<PAGE> 1
PROSPECTUS SUPPLEMENT Filed Pursuant to Rule 424(b)(3)
- --------------------- Registration No. 33-93574
(To Prospectus dated February 9, 1996)
$100,000,000
CHAMPION HOME EQUITY LOAN TRUST 1996-1
CHAMPION MORTGAGE SERVICING CORP.
SERVICER
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
The Champion Home Equity Loan Asset-Backed Certificates, Series 1996-1
(collectively, the "Certificates"), consist of three Classes of Certificates,
the Class A-1 Certificates, the Class A-2 Certificates and the Class A-3
Certificates (the "Offered Certificates"), as well as certain additional Classes
of Certificates which are not being offered for sale hereunder. The Certificates
evidence in the aggregate the entire beneficial interest in Champion Home Equity
Loan Trust 1996-1 (the "Trust") formed pursuant to a Pooling and Servicing
Agreement (the "Agreement") among Bear Stearns Asset Backed Securities, Inc., as
depositor (the "Depositor"), Champion Mortgage Servicing Corp., as Servicer (the
"Servicer"), and The Bank of New York, as Trustee and Back-Up Servicer (the
"Trustee" and the "Back-Up Servicer," respectively).
(cover continued on next page)
------------------------------
SEE "RISK FACTORS" HEREIN ON PAGE S-15 AND IN THE PROSPECTUS
ON PAGE 17 FOR CERTAIN FACTORS TO BE CONSIDERED
IN PURCHASING THE OFFERED CERTIFICATES.
------------------------------
THE CERTIFICATES DO NOT REPRESENT AN OBLIGATION OF OR INTEREST IN THE
DEPOSITOR, THE SELLER, THE SERVICER, THE TRUSTEE OR ANY OF THEIR RESPECTIVE
AFFILIATES. NEITHER THE CERTIFICATES NOR THE UNDERLYING HOME EQUITY LOANS ARE
INSURED OR GUARANTEED BY ANY GOVERNMENTAL ENTITY, THE DEPOSITOR, THE SELLER,
THE SERVICER OR ANY OF THEIR AFFILIATES.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------------------------
BEAR, STEARNS & CO. INC. KEY CAPITAL MARKETS, INC.
July 21, 1998
<PAGE> 2
(cover page continued)
The property of the Trust includes two pools (each, a "Loan Group") of
non-conforming closed-end home equity loans (the "Home Equity Loans"). The Home
Equity Loans are secured by first and second deeds of trust or mortgages
primarily on one- to four- family residential properties. Loan Group One
consists of fixed rate, simple interest Home Equity Loans, and Loan Group Two
consists of adjustable rate, actuarial Home Equity Loans. The Trust also
includes approximately $19,767,878 on deposit in the Pre-Funding Account which
will be used to purchase additional Home Equity Loans for each Loan Group from
time to time as described herein and funds on deposit in the Capitalized
Interest Account.
Distributions of principal and interest on the Offered Certificates
will be made on the 25th day of each month or, if such day is not a Business
Day, then on the succeeding Business Day (each, a "Distribution Date"),
commencing in March 1996. On each Distribution Date, holders of the Offered
Certificates are entitled to receive, from and to the extent of funds available
in the related Distribution Account (as defined herein), distributions with
respect to interest and principal calculated as set forth herein. The Offered
Certificates have the benefit of an irrevocable and unconditional surety bond
(the "Policy") issued by Capital Markets Assurance Corporation (the "Certificate
Insurer") pursuant to which the Certificate Insurer guarantees payments to the
holders of the Offered Certificates as described herein. See "DESCRIPTION OF THE
CERTIFICATES" herein. The Certificate Insurer has entered into a reinsurance
agreement with MBIA Insurance Corporation. See "THE POLICY AND THE CERTIFICATE
INSURER" herein.
THE YIELD TO INVESTORS IN EACH CLASS OF OFFERED CERTIFICATES WILL BE
SENSITIVE IN VARYING DEGREES TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS
(INCLUDING PREPAYMENTS) ON THE HOME EQUITY LOANS IN THE RELATED LOAN GROUP,
WHICH GENERALLY MAY BE PREPAID IN FULL OR IN PART AT ANY TIME WITHOUT PENALTY.
THE YIELD TO MATURITY OF A CLASS OF OFFERED CERTIFICATES PURCHASED AT A DISCOUNT
OR PREMIUM WILL BE MORE SENSITIVE TO THE RATE AND TIMING OF PAYMENTS THEREON.
HOLDERS OF THE OFFERED CERTIFICATES SHOULD CONSIDER, IN THE CASE OF ANY SUCH
CERTIFICATES PURCHASED AT A DISCOUNT, THE RISK THAT A SLOWER THAN ANTICIPATED
RATE OF PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN
THE ANTICIPATED YIELD AND, IN THE CASE OF ANY OFFERED CERTIFICATES 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. NO
REPRESENTATION IS MADE AS TO THE ANTICIPATED RATE OF PREPAYMENTS ON THE HOME
EQUITY LOANS OR AS TO THE RESULTING YIELD TO MATURITY OF ANY CLASS OF OFFERED
CERTIFICATES.
Two separate elections will be made to treat certain pools of assets of
the Trust as real estate mortgage investment conduits (each a "REMIC") for
federal income tax purposes. As described more fully herein and in the
Prospectus, the Offered Certificates will be designated as "regular interests"
in a REMIC. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES" in the Prospectus.
After the initial distribution of the Certificates by the Underwriter,
the Prospectus and Prospectus Supplement may be used by Key Capital Markets,
Inc., an affiliate of the Seller and the Servicer, in connection with market
making transactions in the Offered Certificates. Key Capital Markets, Inc. may
act as principal or agent in such transactions, but has no obligation to do so.
Such transactions will be at prices related to prevailing market prices at the
time of sale. Certain information in this Prospectus Supplement will be updated
from time to time as described in the Prospectus under "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE."
__________________________
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON
OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.
THE CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE A SEPARATE
SERIES OF SECURITIES BEING OFFERED BY THE DEPOSITOR PURSUANT TO ITS PROSPECTUS
DATED FEBRUARY 9, 1996, OF WHICH THIS PROSPECTUS SUPPLEMENT IS A PART AND WHICH
ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT
INFORMATION REGARDING THIS OFFERING WHICH IS NOT CONTAINED HEREIN AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL.
S-2
<PAGE> 3
SUMMARY OF TERMS
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. Capitalized terms
used but not defined herein or in the accompanying Prospectus are defined in the
"GLOSSARY OF TERMS" in the Prospectus.
TRUST: Champion Home Equity Loan Trust
1996-1 (the "Trust") will be formed
pursuant to a Pooling and Servicing
Agreement (the "Agreement"), to be
dated as of February 1, 1996 (the
"Cut-Off Date"), among Bear Stearns
Asset Backed Securities, Inc., as
depositor (the "Depositor"),
Champion Mortgage Servicing Corp.,
as servicer (together with any
successor in such capacity, the
"Servicer"), and The Bank of New
York, as trustee (the "Trustee") and
back-up servicer (the "Back-Up
Servicer"). The property of the
Trust will include: two pools (each,
a "Loan Group") of non- conforming
closed-end home equity loans (the
"Home Equity Loans"), secured by
first and second mortgages primarily
on one- to four- family residential
properties (the "Mortgaged
Properties"); payments in respect of
the Home Equity Loans received on
and after the Cut-Off Date; property
that secured a Home Equity Loan
which has been acquired by
foreclosure or deed in lieu of
foreclosure; rights under certain
hazard insurance policies covering
the Mortgaged Properties; funds on
deposit in the Pre-Funding Account,
the Capitalized Interest Account and
the Spread Account (each as defined
below); the Depositor's rights under
the Purchase Agreement (as defined
herein); and certain other property,
as described more fully herein. In
addition, the Depositor will cause
the Certificate Insurer (as defined
below) to issue an irrevocable and
unconditional surety bond (the
"Policy") for the benefit of the
Holders of the Offered Certificates
pursuant to which it will guarantee
payments to such Holders as
described herein. The Trust is one
of the Trust Funds referred to in
the Prospectus.
SECURITIES OFFERED: The Champion Home Equity Loan
Asset-Backed Certificates,
Securities 1996-1 (the
"Certificates") will consist of the
Class A-1, Class A-2 and Class A-3
Certificates (collectively, the
"Offered Certificates"), the Class I
Certificates and the Class R
Certificates. Only the Offered
Certificates are offered hereby. Any
information contained herein
regarding the Class I or Class R
Certificates is included solely to
permit a better understanding of the
Offered Certificates.
The Class A-1 and Class A-2
Certificates (collectively, the
"Fixed Rate Certificates") and the
Class I Certificates are related to
Loan Group One (defined below) and
the Class A-3 Certificates are
related to Loan Group Two (defined
below). Each Class of Offered
Certificates represents the right to
receive payments of interest at the
per annum rate (the "Certificate
Rate") described below and payable
monthly, and payments of principal
to the extent provided below. The
Offered Certificates will be offered
for purchase in minimum dollar
denominations of $25,000 and
integral multiples of $1,000 in
excess thereof, provided, however,
that one Certificate of each Class
of Offered Certificates may be
issued in an amount representing the
S-3
<PAGE> 4
remainder, if any, of such Class.
The "Percentage Interest" evidenced
by an Offered Certificate will be
equal to the percentage derived by
dividing the denomination of such
Certificate by the aggregate
denomination of all Certificates of
the same Registration of the Offered
Class as such Certificate.
REGISTRATION OF THE OFFERED CERTIFICATES: The Offered Certificates initially
will be represented by one or more
certificates registered in the name
of Cede & Co., the nominee of The
Depository Trust Company ("DTC"),
and will be available only in the
form of book-entries on the records
of DTC, participating members
thereof ("Participants") and other
entities, such as banks, brokers,
dealers and trust companies that
clear through or maintain custodial
relationships with a Participant,
either directly or indirectly
("Indirect Participants").
References herein to "Holders"
reflect the rights of owners of the
Offered Certificates only as the may
indirectly exercise such rights
through DTC and Participants, except
as otherwise specified herein. See
"RISK FACTORS - Book-Entry
Registration" and "DESCRIPTION OF
THE CERTIFICATES - Book-Entry
Registration" herein.
DISTRIBUTION AND RECORD DATES: Distributions will be made on the
25th day of each month or, if such
25th day is not a Business Day, on
the succeeding Business Day (each, a
"Distribution Date"), commencing in
March 1996. Distributions on a
Distribution Date will be made to
Holders of record as of the last
Business Day of the month preceding
the month in which such Distribution
Date occurs (each, a "Record Date").
DEPOSITOR: Bear Stearns Asset Backed
Securities, Inc. (the "Depositor"),
a wholly-owned, special purpose
subsidiary of The Bear Stearns
Companies Inc. None of The Bear
Stearns Companies Inc., any other
affiliate of the Depositor, the
Servicer, the Trustee or the Seller
has guaranteed or is otherwise
obligated with respect to the
Certificates. See "THE DEPOSITOR" in
the Prospectus.
SELLER: Champion Mortgage Co., Inc., a New
Jersey corporation. All of the Home
Equity Loans originally delivered to
the Trust (the "Initial Home Equity
Loans") were, and any Subsequent
Home Equity Loans (as defined below)
will be, originated by the Seller or
by an affiliate and acquired by the
Seller in the ordinary course of its
business. The Home Equity Loans will
be acquired by the Depositor in a
privately negotiated transaction
concurrently with the delivery of
such Home Equity Loans to the Trust.
The Seller's corporate headquarters
are located at 20 Waterview Blvd.,
Parsippany, New Jersey 07054, and
its telephone number is (973)
402-7700. See "THE SELLER AND THE
SERVICER" herein.
SERVICER: Champion Mortgage Servicing Corp., a
Delaware corporation and an
affiliate of the Seller. See "THE
SELLER AND THE SERVICER" herein.
TRUSTEE AND BACK-UP SERVICER: The Bank of New York, a banking
corporation organized under the laws
of the State of New York, will act
as trustee and back-up servicer (the
"Trustee" and the "Back-Up
Servicer," respectively).
CUT-OFF DATE: February 1, 1996.
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<PAGE> 5
CLOSING DATE: On or about February 21, 1996.
THE HOME EQUITY LOANS: The Home Equity Loans consist of
promissory notes or other evidences
of indebtedness (the "Mortgage
Notes") secured by mortgages, deeds
of trust or other instruments (the
"Mortgages") creating first or
second liens primarily on one- to
four- family residential properties
(the "Mortgaged Properties"). The
Home Equity Loans are the Mortgage
Loans referred to in the Prospectus.
The Home Equity Loans bear fixed or
adjustable rates (each, a "Loan
Rate"). Interest on each fixed rate
Home Equity Loan is calculated on
the "simple interest" method
("Simple Interest Loans"), and
interest on each adjustable rate
Home Equity Loan is calculated on
the "actuarial" method ("Actuarial
Loans"). Monthly payments are due on
the date of the month specified in
the related Mortgage Note (each, a
"Due Date"). The Due Dates for the
Home Equity Loans occur throughout
the month. Except for the Balloon
Loans (defined herein) in Loan Group
One, the Home Equity Loans are fully
amortizing.
The Home Equity Loans will be
divided into two Loan Groups. Loan
Group One will consist of fixed rate
Home Equity Loans, and Loan Group
Two will consist of adjustable rate
Home Equity Loans ("ARMs"). The Loan
Rate borne by each ARM is subject to
adjustment annually on the date set
forth in the related Mortgage Note
(each, a "Change Date") to equal the
sum of (i) the weekly average yield
on U.S. Treasury securities adjusted
to a constant maturity of one year,
as made available by the Federal
Reserve Board as of the date 45 days
before the applicable Change Date
(the "Index") and (ii) the number of
basis points set forth in such
Mortgage Note (the "Gross Margin"),
subject to rounding and to the
effects of the Periodic Cap, the
applicable Lifetime Cap and the
applicable Lifetime Floor. The
"Periodic Cap" limits changes in the
Loan Rate for each ARM on each
Change Date to 200 basis points. The
"Lifetime Cap" is the maximum Loan
Rate that may be borne by an ARM
over its life and is equal to the
sum of (i) the initial Loan Rate for
such ARM and (ii) 600 basis points.
The "Lifetime Floor" is the minimum
Loan Rate that may be borne by an
ARM over its life and is equal to
the initial Loan Rate for such ARM.
The ARMs do not provide for negative
amortization. None of the ARMs has
reached its initial Change Date.
The "Principal Balance" of a Home
Equity Loan (other than a Liquidated
Home Equity Loan (as defined herein)
on any day is equal to its principal
balance as of the Cut-Off Date (or,
with respect to a Subsequent Home
Equity Loan, its principal balance
as of the applicable Subsequent
Cut-Off Date), minus all collections
credited against the Principal
Balance of such Home Equity Loan.
The Principal Balance of a
Liquidated Home Equity Loan after
final recovery of related
Liquidation Proceeds (as defined
herein) will be zero. With respect
to any Distribution Date and Loan
Group, the "Loan Group Balance" will
be equal to the aggregate of the
Principal Balances of all Home
Equity Loans in such Loan Group as
of the first day of the related Due
Period. See "DESCRIPTION OF THE HOME
EQUITY LOANS" herein and Appendix A
attached hereto.
