrow Accounts and generally will
make advances to such accounts when a deficiency exists therein.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT
Unless otherwise specified in the related Prospectus Supplement, the
Trustee or the Servicer will establish a separate account (the 'Collection
Account') in the name of the Trustee. Unless otherwise indicated in the related
Prospectus Supplement, the Collection Account will be an account maintained (i)
at a depository institution, the long-term unsecured debt obligations of which
at the time of any deposit therein are rated by each Rating Agency rating the
Securities of such Series at levels satisfactory to each Rating Agency or (ii)
in an account or accounts the deposits in which are insured to the maximum
extent available by the FDIC or which are secured in a manner meeting
requirements established by each Rating Agency.
Unless otherwise specified in the related Prospectus Supplement, the funds
held in the Collection Account may be invested, pending remittance to the
Trustee, in Eligible Investments. If so specified in the related Prospectus
Supplement, the Servicer will be entitled to receive as additional compensation
any interest or other income earned on funds in the Collection Account.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer, the Depositor, the Trustee or the Seller, as appropriate, will deposit
into the Collection Account for each Series on the Business Day following the
Closing Date any amounts representing Scheduled Payments due after the related
Cut-off Date but received by the Servicer on or before the Closing Date, and
thereafter, within two business days after the date of receipt thereof, the
following payments and collections received or made by it (other than, unless
otherwise provided in the related Prospectus Supplement, in respect of principal
of and interest on the related Primary Assets due on or before such Cut-off
Date):
(i) All payments on account of principal, including prepayments, on
such Primary Assets;
(ii) All payments on account of interest on such Primary Assets after
deducting therefrom, at the discretion of the Servicer but only to the
extent of the amount permitted to be withdrawn or withheld from the
Collection Account in accordance with the related Agreement, the Servicing
Fee in respect of such Primary Assets;
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(iii) All amounts received by the Servicer in connection with the
liquidation of Primary Assets or property acquired in respect thereof,
whether through foreclosure sale, repossession or otherwise, including
payments in connection with such Primary Assets received from the obligor,
other than amounts required to be paid or refunded to the obligor pursuant
to the terms of the applicable loan documents or otherwise pursuant to law
('Liquidation Proceeds'), exclusive of, in the discretion of the Servicer,
but only to the extent of the amount permitted to be withdrawn from the
Collection Account in accordance with the related Agreement, the Servicing
Fee, if any, in respect of the related Primary Asset;
(iv) All proceeds under any title insurance, hazard insurance or other
insurance policy covering any such Primary Asset, other than proceeds to be
applied to the restoration or repair of the related Property or released to
the obligor in accordance with the related Agreement;
(v) All amounts required to be deposited therein from any applicable
Reserve Fund for such Series pursuant to the related Agreement;
(vi) All Advances made by the Servicer required pursuant to the
related Agreement; and
(vii) All repurchase prices of any such Primary Assets repurchased by
the Depositor, the Servicer or the Seller pursuant to the related
Agreement.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer is permitted, from time to time, to make withdrawals from the
Collection Account for each Series for the following purposes:
(i) to reimburse itself for Advances for such Series made by it
pursuant to the related Agreement; the Servicer's right to reimburse itself
is limited to amounts received on or in respect of particular Loans
(including, for this purpose, Liquidation Proceeds and amounts representing
proceeds of insurance policies covering the related Property) which
represent late recoveries of Scheduled Payments respecting which any such
Advance was made;
(ii) to the extent provided in the related Agreement, to reimburse
itself for any Advances for such Series that the Servicer determines in
good faith it will be unable to recover from amounts representing late
recoveries of Scheduled Payments respecting which such Advance was made or
from Liquidation Proceeds or the proceeds of insurance policies;
(iii) to reimburse itself from Liquidation Proceeds for liquidation
expenses and for amounts expended by it in good faith in connection with
the restoration of damaged Property and, in the event deposited in the
Collection Account and not previously withheld, and to the extent that
Liquidation Proceeds after such reimbursement exceed the outstanding
principal balance of the related Loan, together with accrued and unpaid
interest thereon to the Due Date for such Loan next succeeding the date of
its receipt of such Liquidation Proceeds, to pay to itself out of such
excess the amount of any unpaid Servicing Fee and any assumption fees, late
payment charges, or other charges on the related Loan;
(iv) in the event it has elected not to pay itself the Servicing Fee
out of the interest component of any Scheduled Payment, late payment or
other recovery with respect to a particular Loan prior to the deposit of
such Scheduled Payment, late payment or recovery into the Collection
Account, to pay to itself the Servicing Fee, as adjusted pursuant to the
related Agreement, from any such Scheduled Payment, late payment or such
other recovery, to the extent permitted by the related Agreement;
(v) to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it pursuant to the related Agreement;
(vi) to pay to the applicable person with respect to each Primary
Asset or REO Property acquired in respect thereof that has been repurchased
or removed from the Trust Fund by the Depositor, the Servicer or the Seller
pursuant to the related Agreement, all amounts received thereon and not
distributed as of the date on which the related repurchase price was
determined;
(vii) to make payments to the Trustee of such Series for deposit into
the Distribution Account, if any, or for remittance to the Holders of such
Series in the amounts and in the manner provided for in the related
Agreement; and
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(viii) to clear and terminate the Collection Account pursuant to the
related Agreement.
In addition, if the Servicer deposits in the Collection Account for a
Series any amount not required to be deposited therein, it may, at any time,
withdraw such amount from such Collection Account.
ADVANCES AND LIMITATIONS THEREON
The related Prospectus Supplement will describe the circumstances, if any,
under which the Servicer will make Advances with respect to delinquent payments
on Loans. If specified in the related Prospectus Supplement, the Servicer will
be obligated to make Advances, and such obligation may be limited in amount, or
may not be activated until a certain portion of a specified Reserve Fund is
depleted. Advances are intended to provide liquidity and, except to the extent
specified in the related Prospectus Supplement, not to guarantee or insure
against losses. Accordingly, any funds advanced are recoverable by the Servicer
out of amounts received on particular Loans which represent late recoveries of
principal or interest, proceeds of insurance policies or Liquidation Proceeds
respecting which any such Advance was made. If an Advance is made and
subsequently determined to be nonrecoverable from late collections, proceeds of
insurance policies, or Liquidation Proceeds from the related Loan, the Servicer
may be entitled to reimbursement from other funds in the Collection Account or
Distribution Account, as the case may be, or from a specified Reserve Fund as
applicable, to the extent specified in the related Prospectus Supplement.
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
Standard Hazard Insurance; Flood Insurance. Except as otherwise specified
in the related Prospectus Supplement, the Servicer will be required to maintain
or to cause the obligor on each Loan to maintain a standard hazard insurance
policy providing coverage of the standard form of fire insurance with extended
coverage for certain other hazards as is customary in the state in which the
related Property is located. The standard hazard insurance policies will provide
for coverage at least equal to the applicable state standard form of fire
insurance policy with extended coverage for property of the type securing the
related Loans. In general, the standard form of fire and extended coverage
policy will cover physical damage to or destruction of, the related Property
caused by fire, lightning, explosion, smoke, windstorm, hail, riot, strike and
civil commotion, subject to the conditions and exclusions particularized in each
policy. Because the standard hazard insurance policies relating to the Loans
will be underwritten by different hazard insurers and will cover Properties
located in various states, such policies will not contain identical terms and
conditions. The basic terms, however, generally will be determined by state law
and generally will be similar. Most such policies typically will not cover any
physical damage resulting from war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides
and mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all inclusive. Uninsured risks not covered by a special hazard insurance policy
or other form of Enhancement will adversely affect distributions to Holders.
When a Property securing a Loan is located in a flood area identified by HUD
pursuant to the Flood Disaster Protection Act of 1973, as amended, the Servicer
will be required to cause flood insurance to be maintained with respect to such
Property, to the extent available.
The standard hazard insurance policies covering Properties securing Loans
typically will contain a 'coinsurance' clause which, in effect, will require the
insured at all times to carry hazard insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the Property, including
the improvements on any Property, in order to recover the full amount of any
partial loss. If the insured's coverage falls below this specified percentage,
such clause will provide that the hazard insurer's liability in the event of
partial loss will not exceed the greater of (i) the actual cash value (the
replacement cost less physical depreciation) of the Property, including the
improvements, if any, damaged or destroyed or (ii) such proportion of the loss,
without deduction for depreciation, as the amount of insurance carried bears to
the specified percentage of the full replacement cost of such Property and
improvements. Since the amount of hazard insurance to be maintained on the
improvements securing the Loans declines as the principal balances owing thereon
decrease, and since the value of the Properties will fluctuate in value over
time, the effect of this requirement in the event of partial loss may be that
hazard insurance proceeds will be insufficient to restore fully the damage to
the affected Property.
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Unless otherwise specified in the related Prospectus Supplement, coverage
will be in an amount at least equal to the greater of (i) the amount necessary
to avoid the enforcement of any co-insurance clause contained in the policy or
(ii) the outstanding principal balance of the related Loan. Unless otherwise
specified in the related Prospectus Supplement, the Servicer will also maintain
on REO Property that secured a defaulted Loan and that has been acquired upon
foreclosure, deed in lieu of foreclosure, or repossession, a standard hazard
insurance policy in an amount that is at least equal to the maximum insurable
value of such REO Property. No earthquake or other additional insurance will be
required of any obligor or will be maintained on REO Property acquired in
respect of a defaulted Loan, other than pursuant to such applicable laws and
regulations as shall at any time be in force and shall require such additional
insurance.
Any amounts collected by the Servicer under any such policies of insurance
(other than amounts to be applied to the restoration or repair of the Property,
released to the obligor in accordance with normal servicing procedures or used
to reimburse the Servicer for amounts to which it is entitled to reimbursement)
will be deposited in the Collection Account. In the event that the Servicer
obtains and maintains a blanket policy insuring against hazard losses on all of
the Loans, written by an insurer then acceptable to each Rating Agency which
assigns a rating to such Series, it will conclusively be deemed to have
satisfied its obligations to cause to be maintained a standard hazard insurance
policy for each Loan or related REO Property. This blanket policy may contain a
deductible clause, in which case the Servicer will be required, in the event
that there has been a loss that would have been covered by such policy absent
such deductible clause, to deposit in the Collection Account the amount not
otherwise payable under the blanket policy because of the application of such
deductible clause.
REALIZATION UPON DEFAULTED LOANS
The Servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the Properties
securing the related Loans as come into and continue in default and as to which
no satisfactory arrangements can be made for collection of delinquent payments.
In connection with such foreclosure or other conversion, the Servicer will
follow such practices and procedures as it deems necessary or advisable and as
are normal and usual in its servicing activities with respect to comparable
loans serviced by it. However, the Servicer will not be required to expend its
own funds in connection with any foreclosure or towards the restoration of the
Property unless it determines that (i) such restoration or foreclosure will
increase the Liquidation Proceeds in respect of the related Loan available to
the Holders after reimbursement to itself for such expenses and (ii) such
expenses will be recoverable by it either through Liquidation Proceeds or the
proceeds of insurance. Notwithstanding anything to the contrary herein, in the
case of a Trust Fund for which a REMIC election has been made, the Servicer will
be required to liquidate any Property acquired through foreclosure within two
years after the acquisition of the beneficial ownership of such Property. While
the holder of a Property acquired through foreclosure can often maximize its
recovery by providing financing to a new purchaser, the Trust Fund, if
applicable, will have no ability to do so and neither the Servicer nor the
Depositor will be required to do so.
The Servicer may arrange with the obligor on a defaulted Loan a
modification of such Loan (a 'Modification') to the extent provided in the
related Prospectus Supplement. Such Modifications may only be entered into if
they meet the underwriting policies and procedures employed by the Servicer in
servicing receivables for its own account and meet the other conditions set
forth in the related Prospectus Supplement.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement for a
Series, when any Property is about to be conveyed by the obligor, the Servicer
will, to the extent it has knowledge of such prospective conveyance and prior to
the time of the consummation of such conveyance, exercise its rights to
accelerate the maturity of the related Loan under the applicable 'due-on-sale'
clause, if any, unless it reasonably believes that such clause is not
enforceable under applicable law or if the enforcement of such clause would
result in loss of coverage under any primary mortgage insurance policy. In such
event, the Servicer is authorized to accept from or enter into an assumption
agreement with the person to whom such property has been or is about to be
conveyed, pursuant to which such person becomes liable under the Loan and
pursuant to which the original obligor is released from liability and such
person is substituted as the obligor and becomes liable under the Loan. Any fee
collected in
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connection with an assumption will be retained by the Servicer as additional
servicing compensation. The terms of a Loan may not be changed in connection
with an assumption.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Except as otherwise provided in the related Prospectus Supplement, the
Servicer will be entitled to a periodic fee as servicing compensation (the
'Servicing Fee') in an amount to be determined as specified in the related
Prospectus Supplement. The Servicing Fee may be fixed or variable, as specified
in the related Prospectus Supplement. In addition, unless otherwise specified in
the related Prospectus Supplement, the Servicer will be entitled to servicing
compensation in the form of assumption fees, late payment charges and similar
items, or excess proceeds following disposition of Property in connection with
defaulted Loans.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will pay certain expenses incurred in connection with the servicing of
the Loans, including, without limitation, the payment of the fees and expenses
of the Trustee and independent accountants, payment of insurance policy premiums
and the cost of credit support, if any, and payment of expenses incurred in
preparation of reports to Holders.
When an obligor makes a principal prepayment in full between Due Dates on
the related Loan, the obligor will generally be required to pay interest on the
amount prepaid only to the date of prepayment. If and to the extent provided in
the related Prospectus Supplement in order that one or more Classes of the
Holders of a Series will not be adversely affected by any resulting shortfall in
interest, the amount of the Servicing Fee may be reduced to the extent necessary
to include in the Servicer's remittance to the Trustee for deposit into the
Distribution Account an amount equal to one month's interest on the related Loan
(less the Servicing Fee). If the aggregate amount of such shortfalls in a month
exceeds the Servicing Fee for such month, a shortfall to Holders may occur.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will be entitled to reimbursement for certain expenses incurred by it
in connection with the liquidation of defaulted Loans. The related Holders will
suffer no loss by reason of such expenses to the extent expenses are covered
under related insurance policies or from excess Liquidation Proceeds. If claims
are either not made or paid under the applicable insurance policies or if
coverage thereunder has been exhausted, the related Holders will suffer a loss
to the extent that Liquidation Proceeds, after reimbursement of the Servicer's
expenses, are less than the outstanding principal balance of and unpaid interest
on the related Loan which would be distributable to Holders. In addition, the
Servicer will be entitled to reimbursement of expenditures incurred by it in
connection with the restoration of property securing a defaulted Loan, such
right of reimbursement being prior to the rights of the Holders to receive any
related proceeds of insurance policies, Liquidation Proceeds or amounts derived
from other Enhancement. The Servicer is generally also entitled to reimbursement
from the Collection Account for Advances.
Unless otherwise specified in the related Prospectus Supplement, the rights
of the Servicer to receive funds from the Collection Account for a Series,
whether as the Servicing Fee or other compensation, or for the reimbursement of
Advances, expenses or otherwise, are not subordinate to the rights of Holders of
such Series.
EVIDENCE AS TO COMPLIANCE
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will provide that each year, a firm of independent
public accountants will furnish a statement to the Trustee to the effect that
such firm has examined certain documents and records relating to the servicing
of the Loans by the Servicer and that, on the basis of such examination, such
firm is of the opinion that the servicing has been conducted in compliance with
such Agreement, except for (i) such exceptions as such firm believes to be
immaterial and (ii) such other exceptions as are set forth in such statement.
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will also provide for delivery to the Trustee for such
Series of an annual statement signed by an officer of the Servicer to the effect
that the Servicer has fulfilled its obligations under such Agreement throughout
the preceding calendar year.
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CERTAIN MATTERS REGARDING THE SERVICER
The Servicer for each Series will be identified in the related Prospectus
Supplement. The Servicer may be an affiliate of the Depositor and may have other
business relationships with the Depositor and its affiliates.
If an Event of Default occurs under either a Servicing Agreement or a
Pooling and Servicing Agreement, the Servicer may be replaced by the Trustee or
a successor Servicer. Unless otherwise specified in the related Prospectus
Supplement, such Events of Default and the rights of the Trustee upon such a
default under the Agreement for the related Series will be substantially similar
to those described under 'THE AGREEMENTS--Events of Default; Rights Upon Events
of Default--Pooling and Servicing Agreement; Servicing Agreement' herein.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer does not have the right to assign its rights and delegate its duties
and obligations under the related Agreement for each Series unless the successor
Servicer accepting such assignment or delegation (i) services similar loans in
the ordinary course of its business, (ii) is reasonably satisfactory to the
Trustee for the related Series, (iii) has a net worth of not less than the
amount specified in the related Prospectus Supplement, (iv) would not cause any
Rating Agency's rating of the Securities for such Series in effect immediately
prior to such assignment, sale or transfer to be qualified, downgraded or
withdrawn as a result of such assignment, sale or transfer and (v) executes and
delivers to the Trustee an agreement, in form and substance reasonably
satisfactory to the Trustee, which contains an assumption by such Servicer of
the due and punctual performance and observance of each covenant and condition
to be performed or observed by the Servicer under the related Agreement from and
after the date of such agreement. No such assignment will become effective until
the Trustee or a successor Servicer has assumed the servicer's obligations and
duties under the related Agreement. To the extent that the Servicer transfers
its obligations to a wholly-owned subsidiary or affiliate, such subsidiary or
affiliate need not satisfy the criteria set forth above; however, in such
instance, the assigning Servicer will remain liable for the servicing
obligations under the related Agreement. Any entity into which the Servicer is
merged or consolidated or any successor corporation resulting from any merger,
conversion or consolidation will succeed to the Servicer's obligations under the
related Agreement provided that such successor or surviving entity meets the
requirements for a successor Servicer set forth above.
Except to the extent otherwise provided therein, each Agreement will
provide that neither the Servicer, nor any director, officer, employee or agent
of the Servicer, will be under any liability to the related Trust Fund, the
Depositor or the Holders for any action taken or for failing to take any action
in good faith pursuant to the related Agreement, or for errors in judgment;
provided, however, that neither the Servicer nor any such person will be
protected against any breach of warranty or representations made under such
Agreement or the failure to perform its obligations in compliance with any
standard of care set forth in such Agreement, or liability which would otherwise
be imposed by reason of willful misfeasance, bad faith or negligence in the
performance of their duties or by reason of reckless disregard of their
obligations and duties thereunder. Each Agreement will further provide that the
Servicer and any director, officer, employee or agent of the Servicer is
entitled to indemnification from the related Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the Securities, other than any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
negligence in the performance of duties thereunder or by reason of reckless
disregard of obligations and duties thereunder. In addition, the related
Agreement will provide that the Servicer is not under any obligation to appear
in, prosecute or defend any legal action which is not incidental to its
servicing responsibilities under such Agreement which, in its opinion, may
involve it in any expense or liability. The Servicer may, in its discretion,
undertake any such action which it may deem necessary or desirable with respect
to the related Agreement and the rights and duties of the parties thereto and
the interests of the Holders thereunder. In such event the legal expenses and
costs of such action and any liability resulting therefrom may be expenses,
costs, and liabilities of the Trust Fund and the Servicer may be entitled to be
reimbursed therefor out of the Collection Account.
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THE AGREEMENTS
The following summaries describe certain provisions of the Agreements. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Agreements. Where
particular provisions or terms used in the Agreements are referred to, such
provisions or terms are as specified in the related Agreements.
ASSIGNMENT OF PRIMARY ASSETS
General. At the time of issuance of the Securities of a Series, the
Depositor will transfer, convey and assign to the Trust Fund all right, title
and interest of the Depositor in the Primary Assets and other property to be
transferred to the Trust Fund for a Series. Such assignment will include all
principal and interest due on or with respect to the Primary Assets after the
Cut-off Date specified in the related Prospectus Supplement (except for any
Retained Interests). The Trustee will, concurrently with such assignment,
execute and deliver the Securities.