S-5
<PAGE> 6
PRE-FUNDING ACCOUNT: On the Closing Date, an aggregate
cash amount (the "Pre-Funded
Amount") not to exceed approximately
$19,767,878 will be deposited in the
Pre-Funding Account. Of such amount,
approximately $12,012,283 will be
used to purchase additional home
equity loans secured by first or
second liens on Mortgaged Properties
("Subsequent Home Equity Loans") for
deposit into Loan Group One and, if
required, to make accelerated
payments of principal on the Fixed
Rate Certificates and approximately
$7,755,595 will be used to purchase
Subsequent Home Equity Loans for
deposit into Loan Group Two and, if
required, to make accelerated
payments of principal on the Class
A-3 Certificates. During the period
(the "Pre- Funding Period") from the
Closing Date to the earliest to
occur of (i) the date on which the
aggregate amount on deposit in the
Pre- Funding Account is less than
$100,000, (ii) an Event of Default
under the Agreement and (iii) March
29, 1996, amounts on deposit in the
Pre-Funding Account may be withdrawn
from time to time to acquire
Subsequent Home Equity Loans in
accordance with the Agreement. Any
net investment earnings on the
Pre-Funded Amount will be
transferred to the Capitalized
Interest Account on each
Distribution Date during the Pre-
Funding Period. Any Pre-Funded
Amount remaining in the Pre- Funding
Account at the end of the
Pre-Funding Period will be
distributed on the Distribution Date
occurring at or immediately
following the end of the Pre-Funding
Period. If the Pre-Funded Amount so
distributed and allocated to a Loan
Group is less than $100,000, it will
be treated as a principal prepayment
and allocated to the applicable
Class or Classes of Offered
Certificates related to Loan Group
One or Loan Group Two, as
applicable, as provided herein;
otherwise such amount will be
distributed as principal of the
outstanding Class or Classes of
Offered Certificates related to Loan
Group One or Loan Group Two, as
applicable, pro rata on the basis of
their respective Class Certificate
Balances. Only fixed-rate Subsequent
Home Equity Loans may be added to
Loan Group One, and only
adjustable-rate Subsequent Home
Equity Loans may be added to Loan
Group Two.
CAPITALIZED INTEREST ACCOUNT: On the Closing Date, funds will be
deposited in an account (the
"Capitalized Interest Account")
created and maintained with the
Trustee. The amount so deposited
will be used by the Trustee on the
Distribution Dates during the
Pre-Funding Period to fund the
excess, if any, of the Interest
Remittance Amounts for the Offered
Certificates (as defined below) and
the premium due on the Policy over
the funds available therefor on such
Distribution Dates. Any funds
remaining in the Capitalized
Interest Account at the end of the
Pre-Funding Period will be
distributed to the Holders of the
Class R Certificates.
FINAL SCHEDULED DISTRIBUTION DATE: The Final Scheduled Distribution
Dates for each of the respective
Classes of Offered Certificates are
set forth below. However, it is
anticipated that the actual final
Distribution Date for each Class of
Offered Certificates will occur
earlier, and could occur
significantly earlier, than the
related Final Scheduled Distribution
Date. See "PREPAYMENT AND YIELD
CONSIDERATIONS" herein.
S-6
<PAGE> 7
Final Scheduled
Distribution Date
-----------------
Class A-1 Certificates May 25, 2006
Class A-2 Certificates May 25, 2028
Class A-3 Certificates May 25, 2028
INTEREST:
The Certificate Rate for each Class of
Offered Certificates will be as set
forth or described on the cover page
hereof. The "Remittance Rate" for each
Home Equity Loan in Loan Group Two will
be calculated monthly, and for any
Distribution Date will equal the Loan
Rate for such Home Equity Loan at the
beginning of the related Due Period
(defined below) minus the sum of (a) the
Expense Fee Rate (defined herein) and
(b) the related Excess Spread Rate. The
"Excess Spread Rate" for any Home Equity
Loan in Loan Group Two will equal the
excess of (x) the Gross Margin for such
Home Equity Loan less the Expense Fee
Rate over (y) 2.55%. Holders of the
Offered Certificates will be entitled to
receive on each Distribution Date, to
the extent funds are available therefor,
interest at the applicable Certificate
Rate accrued during the related Interest
Period on the related Class Certificate
Balance (as described below under the
caption "Principal"). Holders of the
Class I Certificates will be entitled to
receive on each Distribution Date, to
the extent funds are available therefor
and concurrently with distributions of
interest on the Fixed Rate Certificates,
interest calculated as follows.
The Class I Certificates will be
comprised of two components, the "Class
I-1 Component" and the "Class I-2
Component." The Class I-1 Component will
have a notional balance equal to the
Class Certificate Balance of the Class
A-1 Certificates and will bear interest
at the rate of 2.00% per annum. The
Class I-2 Component will have a notional
balance equal to the Class Certificate
Balance of the Class A-2 Certificates
and will bear interest at the rate of
1.42% per annum. The Class I Components
are not separately transferable.
The amount of interest (as described
above) payable with respect to a Class
of Offered Certificates or the Class I
Certificates constitutes the "Interest
Remittance Amount" for such Class. The
"Interest Period" for each Distribution
Date will be the calendar month
preceding the month in which such
Distribution Date occurs. Interest on
the Certificates will be calculated on
the basis of a 360-day year consisting
of twelve 30-day months. See
"DESCRIPTION OF THE CERTIFICATES"
herein.
PRINCIPAL: As to any Loan Group and Distribution
Date, the "Basic Principal Amount" will
equal the sum of (i) each payment of
principal on a Home Equity Loan received
by the Servicer (exclusive of amounts
described in clauses (ii) and (iii)
below) during the calendar month
preceding the calendar month in which
such Distribution Date occurs (with
respect to any Distribution Date, the
"Due Period"); (ii) curtailments (i.e.,
partial prepayments) and prepayments in
full received during the related Due
Period; (iii) all Insurance Proceeds and
Net Liquidation Proceeds allocable to
recoveries of principal of Home Equity
Loans received during the related Due
Period; (iv) an amount equal to the
excess, if any, of the Principal Balance
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<PAGE> 8
(immediately prior to liquidation) of
each Home Equity Loan liquidated during
the related Due Period over the
principal portion of Net Liquidation
Proceeds received during such Due Period
(the "Unrecovered Class A Portion"); and
(v) (a) the outstanding Principal
Balance of any Home Equity Loan
repurchased by the Seller or purchased
by the Servicer as required or permitted
by the Purchase Agreement or the
Agreement as of the related
Determination Date and (b) with respect
to any Defective Home Equity Loan for
which the Seller substitutes an Eligible
Substitute Home Equity Loan as of the
related Determination Date, any excess
of the Principal Balance of such
Defective Home Equity Loan over the
Principal Balance of such Eligible
Substitute Home Equity Loan, plus the
amount of any unreimbursed Servicing
Advances (defined herein) made by the
Servicer with respect to the Home Equity
Loan to the extent received.
Distributions of principal of a Class of
Offered Certificates will be measured by
the Basic Principal Amount for the
related Loan Group. As to any
Distribution Date and Class of Offered
Certificates, the "Principal Remittance
Amount" will equal the sum of (i) the
lesser of (x) the Basic Principal Amount
for the related Loan Group and (y) the
portion of such Basic Principal Amount
required to be distributed to increase
the Overcollateralization Amount
(defined below) for the related Loan
Group to the Required
Overcollateralization Amount (defined
below) for such Loan Group, (ii) the
related Carry-Forward Amount (defined
below), and (iii) on the Distribution
Date at or immediately following the end
of the Pre- Funding Period, the amount,
if any, allocable to the related Loan
Group remaining in the Pre-Funding
Account (exclusive of any investment
earnings included therein).
Distributions of principal will be
allocated among the Classes of Offered
Certificates as described herein under
"DESCRIPTION OF THE CERTIFICATES --
Priority of Distributions." As described
below, Holders of a Class of Offered
Certificates also may receive
distributions of Additional Principal
(defined below) on a Distribution Date.
The Interest Remittance Amount, the
Principal Remittance Amount and the
Additional Principal, if any, for a
Class of Offered Certificates together
constitute the "Class Remittance Amount"
for such Class and each Distribution
Date.
An amount to cover any loss on a
Liquidated Home Equity Loan (i.e., the
Unrecovered Class A Portion) may or may
not be distributed to the Holders of the
related Class of Offered Certificates on
the Distribution Date which immediately
follows the event of loss. However, the
Holders of such Certificates are
entitled to receive ultimate recovery of
100% of the original Class Certificate
Balance of the applicable Class of
Certificates.
The "Class Certificate Balance" of a
Class of Offered Certificates on any
date is equal to the Class Certificate
Balance of such Class on the Closing
Date (the "Original Class Certificate
Balance") minus the aggregate of amounts
actually distributed as principal to the
Holders of such Class of Offered
Certificates.
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<PAGE> 9
The "Carry-Forward Amount" of a Class of
Offered Certificates on any Distribution
Date will equal the sum of (a) the
excess of the aggregate of the Class
Remittance Amounts as of each preceding
Distribution Date over the amount of the
actual distributions to the Holders of
such Class of Offered Certificates made
on any such Distribution Date and not
subsequently distributed, and (b)
interest on the amount, if any, of the
interest component of the amount
described in clause (a) at one-twelfth
of the applicable Certificate Rate. See
"DESCRIPTION OF THE CERTIFICATES"
herein.
OVERCOLLATERALIZATION AND
CROSSCOLLATERALIZATION: On any Distribution Date on which the
Overcollateralization Amount for a Loan
Group is less than the Required
Overcollateralization Amount for such
Loan Group, the Remaining Net Excess
Spread for such Loan Group plus the
Available Transfer Cashflow and the Net
Excess Principal, if any, will be used
to make additional distributions of
principal of the related Class or
Classes of Offered Certificates
("Additional Principal") until such
Overcollateralization Amount equals the
related Required Overcollateralization
Amount.
As to any Loan Group and Distribution
Date, the "Overcollateralization Amount"
will equal the sum of (a) the excess, if
any, of (i) the sum of the Loan Group
Balance and the amount on deposit in the
Pre-Funding Account allocated to such
Loan Group (exclusive of any investment
earnings included therein) as of the
close of business on the last day of the
related Due Period, over (ii) the Class
Certificate Balance of the related Class
or Classes of Offered Certificates,
after giving effect to the distributions
of the related Principal Remittance
Amount on such Distribution Date, and
(b) the amount, if any, on deposit in
the Spread Account allocated to the
related Class or Classes of Offered
Certificates.
The Agreement provides that, subject to
certain floors, caps and triggers, the
required level of overcollateralization
(the "Required Overcollateralization
Amount") may (i) increase or decrease
over time based on the delinquency and
default experience on the Home Equity
Loans in the Trust, (ii) be increased by
the Certificate Insurer at the end of
the Pre-Funding Period, (iii) step down
based on the passage of time and the
amortization of the Home Equity Loans in
the Trust or (iv) be reduced or
eliminated by the Certificate Insurer so
long as a Certificate Insurer Default
(as defined herein) does not exist and
is not continuing.
As to any Distribution Date and Loan
Group: (a) the "Excess Spread" will
equal interest collected or advanced on
the Home Equity Loans in such Loan Group
(including amounts allocated to the
related Class or Classes of Offered
Certificates in the Capitalized Interest
Account) minus the sum of (i) the
Interest Remittance Amount for the
related Class or Classes of Offered
Certificates and, in the case of Loan
Group One, the Interest Remittance
Amount for the Class I Certificates,
(ii) the Servicing Fee, (iii) the
Back-Up Servicing Fee, (iv) the Trustee
Fee and (v) the Premium Fee (the sum of
clauses (ii) through (v), the "Expense
Fees"); (b) the "Net Excess Spread" will
equal the Excess Spread remaining after
the application thereof to cover an
Available Funds Shortfall with respect
to the
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related Loan Group; (c) "Remaining Net
Excess Spread" will equal the Net Excess
Spread remaining after the application
thereof to cover an Available Funds
Shortfall with respect to the other Loan
Group and will be used to make payments
of Additional Principal to the Class or
Classes of Offered Certificates related
to such original Loan Group; (d) the
"Available Transfer Cashflow" will equal
the Remaining Net Excess Spread for the
other Loan Group after the application
thereof to the payment of Additional
Principal to the Class or Classes of
Offered Certificates related to such
other Loan Group; (e) the "Excess
Principal" will equal the lesser of (i)
the portion of the Basic Principal
Amount for such Loan Group which is not
required to be included in the Principal
Remittance Amount for the related Class
or Classes of Offered Certificates on
such Distribution Date and (ii) the
amount of such portion remaining after
the application of the related Available
Remittance Amount to the Required
Payments for such Loan Group; (f) the
"Net Excess Principal" will equal the
Excess Principal remaining after the
application thereof to cover an
Available Funds Shortfall in the other
Loan Group; (g) an "Available Funds
Shortfall" is the amount by which the
Available Remittance Amount for a Loan
Group is less than the related Required
Payments; and (h) the "Required
Payments" equal the sum of the related
Expense Fees (other than the Servicing
Fee), the Interest Remittance Amount(s),
the Principal Remittance Amount and
reimbursement of amounts due the
Certificate Insurer with respect to such
Loan Group.
SPREAD ACCOUNT: On the Closing Date the Trustee will
establish and thereafter maintain an
account (the "Spread Account"). If
required by the Certificate Insurer, the
holder of the Class R Certificates will
deliver to the Trustee for deposit in
the Spread Account the amount required
by the Certificate Insurer. Funds on
deposit in the Spread Account, if any,
will be available for withdrawal to fund
any shortfalls between the available
funds for distribution to Holders of the
Offered Certificates and the related
Interest Remittance Amounts or Principal
Remittance Amounts.
THE CERTIFICATE INSURER: Capital Markets Assurance Corporation
(the "Certificate Insurer") is a New
York domiciled insurance company. The
Certificate Insurer has entered into a
reinsurance agreement with MBIA
Insurance Corporation. See "THE POLICY
AND THE CERTIFICATE INSURER" herein.
Pursuant to the Insurance and
Reimbursement Agreement, dated as of the
Cut-Off Date (the "Insurance
Agreement"), among the Certificate
Insurer, the Depositor, the Seller and
the Servicer, the Certificate Insurer
will issue a financial guaranty
insurance policy (the "Policy") pursuant
to which it will irrevocably and
unconditionally guaranty, among other
things, payment on each Distribution
Date to the Trustee for the benefit of
the Holders of each Class of Offered
Certificates of the Guaranteed Interest
Payment Amount and the Guaranteed
Principal Payment Amount. The terms of
the Offered Certificates and the
Agreement may not be amended unless the
Certificate Insurer has given its prior
written consent.
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So long as there does not exist a
failure by the Certificate Insurer to
make a required payment under the Policy
(such event, a "Certificate Insurer
Default"), the Certificate Insurer will
have the right to exercise all rights of
the Holders of the Offered Certificates
under the Agreement without any consent
of such Holders, and such Holders may
exercise such rights only with the prior
written consent of the Certificate
Insurer except as provided in the
Agreement.
SERVICING: The Servicer will be responsible for
servicing, managing and making
collections on the Home Equity Loans.