Assignment of Loans. Unless otherwise specified in the related Prospectus
Supplement, the Depositor will, as to each Loan, deliver or cause to be
delivered to the Trustee, or, as specified in the related Prospectus Supplement
a custodian on behalf of the Trustee (the 'Custodian'), the Mortgage Note
endorsed without recourse to the order of the Trustee or in blank, the original
Mortgage with evidence of recording indicated thereon (except for any Mortgage
not returned from the public recording office, in which case a copy of such
Mortgage will be delivered, together with a certificate that the original of
such Mortgage was delivered to such recording office) and an assignment of the
Mortgage in recordable form. The Trustee, or, if so specified in the related
Prospectus Supplement, the Custodian, will hold such documents in trust for the
benefit of the Holders.
Unless otherwise specified in the related Prospectus Supplement, the
Depositor will as to each Home Improvement Contract deliver or cause to be
delivered to the Trustee (or the Custodian) the original Home Improvement
Contract and copies of documents and instruments related to each Home
Improvement Contract and, other than in the case of unsecured Home Improvement
Contracts, the security interest in the property securing such Home Improvement
Contract. In order to give notice of the right, title and interest of
Securityholders to the Home Improvement Contracts, the Depositor will cause a
UCC-1 financing statement to be executed by the Depositor or the Seller
identifying the Trustee as the secured party and identifying all Home
Improvement Contracts as collateral. Unless otherwise specified in the related
Prospectus Supplement, the Home Improvement Contracts will not be stamped or
otherwise marked to reflect their assignment to the Trust. Therefore, if,
through negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the Home Improvement Contracts without notice of such
assignment, the interest of Securityholders in the Home Improvement Contracts
could be defeated. See 'CERTAIN LEGAL ASPECTS OF THE LOANS--The Home Improvement
Contracts.'
With respect to Loans secured by Mortgages, if so specified in the related
Prospectus Supplement, the Depositor will, at the time of issuance of the
Securities, cause assignments to the Trustee of the Mortgages relating to the
Loans for a Series to be recorded in the appropriate public office for real
property records, except in states where, in the opinion of counsel acceptable
to the Trustee, such recording is not required to protect the Trustee's interest
in the related Loans. If specified in the related Prospectus Supplement, the
Depositor will cause such assignments to be so recorded within the time after
issuance of the Securities as is specified in the related Prospectus Supplement,
in which event, the Agreement may, as specified in the related Prospectus
Supplement, require the Depositor to repurchase from the Trustee any Loan the
related Mortgage of which is not recorded within such time, at the price
described below with respect to repurchases by reason of defective
documentation. Unless otherwise provided in the related Prospectus Supplement,
the enforcement of the repurchase obligation would constitute the sole remedy
available to the Holders or the Trustee for the failure of a Mortgage to be
recorded.
Each Loan will be identified in a schedule appearing as an exhibit to the
related Agreement (the 'Loan Schedule'). Such Loan Schedule will specify with
respect to each Loan: the original principal amount and unpaid principal balance
as of the Cut-off Date; the current interest rate; the current Scheduled Payment
of principal and interest; the maturity date, if any, of the related Mortgage
Note; if the Loan is an adjustable rate Loan, the Lifetime Rate Cap, if any, and
the current index.
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Assignment of Private Securities. The Depositor will cause Private
Securities to be registered in the name of the Trustee (or its nominee or
correspondent). The Trustee (or its nominee or correspondent) will have
possession of any certificated Private Securities. Unless otherwise specified in
the related Prospectus Supplement, the Trustee will not be in possession of or
be assignee of record of any underlying assets for a Private Security. See 'THE
TRUST FUNDS--Private Securities' herein. Each Private Security will be
identified in a schedule appearing as an exhibit to the related Agreement (the
'Certificate Schedule'), which will specify the original principal amount,
outstanding principal balance as of the Cut-off Date, annual pass-through rate
or interest rate and maturity date for each Private Security conveyed to the
Trust Fund. In the Agreement, the Depositor will represent and warrant to the
Trustee regarding the Private Securities: (i) that the information contained in
the Certificate Schedule is true and correct in all material respects; (ii)
that, immediately prior to the conveyance of the Private Securities, the
Depositor had good title thereto, and was the sole owner thereof (subject to any
Retained Interest); (iii) that there has been no other sale by it of such
Private Securities; and (iv) that there is no existing lien, charge, security
interest or other encumbrance (other than any Retained Interest) on such Private
Securities.
Repurchase and Substitution of Non-Conforming Primary Assets. Unless
otherwise provided in the related Prospectus Supplement, if any document in the
file relating to the Primary Assets delivered by the Depositor to the Trustee
(or Custodian) is found by the Trustee within 90 days of the execution of the
related Agreement (or promptly after the Trustee's receipt of any document
permitted to be delivered after the Closing Date) to be defective in any
material respect and the Depositor or Seller does not cure such defect within 90
days, or within such other period specified in the related Prospectus
Supplement, the Depositor or Seller will, not later than 90 days or within such
other period specified in the related Prospectus Supplement, after the Trustee's
notice to the Depositor or the Seller, as the case may be, of the defect,
repurchase the related Primary Asset or any property acquired in respect thereof
from the Trustee at a price equal to, unless otherwise specified in the related
Prospectus Supplement, (a) the lesser of (i) the outstanding principal balance
of such Primary Asset and (ii) the Trust Fund's federal income tax basis in the
Primary Asset and (b) accrued and unpaid interest to the date of the next
scheduled payment on such Primary Asset at the rate set forth in the related
Agreement, provided, however, the purchase price shall not be limited in (i)
above to the Trust Fund's federal income tax basis if the repurchase at a price
equal to the outstanding principal balance of such Primary Asset will not result
in any prohibited transaction tax under Section 860F(a) of the Code.
If provided in the related Prospectus Supplement, the Depositor or Seller,
as the case may be, may, rather than repurchase the Primary Asset as described
above, remove such Primary Asset from the Trust Fund (the 'Deleted Primary
Asset') and substitute in its place one or more other Primary Assets (each, a
'Qualifying Substitute Primary Asset') provided, however, that (i) with respect
to a Trust Fund for which no REMIC election is made, such substitution must be
effected within 120 days of the date of initial issuance of the Securities and
(ii) with respect to a Trust Fund for which a REMIC election is made, after a
specified time period, the Trustee must have received a satisfactory opinion of
counsel that such substitution will not cause the Trust Fund to lose its status
as a REMIC or otherwise subject the Trust Fund to a prohibited transaction tax.
Unless otherwise specified in the related Prospectus Supplement, any
Qualifying Substitute Primary Asset will have, on the date of substitution, (i)
an outstanding principal balance, after deduction of all Scheduled Payments due
in the month of substitution, not in excess of the outstanding principal balance
of the Deleted Primary Asset (the amount of any shortfall to be deposited to the
Collection Account in the month of substitution for distribution to Holders),
(ii) an interest rate not less than (and not more than 2% greater than) the
interest rate of the Deleted Primary Asset, (iii) a remaining term-to-stated
maturity not greater than (and not more than two years less than) that of the
Deleted Primary Asset, and will comply with all of the representations and
warranties set forth in the applicable Agreement as of the date of substitution.
Unless otherwise provided in the related Prospectus Supplement, the
above-described cure, repurchase or substitution obligations constitute the sole
remedies available to the Holders or the Trustee for a material defect in a
document for a Primary Asset.
The Depositor or another entity will make representations and warranties
with respect to Primary Assets for a Series. If the Depositor or such entity
cannot cure a breach of any such representations and warranties in all material
respects within the time period specified in the related Prospectus Supplement
after notification by the
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Trustee of such breach, and if such breach is of a nature that materially and
adversely affects the value of such Primary Asset, the Depositor or such entity
is obligated to repurchase the affected Primary Asset or, if provided in the
related Prospectus Supplement, provide a Qualifying Substitute Primary Asset
therefor, subject to the same conditions and limitations on purchases and
substitutions as described above.
The Depositor's only source of funds to effect any cure, repurchase or
substitution will be through the enforcement of the corresponding obligations,
if any, of the responsible originator or Seller of such Primary Assets. See
'SPECIAL CONSIDERATIONS--Limited Assets.'
No Holder of Securities of a Series, solely by virtue of such Holder's
status as a Holder, will have any right under the applicable Agreement for such
Series to institute any proceeding with respect to such Agreement, unless such
Holder previously has given to the Trustee for such Series written notice of
default and unless the Holders of Securities evidencing not less than 51% of the
aggregate voting rights of the Securities for such Series have made written
request upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity, and the Trustee
for 60 days has neglected or refused to institute any such proceeding.
REPORTS TO HOLDERS
The Trustee or other entity specified in the related Prospectus Supplement
will prepare and forward to each Holder on each Distribution Date, or as soon
thereafter as is practicable, a statement setting forth, to the extent
applicable to any Series, among other things:
(i) the amount of principal distributed to Holders of the related
Securities and the outstanding principal balance of such Securities
following such distribution;
(ii) the amount of interest distributed to Holders of the related
Securities and the current interest on such Securities;
(iii) the amounts of (a) any overdue accrued interest included in such
distribution, (b) any remaining overdue accrued interest with
respect to such Securities or (c) any current shortfall in amounts
to be distributed as accrued interest to Holders of such Securities;
(iv) the amounts of (a) any overdue payments of scheduled principal
included in such distribution, (b) any remaining overdue principal
amounts with respect to such Securities, (c) any current shortfall in
receipt of scheduled principal payments on the related Primary Assets
or (d) any realized losses or Liquidation Proceeds to be allocated as
reductions in the outstanding principal balances of such Securities;
(v) the amount received under any related Enhancement, and the remaining
amount available under such Enhancement;
(vi) the amount of any delinquencies with respect to payments on the
related Primary Assets;
(vii) the book value of any REO Property acquired by the related Trust
Fund; and
(viii) such other information as specified in the related Agreement.