The Servicer will deposit all
collections in respect of the Home
Equity Loans in a Loan Group into the
related Collection Account as described
herein. Not later than the 18th day of
the month (or if such 18th day is not a
Business Day, the preceding Business
Day) of each Distribution Date (the
"Determination Date"), the Trustee will
calculate the amounts to be paid, as
described herein, to the
Certificateholders on such Distribution
Date. See "DESCRIPTION OF THE
CERTIFICATES -- Priority of
Distributions" herein. With respect to
each Due Period, the Servicer will
receive from payments in respect of
interest on the Home Equity Loans
actually received, a portion of such
payments as a monthly servicing fee (the
"Servicing Fee") in the amount of 0.50%
per annum (the "Servicing Fee Rate") on
the Principal Balance of each Home
Equity Loan as of the first day of each
such Due Period. See "DESCRIPTION OF THE
CERTIFICATES - Servicing Compensation
and Payment of Expenses" herein. In
certain limited circumstances, the
Servicer may resign or be removed, in
which event either the Back-Up Servicer
or a third-party servicer will be
appointed as a successor Servicer. See
"DESCRIPTION OF THE CERTIFICATES--
Certain Matters Regarding the Servicer"
herein.
MONTHLY ADVANCES: The Servicer is required to remit to the
Trustee no later than the close of
business on the second Business Day
preceding a Distribution Date for
deposit in the applicable Collection
Account an amount equal to the sum of
(a) interest accrued on each Home Equity
Loan through the date on which the
related monthly payment was due (the
"Due Date") but not received by the
Servicer as of the close of business on
the related Determination Date, net of
the Servicing Fee and (b) with respect
to each REO Property which was acquired
during or prior to the related Due
Period and as to which a final
disposition thereof did not occur during
the related Due Period, an amount equal
to the excess, if any, of interest for
the most recently ended Due Period on
the Principal Balance of the Home Equity
Loan related to such REO Property at the
related Loan Rate, net of the Servicing
Fee, over the net income from the REO
Property transferred to such Collection
Account for such Distribution Date
pursuant to the Agreement (the "Monthly
Advance"). The Servicer is not required
to make any Monthly Advances which it
determines would be nonrecoverable. Such
Monthly Advances by the Servicer are
reimbursable to the Servicer subject to
certain conditions and restrictions. See
"DESCRIPTION OF THE CERTIFICATES -
Advances" herein.
PREPAYMENT INTEREST SHORTFALLS: Not later than the second Business Day
prior to the related Distribution Date,
the Servicer is required to remit to the
Trustee, up to the amount otherwise
payable to the Servicer as its aggregate
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Servicing Fee for the related Due
Period, without any right of
reimbursement, an amount equal to, with
respect to each Home Equity Loan as to
which a principal prepayment in full was
received from the Mortgagor during the
related Due Period, the excess, if any,
of 30 days' interest on the Principal
Balance of such Home Equity Loan at the
Loan Rate (or at such lower rate as may
be in effect for such Home Equity Loan
because of application of the Soldiers'
and Sailors' Civil Relief Act of 1940,
as amended (the "Civil Relief Act"), or
as a result of any reduction of the
monthly payment due on such Home Equity
Loan as a result of a bankruptcy
proceeding (a "Debt Service Reduction"))
minus the Servicing Fee for such Home
Equity Loan over the amount of interest
actually paid by the related Mortgagor
in connection with such principal
prepayment (with respect to all such
Home Equity Loans, the "Prepayment
Interest Shortfall").
OPTIONAL TERMINATION BY THE SERVICER: On any Distribution Date on which the
aggregate of the Loan Group Balances
(the "Pool Balance") is less than 10% of
the sum of (i) the Pool Balance as of
the Cut-Off Date and (ii) the Principal
Balance of the Subsequent Home Equity
Loans as of their respective Subsequent
Cut-Off Dates, the Servicer will have
the option to purchase, in whole, the
Home Equity Loans and the REO Property,
if any, remaining in the Trust. See
"DESCRIPTION OF THE CERTIFICATES -
Termination; Retirement of the
Certificates" herein.
OPTIONAL PURCHASE OF DEFAULTED
HOME EQUITY LOANS: The Servicer has the option, but is not
obligated, to purchase from the Trust
any Home Equity Loan 90 days or more
delinquent at a purchase price equal to
the outstanding Principal Balance as of
the date of Purchase, plus the greater
of (i) all accrued and unpaid interest
on such Principal Balance and (ii) 30
days' interest on such Principal
Balance, computed at the Loan Rate, plus
all unreimbursed amounts owing to the
Certificate Insurer with interest
thereon at the rate referred to in the
Insurance Agreement. See "DESCRIPTION OF
THE CERTIFICATES - Optional Purchase of
Defaulted Home Equity Loans" herein.
CERTAIN FEDERAL TAX CONSIDERATIONS: For federal income tax purposes, two
separate elections will be made to treat
certain pools of assets of the Trust as
"real estate mortgage investment
conduits" (each a "REMIC"). The Offered
Certificates will constitute "regular
interests" in a REMIC and will be
treated as debt instruments of the REMIC
and as interests of the Trust for
federal income tax purposes with payment
terms equivalent to the terms of such
Certificates.
The Holders of the Offered Certificates
will be required to include in income
interest on such Certificates in
accordance with the accrual method of
accounting, and the Offered Certificates
may, depending in part on their issue
price, be treated as having been issued
with original issue discount for federal
income tax purposes. The rate at which
original issue discount, if any, will be
calculated is the Prepayment Ramp (as
defined herein), in the case of the
Fixed Rate Certificates, and 20% CPR (as
defined herein), in the case of the
Class A-3 Certificates. No
representation is made that the Home
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Equity Loans will prepay at that rate or
at any other rate. For further
information regarding the federal income
tax consequences of investing in the
Offered Certificates, see "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS" in
the Prospectus.
ERISA CONSIDERATIONS: Fiduciaries of employee benefit plans
subject to Title I of the Employee
Retirement Income Security Act of 1974,
as amended ("ERISA"), should consider
the ERISA fiduciary investment standards
before authorizing an investment by a
plan in the Offered Certificates. In
addition, fiduciaries of: (i) employee
benefit plans subject to Title I of
ERISA, (ii) employee benefit plans or
other retirement arrangements (including
individual retirement accounts and
certain Keogh plans) which are not
subject to ERISA, but which are subject
to Section 4975 of the Internal Revenue
Code of 1986, as amended (the "Code"),
or (iii) any entity whose underlying
assets are deemed to include plan assets
by reason of a plan or account investing
in such entity (each, a "Plan"), should
consult with their legal counsel to
determine whether an investment in the
Offered Certificates will cause the
assets of the Trust ("Trust Assets") to
be considered plan assets pursuant to
the plan asset regulations set forth in
29 C.F.R. Sec. 2510.3-101, thereby
subjecting the Plan to the prohibited
transaction rules with respect to the
Trust Assets and the Trustee and
Servicer to the fiduciary investment
standards of ERISA, or cause the excise
tax provisions of Section 4975 of the
Code to apply to the Trust Assets,
unless some exemption granted by the
Department of Labor applies to the
purchase, sale, transfer or holding of
the Offered Certificates.
The United States Department of Labor
has issued to Bear, Stearns & Co. Inc.
an individual prohibited transaction
exemption (the "Exemption") from certain
of the prohibited transaction rules of
ERISA. Although the Exemption will not
apply to the acquisition and holding of
the Offered Certificates by a Plan prior
to the expiration of the Pre-Funding
Period, it is believed that the
Exemption will so apply following the
expiration of the Pre-Funding Period.
Prospective Plan investors should
consult with their legal advisors
concerning the impact of ERISA and the
Code, the applicability of the
Exemption, and the potential
consequences in their specific
instances, prior to making an investment
in the Offered Certificates. See "ERISA
CONSIDERATIONS" in the Prospectus.
LEGAL INVESTMENT CONSIDERATIONS: The Offered Certificates will NOT
constitute "mortgage related securities"
for purposes of the Secondary Mortgage
Market Enhancement Act of 1984
("SMMEA"). Accordingly, many
institutions with legal authority to
invest in comparably rated securities
may not be legally authorized to invest
in the Offered Certificates. See "LEGAL
INVESTMENT CONSIDERATIONS" in the
Prospectus.
CERTIFICATE RATING: It is a condition to the issuance of
each Class of Offered Certificates that
they be rated in the highest rating
category by Standard & Poor's, a
division of The McGraw Hill Companies
("S&P") and Moody's (each a "Rating
Agency"). A security rating is not a
recommendation to buy, sell or hold
securities and may be subject to
revision or withdrawal at any time by
the assigning rating agency. In
addition,
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a security rating does not address or
assess the frequency or likelihood of
prepayments on the Home Equity Loans or
the degree to which such prepayments
might differ from those originally
anticipated. A rating also does not
address the possibility that holders of
the Offered Certificates might suffer a
lower than anticipated yield. See
"RATINGS" and "RISK FACTORS Certificate
Rating" herein.
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Offered Certificates.
Trust Is Only Source of Payment. The Offered Certificates do not
represent an interest in, or the obligation of, the Depositor, the Seller, the
Servicer, the Trustee or any of their respective affiliates. The Offered
Certificates will be payable solely from the Trust. There will be no recourse to
the Depositor, the Seller, the Servicer, the Trustee or any other person for any
failure to receive distributions on the Offered Certificates. Consequently,
Holders of the Offered Certificates must rely solely upon payments with respect
to the Home Equity Loans and the other assets constituting the Trust, including
any amounts available pursuant to the Policy, for the payment of principal of
and interest on such Certificates. Neither the Offered Certificates nor the Home
Equity Loans are insured or guaranteed by any government agency or
instrumentality.
Second Mortgages Include Additional Risks. Approximately 28.66% of the
Initial Home Equity Loans by aggregate Principal Balance as of the Cut-Off Date
are secured by second mortgages, which are subordinate to the rights of the
mortgagee under the senior mortgage or mortgages encumbering the related
Mortgaged Property ("First Liens"). The proceeds from any foreclosure,
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 the mortgagees under such First Liens have been satisfied in full,
including any related foreclosure costs. In addition, a junior mortgagee may not
foreclose on the Mortgaged Property securing a junior mortgage unless it
forecloses subject to the First Liens, in which case it must either pay the
entire amount due on the First Liens to the mortgagees thereof at or prior to
the foreclosure sale or undertake the obligation to make payments on the First
Liens in the event the mortgagor is in default thereunder. The Trust will not
have any source of funds to satisfy the First Liens or make payments due to the
mortgagees thereof.
Liquidation expenses with respect to defaulted home equity loans do not
vary directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted home equity loan having a small remaining principal balance as
it would in the case of a defaulted home equity loan having a larger principal
balance, the amount realized after expenses of liquidation would be smaller as a
percentage of the outstanding principal balance of the smaller home equity loan
than would be the case with a larger loan. Because the average outstanding
principal balances of the Home Equity Loans are small relative to the size of
the loans in a typical pool of conventional first mortgages, realizations net of
liquidation expenses on defaulted Home Equity Loans may also be smaller as a
percentage of the principal amount of the Home Equity Loans than would be the
case with respect to a typical pool of conventional first mortgage loans.
There are several factors that could adversely affect the value of
Mortgaged Properties such that the outstanding balance of the related Home
Equity Loan, together with any senior financing on the Mortgaged Properties,
would equal or exceed the value of the Mortgaged Properties. Among the factors
that could adversely affect the value of the Mortgaged Properties are an overall
decline in the residential real estate market in the areas in which the
Mortgaged Properties are located or a decline in the general condition of the
Mortgaged Properties as a result of failure of borrowers to maintain adequately
the Mortgaged 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 Mortgaged 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 Home Equity
Loans could be higher than those currently experienced in the mortgage lending
industry in general.
Prepayments May Fluctuate. All of the Home Equity Loans may be prepaid
in whole or in part at any time without penalty. Home equity loans, such as the
Home Equity Loans, have been originated in significant volume only during the
past few years and the Depositor is not aware of any publicly available studies
or statistics on the rate of prepayment of such loans. Generally, home equity
loans are not viewed by borrowers as permanent financing. Accordingly, the Home
Equity Loans may experience a higher rate of prepayment than traditional loans.
The prepayment experience of the Trust may be affected by a wide variety of
factors, including general economic conditions, interest rates, the availability
of alternative financing and homeowner mobility. In addition, all of the Home
Equity Loans contain due-on-sale provisions and the Servicer is obligated to
enforce such provisions unless such enforcement is not permitted by applicable
law.
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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
Home Equity Loans, 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.
Payments on the Home Equity Loans May Vary. When a principal prepayment
in full is made on a Home Equity Loan, the Mortgagor is charged interest only up
to the date of such prepayment, instead of for a full month. In addition, all of
the fixed rate Home Equity Loans are Simple Interest Loans pursuant to which
interest is computed and charged to the Mortgagor on the outstanding principal
balance of the related Home Equity Loan based on the number of days elapsed
between the date through which interest was last paid on the Home Equity Loan to
receipt of the Mortgagor's most current payment, and the portions of each
monthly payment that are allocated to interest and principal are adjusted based
on the actual amount of interest charged on such basis. Consequently, if less
than a full month has elapsed between the interest paid to date and the next
payment on a Simple Interest Loan, the amount of interest actually paid by the
Mortgagor will be less than a full month's interest on the principal balance of
such Home Equity Loan. Conversely, if more than a full month has elapsed between
payments on a Simple Interest Loan, the amount of interest actually paid by the
Mortgagor will be greater than a full month's interest on the principal balance
of such Home Equity Loan.
Each ARM will be serviced as an Actuarial Loan. Actuarial Loans Provide
that interest is charged to each related Mortgagor, and payments are due
therefrom, as of a scheduled day in each month that is fixed at the time of
origination. Scheduled monthly payments by a Mortgagor on an Actuarial Loan
either earlier or later than the scheduled due date therefor will not affect the
amortization schedule or the relative application of such payment to principal
and interest.
Balloon Loans May Affect Distributions. Approximately 30.21% of the
Initial Home Equity Loans in Loan Group One by aggregate Principal Balance as of
the Cut-Off Date have original terms to stated maturity of up to 15 years and
amortization schedules of up to 30 years ("Balloon Loans"), leaving a
substantial payment due at the stated maturity (each, a "Balloon Payment"). The
ability of a Mortgagor to repay a Balloon Loan at maturity frequently will
depend on such Mortgagor's ability to refinance the Balloon Loan. The ability of
a Mortgagor to refinance such a Balloon Loan will be affected by a number of
factors, including the level of available mortgage rates at the time, the value
of the related Mortgaged Property, the Mortgagor's equity in the related
Mortgaged Property, the financial condition of the Mortgagor, the tax laws and
general economic conditions at the time.
Although a low interest rate environment may facilitate the refinancing
of a Balloon Payment, the receipt and reinvestment by Certificateholders of the
proceeds in such an environment may produce a lower return than that previously
received in respect of the related Home Equity Loan. Conversely, a high interest
rate environment may make it more difficult for the Mortgagor to accomplish a
refinancing and may result in delinquencies or defaults. None of the Depositor,
the Seller, the Servicer or the Trustee will be obligated to provide funds to
refinance any Home Equity Loan.