In addition, within a reasonable period of time after the end of each
calendar year the Trustee, unless otherwise specified in the related Prospectus
Supplement, will furnish to each Holder of record at any time during such
calendar year (a) the aggregate of amounts reported pursuant to (i), (ii), and
(iv)(d) above for such calendar year and (b) such information specified in the
related Agreement to enable Holders to prepare their tax returns including,
without limitation, the amount of original issue discount accrued on the
Securities, if applicable. Information in the Distribution Date and annual
statements provided to the Holders will not have been examined and reported upon
by an independent public accountant. However, the Servicer will provide to the
Trustee a report by independent public accountants with respect to the
Servicer's servicing of the Loans. See 'SERVICING OF LOANS--Evidence as to
Compliance' herein.
If so specified in the Prospectus Supplement for a Series of Securities,
such Series or one or more Classes of such Series will be issued in book-entry
form. In such event, owners of beneficial interests in such Securities will
not be considered Holders and will not receive such reports directly from the
Trustee. The Trustee will forward
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such reports only to the entity or its nominee which is the registered holder of
the global certificate which evidences such book-entry securities. Beneficial
owners will receive such reports from the participants and indirect participants
of the applicable book-entry system in accordance with the practices and
procedures of such entities.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Servicing Agreement. Unless otherwise
specified in the related Prospectus Supplement, Events of Default under the
Pooling and Servicing Agreement for each Series of Certificates relating to
Loans include (i) any failure by the Servicer to deposit amounts in the
Collection Account and Distribution Account to enable the Trustee to distribute
to Holders of such Series any required payment, which failure continues
unremedied for the number of days specified in the related Prospectus Supplement
after the giving of written notice of such failure to the Servicer by the
Trustee for such Series, or to the Servicer and the Trustee by the Holders of
such Series evidencing not less than 25% of the aggregate voting rights of the
Securities for such Series, (ii) any failure by the Servicer duly to observe or
perform in any material respect any other of its covenants or agreements in the
applicable Agreement which continues unremedied for the number of days specified
in the related Prospectus Supplement after the giving of written notice of such
failure to the Servicer by the Trustee, or to the Servicer and the Trustee by
the Holders of such Series evidencing not less than 25% of the aggregate voting
rights of the Securities for such Series, and (iii) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings and certain actions by the Servicer indicating its
insolvency, reorganization or inability to pay its obligations.
So long as an Event of Default remains unremedied under the applicable
Agreement for a Series of Securities relating to the servicing of Loans, unless
otherwise specified in the related Prospectus Supplement, the Trustee for such
Series or Holders of Securities of such Series evidencing not less than 51% of
the aggregate voting rights of the Securities for such Series may terminate all
of the rights and obligations of the Servicer as servicer under the applicable
Agreement (other than its right to recovery of other expenses and amounts
advanced pursuant to the terms of such Agreement which rights the Servicer will
retain under all circumstances), whereupon the Trustee will succeed to all the
responsibilities, duties and liabilities of the Servicer under such Agreement
and will be entitled to reasonable servicing compensation not to exceed the
applicable servicing fee, together with other servicing compensation in the form
of assumption fees, late payment charges or otherwise as provided in such
Agreement.
In the event that the Trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a finance
institution, bank or loan servicing institution with a net worth specified in
the related Prospectus Supplement to act as successor Servicer under the
provisions of the applicable Agreement. The successor Servicer would be entitled
to reasonable servicing compensation in an amount not to exceed the Servicing
Fee as set forth in the related Prospectus Supplement, together with the other
servicing compensation in the form of assumption fees, late payment charges or
otherwise, as provided in such Agreement.
During the continuance of any Event of Default of a Servicer under an
Agreement for a Series of Securities, the Trustee for such Series will have the
right to take action to enforce its rights and remedies and to protect and
enforce the rights and remedies of the Holders of such Series, and, unless
otherwise specified in the related Prospectus Supplement, Holders of Securities
evidencing not less than 51% of the aggregate voting rights of the Securities
for such Series may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred upon that Trustee. However, the Trustee will not be under any
obligation to pursue any such remedy or to exercise any of such trusts or powers
unless such Holders have offered the Trustee reasonable security or indemnity
against the cost, expenses and liabilities which may be incurred by the Trustee
therein or thereby. The Trustee may decline to follow any such direction if the
Trustee determines that the action or proceeding so directed may not lawfully be
taken or would involve it in personal liability or be unjustly prejudicial to
the nonassenting Holders.
Indenture. Unless otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for thirty (30) days or more in the payment of any
principal of or interest on any Note of such Series; (ii) failure to perform any
other covenant of the Depositor or the Trust Fund in the Indenture which
continues for a period of sixty (60) days after notice thereof is given in
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accordance with the procedures described in the related Prospectus Supplement;
(iii) any representation or warranty made by the Depositor or the Trust Fund in
the Indenture or in any certificate or other writing delivered pursuant thereto
or in connection therewith with respect to or affecting such Series having been
incorrect in a material respect as of the time made, and such breach is not
cured within sixty (60) days after notice thereof is given in accordance with
the procedures described in the related Prospectus Supplement; (iv) certain
events of bankruptcy, insolvency, receivership or liquidation of the Depositor
or the Trust Fund; or (v) any other Event of Default provided with respect to
Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, either the Trustee or the Holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may declare the principal amount (or, if the Notes of that Series are Zero
Coupon Securities, such portion of the principal amount as may be specified in
the terms of that Series, as provided in the related Prospectus Supplement) of
all the Notes of such Series to be due and payable immediately. Such declaration
may, under certain circumstances, be rescinded and annulled by the Holders of a
majority in aggregate outstanding amount of the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Trustee may,
in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default other than a default in the payment of
any principal or interest on any Note of such Series for thirty (30) days or
more, unless (a) the Holders of 100% of the then aggregate outstanding amount of
the Notes of such Series consent to such sale, (b) the proceeds of such sale or
liquidation are sufficient to pay in full the principal of and accrued interest
due and unpaid on the outstanding Notes of such Series at the date of such sale
or (c) the Trustee determines that such collateral would not be sufficient on an
ongoing basis to make all payments on such Notes as such payments would have
become due if such Notes had not been declared due and payable, and the Trustee
obtains the consent of the Holders of 66 2/3% of the then aggregate outstanding
amount of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default involving a default for thirty (30) days or more in the
payment of principal of or interest on the Notes of a Series, the Indenture
provides that the Trustee will have a prior lien on the proceeds of any such
liquidation for unpaid fees and expenses. As a result, upon the occurrence of
such an Event of Default, the amount available for distribution to the
Noteholders may be less than would otherwise be the case. However, the Trustee
may not institute a proceeding for the enforcement of its lien except in
connection with a proceeding for the enforcement of the lien of the Indenture
for the benefit of the Noteholders after the occurrence of such an Event of
Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a Series is declared due and payable, as
described above, the Holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with respect
to a Series of Notes, the Trustee will be under no obligation to exercise any of
the rights or powers under the Indenture at the request or direction of any of
the Holders of Notes of such Series, unless such Holders offered to the Trustee
security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with such request or
direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the Holders of a majority of the then
aggregate outstanding amount of the Notes of such Series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Notes of such Series, and the Holders of a majority
of the then aggregate outstanding amount of the Notes of such Series may, in
certain cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision 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.
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THE TRUSTEE
The identity of the commercial bank, savings and loan association or trust
company named as the Trustee for each Series of Securities will be set forth in
the related Prospectus Supplement. The entity serving as Trustee may have normal
banking relationships with the Depositor or the Servicer. In addition, for the
purpose of meeting the legal requirements of certain local jurisdictions, the
Trustee will have the power to appoint co-trustees or separate trustees of all
or any part of the Trust Fund relating to a Series of Securities. In the event
of such appointment, all rights, powers, duties and obligations conferred or
imposed upon the Trustee by the Agreement relating to such Series will be
conferred or imposed upon the Trustee and each such separate trustee or
co-trustee jointly, or, in any jurisdiction in which the Trustee shall be
incompetent or unqualified to perform certain acts, singly upon such separate
trustee or co-trustee who will exercise and perform such rights, powers, duties
and obligations solely at the direction of the Trustee. The Trustee may also
appoint agents to perform any of the responsibilities of the Trustee, which
agents will have any or all of the rights, powers, duties and obligations of the
Trustee conferred on them by such appointment; provided that the Trustee will
continue to be responsible for its duties and obligations under the Agreement.
DUTIES OF THE TRUSTEE
The Trustee will not make any representations as to the validity or
sufficiency of the Agreement, the Securities or of any Primary Asset or related
documents. If no Event of Default (as defined in the related Agreement) has
occurred, the Trustee is required to perform only those duties specifically
required of it under the Agreement. Upon receipt of the various certificates,
statements, reports or other instruments required to be furnished to it, the
Trustee is required to examine them to determine whether they are in the form
required by the related Agreement. However, the Trustee will not be responsible
for the accuracy or content of any such documents furnished to it by the Holders
or the Servicer under the Agreement.
The Trustee may be held liable for its own negligent action or failure to
act, or for its own misconduct; provided, however, that the Trustee will not be
personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the Holders in an
Event of Default. The Trustee is not required to expend or risk its own funds or
otherwise incur any financial liability in the performance of any of its duties
under the Agreement, or in the exercise of any of its rights or powers, if it
has reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
RESIGNATION OF TRUSTEE
The Trustee may, upon written notice to the Depositor, resign at any time,
in which event the Depositor will be obligated to use its best efforts to
appoint a successor Trustee. If no successor Trustee has been appointed and has
accepted the appointment within 30 days after the giving of such notice of
resignation, the resigning Trustee may petition any court of competent
jurisdiction for appointment of a successor Trustee. The Trustee may also be
removed at any time (i) if the Trustee ceases to be eligible to continue as such
under the Agreement, (ii) if the Trustee becomes insolvent or (iii) by the
Holders of Securities evidencing over 50% of the aggregate voting rights of the
Securities in the Trust Fund upon written notice to the Trustee and to the
Depositor. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the appointment
by the successor Trustee.