Pre-Funding May Adversely Affect Investment. If the principal amount of
eligible Home Equity Loans available during the Pre-Funding Period is less than
100% of the original Pre-Funded Amount, the Depositor will have insufficient
Home Equity Loans to sell to the Trust on the Subsequent Transfer Dates, thereby
resulting in prepayments of principal to Holders of one or more Classes of
Offered Certificates as described herein. Any such principal prepayment may
adversely affect the yield to maturity of the applicable Class or Classes of
Offered Certificates. Since prevailing interest rates are subject to
fluctuation, there can be no assurance that investors will be able to reinvest
such a prepayment at yields equaling or exceeding the yields on the related
Offered Certificates. It is possible that the yield on any such reinvestment
will be lower, and may be significantly lower, than the yield on the related
Offered Certificates.
Each Subsequent Home Equity Loan must satisfy the eligibility criteria
set forth in the Agreement. However, Subsequent Home Equity Loans may be
originated or purchased by the Seller using credit criteria different from those
which were applied to the Initial Home Equity Loans and may be of a lesser
credit quality. Therefore, following the transfer of Subsequent Home Equity
Loans to a Loan Group, the aggregate characteristics of the Home Equity Loans
then held by the Trust as part of such Loan Group may vary from those of the
Initial Home Equity Loans in such Loan Group.
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The ability of the Trust to invest in Subsequent Home Equity Loans is
largely dependent upon whether the Seller is able to originate or purchase home
equity loans which meet the requirements for transfer to the Trust under the
Purchase Agreement and the Agreement. The ability of the Seller to originate or
purchase such mortgage loans is affected by a variety of social and economic
factors. Economic factors include interest rates, unemployment levels, the rate
of inflation and consumer perception of economic conditions generally.
Underwriting Standards May Affect Performance. As described herein,
Champion's underwriting standards generally are less stringent than those of
FNMA or FHLMC with respect to a borrower's credit history and in certain other
respects. A borrower's past credit history may not preclude Champion from making
a loan, however, it will reduce the size (and consequently the Combined
Loan-to-Value Ratio) of the loan that Champion is willing to make. As a result
of this approach to underwriting, the Home Equity Loans in the Trust may
experience higher rates of delinquencies, defaults and foreclosures than
mortgage loans underwritten in a more traditional manner.
The Servicer Has Limited History. Prior to June 1993, Champion
conducted its servicing operations through its loan servicing department. These
operations primarily involved servicing home equity loans funded by Champion
pending sale to third parties on a servicing-released basis and servicing home
equity loans retained by Champion. In June 1993, these operations were
incorporated into a separate corporation and, as of December 31, 1995, the
Servicer's servicing portfolio was approximately $272,190,000. The lack of a
significant servicing portfolio may make it more difficult to assess the likely
delinquency and loss experience on the Home Equity Loans. The Back-Up Servicer
will be obligated pursuant to the Agreement to maintain current servicing
records for the Home Equity Loans and to recalculate certain servicing
information furnished by the Servicer to the Trustee on a monthly basis. See
"THE SELLER AND THE SERVICER," "CHAMPION'S HOME EQUITY LOAN PROGRAM" and
"DESCRIPTION OF THE CERTIFICATES - Back-Up Servicer" herein.
Geographic Concentration May Affect Performance. Approximately 80.30%
and 72.74% (by aggregate Principal Balance as of the Cut-Off Date) of the
Initial Home Equity Loans in Loan Group One and Loan Group Two, respectively,
are secured by Mortgaged Properties located in New Jersey and New York. To the
extent that the Northeast region has experienced or may experience in the future
weaker economic conditions or greater rates of decline in real estate values
than the United States generally, such a concentration of the Home Equity Loans
may be expected to exacerbate the foregoing risks. The Depositor can neither
quantify the impact of any recent property value declines on the Home Equity
Loans nor predict whether, to what extent or for how long such declines may
continue.
Book-Entry Registration May Affect Liquidity. Issuance of the Offered
Certificates in book-entry form may reduce the liquidity of such Certificates in
the secondary trading market since investors may be unwilling to purchase
Offered Certificates for which they cannot obtain physical certificates.
Since transactions in the Offered Certificates will, in most cases, be
able to be effected only through Participants, Indirect Participants and certain
banks, the ability of a Certificate Owner (defined herein) to pledge an Offered
Certificate to persons or entities that do not participate in the DTC system, or
otherwise to take actions in respect of such certificate, may be limited due to
lack of a physical certificate representing the Certificates.
Certificate Owners may experience some delay in their receipt of
distributions of interest on and principal of the Offered Certificates since
distributions will be required to be forwarded by the Trustee to DTC and DTC
will be required to credit such distributions to the accounts of its
Participants which thereafter will be required to credit them to the accounts of
the applicable Certificate Owners either directly or indirect through Indirect
Participants. See "DESCRIPTION OF THE CERTIFICATES - Book-Entry Registration"
herein.
Certificate Rating Is Not A Recommendation. The rating of the Offered
Certificates will depend primarily on an assessment by the Rating Agencies of
the Home Equity Loans and upon the claims-paying ability of the Certificate
Insurer. Any reduction in a rating assigned to the claims-paying ability of the
Certificate Insurer below the rating initially given to the Offered Certificates
may result in a reduction in the rating of such Certificates. The rating by the
Rating Agencies of the Offered Certificates is not a recommendation to purchase,
hold or sell the Offered Certificates, inasmuch as such rating does not comment
as to the market price or suitability for a particular investor. There is no
assurance that the ratings will remain in place for any given period of time or
that the ratings will not be lowered or withdrawn by the Rating Agencies.
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DESCRIPTION OF THE HOME EQUITY LOANS
GENERAL
The Initial Home Equity Loans were, and any Subsequent Home Equity
Loans will be, originated by the Seller or an affiliate in accordance with the
policies set forth under "CHAMPION'S HOME EQUITY LOAN PROGRAM." All of the
Initial Home Equity Loans are, and all Subsequent Home Equity Loans will be,
home equity loans bearing fixed or adjustable interest rates (the "Loan Rates")
and evidenced by Promissory notes (the "Mortgage Notes") secured by deeds of
trust, security deeds or mortgages on Mortgaged Properties.
The Home Equity Loans are secured by either first or second mortgages
or deeds of trust on Mortgaged Properties located in seven states and the
District of Columbia. The Mortgaged Properties securing the Home Equity Loans
consist primarily of one- to four- family residential properties. The Mortgaged
Properties may be owner-occupied and non-owner occupied (which includes second
and vacation homes). The Home Equity Loans will be divided into two groups
(each, a "Loan Group"): "Loan Group One" and "Loan Group Two."
Each Home Equity Loan (including Subsequent Home Equity Loans, if any)
in Loan Group One will be a Simple Interest Loan bearing interest at a fixed
rate. Certain of the Home Equity Loans in Loan Group One will have original
terms to stated maturity of up to 15 years and amortization schedules of up to
30 years ("Balloon Loans"), leaving a substantial payment due at the stated
maturity (each, a "Balloon Payment").
Each Home Equity Loan (including Subsequent Home Equity Loans, if any)
in Loan Group Two will bear interest at an adjustable rate and will be serviced
as an Actuarial Loan. The Loan Rate borne by each ARM is subject to adjustment
annually on the date set forth in the related Mortgage Note (each, a "Change
Date") to equal the sum of (i) the weekly average yield on U.S. Treasury
securities adjusted to a constant maturity of one year, as made available by the
Federal Reserve Board as of the date 45 days before the applicable Change Date
(the "Index") and (ii) the number of basis points set forth in such Mortgage
Note (the "Gross Margin"), subject to rounding and to the effects of the
Periodic Cap, the applicable Lifetime Cap and the applicable Lifetime Floor. The
"Periodic Cap" limits changes in the Loan Rate for each ARM on each Change Date
to 200 basis points. The "Lifetime Cap" is the maximum Loan Rate that may be
borne by an ARM over its life and is equal to the sum of (i) the initial Loan
Rate for such ARM and (ii) 600 basis points. The "Lifetime Floor" is the minimum
Loan Rate that may be borne by an ARM over its life and is equal to the initial
Loan Rate for such ARM. The ARMs do not provide for negative amortization.
STATISTICAL INFORMATION
Set forth below is certain summary statistical information regarding
the Initial Home Equity Loans expected to be included in each Loan Group as of
the Closing Date. All such information is approximate and is given as of the
Cut-Off Date. More detailed statistical information is set forth in Appendix A.
Prior to the Closing Date, Home Equity Loans may be removed from either Loan
Group and other Home Equity Loans may be substituted therefor. In addition, Home
Equity Loans may be prepaid at any time. As a result, certain characteristics of
the Home Equity Loans in one or both Loan Groups may vary from the
characteristics set forth below and in Appendix A as of the Cut-Off Date.
LOAN GROUP ONE. With respect to the Initial Home Equity Loans in Loan
Group One as of the Cut-Off Date: the Principal Balances ranged from $941 to
$359,480; the average Principal Balance was $48,277; the Loan Rates ranged from
7.750% to 20.990%; the weighted average Loan Rate was 11.168%; the original
Combined Loan-to-Value Ratios ranged from 4.25% to 80.09%; the weighted average
original Combined Loan-to-Value Ratio was 58.00%; the remaining terms to stated
maturity of the Balloon Loans ranged from 157 months to 180 months; the weighted
average remaining term to stated maturity of the Balloon Loans was 178.13
months; the remaining terms to stated maturity of the non-Balloon Loans ranged
from 1 month to 360 months, the weighted average remaining term to stated
maturity of the non-Balloon Loans was 186.12 months; approximately 30.21 % of
the Home Equity Loans are Balloon Loans; the number of months since funding
ranged from 0 months to 68 months; the weighted average number of months since
funding was 5.97 months; and no more than 1.05% of the Home Equity Loans will be
secured by Mortgaged Properties located in any one postal zip code area.
LOAN GROUP TWO. With respect to the Initial Home Equity Loans in Loan
Group Two as of the Cut-Off Date: the Principal Balances ranged from $9,956 to
$310,776; the average Principal Balance was $68,459; the current Loan Rates
ranged from 7.500% to 12.375%; the weighted average current Loan Rate was
9.200%; the original Combined
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<PAGE> 19
Loan-to-Value Ratios ranged from 9.17% to 80.00%; the weighted average original
Combined Loan-to-Value Ratio was 69.04%; the remaining terms to stated maturity
ranged from 117 months to 360 months; the weighted average remaining term to
stated maturity was 298.48 months; the number of months since funding ranged
from 0 months to 5 months; the weighted average number of months since funding
was 2.47 months; the Gross Margins ranged from 4.350% to 8.875%; the weighted
average Gross Margin was 5.699%; the Lifetime Floors ranged from 7.500% to
12.375%; the weighted average Lifetime Floor was 9.200%; the Lifetime Caps
ranged from 13.500% to 18.375%; the weighted average Lifetime Cap was 15.200%;
the weighted average number of months to the next Change Date was 10.63 months;
and no more than 1.38% of the Home Equity Loans are secured by Mortgaged
Properties located in any one postal zip code area.
SUBSEQUENT LOANS
The Depositor expects to sell Subsequent Home Equity Loans to the Trust
during the Pre-Funding Period for inclusion in the applicable Loan Group. The
purchase price for each Subsequent Home Equity Loan will equal the outstanding
principal balance thereof as of the opening of business on the first day of the
month in which such Subsequent Home Equity Loan is transferred to the Trust
(each, a "Subsequent Cut-Off Date") and will be paid by withdrawal of funds on
deposit in the Pre-Funding Account allocated to the applicable Loan Group. The
Subsequent Home Equity Loans will have been originated more recently than, and
may have other characteristics which differ from, the Initial Home Equity Loans
in each Loan Group. As a result, following any sale of Subsequent Home Equity
Loans to the Trust, the description of the Loan Groups set forth above and in
Appendix A may not accurately reflect the characteristics of all of the Initial
Home Equity Loans and Subsequent Home Equity Loans in such Loan Groups. However,
the Subsequent Home Equity Loans must conform to the representations and
warranties set forth in the Purchase Agreement and the Agreement. Following the
end of the Pre-Funding Period, the Depositor expects that the Home Equity Loans
(including Subsequent Home Equity Loans) in Loan Group One and Loan Group Two
will have the following approximate characteristics.
<TABLE>
<S> <C>
LOAN GROUP ONE
Average Unpaid Principal Balance ........................no more than $70,000
Weighted Average Loan Rate ..............................at least 10.000%
Weighted Average Remaining Term to Stated
Maturity
Balloon......................................no more than 180 months
Non-Balloon..................................no more than 190 months
Weighted average Original Combined Loan-To-Value
Ratio .............................................no more than 70.00%
Weighted Average Loan Age ...............................0 months - 1 month
Loans Secured by Primary Residences .....................at least 90.00%
Single Family Detached ..................................at least 70.00%
LOAN GROUP TWO
Average Unpaid Principal Balance ........................no more than $90,000
Weighted Average Initial Loan Rate ......................at least 8.500%
Weighted Average Remaining Term to Stated
Maturity .............................................no more than 300 months
Weighted Average Original Combined Loan-To-Value
Ratio .............................................no more than 70.00%
Weighted Average Loan Age ...............................0 months - 1 month
Weighted Average Gross Margin ...........................at least 5.00%
Loans Secured by Primary Residences .....................at least 90.00%
Single Family Detached ..................................at least 70.00%
</TABLE>
S-19
<PAGE> 20
THE SELLER AND THE SERVICER
Champion Mortgage Co., Inc. ("Champion" or "Seller", as the context
requires) is a wholly owned subsidiary of Key Bank USA, National Association, a
national banking association ("Key Bank USA"). Key Bank USA is engaged in
banking and related activities. Key Bank USA is a wholly owned subsidiary of
KeyCorp, an Ohio financial services holding company headquartered in Cleveland,
Ohio ("KeyCorp"). KeyCorp completed the acquisition of Champion effective August
29, 1997 in a transaction structured as a tax-free exchange and accounted for as
a purchase.
Prior to the acquisition of Champion by KeyCorp, Champion conducted its
various business activities directly and through a number of affiliated
companies. Immediately prior to the acquisition of Champion, all affiliated
companies, including the Servicer, were consolidated into Champion Mortgage Co.,
Inc. Champion is a mortgage banking company which originates non-conforming home
equity loans secured by first or second liens primarily on one- to four-family
residential properties.
Champion expanded its operations in 1988. From October 1, 1988 to March
31, 1998, Champion has funded approximately $2.59 billion of mortgage loans. For
the fiscal years ended September 30, 1997, September 30, 1996 and September 30,
1995, Champion funded $580.5 million, $501.6 million and $296.7 million,
respectively, of mortgage loans. For the six months ended March 31, 1998,
Champion funded approximately $423.2 million of mortgage loans. Champion
discontinued its origination of conforming first mortgage loans as of May 1994.
During the fiscal year ended September 30, 1997, approximately 67% and 33% of
Champion's originations were secured by first liens and second liens,
respectively. During the six months ended March 31, 1998, approximately 74% and
26% of Champion's originations were secured by first liens and second liens,
respectively.