AMENDMENT OF AGREEMENT
Unless otherwise specified in the Prospectus Supplement, the Agreement for
each Series of Securities may be amended by the Depositor, the Servicer (with
respect to a Series relating to Loans), and the Trustee with respect to such
Series, without notice to or consent of the Holders (i) to cure any ambiguity,
(ii) to correct any defective provisions or to correct or supplement any
provision therein, (iii) to add to the duties of the Depositor, the Trust Fund
or Servicer, (iv) to add any other provisions with respect to matters or
questions arising under 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
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with any requirements imposed by the Code; provided that any such amendment
except pursuant to clause (vi) above will not adversely affect in any material
respect the interests of any Holders of such Series, as evidenced by an opinion
of counsel. Any such amendment except pursuant to clause (vi) of the preceding
sentence shall be deemed not to adversely affect in any material respect the
interests of any Holder if the Trustee receives written confirmation from each
Rating Agency rating such Securities that such amendment will not cause such
Rating Agency to reduce the then current rating thereof. Unless otherwise
specified in the Prospectus Supplement, the Agreement for each Series may also
be amended by the Trustee, the Servicer, if applicable, and the Depositor with
respect to such Series with the consent of the Holders possessing not less than
66 2/3% of the aggregate outstanding principal amount of the Securities of such
Series or, if only certain Classes of such Series are affected by such
amendment, 66 2/3% of the aggregate outstanding principal amount of the
Securities of each Class of such Series affected thereby, for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of such Agreement or modifying in any manner the rights of Holders of
such Series; provided, however, that no such amendment may (a) reduce the amount
or delay the timing of payments on any Security without the consent of the
Holder of such Security; or (b) reduce the aforesaid percentage of the aggregate
outstanding principal amount of Securities of each Class, the Holders of which
are required to consent to any such amendment without the consent of the Holders
of 100% of the aggregate outstanding principal amount of each Class of
Securities affected thereby.
VOTING RIGHTS
The related Prospectus Supplement will set forth the method of determining
allocation of voting rights with respect to a Series.
LIST OF HOLDERS
Upon written request of three or more Holders of record of a Series for
purposes of communicating with other Holders with respect to their rights under
the Agreement, which request is accompanied by a copy of the communication which
such Holders propose to transmit, the Trustee will afford such Holders access
during business hours to the most recent list of Holders of that Series held by
the Trustee.
No Agreement will provide for the holding of any annual or other meeting of
Holders.
BOOK-ENTRY SECURITIES
If specified in the Prospectus Supplement for a Series of Securities, such
Series or one or more Classes of such Series may be issued in book-entry form.
In such event, beneficial owners of such Securities will not be considered
'Holders' under the Agreements and may exercise the rights of Holders only
indirectly through the participants in the applicable book-entry system.
REMIC ADMINISTRATOR
For any Series with respect to which a REMIC election is made, preparation
of certain reports and certain other administrative duties with respect to the
Trust Fund may be performed by a REMIC administrator, who may be an affiliate of
the Depositor.
TERMINATION
Pooling and Servicing Agreement; Trust Agreement. The obligations created
by the Pooling and Servicing Agreement or Trust Agreement for a Series will
terminate upon the distribution to Holders of all amounts distributable to them
pursuant to such Agreement after the earlier of (i) the later of (a) the final
payment or other liquidation of the last Primary Asset remaining in the Trust
Fund for such Series and (b) the disposition of all property acquired upon
foreclosure or deed in lieu of foreclosure or repossession in respect of any
Primary Asset or (ii) the repurchase, as described below, by the Servicer or
other entity specified in the related Prospectus Supplement from the Trustee for
such Series of all Primary Assets and other property at that time subject to
such 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
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Principal Balance of such Primary Assets plus, with respect to any property
acquired in respect of a Primary Asset, if any, the outstanding Principal
Balance of the related Primary Asset at the time of foreclosure, less, in either
case, related unreimbursed Advances (in the case of the Primary Assets, only to
the extent not already reflected in the computation of the aggregate Principal
Balance of such Primary Assets) and unreimbursed expenses (that are reimbursable
pursuant to the terms of the Pooling and Servicing Agreement) plus, in either
case, accrued interest thereon at the weighted average rate on the related
Primary Assets through the last day of the Due Period in which such repurchase
occurs; provided, however, that if an election is made for treatment as a REMIC
under the Code, the repurchase price may equal the greater of (a) 100% of the
aggregate Principal Balance of such Primary Assets, plus accrued interest
thereon at the applicable net rates on the Primary Assets through the last day
of the month of such repurchase and (b) the aggregate fair market value of such
Primary Assets plus the fair market value of any property acquired in respect of
a Primary Asset and remaining in the Trust Fund. The exercise of such right will
effect early retirement of the Securities of such Series, but such entity's
right to so purchase is subject to the aggregate Principal Balance of the
Primary Assets at the time of repurchase being less than a fixed percentage, to
be set forth in the related Prospectus Supplement, of the aggregate Principal
Balance of the Primary Assets as of the Cut-off Date. In no event, however, will
the trust created by the Agreement continue beyond the expiration of 21 years
from the death of the last survivor of certain persons identified therein. For
each Series, the Servicer or the Trustee, as applicable, will give written
notice of termination of the Agreement to each Holder, and the final
distribution will be made only upon surrender and cancellation of the Securities
at an office or agency specified in the notice of termination. If so provided in
the related Prospectus Supplement for a Series, the Depositor or another entity
may effect an optional termination of the Trust Fund under the circumstances
described in such Prospectus Supplement. See 'DESCRIPTION OF THE
SECURITIES--Optional Redemption, Purchase or Termination' herein.
Indenture. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes of
such Series or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which, through the
payment of interest and principal in respect thereof in accordance with their
terms, will provide money in an amount sufficient to pay the principal of and
each installment of interest on the Notes of such Series on the Final Scheduled
Distribution Date for such Notes and any installment of interest on such Notes
in accordance with the terms of the Indenture and the Notes of such Series. In
the event of any such defeasance and discharge of Notes of such Series, holders
of Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
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
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debt creates a lien or title interest upon the real property covered by such
instrument and represents the security for the repayment of an obligation that
is customarily evidenced by a promissory note. It is not prior to the lien for
real estate taxes and assessments or other charges imposed under governmental
police powers and may also be subject to other liens pursuant to the laws of the
jurisdiction in which the Mortgaged Property is located. Priority with respect
to such instruments depends on their terms, the knowledge of the parties to the
mortgage and generally on the order of recording with the applicable state,
county or municipal office. There are two parties to a mortgage, the mortgagor,
who is the borrower/property owner or the land trustee (as described below), and
the mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the borrower/property owner is the
beneficiary; at origination of a mortgage loan, the borrower executes a separate
undertaking to make payments on the mortgage note. A deed of trust transaction
normally has three parties: the trustor, who is the borrower/property owner; the
beneficiary, who is the lender; and the trustee, a third-party grantee. Under a
deed of trust, the trustor grants the property, irrevocably until the debt is
paid, in trust, generally with a power of sale, to the trustee to secure payment
of the obligation. The mortgagee's authority under a mortgage and the trustee's
authority under a deed of trust are governed by the law of the state in which
the real property is located, the express provisions of the mortgage or deed of
trust, and, in some cases, in deed of trust transactions, the directions of the
beneficiary.
FORECLOSURE ON MORTGAGES
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming and expensive. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a receiver
or other officer to conduct the sale of the property. In some states, mortgages
may also be foreclosed by advertisement, pursuant to a power of sale provided in
the mortgage. Foreclosure of a mortgage by advertisement is essentially similar
to foreclosure of a deed of trust by nonjudicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a nonjudicial
trustee's sale under a specific provision in the deed of trust which authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In certain states, such foreclosure also may
be accomplished by judicial action in the manner provided for foreclosure of
mortgages. In some states, the trustee must record a notice of default and send
a copy to the borrower-trustor and to any person who has recorded a request for
a copy of a notice of default and notice of sale. In addition, the trustee in
some states must provide notice to any other individual having an interest in
the real property, including any junior lienholders. If the deed of trust is not
reinstated within any applicable cure period, a notice of sale must be posted in
a public place and, in most states, published for a specified period of time in
one or more newspapers. In addition, some state laws require that a copy of the
notice of sale be posted on the property and sent to all parties having an
interest of record in the property. The trustor, borrower, or any person having
a junior encumbrance on the real estate, may, during a reinstatement period,
cure the default by paying the entire amount in arrears plus the costs and
expenses incurred 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
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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.
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.
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The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the mortgagor. All sums so expended by
the mortgagee become part of the indebtedness secured by the mortgage.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower. In
certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower following a foreclosure sale to
the excess of the outstanding debt over the fair market value of the property at
the time of the public sale. The purpose of these statutes is generally to
prevent a beneficiary or a mortgagee from obtaining a large deficiency judgment
against the former borrower as a result of low or no bids at the foreclosure
sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws, the Federal
Soldiers' and Sailors' Relief Act and state laws affording relief to debtors,
may interfere with or affect the ability of the secured lender to realize upon
collateral and/or enforce a 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
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lender a general unsecured creditor for the difference between the value of the
residence and the outstanding balance of the loan. Federal bankruptcy law and
limited case law indicate that the foregoing modifications could not be applied
to the terms of a loan secured by property that is the principal residence of
the debtor. In all cases, the secured creditor is entitled to the value of its
security plus post-petition interest, attorney's fees and costs to the extent
the value of the security exceeds the debt.
In a Chapter 11 case under the Bankruptcy Code, the lender is precluded
from foreclosing without authorization from the bankruptcy court. The lender's
lien may be transferred to other collateral and/or be limited in amount to the
value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate
due-on-sale clauses through confirmed Chapter 11 plans of reorganization.
The Bankruptcy Code provides priority to certain tax liens over the
lender's security. This may delay or interfere with the enforcement of rights in
respect of a defaulted Loan. In addition, substantive requirements are imposed
upon lenders in connection with the origination and the servicing of mortgage
loans by numerous federal and some state consumer protection laws. The laws
include the federal Truth-in-Lending Act, Real Estate Settlement Procedures Act,
Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act
and related statutes and regulations. These federal laws impose specific
statutory liabilities upon lenders who originate loans and who fail to comply
with the provisions of the law. In some cases, this liability may affect
assignees of the loans.
DUE-ON-SALE CLAUSES IN MORTGAGE LOANS
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases, typically involving
single family residential mortgage transactions, their enforceability has been
limited or denied. In any event, the Garn-St. Germain Depository Institutions
Act of 1982 (the 'Garn-St. Germain Act') preempts state constitutional,
statutory and case law that prohibits the enforcement of due-on-sale clauses and
permits lenders to enforce these clauses in accordance with their terms, subject
to certain exceptions. As a result, due-on-sale clauses have become generally
enforceable except in those states whose legislatures exercised their authority
to regulate the enforceability of such clauses with respect to mortgage loans
that were (i) originated or assumed during the 'window period' under the
Garn-St. Germain Act which ended in all cases not later than October 15, 1982,
and (ii) originated by lenders other than national banks, federal savings
institutions and federal credit unions. FHLMC has taken the position in its
published mortgage servicing standards that, out of a total of eleven 'window
period states,' five states (Arizona, Michigan, Minnesota, New Mexico and Utah)
have enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of window period loans. Also, the Garn-St. Germain Act does
'encourage' lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
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.
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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 Tide V. Tide 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.
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
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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 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.
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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 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 the
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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 (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.'
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
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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 or 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 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
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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
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
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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 qualified inverse floating rate). Under such circumstances, the
qualified floating rate or qualified inverse floating
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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 on a Debt Security, such election will apply to all taxable
debt instruments (including all REMIC regular interests and
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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 (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.
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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 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
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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 Security
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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.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Interest Securities may be disregarded. See '--Restrictions on
Ownership and Transfer of Residual Interest Securities' and '--Tax Treatment of
Foreign Investors' below.
Restrictions on Ownership and Transfer of Residual Interest Securities. As
a condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a REMIC residual interest by any 'Disqualified
Organization.' Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in Section 1381(a)(2)(C) of the
Code, or any entity exempt from the tax imposed by Sections 1399 of the Code, if
such entity is not subject to tax on its unrelated business income. Accordingly,
the applicable Pooling and Servicing Agreement will prohibit Disqualified
Organizations from owning a Residual Interest Security. In addition, no transfer
of a Residual Interest Security will be permitted unless the proposed transferee
shall have furnished to the Trustee an affidavit representing and warranting
that it is neither a Disqualified Organization nor an agent or nominee acing on
behalf of a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
Interest Security at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
Residual Interest Security, the
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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 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. For taxable years beginning after December 31, 1993, the maximum tax
rate on ordinary income for individual taxpayers is 39.6% and the maximum tax
rate on long-term capital gains reported after December 31, 1990 for such
taxpayers is 28%. The maximum tax rate on both ordinary income and long-term
capital gains of corporate taxpayers is 35%.
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
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who is not a United States person, as defined below, ('Nonresidents'), such
interest will normally qualify as portfolio interest (except where (i) the
recipient is a holder, directly or by attribution, of 10% or more of the capital
or profits interest in the issuer, or (ii) the recipient is a controlled foreign
corporation to which the issuer is 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
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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.
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
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accrued interest and accrued market discount not previously included in income.
Capital losses generally may be used only to offset capital gains.
Foreign Holders. Interest payments made (or accrued) to a Noteholder who
is a Holder other than a United States Person, as defined below, (a 'foreign
person') generally will be considered 'portfolio interest', and 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, 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 is 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 years 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 Note
could claim the exemption from federal income and withholding tax.
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). 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.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute 'unrelated business
taxable income' generally taxable to such a Holder 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 distribute its assets to the partners, who would then be treated
as recontributing those assets to the Trust Fund as a new partnership. The Trust
Fund will not comply with certain technical requirements that might apply when
such a constructive termination occurs. As a result, the Trust Fund may be
subject to certain tax penalties and may incur additional expenses if it is
required to comply with those requirements. Furthermore, the Trust Fund might
not be able to comply due to lack of data.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
Holder's cost increased by the Holder's share of Trust Fund income (includible
in income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include the Holder's share of the
Notes and other liabilities of the Trust Fund. A Holder acquiring Certificates
at different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the Certificates
sold (rather than maintaining a separate tax basis in each Certificate for
purposes of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the Holder's share of
unrecognized accrued market discount on the Loans would generally be treated as
ordinary income to the Holder and would give rise to special tax reporting
requirements. The Trust Fund does not expect to have any other assets that would
give rise to such special reporting requirements. Thus, to avoid those special
reporting requirements, the Trust Fund will elect to include market discount in
income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a Holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
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The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust Fund were to file an election under
Section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the Trust Fund will not make such
election. As a result, Certificateholders might be allocated a greater or lesser
amount of Trust Fund income than would be appropriate based on their own
purchase price for Certificates.
Administrative Matters. The Owner Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust Fund will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust Fund and will report each Certificateholder's allocable share of items of
Trust Fund income and expense to Holders and the IRS on Schedule K-1. The Trust
Fund will provide the Schedule K-1 information to nominees that fail to provide
the Trust Fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
Certificates. Generally, Holders must file tax returns that are consistent with
the information return filed by the Trust Fund or be subject to penalties unless
the Holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund information
as to themselves and their ownership of Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Trust Fund. The information referred to above
for any calendar year must be furnished to the Trust Fund on or before the
following January 31. Nominees, brokers and financial institutions that fail to
provide the Trust Fund with the information described above may be subject to
penalties.
The Depositor will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the Certificateholders, and,
under certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the Trust Fund. An
adjustment could also result in an audit of a Certificateholder's returns and
adjustments of items not related to the income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to foreign
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a failure
to withhold. The Trust Fund expects to withhold on the portion of its taxable
income that is allocable to a Certificateholder which is a foreign person
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pursuant to Section 1446 of the Code, as if such income were effectively
connected to a U.S. trade or business, at a rate of 35% for Holders which are
foreign persons that are taxable as corporations and 39.6% for all other Holders
which are foreign persons. Subsequent adoption of Treasury regulations or the
issuance of other administrative pronouncements may require the Trust Fund to
change its withholding procedures. In determining a Holder's withholding status,
the Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the Holder's
certification of nonforeign status signed under penalties of perjury.
Each Certificateholder which is a foreign person might be required to file
a U.S. individual or corporate income tax return (including, in the case of a
corporation, the branch profits tax) on its share of the Trust Fund's income.
Each Certificateholder which is a foreign person must obtain a taxpayer
identification number from the IRS and submit that number to the Trust Fund on
Form W-8 in order to assure appropriate crediting of the taxes withheld. A
Certificateholder which is a foreign person generally would be entitled to file
with the IRS a claim for refund with respect to taxes withheld by the Trust Fund
taking the position that no taxes were due because the Trust Fund was not
engaged in a U.S. trade or business. However, interest payments made (or
accrued) to a Certificateholder who is a foreign person generally will be
considered guaranteed payments to the extent such payments are determined
without regard to the income of the Trust Fund. If these interest payments are
properly characterized as guaranteed payments, then the interest will not be
considered 'portfolio interest.' As a result, Certificateholders which are
foreign persons will be subject to United States federal income tax and
withholding tax at a rate of 30%, unless reduced or eliminated pursuant to an
applicable treaty. In such case, a Certificateholder which is a foreign person
would only be entitled to claim a refund for that portion of the taxes in excess
of the taxes that should be withheld with respect to the guaranteed payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a 'backup' withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the Holder is an exempt recipient under
applicable provisions of the Code.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in 'Certain
Federal Income Tax Considerations,' potential investors should consider the
state and local income tax consequences of the acquisition, ownership, and
disposition of the Securities. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in the
Securities.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ('ERISA')
and the Code impose certain restrictions on employee benefit plans subject to
ERISA and on plans and other arrangements subject to Section 4975 of the Code
and on persons who are parties in interest or disqualified persons ('parties in
interest') with respect to such plans or arrangements. Certain employee benefit
plans, such as governmental plans and church plans (if no election has been made
under Section 410(d) of the Code), are not subject to the restrictions of ERISA,
and assets of such plans may be invested in the Securities without regard to the
ERISA considerations described below, subject to other applicable federal and
state law. However, any such governmental or church plan which is qualified
under Section 401(a) of the Code and exempt from taxation under Section 501(a)
of the Code is subject to the prohibited transaction rules set forth in Section
503 of the Code.
A fiduciary of an employee benefit plan subject to Title I of ERISA should
consider the fiduciary standards under ERISA in the context of the plan's
particular circumstances before authorizing an investment of a portion of such
plan's assets in the Securities. Accordingly, among other factors, such
fiduciary should consider (i) whether the investment is for the exclusive
benefit of plan participants and their beneficiaries; (ii) whether the
investment satisfies the diversification requirements of Section 404 of ERISA;
(iii) whether the investment is in accordance with the documents and instruments
governing the plan and (iv) whether the investment is prudent, considering the
nature of the investment. Fiduciaries of such plans also should consider ERISA's
prohibition on improper delegation of control over, or responsibility for, plan
assets.
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In addition, fiduciaries of employee benefit plans subject to Title I of
ERISA, as well as certain plans or other retirement arrangements not subject to
ERISA but which are subject to Section 4975 of the Code (such as individual
retirement accounts and Keogh plans covering only a sole proprietor or partners)
or any entity, including an insurance company general account whose underlying
assets include plan assets by reason of a plan or account investing in such
entity, (collectively, 'Plans(s)'), should consult with their legal counsel to
determine whether an investment in the Securities will cause the assets of the
Trust Fund to be considered plan assets pursuant to the plan asset regulations
set forth at 29 CFR 2510.3-101 (the 'Regulation'), thereby subjecting the Plan
to the prohibited transaction rules with respect to the Trust Fund and the
Trustee, or any entities providing services with respect to the operation of the
Trust, to the fiduciary investment standards of ERISA, or cause the excise tax
provisions of Section 4975 of the Code to apply to the Trust Fund, unless a
statutory or regulatory exception or an administrative exemption granted by the
Department of Labor ('DOL') applies to the purchase, sale, transfer or holding
of the Securities.