Substantially all of Champion's mortgage loans have been originated
directly by Champion through its own employees located at its corporate
headquarters or at any of its sixteen branch offices located in New Jersey, New
York, Pennsylvania, Rhode Island and Maryland. Champion makes extensive use of
advertising, including direct mailing, to locate potential customers and
generally conducts the application and loan approval process in person. As of
March 31, 1998, Champion was originating mortgage loans secured by residential
properties in New Jersey, New York, Connecticut, Pennsylvania, Delaware,
Maryland, Virginia, Rhode Island, the District of Columbia, Colorado and
Illinois.
Until June 1993, Champion sold the majority of its loan production to
institutional investors pursuant to bulk purchase or flow-purchase agreements.
The mortgage loans were sold at a premium, on a rate participation basis or
based on a combination of both methods. All mortgage loans were sold on a
servicing released, non-recourse basis. In June 1993, Champion began to sell
mortgage loans on a servicing retained basis. In September 1994, Champion began
securitizing and servicing mortgage loans in various trusts established in
connection with such securitizations. As of March 31, 1998, Champion was
servicing approximately $1.1 billion of mortgage loans for itself and others.
As of the end of March 1998, Champion had approximately 533 employees.
Champion occupies 70,101 square feet in a four story building located at 20
Waterview Boulevard, Parsippany, New Jersey 07054. Its telephone number is (973)
402-7700.
CHAMPION'S HOME EQUITY LOAN PROGRAM
GENERAL
Champion's principal product is a closed end, fixed rate, fully
amortizing mortgage loan with an original term to maturity of 15 years. Champion
also offers fixed rate fully-amortizing mortgage loans with original terms to
maturity of 5, 7, 10, 20 and 30 years and fixed rate mortgage loans with
original terms to maturity of 5 or 7 years and an amortization schedule of up to
15 years or an original term to maturity of up to 15 years and an amortization
schedule of up to 30 years. Champion recently began offering closed end,
adjustable rate, fully-amortizing mortgage loans with original terms to maturity
of either 15 or 30 years. Each adjustable rate mortgage loan provides for annual
adjustments based on changes in the level of the Index, subject to rounding, the
Periodic Cap and the applicable Lifetime Cap and the applicable Lifetime Floor.
In most instances, Champion's mortgage loans are non-purchase money
mortgages secured by first or second liens on owner-occupied one- to four-family
residential properties, including townhouses and individual units in
condominiums and planned unit developments. In the fiscal year ended September
30, 1995 and the three months ended
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<PAGE> 21
December 31, 1995, approximately 95.4% and 95.2%, respectively, of the mortgage
loans originated by Champion were secured by owner occupied residences. Champion
also makes mortgage loans secured by first or second liens on residential rental
properties or vacation properties.
All of Champion's fixed rate mortgage loans are Simple Interest Loans.
A Simple Interest Loan provides for a series of substantially equal monthly
payments which, if paid when due, will fully amortize the amount financed by the
scheduled maturity date. Each monthly payment includes an installment of
interest which is calculated on the basis of the outstanding principal balance
of the mortgage loan multiplied by the stated Loan Rate 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 of
which is the number of days in the annual period for which interest accrues on
such loan. As payments are received under a Simple Interest Loan, the amount
received is applied first to interest accrued to the date of payment and the
balance is applied to reduce the unpaid principal balance. Accordingly, if a
borrower pays a fixed monthly installment on a Simple Interest Loan before its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be less than it would have been
had the payment been made as scheduled, and the portion of the payment applied
to reduce the unpaid principal balance will be correspondingly greater.
Conversely, if a borrower pays the fixed monthly installment after the scheduled
due date, the portion of the payment allocable to interest will be greater, and
the amortization of the unpaid principal balance will be correspondingly less.
All of Champion's mortgage loans may be prepaid by the borrowers in
whole or in part at any time without penalty. Late charges are assessed on loans
for which payments are made after applicable grace periods established by
federal and state laws. None of Champion's mortgage loans are insured or
guaranteed by any governmental agency or instrumentality, and none are covered
by primary mortgage guaranty insurance policies.
UNDERWRITING PROCEDURES
The following is a description of the underwriting procedures
customarily employed by Champion with respect to fixed rate and adjustable rate
mortgage loans secured by first or second liens primarily on one- to four-
family residential properties. Champion's underwriting process, which is
centralized at its corporate headquarters, is intended to assess the applicant's
credit standing and repayment ability and the value and adequacy of the real
property security as collateral for the proposed loan. Champion considers itself
to be a credit lender as opposed to an equity lender, focusing primarily on the
borrower's ability and willingness to repay, and only secondarily on the
potential value of the collateral upon foreclosure, in determining whether or
not to make a mortgage loan. As of December 31, 1995, Champion employed 68 loan
officers and 13 underwriters. Underwriters are primarily promoted from within
Champion on a selective basis in order to maintain the quality and integrity of
Champion's business philosophy. All underwriters receive fixed annual salaries
which are not based on underwriting volume.
The application process generally is conducted by telephone. Each
applicant for a mortgage loan is required to supply the information necessary to
complete an application which lists the applicant's liabilities, income, credit
and employment history and other demographic and personal information. If the
information in the loan application demonstrates that the applicant has
sufficient income and that there is sufficient equity in the real property to
justify making a mortgage loan, the loan officer will conduct a further credit
investigation of the applicant. This investigation includes obtaining and
reviewing an independent credit bureau report on the credit history of the
applicant in order to evaluate the applicant's ability to repay. The credit
report typically contains information relating to such matters as credit history
with local merchants and lenders, installment debt payments and any record of
defaults, bankruptcy, collateral repossessions, suits or judgments. Any adverse
information contained in the credit report must be acceptable (and if requested,
explained) to the loan officer.
Based on the information obtained from the applicant, the loan officer
advises the applicant of the loan program for which the applicant qualifies.
Upon gaining the agreement of the applicant, the loan officer submits the
application to the underwriting department for further review. An underwriter
will then evaluate the submission in accordance with certain established
guidelines. The underwriter will either approve, reject, or amend the loan
request based on the information submitted in the application. If the applicant
accepts the amendment, the underwriter will approve the amended loan
application.
The application is then further processed to verify the accuracy of the
information therein. Verification may take the form of written or verbal
communication with the applicant's employer or recent pay stubs and current W-2
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<PAGE> 22
forms supplied by the applicant. Income tax returns also may be obtained and
reviewed. Self-employed borrowers generally are required to have been in
business for at least two years and must provide signed federal income tax
returns, including all schedules thereto, for the past two tax years, and may be
required to furnish personal and business financial statements if deemed
necessary by the underwriter.
In certain circumstances, Champion may not be able to verify the income
claimed on the application but is able to document adequate cashflow to support
the loan for which the application was made. In such circumstances, the
permitted combined loan-to-value ratio will be less than otherwise would be the
case. Approximately 29.68% (by aggregate Principal Balance as of the Cut-Off
Date) of the Initial Home Equity Loans in Loan Group One were underwritten using
such alternative approach to income verification. None of the Initial Home
Equity Loans in Loan Group Two were so underwritten.
If there is a senior mortgage on the property to be used as security
for the mortgage loan, the loan officer also evaluates the type and outstanding
balance of the senior mortgage loan and its payment history. Champion obtains a
credit reference on the senior mortgage by using either credit bureau
information, telephone verification, the year-end senior mortgage statement,
canceled checks or written verification from the senior mortgagee.
In every instance, the property securing a loan made by Champion is
appraised and title insurance acquired before the loan is closed. Champion
requires appraisals on all properties that will secure its mortgage loans. Such
appraisals are conducted by approved, independent third-party appraisers who are
paid a fee by the applicant, regardless of whether the application for a
mortgage loan is approved. All appraisals are required to be on forms approved
by FNMA or FHLMC. Champion obtains a lender's title insurance policy or binder,
or other assurance of title customary in the relevant jurisdiction. Homeowners
insurance coverage is required on every property securing a home equity loan
originated by Champion. Necessary coverage and mortgagee clause endorsements are
acquired and monitored by the loan servicing department. Forced-placed policies
are acquired for properties in which the borrower has allowed coverage to lapse.
After obtaining all applicable employment, credit and property
information, Champion determines whether sufficient unencumbered equity in the
property exists and whether the prospective borrower has sufficient monthly
income available to support the payments of principal and interest on the
mortgage loan in addition to any senior mortgage loan payments (including any
escrows for property taxes and hazard insurance premiums) and other monthly
credit obligations. Champion applies the "debt-to-gross income ratio" which is
the ratio of the borrower's total monthly payments on all outstanding debt
(including the new loan) to the borrower's gross verifiable monthly income. The
debt- to-gross income ratio generally may not exceed 45%. For ARMs, such ratios
generally are calculated using the "fully indexed" rate (i.e., the sum of the
applicable Index and the related Gross Margin). In addition, the maximum
Combined Loan-to-Value Ratio of any mortgage loan may not exceed 90% and may be
reduced depending on a number of factors, including the applicant's credit
history and employment status.
Any exceptions to the underwriting policies may be approved by the
manager of the underwriting department or a member of the Goryeb family. The
factors considered when determining if an exception to the general underwriting
standards should be made include: the quality of the property, how long the
borrower has owned the property, the amount of disposable income, the type and
length of employment, the credit history, the current and pending debt
obligations, the payment habits and the status of past and currently existing
mortgages.
When an application is approved, a mortgage loan is completed by
signing the applicable loan documents, including a promissory note and mortgage.
All mortgage loans are closed by approved attorneys. Following the three
business day rescission period required by the federal Truth-in-Lending Act, a
mortgage loan is fully funded. Scheduled repayment of principal and interest on
such loan generally begins one month from the date interest starts to accrue.
After a mortgage loan is underwritten, approved and funded, the loan package is
reviewed by an employee.
REFINANCING POLICY
Where Champion believes that borrowers having existing loans with
Champion are likely to refinance such loans due to interest rate changes or
other reasons, Champion actively attempts to retain such borrowers through
solicitations of such borrowers to refinance with Champion. Such refinancings
generate fee and servicing income for Champion. Since the solicited borrowers
may refinance their existing loans in any case, Champion believes that this
practice will be unlikely to affect the prepayment experience of the mortgage
loans in a material respect. Champion
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<PAGE> 23
also has solicited its borrowers who are in good standing to apply for
additional loans, consistent with its origination standards where deemed
appropriate.
SERVICING OF HOME EQUITY LOANS
The Servicer has established standard policies for the servicing and
collection of the mortgage loans. Servicing includes, but is not limited to,
post-origination loan processing, customer service, collections, remittance
processing and liquidations.
The Servicer sends a monthly statement to each of its borrowers.
Collection procedures vary somewhat depending on whether a late payment is the
first payment due under the mortgage loan. If the first payment is not received
on or prior to the due date, an initial phone call is made on the first business
day after the due date. Phone calls continue on a daily basis until contact is
made. A "Friendly Reminder Letter" is sent on the second business day after the
due date. If no contact is made with the borrower by the 10th day after the due
date, a "Pre-foreclosure Letter" is sent, and a qualified outside agency is used
to inspect the property. On the 20th day after a first payment default a Notice
of Default is sent to the borrower. This letter indicates an intent to
accelerate the mortgage loan if satisfactory arrangements are not made within
ten days.
If the delinquency relates to a due date other than the first due date,
a Friendly Reminder Letter is sent on the second business day after the due
date. On the fifth day after the due date, telephone calls to the borrower begin
and telephone calls continue on a daily basis until payment is received or
contact is made. In addition, a series of mailings is made depending on the
customer's payment history. On the 20th day of delinquency a Notice of Default
is sent. A qualified outside agency is used to conduct an interview with the
borrower and the property is inspected.
Accounts which are 32 days past due without a specific arrangement for
repayment will be sent a Notice of Intent to Foreclosure which gives the
customer five days in which to respond. On the 37th day of delinquency, a
determination whether to foreclose is made. If the Servicer decides to
foreclose, the necessary documentation is sent to an approved attorney who then
sends the borrower an acceleration letter allowing the borrower 30 days to
reinstate the mortgage. When foreclosure proceedings are initiated, a third
party appraiser completes a drive-by evaluation of the property and obtains
comparable sales prices and listings in the area. In addition, homeowner's
insurance is verified and the status of senior mortgages and property taxes is
checked. Subject to applicable state law, all legal expenses are assessed to the
account and become the responsibility of the borrower.
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. The Servicer will decide that liquidation is the appropriate
course of action only if a delinquency cannot otherwise be cured. 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 a deed in lieu of foreclosure.
Servicing and collection practices may change over time in accordance
with, among other things, the Servicer's business judgment, changes in the
portfolio and applicable laws and regulations. Any realization from the sale of
foreclosed property is taken as a recovery. After the Servicer acquires title to
a mortgaged property by foreclosure or deed in lieu of foreclosure, an approved
realtor is selected to list and advertise the property.
The Servicer may not foreclose on the property securing a junior
mortgage loan unless it forecloses subject to all senior mortgages. If any
senior mortgage loan is in default after the Servicer has initiated its
foreclosure actions, the Servicer may advance funds to keep such senior mortgage
loan current until such time as the Servicer satisfies such senior mortgage
loan. Such amounts are added to the balance of the mortgage loan. In the event
that foreclosure proceedings have been instituted on any senior mortgage prior
to the initiation of the Servicer's foreclosure action, the Servicer will either
satisfy the senior mortgage loan at the time of the foreclosure sale or take
other action to protect its interest in the related property.
DELINQUENCY AND LOSS EXPERIENCE
As described above under "THE SELLER AND SERVICER," Champion
historically has sold the majority of its loan production on a
servicing-released basis. Such mortgage loans typically are sold within 30 to 60
days after funding and are serviced by the Servicer pending completion of the
sale. In addition, the Servicer services mortgage
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<PAGE> 24
loans retained by Champion. Champion has no reliable delinquency or loss
information with respect to the mortgage loans it has sold. Set forth below is
the delinquency and loss experience on the mortgage loans serviced by the
Servicer (and prior to formation of the Servicer, by the Seller) for the periods
and at the dates indicated.
<TABLE>
<CAPTION>
DELINQUENCY EXPERIENCE
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDING
YEAR ENDING SEPTEMBER 30, DECEMBER 31,
-------------------------- ------------
1993 1994 1995 1994 1995
------ ------ ------ ------ ----
<S> <C> <C> <C> <C> <C>
Number of loans ............................ 745 1588 4416 2181 5319
Dollar amount of loans ..................... $ 36,214 $ 75,916 $ 214,860 $ 102,468 $ 272,190
Delinquency Period
30-59 days
% of number of loans (1) ............... 1.07% 0.12% 1.18% 0.56% 1.10%
% of dollar amount of loans (2) ........ 0.42% 0.07% 1.12% 0.43% 0.85%
60-89 days
% of number of loans (1) ............... 0.13% 0.06% 0.25% 0.05% 0.21%
% of dollar amount of loans (2) ........ 0.85% 0.05% 0.16% 0.02% 0.28%
90 days and over (3)
% of number of loans (1) ............... 0.94% 0.00% 0.38% 0.05% 0.51%
% of dollar amount of loans (2) ........ 0.76% 0.00% 0.46% 0.02% 0.52%
Foreclosed Properties
% of number of loans (1) ............... 0.67% 0.00% 0.21% 0.05% 0.27%
% of dollar amount of loans (2) ........ 0.56% 0.00% 0.30% 0.02% 0.30%
Total (3)
% of number of loans (1) ............... 2.14% 0.18% 1.81% 0.66% 1.82%
% of dollar amount of loans (2) ........ 1.26% 0.12% 1.74% 0.47% 1.65%
<FN>
- -----------
(1) The number of delinquent loans as a percentage of the total "Number of loans" as of the date indicated.