The Regulation contains rules for determining what constitutes the assets
of a Plan. The Regulation provides that, as a general rule, the underlying
assets and properties of corporations, partnerships, trusts and certain other
entities in which a Plan makes an investment in an 'equity interest' will be
deemed for purposes of ERISA to be assets of the Plan unless certain exceptions
apply.
Under the terms of the Regulation, the Trust Fund may be deemed to hold
plan assets by reason of a Plan's investment in a Security; such plan assets
would include an undivided interest in the Primary Assets and any other assets
held by the Trust Fund. In such an event, persons providing services with
respect to the operation of the Trust Fund may be parties in interest, subject
to the fiduciary responsibility provisions of Title I of ERISA, including the
prohibited transaction provisions of Section 406 of ERISA and of Section 4975 of
the Code, with respect to transactions involving such assets unless such
transactions are subject to a statutory or regulatory exception or an
administrative exemption.
One such exception applies if the interest described is treated as
indebtedness under applicable local law and which has no substantial equity
features. Generally, a profits interest in a partnership, an undivided ownership
interest in property and a beneficial ownership interest in a trust are deemed
to be 'equity interests' under the final regulation. If Notes of a particular
Series were deemed to be indebtedness under applicable local law without any
substantial equity features, an investing Plan's assets would include such
Notes, but not, by reason of such purchase, the underlying assets of the Trust
Fund. However, without regard to whether the Notes are treated as an equity
interest for such purposes, the purchase, holding or transfer of Notes by or on
behalf of a Plan could be considered a prohibited transaction if the Depositor
or the Trustee or any of their respective affiliates is, or becomes, a party in
interest or disqualified person with respect to such Plan.
Another such exception applies if the class of equity interests in question
is: (i) 'widely held' (held by 100 or more investors who are independent of the
Depositor and each other); (ii) freely transferable; and (iii) sold as part of
an offering pursuant to (A) an effective registration statement under the
Securities Act of 1933, and then subsequently registered under the Securities
Exchange Act of 1934 or (B) an effective registration statement under Section
12(b) or 12(g) of the Securities Exchange Act of 1934 ('Publicly Offered
Securities'). In addition, the regulation provides that if at all times more
than 75% of the value of all classes of equity interests in the Depositor or the
Trust Fund are held by investors other than benefit plan investors (which is
defined as including both Plans and government plans), the investing Plan's
assets will not include any of the underlying assets of the Depositor or the
Trust Fund.
An additional exemption may also be available to the purchase, holding and
transfer of the Securities. The DOL granted to Bear, Stearns & Co. Inc., an
administrative exemption, Prohibited Transaction Exemption 90-30 (Application
No. D-8207, 55 Fed. Reg. 21461) (1990) (the 'Exemption'), from certain of the
prohibited transaction rules of ERISA with respect to the initial purchase, the
holding and the subsequent resale by Plans of securities representing interests
in asset-backed pass-through trusts that consist of certain receivables, loans
and other obligations that meet the conditions and requirements of the
Exemption, wherever Bear, Stearns & Co. Inc. or its affiliate is the sole
underwriter, manager or co-manager of an underwriting syndicate or is the
selling or placement agent. The obligations covered by the Exemption include
obligations such as the Primary Assets (other than Private Securities which are
not insured or guaranteed by the United States or an agency or instrumentality
thereof, or Home Improvement Contracts that are unsecured). The Exemption will
apply to the acquisition,
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holding and transfer of the Securities by a Plan, provided that certain
conditions (certain of which are described below) are met.
Among the conditions which must be satisfied for the Exemption to apply are
the following:
(i) The acquisition of the Securities by a Plan is on terms (including
the price for the Securities) that are at least as favorable to the Plan as
they would be in an arm's-length transaction with an unrelated party;
(ii) The rights and interests evidenced by the Securities acquired by
the Plan are not subordinated to the rights and interests evidenced by
other securities of the trust;
(iii) The Securities acquired by the Plan have received a rating at
the time of such acquisition that is in one of the three highest generic
rating categories from either Standard & Poor's Ratings Group ('Standard &
Poor's'), Moody's Investors Service, Inc. ('Moody's'), Duff & Phelps Inc.
('D&P') or Fitch Investors Service, Inc. ('Fitch');
(iv) The sum of all payments made to the underwriter in connection
with the distribution of the Securities represents not more than reasonable
compensation for underwriting the Securities. The sum of all payments made
to and retained by the seller pursuant to the sale of the obligations to
the trust represents not more than the fair market value of such
obligations. The sum of all payments made to and retained by the servicer
represents not more than reasonable compensation for the servicer's
services under the related servicing agreement and reimbursement of the
servicer's reasonable expenses in connection therewith;
(v) The Trustee must not be an affiliate of any other member of the
Restricted Group (as defined below); and
(vi) The Plan investing in the Securities is an 'accredited investor'
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933. The Depositor assumes that
only Plans which are accredited investors under the federal securities laws
will be permitted to purchase the Securities.
The trust also must meet the following requirements:
(i) the corpus of the trust must consist solely of assets of the type
which have been included in other investment pools;
(ii) securities in such other investment pools must have been rated in
one of the three highest generic rating categories of Standard & Poor's,
Moody's, D&P or Fitch for at least one year prior to the Plan's acquisition
of securities; and
(iii) securities evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one
year prior to any Plan's acquisition of Securities.
Moreover, the Exemption provides relief from certain self dealing/conflict
of interest prohibited transactions that may occur when the Plan fiduciary
causes a Plan to acquire securities in a trust in which the fiduciary (or its
affiliate) is an obligor on the receivables held in the trust provided that,
among other requirements: (i) in the case of an acquisition in connection with
the initial issuance of Securities, at least fifty (50) percent of each Class of
Securities in which Plans have invested is acquired by persons independent of
the Restricted Group and at least fifty (50) percent of the aggregate interest
in the trust is acquired by persons independent of the Restricted Group; (ii)
such fiduciary (or its affiliate) is an obligor with respect to five (5) percent
or less of the fair market value of the obligations contained in the trust;
(iii) the Plan's investment in Securities does not exceed twenty-five (25)
percent of all of the Securities outstanding after the acquisition; and (iv) no
more than twenty-five (25) percent of the assets of the Plan are invested in
securities representing an interest in one or more trusts containing assets sold
or serviced by the same entity. The Exemption does not apply to Plans sponsored
by the Depositor, the underwriters of the Securities, the Trustee, the Servicer,
any obligor with respect to obligations included in a Trust Fund constituting
more than five (5) percent of the aggregate unamortized principal balance of the
assets in a Trust Fund, or any affiliate of such parties (the 'Restricted
Group').
In the event that the Exemption is not applicable, some other prohibited
transaction class exemption issued by the DOL, including PTCE 95-60 (relating to
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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
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Termination Date, and with respect to which no interest shall be payable until
such Accrual Termination Date, after which interest payments will be made on the
Compound Value thereof.
'Compound Value' means, with respect to a Class of Compound Interest
Securities, the original principal balance of such Class, plus all accrued and
unpaid interest, if any, previously added to the principal balance thereof and
reduced by any payments of principal previously made on such Class of Compound
Interest Securities.
'Condominium' means a form of ownership of real property wherein each owner
is entitled to the exclusive ownership and possession of his or her individual
Condominium Unit and also owns a proportionate undivided interest in all parts
of the Condominium Building (other than the individual Condominium Units) and
all areas or facilities, if any, for the common use of the Condominium Units.
'Condominium Association' means the person(s) appointed or elected by the
Condominium Unit owners to govern the affairs of the Condominium.
'Condominium Building' means a multi-unit building or buildings, or a group
of buildings whether or not attached to each other, located on property subject
to Condominium ownership.
'Condominium Loan' means a Loan secured by a Mortgage on a Condominium Unit
(together with its appurtenant interest in the common elements).
'Condominium Unit' means an individual housing unit in a Condominium
Building.
'Cooperative' means a corporation owned by tenant-stockholders who, through
the ownership of stock, shares or membership securities in the corporation,
receive proprietary leases or occupancy agreements which confer exclusive rights
to occupy specific units and which is described in Section 216 of the Code.
'Cooperative Dwelling' means an individual housing unit in a building owned
by a Cooperative.
'Cooperative Loan' means a housing loan made with respect to a Cooperative
Dwelling and secured by an assignment by the borrower (tenant-stockholder) or
security interest in shares issued by the applicable Cooperative.
'Cut-off Date' means the date designated as such in the related Prospectus
Supplement for a Series.
'Debt Securities' means Securities characterized as indebtedness for
federal income tax purposes, and Regular Interest Securities.
'Deferred Interest' means the excess of the interest accrued on the
outstanding principal balance of a Loan during a specified period over the
amount of interest required to be paid by an obligor on such Loan on the related
Due Date.
'Deposit Agreement' means a guaranteed investment contract or reinvestment
agreement providing for the investment of funds held in a fund or account,
guaranteeing a minimum or a fixed rate of return on the investment of moneys
deposited therein.
'Depositor' means Bear Stearns Asset Backed Securities, Inc.
'Disqualified Organization' means the United States, any State or political
subdivision thereof, any possession of the United States, any foreign
government, any international organization, or any agency or instrumentality of
any of the foregoing, a rural electric or telephone cooperative described in
section 1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income.
'Distribution Account' means, with respect to a Series, the account
established in the name of the Trustee for the deposit of remittances received
from the Servicer with respect to the Primary Assets.
'Distribution Date' means, with respect to a Series or Class of Securities,
each date specified as a distribution date for such Series or Class in the
related Prospectus Supplement.
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'Due Date' means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest is due
and payable by the obligor on any Primary Asset pursuant to the terms thereof.
'Eligible Investments' means any one or more of the obligations or
securities described as such in the related Agreement.
'Enhancement' means the enhancement for a Series, if any, specified in the
related Prospectus Supplement.
'Enhancer' means the provider of the Enhancement for a Series specified in
the related Prospectus Supplement.
'ERISA' means the Employee Retirement Income Security Act of 1974, as
amended.
'Escrow Account' means an account, established and maintained by the
Servicer for a Loan, into which payments by borrowers to pay taxes, assessments,
mortgage and hazard insurance premiums and other comparable items required to be
paid to the mortgagee are deposited.
'FHLMC' means the Federal Home Loan Mortgage Corporation.
'Final Scheduled Distribution Date' means, with respect to a Class of Notes
of a Series, the date no later than which principal thereof will be fully paid
and with respect to a Class of Certificates of a Series, the date after which no
Certificates of such Class will remain outstanding, in each case based on the
assumptions set forth in the related Prospectus Supplement.
'FNMA' means the Federal National Mortgage Association.
'Holder' means the person or entity in whose name a Security is registered.
'Home Improvements' means the home improvements financed by a Home
Improvement Contract.
'Home Improvement Contract' means any home improvement installment sales
contracts and installment loan agreement which may be unsecured or secured by
purchase money security interest in the Home Improvement financed thereby.
'HUD' means the United States Department of Housing and Urban Development.
'Indenture' means the indenture relating to a Series of Notes between the
Trust Fund and the Trustee.
'Insurance Policies' means certain mortgage insurance, hazard insurance and
other insurance policies required to be maintained with respect to Loans.
'Insurance Proceeds' means amount paid by the insurer under any of the
Insurance Policies covering any Loan or Mortgaged Property.
'Interest Only Securities' means a Class of Securities entitled solely or
primarily to distributions of interest and which is identified as such in the
related Prospectus Supplement.
'IRS' means the Internal Revenue Service.
'Lifetime Rate Cap' means the lifetime limit if any, on the Loan Rate
during the life of each adjustable rate Loan.
'Liquidation Proceeds' means amounts received by the Servicer in connection
with the liquidation of a Loan, net of liquidation expenses.
'Loan Rate' means, unless otherwise indicated herein or in the Prospectus
Supplement, the interest rate borne by a Loan.
'Loans' mean Mortgage Loans and/or Home Improvement Contracts,
collectively. A Loan refers to a specific Mortgage Loan or Home Improvement
Contract, as the context requires.
'Loan-to-Value Ratio' means, with respect to a Loan, the ratio determined
as set forth in the related Prospectus Supplement.
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'Minimum Rate' means the lifetime minimum Loan Rate during the life of each
adjustable rate Loan.
'Minimum Principal Payment Agreement' means a minimum principal payment
agreement with an entity meeting the criteria of the Rating Agencies.
'Modification' means a change in any term of a Loan.
'Mortgage' means the mortgage, deed of trust or other similar security
instrument securing a Mortgage Note.
'Mortgage Loan' means a closed-end home equity loan secured by a Mortgaged
Property.
'Mortgage Note' means the note or other evidence of indebtedness of a
Mortgagor under the Loan.
'Mortgagor' means the obligor on a Mortgage Note.
'1986 Act' means the Tax Reform Act of 1986.
'Notes' means the Asset-Backed Notes.
'Notional Amount' means the amount set forth in the related Prospectus
Supplement for a Class of Interest Only Securities.
'PAC' ('Planned Amortization Class Securities') means a Class of Securities
of a Series on which payments of principal are made in accordance with a
schedule specified in the related Prospectus Supplement, based on certain
assumptions stated therein.
'Participating Securities' means Securities entitled to receive payments of
principal and interest and an additional return on investment as described in
the related Prospectus Supplement.
'Pass-Through Security' means a security representing an undivided
beneficial interest in a pool of assets, including the right to receive a
portion of all principal and interest payments relating to those assets.
'Pay Through Security' means Regular Interest Securities and certain Debt
Securities that are subject to acceleration due to prepayment on the underlying
Primary Assets.
'Person' means any individual, corporation, partnership, joint venture,
association, joint stock company, trust (including any beneficiary thereof),
unincorporated organization, or government or any agency or political
subdivision thereof.
'Pooling and Servicing Agreement' means the pooling and servicing agreement
relating to a Series of Certificates among the Depositor, the Servicer (if such
Series relates to Loans) and the Trustee.
'Primary Assets' means the Private Securities and/or Loans, as the case may
be, which are included in the Trust Fund for such Series. A Primary Asset refers
to a specific Private Security or Loan, as the case may be.
'Principal Balance' means, with respect to a Primary Asset and as of a Due
Date, the original principal amount of the Primary Asset, plus the amount of any
Deferred Interest added to such principal amount, reduced by all payments, both
scheduled or otherwise, received on such Primary Asset prior to such Due Date
and applied to principal in accordance with the terms of the Primary Asset.
'Principal Only Securities' means a Class of Securities entitled solely or
primarily to distributions of principal and identified as such in the Prospectus
Supplement.
'Private Security' means a participation or pass-through certificate
representing a fractional, undivided interest in Underlying Loans or
collateralized obligations secured by Underlying Loans.
'Property' means either a Home Improvement or a Mortgaged Property securing
a Loan, as the context requires.
'PS Agreement' means the pooling and servicing agreement, indenture, trust
agreement or similar agreement pursuant to which a Private Security is issued.
'PS Servicer' means the servicer of the Underlying Loans.
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'PS Sponsor' means, with respect to Private Securities, the sponsor or
depositor under a PS Agreement.
'PS Trustee' means the trustee designated under a PS Agreement.
'Qualified Insurer' means a mortgage guarantee or insurance company duly
qualified as such under the laws of the states in which the Mortgaged Properties
are located duly authorized and licensed in such states to transact the
applicable insurance business and to write the insurance provided.
'Rating Agency' means the nationally recognized statistical rating
organization (or organizations) which was (or were) requested by the Depositor
to rate the Securities upon the original issuance thereof.
'Regular Interest' means a regular interest in a REMIC.
'REMIC' means a real estate mortgage investment conduit.
'REMIC Administrator' means the Person, if any, specified in the related
Prospectus Supplement for a Series for which a REMIC election is made, to serve
as administrator of the Series.
'REMIC Provisions' means the provisions of the federal income tax law
relating to real estate mortgage investment conduits, which appear at sections
860A through 860G of Subchapter M of Chapter 1 of the Code, and related
provisions, and regulations, including proposed regulations and rulings, and
administrative pronouncements promulgated thereunder, as the foregoing may be in
effect from time to time.
'REO Property' means real property which secured a defaulted Loan,
beneficial ownership of which has been acquired upon foreclosure, deed in lieu
of foreclosure, repossession or otherwise.
'Reserve Fund' means, with respect to a Series, any Reserve Fund
established pursuant to the related Agreement.
'Residual Interest' means a residual interest in a REMIC.
'Retained Interest' means, with respect to a Primary Asset, the amount or
percentaged specified in the related Prospectus Supplement which is not included
in the Trust Fund for the related Series.
'Scheduled Payments' means the scheduled payments of principal and interest
to be made by the borrower on a Primary Asset.
'Securities' means the Notes or the Certificates.
'Seller' means the seller of the Primary Assets to the Depositor identified
in the related Prospectus Supplement for a Series.
'Senior Securityholder' means a holder of a Senior Security.
'Senior Securities' means a Class of Securities as to which the holders'
rights to receive distributions of principal and interest are senior to the
rights of holders of Subordinate Securities, to the extent specified in the
related Prospectus Supplement.
'Series' means a separate series of Securities sold pursuant to this
Prospectus and the related Prospectus Supplement.
'Servicer' means, with respect to a Series relating to Loans, the Person if
any, designated in the related Prospectus Supplement to service Loans for that
Series, or the successors or assigns of such Person.
'Single Family Property' means property securing a Loan consisting of one-
to four-family attached or detached residential housing, including Cooperative
Dwellings.
'Stripped Securities' means Pass-Through Securities representing interests
in Primary Assets with respect to which all or a portion of the principal
payments have been separated from all or a portion of the interest payments.
'Subordinate Securityholder' means a Holder of a Subordinate Security.
'Subordinated Securities' means a Class of Securities as to which the
rights of holders to receive distributions of principal, interest or both is
subordinated to the rights of holders of Senior Securities, and may be
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allocated losses and shortfalls 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 IN 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
INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Incorporation of Certain Documents by
Reference.................................... ii
Summary........................................ S-1
Risk Factors................................... S-13
The Trust...................................... S-22
The Loans...................................... S-23
Life Financial Corp............................ S-39
Life Savings Bank, Federal Savings Bank........ S-39
Description of Credit Enhancement.............. S-48
Description of the Notes....................... S-50
Description of Transfer and Servicing
Agreements................................... S-60
Prepayment and Yield Considerations............ S-64
Certain Federal Income Tax Consequences........ S-78
State Tax Consequences......................... S-81
ERISA Considerations........................... S-81
Method of Distribution......................... S-82
Legal Investment Matters....................... S-83
Legal Matters.................................. S-83
Ratings........................................ S-83
PROSPECTUS
Prospectus Supplement.......................... 3
Reports to Holders............................. 3
Available Information.......................... 3
Incorporation of Certain Documents by
Reference.................................... 4
Summary of Terms............................... 5
Risk Factors................................... 15
Description of the Securities.................. 18
The Trust Funds................................ 22
Enhancement.................................... 28
Servicing of Loans............................. 30
The Agreements................................. 36
Certain Legal Aspects of the Loans............. 43
The Depositor.................................. 51
Use of Proceeds................................ 51
Certain Federal Income Tax Consequences........ 51
State Tax Considerations....................... 71
ERISA Considerations........................... 71
Legal Investment............................... 74
Plan of Distribution........................... 74
Legal Matters.................................. 74
Glossary of Terms.............................. 75
</TABLE>
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$123,750,000
ASSET BACKED NOTES
LIFE FINANCIAL HOME
LOAN OWNER TRUST 1997-2
LIFE SAVINGS BANK,
FEDERAL SAVINGS BANK
(SERVICER)
BEAR STEARNS ASSET BACKED
SECURITIES, INC.
(DEPOSITOR)
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PROSPECTUS SUPPLEMENT
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BEAR, STEARNS & CO. INC.
AUGUST 25, 1997
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