(2) The dollar amount of delinquent loans as a percentage of the total "Dollar amount of loans" as of date indicated.
(3) Includes foreclosures and REO.
</TABLE>
<TABLE>
<CAPTION>
LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDING
YEAR ENDING SEPTEMBER 30, DECEMBER 31,
--------------------------------- ----------------------
1993 1994 1995 1994 1995
----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C>
Average dollar amount of loans outstanding
during period ........................................ $25,765 $43,374 $144,721 $94,091 $253,110
Net Losses (1) ....................................... $ 199 $ 146 $ 145 $ 1 $ 11
Net Losses as a percentage of average amount
outstanding .......................................... 0.77% 0.34% 0.10% 0.00%(2) 0.02%(2)
<FN>
- ---------------------
(1) "Net Losses" means Gross Losses minus Recoveries.
(2) Annualized.
</TABLE>
The delinquency and loss experience set forth above represents the
experience with respect to only a portion of Champion's loan production for the
periods indicated. In addition, because the majority of Champion's loan
production typically is sold within 30 to 60 days after funding, many of the
mortgage loans serviced by the Servicer are not serviced long enough for such
mortgage loans to give rise to some or all of the periods of delinquency or loss
reflected in the tables above. In the absence of such sales, the delinquency and
loss experience reflected in the above tables could be substantially different.
In addition, Champion only began originating ARMs in September, 1994. Champion
has no meaningful basis on which to assess the possible delinquency and loss
experience of the ARMs. The delinquencies and losses on the ARMs could be
significantly higher than those on Champion's fixed rate Home Equity
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<PAGE> 25
Loans. Until such time as Champion develops a meaningful servicing portfolio,
the reported delinquency and loss experience is unlikely to have any predictive
value with respect to the delinquency and loss experience of the Home Equity
Loans. As a result, it is unlikely that the delinquency and loss experience on
the Home Equity Loans will be comparable to that reported above.
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The rate of principal payments on a Class of Offered Certificates, the
aggregate amount of distributions on such Certificates and the yield to maturity
of such Certificates will be related to the rate and timing of payments of
principal on the Home Equity Loans in the related Loan Group. The rate of
principal payments on the Home Equity Loans will in turn be affected by the
amortization schedules of the Home Equity Loans (including, in the case of ARMs,
changes thereto to accommodate changes in the Loan Rate) and by the rate of
principal prepayments (including for this purpose prepayments resulting from
refinancing, liquidations of the Home Equity Loans due to defaults, casualties,
condemnations and repurchases by the Seller or purchases by the Servicer). The
Home Equity Loans may be prepaid by the Mortgagors at any time without a
prepayment penalty.
Prepayments, liquidations and purchases of the Home Equity Loans
(including any optional purchase by the Servicer of a defaulted Home Equity Loan
and any optional purchase of the remaining Home Equity Loans in connection with
the termination of the Trust, in each case as described herein) will result in
distributions on the related Class or Classes of Offered Certificates of
principal amounts which would otherwise be distributed over the remaining terms
of the Home Equity Loans. In addition, any Pre-Funded Amount allocated to a Loan
Group remaining at the end of the Pre-Funding Period will be distributed as a
prepayment of the related Class or Classes of Offered Certificates. Since the
rate of payment of principal of the Home Equity Loans will depend on future
events and a variety of factors, no assurance can be given as to such rate or
the rate of principal prepayments. The extent to which the yield to maturity of
an Offered Certificate may vary from the anticipated yield will depend upon the
degree to which such Certificate is purchased at a discount or premium.
The prepayment experience on non-conventional home equity loans may
differ from that on conventional first mortgage loans, primarily due to the
credit quality of the typical borrower. Because the credit histories of many
home equity borrowers may preclude them from other traditional sources of
financing, such borrowers may be less likely to refinance due to a decline in
market interest rates. Non-conventional home equity loans may experience more
prepayments in a rising interest rate environment as the borrowers' finances are
stressed to the point of default.
The rate of prepayments on the Home Equity Loans cannot be predicted.
Home equity loans such as the Home Equity Loans have been originated in
significant volume only during the past few years and the Depositor is not aware
of any publicly available studies or statistics on the rate of prepayment of
such Home Equity Loans. Generally, home equity loans are not viewed by borrowers
as permanent financing. Accordingly, the Home Equity Loans may experience a
higher rate of prepayment than traditional first mortgage loans. The prepayment
experience of the Trust with respect to the Home Equity Loans may be affected by
a wide variety of factors, including economic conditions, prevailing interest
rate levels, the availability of alternative financing and homeowner mobility
and changes affecting the deductibility for Federal income tax purposes of
interest payments on home equity loans. All of the Home Equity Loans contain
"due-on-sale" provisions, and the Servicer is required by the Agreement to
enforce such provisions, unless such enforcement is not permitted by applicable
law. The enforcement of a "due-on-sale" provision will have the same effect as a
prepayment of the related Home Equity Loan. See "CERTAIN LEGAL ASPECTS OF LOANS
- - Due-on-Sale Clauses in Home Equity Loans" in the Prospectus. No assurance can
be given as to the level of prepayments that will be experienced by the Trust
and it can be expected that a portion of borrowers will not prepay their Home
Equity Loans to any significant degree.
OVERCOLLATERALIZATION
The overcollateralization and cross collateralization features
described herein will affect the rate and timing of principal distributions on
the Offered Certificates, and consequently the average life and yield to
maturity. On any Distribution Date on which the Overcollateralization Amount for
a Loan Group is less than the related Required Overcollateralization Amount, the
Remaining Net Excess Spread for such Loan Group, the Available Transfer Cashflow
and the Net Excess Principal will be used to reduce the Class Certificate
Balance of the related Class or Classes of
S-25
<PAGE> 26
Offered Certificates through the distribution of Additional Principal. Until
such time, if any, that the Overcollateralization Amount for a Loan Group equals
the related Required Overcollateralization Amount, there will be no Available
Transfer Cashflow or Net Excess Principal to accelerate the amortization of the
other Class or Classes of Offered Certificates. Home Equity Loans with higher
Loan Rates contribute more interest to the Excess Spread than do Home Equity
Loans with relatively lower Loan Rates. If Home Equity Loans with higher Loan
Rates were to prepay, the amount of Net Excess Spread could be reduced thereby
slowing the amortization of the Class Certificate Balance of the related Class
or Classes of Offered Certificates from the distribution of Additional
Principal.
Because the Excess Spread for a Loan Group is available to cover an
Available Funds Shortfall with respect to both the related Loan Group and the
other Loan Group, there may be no Remaining Net Excess Spread with which to make
payments of Additional Principal. Similarly, any Excess Principal for a Loan
Group will be applied to cover an Available Funds Shortfall in the other Loan
Group prior to being applied to the payment of Additional Principal for the
Class or Classes of Offered Certificates related to such other Loan Group. Thus,
the amount and timing of any distributions in respect of Additional Principal on
a Class of Offered Certificates will depend, in part, on the prepayment and loss
experience of the Home Equity Loans in the Loan Group related to the other Class
or Classes of Offered Certificates.
The application of Remaining Net Excess Spread, Available Transfer
Cashflow and Net Excess Principal to payments of Additional Principal is
intended to create overcollateralization to provide a source of additional
cashflow to cover losses on the Home Equity Loans in each Loan Group. If the
amount of losses in a particular Due Period exceeds the amount of Excess Spread
for the related Loan Group and the Net Excess Spread and Excess Principal for
the other Loan Group for the related Distribution Date, the amount in respect of
principal distributed to the related Class or Classes of Offered Certificates
will be reduced. A draw on the Policy in respect of principal will not be made
until the Loan Group Balance is less than the aggregate Class Certificate
Balance of the related Class or Classes of Offered Certificates, i.e., the
related Class or Classes of Offered Certificates are undercollateralized.
If a Required Overcollateralization Amount is allowed to step down, the
amount of Remaining Net Excess Spread and Net Excess Principal available to the
other Loan Group may be increased, and the amount of principal distributed to
the Class or Classes of Offered Certificates for which the step down occurred
will be decreased.
As a result of the interaction of the foregoing features, there may be
Distribution Dates on which Holders of the Offered Certificates receive little
or no distributions in respect of principal. Either Overcollateralization Amount
may or may not equal the related Required Overcollateralization Amount on any
Distribution Date. There can be no assurance as to whether or when either
Overcollateralization Amount may equal the related Required
Overcollateralization Amount.
ARMS
All of the Home Equity Loans in Loan Group Two are ARMs. As is the case
with fixed rate Home Equity Loans, the ARMs may be subject to a greater rate of
principal prepayments in a low interest rate environment. For example, if
prevailing interest rates were to fall, Mortgagors with ARMs may be inclined to
refinance their ARMs with a fixed rate loan to "lock in" a lower interest rate.
The existence of the Periodic Cap, Lifetime Cap and Lifetime Floor also may
affect the likelihood of prepayments resulting from refinancings. In addition,
the delinquency and loss experience on the ARMs may differ from that on the
fixed rate Home Equity Loans because the amount of the monthly payments on the
ARMs is subject to adjustment on each Change Date. If such different experience
were to occur, the prepayment experience on the Class A-3 Certificates may
differ from that on the Fixed Rate Certificates.
Certain of the ARMs were originated with initial Loan Rates that were
based on competitive conditions and did not equal the sum of the applicable
Index and the related Gross Margin. In addition, none of the ARMs has reached
its initial Change Date. As a result, the Loan Rates on such ARMs are more
likely to adjust on their first, and possibly subsequent Change Dates, subject
to the effects of the applicable Periodic Cap and Lifetime Cap. Because the
Certificate Rate for the Class A-3 Certificates is a function of the weighted
average Remittance Rate of the ARMs, limits on changes in the Loan Rates of the
ARMs may limit changes in the Certificate Rate for the Class A-3 Certificates.
Disproportionate principal payments on ARMs having Loan Rates higher
than the current Certificate Rate will also affect the yield on the Class A-3
Certificates. The yield to maturity of the Class A-3 Certificates will be lower
than
S-26
<PAGE> 27
otherwise would be the case if disproportionate principal payments (including
prepayments) are made on ARMs having Loan Rates that exceed the related
Certificate Rate.
FINAL SCHEDULED DISTRIBUTION DATE
The Final Scheduled Distribution Date for each Class of Offered
Certificates is set forth in "SUMMARY OF TERMS -- Final Scheduled Distribution
Date." The Final Scheduled Distribution Date for the Class A-1 Certificates was
determined based on the Structuring Assumptions (defined below) and the
assumption that there are no prepayments. The Final Scheduled Distribution Dates
for the Class A-2 and Class A-3 Certificates were set to equal the Distribution
Date in the 25th month following the month of the latest possible scheduled
maturity date for any of the Home Equity Loans in the related Loan Group. Since
the rate of distributions in reduction of the Class Certificate Balance of each
Class of Offered Certificates will depend on the rate of payment (including
prepayments) of the Home Equity Loans, the Class Certificate Balance of any such
Class could be reduced to zero significantly earlier or later than the
applicable Final Scheduled Distribution Date. The rate of payments on the Home
Equity Loans will depend on their particular characteristics, as well as on
prevailing interest rates from time to time and other economic factors, and no
assurance can be given as to the actual payment experience of the Home Equity
Loans.
STRUCTURING ASSUMPTIONS
The information in the decrement tables has been prepared on the basis
of the following assumed characteristics of the Home Equity Loans and the
following additional assumptions (collectively, the "Structuring Assumptions"):
(i) the Home Equity Loans prepay at the specified percentages of the Prepayment
Ramp or CPR (each as defined below), (ii) no defaults or delinquencies in the
payment by Mortgagors of principal of and interest on the Home Equity Loans are
experienced, (iii) the initial Class Certificate Balance of each Class of
Offered Certificates is as set forth on the cover page hereof, (iv) interest
accrues on each Class of Offered Certificates in each period at the applicable
Certificate Rate or initial Certificate Rate described herein, (v) distributions
in respect of the Offered Certificates are received in cash on the 25th day of
each month commencing in March 1996, (vi) the Servicer does not exercise its
option to purchase the Home Equity Loans described herein under "DESCRIPTION OF
THE CERTIFICATES - Termination: Retirement of Certificates" and "-- Optional
Purchase of Defaulted Home Equity Loans," (vii) the Offered Certificates are
purchased on February 21, 1996, (viii) scheduled payments on the Home Equity
Loans are received on the first day of each month commencing in the calendar
month following the Closing Date and are computed prior to giving effect to
prepayments received on the last day of the prior month, (ix) prepayments
represent prepayments in full of individual Home Equity Loans and are received
on the last day of each month and include 30 days' interest thereon, commencing
in the calendar month of the Closing Date, (x) the scheduled monthly payment for
each Home Equity Loan has been calculated based on the assumed Home Equity Loan
characteristics set forth in the following table such that each Home Equity Loan
will amortize in amounts sufficient to repay the balance of such Home Equity
Loan by its indicated remaining term to maturity, (xi) all of the indicated
Subsequent Home Equity Loans purchased with funds from the Pre-Funding Account
are purchased during February 1996, (xi) the Trust consists of 17 Home Equity
Loans with the characteristics set forth in the following table, (xiii) the
level of the Index remains constant at 4.79% and (xiv) the Loan Rate for each
Home Equity Loan in Loan Group Two is adjusted on its next Change Date (and on
subsequent Change Dates, if necessary) to equal the sum of (a) the assumed level
of the Index and (b) the Gross Margin (such sum being subject to the Periodic
Rate Cap). While it is assumed that each of the Home Equity Loans prepays at the
specified percentages of the Prepayment Ramp or CPR, as applicable, this is not
likely to be the case. Moreover, discrepancies will exist between the
characteristics of the actual Home Equity Loans which will be delivered to the
Trustee (including Subsequent Home Equity Loans) and characteristics of the Home
Equity Loans assumed in preparing the tables herein.
Prepayments of home equity loans are commonly measured relative to a
prepayment standard or model. The model used with respect to the Fixed Rate
Certificates (the "Prepayment Ramp") assumes that the Home Equity Loans in Loan
Group One prepay at a rate of 4% CPR in the first month after origination, and
an additional 1.50% each month thereafter until the 14th month. Beginning in the
15th month and each month thereafter, the Prepayment Ramp assumes a prepayment
rate of 25% CPR. For the Class A-3 Certificates, it was assumed that the Home
Equity Loans in Loan Group Two prepay at a rate of 20% CPR. The Constant
Prepayment Rate ("CPR") represents an assumed constant rate of prepayment each
month, expressed as an annual rate, relative to the then outstanding principal
balance of a pool of home equity loans for the life of such home equity loans.
Neither model purports to be either an historical description of the prepayment
experience of any pool of home equity loans or a prediction of the anticipated
rate of prepayment of any home equity loans, including the Home Equity Loans to
be included in the Loan Groups.
S-27
<PAGE> 28
<TABLE>
<CAPTION>
LOAN GROUP ONE
INITIAL HOME EQUITY LOANS
INITIAL INITIAL REMAINING REMAINING ORIGINAL
MORTGAGE NET TERM TO TERM OF TERM OF
POOL PRINCIPAL INTEREST MORTGAGE MATURITY AMORTIZATION AMORTIZATION AMORTIZATION
NUMBER BALANCE RATE RATE (IN MONTHS) (IN MONTHS) (IN MONTHS) METHOD
------ --------- ------ ------ ----------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 3,636,232.62 11.549% 11.049% 103 103 109 Level
2 20,932,349.00 11.514 11.014 172 172 180 Level
3 7,801,076.39 10.229 9.729 239 239 240 Level
4 1,122,395.31 11.536 11.036 351 351 360 Level
5 14,495,664.50 11.048 10.548 178 355 357 Balloon
<CAPTION>
LOAN GROUP ONE
SUBSEQUENT HOME EQUITY LOANS
INITIAL INITIAL REMAINING REMAINING ORIGINAL
MORTGAGE NET TERM TO TERM OF TERM OF
POOL PRINCIPAL INTEREST MORTGAGE MATURITY AMORTIZATION AMORTIZATION AMORTIZATION
NUMBER BALANCE RATE RATE (IN MONTHS) (IN MONTHS) (IN MONTHS) METHOD
------ --------- ------ ------ ----------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
6 $ 910,221.50 11.549% 11.049% 110 110 110 Level
7 5,239,784.13 11.514 11.014 180 180 180 Level
8 1,952,764.90 10.229 9.729 240 240 240 Level
9 280,957.92 11.536 11.036 360 360 360 Level
10 3,628,553.73 11.048 10.548 180 360 360 Balloon
<CAPTION>
LOAN GROUP TWO
INITIAL HOME EQUITY LOANS
MONTHS TO
INITIAL INITIAL NEXT ORIGINAL REMAINING
MORTGAGE NET MORTGAGE MAXIMUM MINIMUM TERM TO TERM OF
POOL PRINCIPAL INTEREST MORTGAGE RATE GROSS INTEREST INTEREST MATURITY AMORTIZATION AMORTIZATION
NUMBER BALANCE RATE RATE CHANGE MARGIN RATE RATE (IN MONTHS) (IN MONTHS) METHOD
------ --------- ------ ------ -------- ------ ------ ------ ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
11 $ 282,486.05 9.960% 9.460% 8 6.242% 15.960% 9.960% 360 356 Level
12 5,009,632.32 9.187 8.687 9 5.555 15.187 9.187 304 301 Level
13 9,853,582.75 9.389 8.889 10 5.777 15.389 9.389 297 295 Level
14 10,223,334.95 9.132 8.632 11 5.678 15.132 9.132 307 306 Level
15 4,999,169.06 9.106 8.606 12 5.769 15.106 9.106 291 291 Level
16 1,876,200.00 8.751 8.251 13 5.517 14.751 8.751 279 279 Level
<CAPTION>
LOAN GROUP TWO
SUBSEQUENT HOME EQUITY LOANS
MONTHS TO
INITIAL INITIAL NEXT ORIGINAL
MORTGAGE NET MORTGAGE MAXIMUM MINIMUM TERM TO
POOL PRINCIPAL INTEREST MORTGAGE RATE GROSS INTEREST INTEREST MATURITY
NUMBER BALANCE RATE RATE CHANGE MARGIN RATE RATE (IN MONTHS)
------ --------- ------ ------ -------- ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
17 $7,775,594.87 9.200% 8.700% 13 5.699% 15.200% 9.200% 299
<CAPTION>
REMAINING
TERM OF
POOL AMORTIZATION AMORTIZATION
NUMBER (IN MONTHS) METHOD
------ ------------- -------
<S> <C> <C>
17 299 Level
</TABLE>
S-28
<PAGE> 29
DECREMENT TABLES
The following tables indicate, based on the Structuring Assumptions,
the percentages of the initial Class Certificate Balances of the Classes of
Offered Certificates that would be outstanding after each of the dates shown at
various percentages of the Prepayment Ramp or CPR and the corresponding weighted
average lives of such Classes. It is not likely that (i) all of the Home Equity
Loans will have the characteristics assumed, (ii) the Home Equity Loans will
prepay at the specified percentages of the Prepayment Ramp or CPR or at any
other constant percentage or (iii) the level of the Index will remain constant
at the level assumed or at any other level. Moreover, the diverse remaining
terms to maturity of the Home Equity Loans could produce slower or faster
principal distributions than indicated in the tables at the specified
percentages of the Prepayment Ramp or CPR, even if the weighted average
remaining term to maturity of the Home Equity Loans is consistent with the
remaining terms to maturity of the Home Equity Loans specified in the
Structuring Assumptions.
S-29
<PAGE> 30
<TABLE>
<CAPTION>
PERCENT OF INITIAL CLASS CERTIFICATE
BALANCES OUTSTANDING **
CLASS A-1
PERCENTAGE OF PREPAYMENT RAMP
--------------------------------------------------------
Distribution Date............................ 0% 50% 75% 100% 125% 150%
- ----------------- -- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percent.............................. 100 100 100 100 100 100
February 1997................................ 89 68 58 47 36 25
February 1998................................ 83 35 13 0 0 0
February 1999................................ 76 6 0 0 0 0
February 2000................................ 68 0 0 0 0 0
February 2001................................ 60 0 0 0 0 0
February 2002................................ 50 0 0 0 0 0
February 2003................................ 39 0 0 0 0 0
February 2004................................ 27 0 0 0 0 0
February 2005................................ 14 0 0 0 0 0
February 2006................................ 3 0 0 0 0 0
February 2007................................ 0 0 0 0 0 0
February 2008................................ 0 0 0 0 0 0
February 2009................................ 0 0 0 0 0 0
February 2010................................ 0 0 0 0 0 0
February 2011................................ 0 0 0 0 0 0
February 2012................................ 0 0 0 0 0 0
February 2013................................ 0 0 0 0 0 0
February 2014................................ 0 0 0 0 0 0
February 2015................................ 0 0 0 0 0 0
February 2016................................ 0 0 0 0 0 0
February 2017................................ 0 0 0 0 0 0
February 2018................................ 0 0 0 0 0 0
February 2019................................ 0 0 0 0 0 0
February 2020................................ 0 0 0 0 0 0
February 2021................................ 0 0 0 0 0 0
February 2022................................ 0 0 0 0 0 0
February 2023................................ 0 0 0 0 0 0
February 2024................................ 0 0 0 0 0 0
February 2025................................ 0 0 0 0 0 0
February 2026................................ 0 0 0 0 0 0
Weighted Average Life (years) ***............ 5.6 1.6 1.2 1.0 0.9 0.8
CLASS A-2
PERCENTAGE OF PREPAYMENT RAMP
--------------------------------------------------------
Distribution Date............................ 0% 50% 75% 100% 125% 150%
- ----------------- -- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percent.............................. 100 100 100 100 100 100
February 1997................................ 100 100 100 100 100 100
February 1998................................ 100 100 100 95 82 70
February 1999................................ 100 100 85 69 55 43
February 2000................................ 100 88 67 50 36 26
February 2001................................ 100 73 52 36 24 15
February 2002................................ 100 61 40 26 16 9
February 2003................................ 100 51 31 18 10 5
February 2004................................ 100 42 24 13 6 3
February 2005................................ 100 34 18 9 4 1
February 2006................................ 100 28 13 6 2 *
February 2007................................ 93 22 10 4 1 0
February 2008................................ 84 18 7 2 * 0
February 2009................................ 74 13 5 1 0 0
February 2010................................ 62 10 3 * 0 0
February 2011................................ 23 3 * 0 0 0
February 2012................................ 13 1 0 0 0 0
February 2013................................ 10 * 0 0 0 0
February 2014................................ 8 0 0 0 0 0
February 2015................................ 5 0 0 0 0 0
February 2016................................ 2 0 0 0 0 0
February 2017................................ 2 0 0 0 0 0
February 2018................................ 1 0 0 0 0 0
February 2019................................ 1 0 0 0 0 0
February 2020................................ 1 0 0 0 0 0
February 2021................................ 1 0 0 0 0 0
February 2022................................ * 0 0 0 0 0
February 2023................................ * 0 0 0 0 0
February 2024................................ 0 0 0 0 0 0
February 2025................................ 0 0 0 0 0 0
February 2026................................ 0 0 0 0 0 0
Weighted Average Life (years) ***............ 14.4 8.0 6.1 4.8 3.9 3.3
CLASS A-3
PERCENTAGE OF CPR
--------------------------------------------------------
Distribution Date............................ 0% 10% 15% 20% 25% 30%
- ----------------- -- --- --- --- --- ---
Initial Percent.............................. 100 100 100 100 100 100
February 1997................................ 97 87 82 77 72 68
February 1998................................ 96 77 69 61 53 46
February 1999................................ 95 69 57 48 39 32
February 2000................................ 93 61 48 38 29 22
February 2001................................ 92 54 40 30 22 15
February 2002................................ 91 47 34 23 16 10
February 2003................................ 89 42 28 18 12 7
February 2004................................ 87 37 23 14 8 5
February 2005................................ 85 32 19 11 7 3
February 2006................................ 83 28 16 9 4 2
February 2007................................ 80 25 13 7 3 1
February 2008................................ 78 22 11 5 2 1
February 2009................................ 74 19 9 4 1 *
February 2010................................ 71 16 7 3 1 0
February 2011................................ 67 14 6 2 * 0
February 2012................................ 63 12 4 1 * 0
February 2013................................ 58 10 3 1 0 0
February 2014................................ 53 8 2 * 0 0
February 2015................................ 47 6 2 * 0 0
February 2016................................ 41 5 1 0 0 0
February 2017................................ 34 3 1 0 0 0
February 2018................................ 27 2 * 0 0 0
February 2019................................ 18 2 0 0 0 0
February 2020................................ 9 1 0 0 0 0
February 2021................................ 1 * 0 0 0 0
February 2022................................ 0 0 0 0 0 0
February 2023................................ 0 0 0 0 0 0
February 2024................................ 0 0 0 0 0 0
February 2025................................ 0 0 0 0 0 0
February 2026................................ 0 0 0 0 0 0
Weighted Average Life (years) ***............ 16.9 7.3 5.3 4.1 3.2 2.6
<FN>
- ------------------------
* Less than 0.5 but more than zero.
** Rounded to the nearest whole percentage
*** The weighted average life of an Offered Certificate is determined by
(a) multiplying the amount of the reduction, if any, of the Class
Certificate Balance of such Certificate on each Distribution Date by
the number of years from the date of issuance to such Distribution
Date, (b) summing the results and (c) dividing the sum by the aggregate
amount of the reductions in Class Certificate Balance of such
Certificate referred to in clause (a).
</TABLE>
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<PAGE> 31
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement, The
following summaries describe certain provisions of the Agreement. The summaries
do not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all of the provisions of the Agreement. Wherever
particular sections or defined terms of the Agreement are referred to, such
sections or defined terms are hereby incorporated herein by reference.
GENERAL
Each Class of Offered Certificates will evidence specified undivided
interests in the Trust. The property of the Trust will consist of, to the extent
provided in the Agreement: (i) the Home Equity Loans in the Loan Groups; (ii)
payments on the Home Equity Loans received on and after the Cut-Off Date; (iii)
Mortgaged Properties relating to the Home Equity Loans that are acquired by
foreclosure or deed in lieu of foreclosure; (iv) each Collection Account and
Distribution Account; (v) the Capitalized Interest Account; (vi) the Pre-Funding
Account; (vii) the Policy; (viii) certain hazard insurance policies maintained
by the borrowers of the Home Equity Loans or the Servicer in respect thereof;
and (ix) the Depositor's rights under the Purchase Agreement (defined below).
BOOK-ENTRY REGISTRATION
The Offered Certificates initially will be registered in the name of
Cede & Co. ("Cede"), the nominee of the Depository Trust Company ("DTC"). DTC
has advised the Depositor as follows: 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 Uniform
Commercial Code ("UCC") and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participating organizations ("Participants") and facilitate
the clearance and settlement of securities transactions between Participants
through electronic book-entry changes in their accounts, thereby eliminating the
need for physical movement of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include certain other organizations. Indirect access to the DTC system also is
available to others such as brokers, dealers, banks and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participant").
Under a book-entry format, beneficial owners of the Offered
Certificates ("Certificate Owners") that are not Participants or Indirect
Participants but desire to purchase, sell or otherwise transfer ownership of
Offered Certificates registered in the name of Cede, as nominee of DTC, may do
so only through Participants and Indirect Participants. In addition, such
Certificate Owners will receive all distributions of principal of and interest
on the Offered Certificates from the Trustee through DTC and its Participants.
Under a book-entry format, Certificate Owners will receive payments after the
related Distribution Date because, while payments are required to be forwarded
to Cede, as nominee for DTC, on each such date, DTC will forward such payments
to its Participants which thereafter will be required to forward them to
Indirect Participants or Certificate Owners. Under a book entry format, it is
anticipated that the only Certificateholder will be Cede, as nominee of DTC, and
that the Certificate Owners will not be recognized by the Trustee as
Certificateholders under the Agreement. The Certificate Owners will only be
permitted to exercise the rights of Certificateholders under the Agreement
indirectly through DTC and its Participants who in turn will exercise their
rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Offered Certificates
and is required to receive and transmit payments of principal of and interest on
the Offered Certificates. Participants and Indirect Participants with which
Certificate Owners have accounts with respect to the Offered Certificates
similarly are required to make book-entry transfers and receive and transmit
such payments on behalf of their respective Certificate Owners. Accordingly,
although Certificate Owners will not possess certificates, the rules provide a
mechanism by which Certificate Owners will receive distributions and will be
able to transfer their interests.
Certificate Owners who are not Participants may transfer ownership of
the Offered Certificates only through Participants by instructing such
Participants to transfer the Offered Certificates, by book-entry transfer,
through DTC for the account of the purchasers of such Certificates, which
account is maintained with their respective Participants. Under the rules and in
accordance with DTC's normal procedures, transfers of ownership of Offered
Certificates will be executed through DTC and the accounts of the respective
Participants at DTC will be debited and credited. Similarly,
S-31
<PAGE> 32
the respective Participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Certificate Owners.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of Certificate
Owners to pledge the Offered Certificates to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Certificates may be limited due to the lack of a physical certificate for such
Certificates.
DTC in general advises that it will take any action permitted to be
taken by a Certificate Owner under the Agreement only at the direction of one or
more Participants to whose account with DTC the Offered Certificates are
credited. Additionally, DTC in general advises that it will take such actions
with respect to specified percentages of the Certificate Owners only at the
direction of and on behalf of Participants whose holdings include current
principal amounts of outstanding Offered Certificates that satisfy such
specified percentages. DTC may take conflicting actions with respect to other
current principal amounts of outstanding Offered Certificates to the extent that
such actions are taken on behalf of Participants whose holdings include such
current principal amounts of outstanding Offered Certificates.
Any Offered Certificates initially registered in the name of Cede, as
nominee of DTC, will be issued in fully registered, certificated form to
Certificate Owners or their nominees ("Definitive Certificates"), rather than to
DTC or its nominee only under the following circumstances: (i) the Depositor
advises the Trustee in writing that DTC is no longer willing or able to properly
discharge its responsibilities as Depository with respect to the Offered
Certificates, and the Trustee or the Depositor is unable to locate a qualified
successor, (ii) the Depositor, at its option, elects to terminate the book-entry
system through DTC, or (iii) after the occurrence of an Event of Default
(defined herein), Certificate Owners representing not less than 50% of the
aggregate Class Certificate Balance of the Offered Certificates advise the
Trustee and DTC through Participants in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interest of the Certificate Owners. Upon the occurrence of any of such events,
DTC will be required to notify all Participants of the availability through DTC
of Definitive Certificates. Upon surrender by DTC of the certificates
representing the Offered Certificates and instruction for re-registration, the
Trustee will issue the Offered Certificates in the form of Definitive
Certificates, and thereafter the Trustee will recognize the holders of such
Definitive Certificates as Certificateholders. Thereafter, payments of principal
of and interest on the Offered Certificates will be made by the Trustee directly
to Certificateholders in accordance with the procedures set forth in the
Agreement. The final distribution of any Offered Certificate (whether Definitive
Certificates or Offered Certificates registered in the name of Cede), however,
will be made only upon presentation and surrender of such Certificates on the
final Distribution Date at such office or agency as is specified in the notice
of final payment to Certificateholders.
Although DTC has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Offered Certificates among
Participants, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. None of the
Depositor, the Seller, the Servicer or the Trustee will have any responsibility
for the performance by DTC or its Participants or Indirect Participants of their
respective obligations under the rules and procedures governing their
operations.
ASSIGNMENT OF HOME EQUITY LOANS
The Home Equity Loans will be acquired by the Depositor from the Seller
pursuant to the Mortgage Loan Purchase Agreement, dated the Closing Date (the
"Purchase Agreement"), between the Seller and the Depositor. At the time of
issuance of the Certificates, the Depositor will transfer to the Trust all of
its right, title and interest in and to each Home Equity Loan, the related
mortgage note, mortgage and other related documents (collectively, the "Related
Documents"), including all payments received on or with respect to each such
Mortgage Loan on or after the Cut-Off Date (exclusive of payments in respect of
accrued interest on the Home Equity Loans through the related Due Date in the
month preceding the month of the Cut-Off Date). The Depositor also will assign
to the Trustee all of the Depositor's rights under the Purchase Agreement. The
Trustee, concurrently with such transfer, will deliver the Certificates to the
Depositor. Each Home Equity Loan transferred to the Trust will be identified on
a schedule (the "Home Equity Loan Schedule") delivered to the Trustee pursuant
to the Agreement. Such schedule will include information as to the Principal
Balance of each Home Equity Loan as of the Cut-Off Date, as well as information
with respect to the current Loan Rate.
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The Agreement will require that, within the time period specified
therein, the Depositor will deliver or cause to be delivered to the Trustee (or
a custodian, as the Trustee's agent for such purpose) the Home Equity Loans
endorsed to the Trustee and the Related Documents. In lieu of delivery of
original mortgages, the Depositor may deliver or cause to be delivered true and
correct copies thereof which have been certified as to authenticity by the
appropriate county recording office where such mortgage is recorded.
Under the terms of the Purchase Agreement, the Seller will have 30 days
after the Closing Date to prepare and submit for recording assignments of the
mortgages related to each Home Equity Loan in favor of the Trustee (unless
opinions of counsel satisfactory to the Rating Agencies and the Certificate
Insurer are delivered to the Trustee and the Certificate Insurer to the effect
that recordation of such assignments is not required in the relevant
jurisdictions to protect the interests of the Trustee in the Home Equity Loans).
If the recording information with respect to any assignment of Mortgage is
unavailable within 30 days of the Closing Date, such assignment will be prepared
and recorded promptly after receipt of such information, but in no event later
than one year after the Closing Date.
Within 90 days of the Closing Date, the Trustee will review the Home
Equity Loans and the Related Documents pursuant to the Agreement and if any Home
Equity Loan or Related Document is found to be defective in any material respect
and such defect is not cured within 90 days following notification thereof to
the Seller and the Depositor by the Trustee, the Seller will be obligated to
either (i) substitute for such Home Equity Loan an Eligible Substitute Home
Equity Loan; however, such substitution is permitted only within two years of
the Closing Date, and may not be made unless an opinion of counsel is provided
to the effect that such substitution will not disqualify the Trust as a REMIC
for federal income tax purposes or result in a prohibited transaction tax under
the Code or (ii) purchase such Home Equity Loan at a price (the "Purchase
Price") equal to the outstanding Principal Balance of such Home Equity Loan as
of the date of purchase, plus the greater of (i) all accrued and unpaid interest
thereon and (ii) 30 days' interest thereon, computed at the Loan Rate, net of
the Servicing Fee with respect to such Home Equity Loan if the Seller or an
affiliate is the Servicer, plus the amount of any unreimbursed Servicing
Advances made by the Servicer with respect to such Home Equity Loan. The
Purchase Price will be deposited in the applicable Collection Account on or
prior to the next succeeding Determination Date after such obligation arises.
The obligation of the Seller to repurchase or substitute for a Defective Home
Equity Loan is the sole remedy regarding any defects in the Home Equity Loans
and Related Documents available to the Trustee or the Certificateholders.
In connection with the substitution of an Eligible Substitute Home
Equity Loan, the Seller will be required to deposit in the applicable Collection
Account on or prior to the next succeeding Determination Date after such
obligation arises an amount (the "Substitution Adjustment") equal to the sum of
(i) the excess of the Principal Balance of the related Defective Home Equity
Loan over the Principal Balance of such Eligible Substitute Home Equity Loan,
(ii) 30 days' interest on such excess computed at the Loan Rate, net of the
Servicing Fee if the Seller or an affiliate is the Servicer, and (iii) the
amount of any unreimbursed Servicing Advances and Monthly Advances made by the
Servicer with respect to such Defective Home Equity Loan if the Servicer is not
an affiliate of the Seller. The Servicer will be deemed to have been reimbursed
for any Servicing Advances and Monthly Advances that are not paid pursuant to
clause (iii).
An "Eligible Substitute Home Equity Loan" is a home equity loan
substituted by the Seller for a Defective Home Equity Loan which must, on the
date of such substitution, (i) have an outstanding Principal Balance (or in the
case of a substitution of more than one Home Equity Loan for a Defective Home
Equity Loan, an aggregate Principal Balance), not in excess of, and not more
than 5% less than, the Principal Balance of the Defective Home Equity Loan; (ii)
have a Loan Rate not less than the Loan Rate of the Defective Home Equity Loan
and not more than 1% in excess of the Loan Rate of such Defective Home Equity
Loan; (iii) have a mortgage of the same or higher level of lien priority as the
mortgage relating to the Defective Home Equity Loan; (iv) have a remaining term
to maturity not more than six months earlier and not later than the remaining
term to maturity of the Defective Home Equity Loan; (v) comply with each
representation and warranty as to the Home Equity Loans set forth in the
Purchase Agreement (deemed to be made as of the date of substitution); (vi) have
a Combined Loan-to-Value Ratio not greater than that of the Defective Home
Equity Loan; (vii) bear a fixed or adjustable Loan Rate if the Defective Home
Equity Loan was in Loan Group One or Loan Group Two, respectively; and (viii) if
the Home Equity Loan is an ARM, have a Gross Margin and Lifetime Cap no less
than, the same interval between the Change Dates as, and a Loan Rate based on
the same Index as, that of the Defective Home Equity Loan.
In the Purchase Agreement, the Seller will make certain representations
and warranties with respect to the Home Equity Loans including, among others:
(i) The information with respect to each Home Equity Loan set forth in the Home
Equity Loan Schedule is true and correct in all material respects as of the
Cut-off Date; (ii) Each Mortgage is a valid and subsisting first or second lien
of record on the Mortgaged Property subject, in the case of any second
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Home Equity Loan, only to a First Lien on such Mortgaged Property and subject in
all cases to the exceptions to title set forth in the title insurance policy
with respect to the related Home Equity Loan, which exceptions are generally
acceptable to mortgage lending companies, and such other exceptions to which
similar properties are commonly subject and which do not individually, or in the
aggregate, materially and adversely affect the benefits of the security intended
to be provided by such Mortgage, (iii) Except with respect to liens released
immediately prior to the transfer contemplated in the Purchase Agreement, each
Mortgage Note and the related Mortgage have not been assigned or pledged and
immediately prior to the transfer and assignment herein contemplated, the Seller
held good, marketable and indefeasible title to, and was the sole owner and
holder of, each Home Equity Loan subject to no liens, charges, mortgages,
claims, participation interests, equities, pledges or security interests of any
nature, encumbrances or rights of others (collectively, a "Lien"); and
immediately upon the completion of the transfers and assignments contemplated in
the Agreement, the Trustee will hold good, marketable and indefeasible title,
to, and be the sole owner of, each Home Equity Loan subject to no Liens; (iv) No
Home Equity Loan was 30 or more days delinquent as of the Cut-Off Date, as
measured at the end of the month; and (v) Each Home Equity Loan at the time it
was made complied in all material respects with applicable state and federal
laws and regulations, including, without limitation, usury, equal credit
opportunity, consumer credit, truth-in-lending, real estate settlement
procedures and disclosure laws.
Upon discovery of a breach of any such representation and warranty
which materially and adversely affects the interests of the Certificateholders
or the Certificate Insurer in the related Home Equity Loan, the Seller will have
a period of 60 days after discovery or notice of the breach to effect a cure. If
the breach cannot be cured within the 60- day period, the Seller will be
obligated to (i) substitute for such Defective Home Equity Loan an Eligible
Substitute Home Equity Loan or (ii) purchase such Defective Home Equity Loan
from the Trust. The same procedure and limitations that are set forth above for
the substitution or purchase of Defective Home Equity Loans as a result of
deficient documentation relating thereto will apply to the substitution or
purchase of a Defective Home Equity Loan as a result of a breach of a
representation or warranty that materially and adversely affects the interests
of the Certificateholders or the Certificate Insurer. The obligation of the
Seller to repurchase or substitute for a Defective Home Equity Loan is the sole
remedy regarding any breach of a representation or warranty with respect thereto
available to the Trustee or the Certificate holders.
The Seller will have similar obligations with respect to any Subsequent
Home Equity Loans delivered to the Trust.
The Depositor will make no representations or warranties with respect
to the Home Equity Loans and will have no obligation (other than to assign to
the Trustee the Depositor's rights under the Purchase Agreement) or liability
with respect to breaches of the Seller's representations or warranties or its
obligations to cure, purchase or substitute for any Defective Home Equity Loan.
PAYMENTS ON HOME EQUITY LOANS; DEPOSITS TO COLLECTION ACCOUNTS AND DISTRIBUTION
ACCOUNT
The Trustee will establish and maintain a separate account (each a
"Collection Account") for each Loan Group. Each Collection Account will be an
Eligible Account (as defined herein). Subject to the investment provision
described in the following paragraphs, upon receipt by the Servicer of amounts
in respect of the Home Equity Loans (excluding amounts representing the
Servicing Fee, reimbursement for previous related Monthly Advances or Servicing
Advances, administrative charges, taxes, assessments, credit insurance charges,
insurance proceeds to be applied to the restoration or repair of a Mortgaged
Property or similar items), the Servicer will deposit such amounts in the
Collection Account for the applicable Loan Group. Amounts so deposited may be
invested in Eligible Investments (as described in the Agreement) maturing no
later than one Business Day prior to the date on which the amount on deposit
therein is required to be deposited in the Distribution Account or on such
Distribution Date if approved by the Rating Agencies and the Certificate
Insurer.
The Trustee will establish a separate account (each, a "Distribution
Account") for each Loan Group into which will be deposited amounts withdrawn
from the related Collection Account for distribution to Certificateholders on a
Distribution Date. Each Distribution Account will be an Eligible Account.
Amounts on deposit therein may be invested in Eligible Investments maturing on
or before the Business Day prior to the related Distribution Date.
An "Eligible Account" is an account that is (i) maintained with a
depository institution the deposits in which are insured by the FDIC to the
limits established by the FDIC and the short-term debt obligations of which (or
in the case of a depository institution that is the principal subsidiary of a
holding company, the short-term debt obligations of which) are rated in the
highest short-term rating category by each Rating Agency and the long-term debt
obligations
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of which are rated at least Aa3 by Moody's, (ii) a trust account or accounts
maintained with the trust department of a federal or a state chartered
depository institution or trust company the long-term debt obligations of which
are rated at least Baa3 by Moody's, acting in a fiduciary capacity or (iii) an
account or accounts otherwise acceptable to each Rating Agency and the
Certificate Insurer.
Eligible Investments are specified in the Agreement and are limited to
investments which meet the criteria of the Rating Agencies from time to time as
being consistent with their then-current ratings of the Certificates.
PRE-FUNDING ACCOUNT
On the Closing Date, an aggregate cash amount (the "Pre-Funded Amount")
not to exceed approximately $19,767,878 will be deposited in the Pre-Funding
Account. Of such amount, approximately $12,012,283 will be used to purchase
Subsequent Home Equity Loans for deposit into Loan Group One and, if required,
to make accelerated payments of principal on the Fixed Rate Certificates and
approximately $7,755,595 will be used to purchase Subsequent Home Equity Loans
for deposit into Loan Group Two and, if required, to make accelerated payments
of principal on the Class A-3 Certificates. During the period (the "Pre-Funding
Period") from the Closing Date to the earliest to occur of (a) the date on which
the amount on deposit in the Pre-Funding Account is less than $100,000, (b) an
Event of Default under the Agreement and (c) March 29,1996, amounts on deposit
in the Pre-Funding Account may be withdrawn from time to time to acquire
Subsequent Home Equity Loans in accordance with the Agreement. Any net
investment earnings on the Pre-Funded Amount will be transferred to the
Capitalized Interest Account on each Distribution Date during the Pre-Funding
Period. Any Pre-Funded Amount remaining in the Pre-Funding Account at the end of
the Pre-Funding Period will be distributed on the Distribution Date occurring at
or immediately following the end of the Pre-Funding Period. If the Pre-Funded
Amount so distributed and allocated to a Loan Group is less than $100,000, it
will be treated as a principal prepayment and allocated to the applicable Class
or Classes of Offered Certificates related to Loan Group One or Loan Group Two,
as applicable, as provided herein; otherwise such amount will be distributed as
principal of the outstanding Class or Classes of Offered Certificates related to
Loan Group One or Loan Group Two, as applicable, pro rata on the basis of their
respective Class Certificate Balances. Only fixed-rate Subsequent Home Equity
Loans may be added to Loan Group One, and only adjustable-rate Subsequent Home
Equity Loans may be added to Loan Group Two.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date, funds will be deposited in an account (the
"Capitalized Interest Account") created and maintained with the Trustee. The
amount so deposited will be used by the Trustee on the Distribution Dates in the
Pre- Funding Period to fund the excess, if any, of the Interest Remittance
Amounts for the Offered Certificates and the premium due for the Policy over the
funds available therefor on such Distribution Dates. Any funds remaining in the
Capitalized Interest Account at the end of the Pre-Funding Period will be
distributed to the Holders of the Class R Certificates.
ADVANCES
Not later than the close of business on the second Business Day prior
to the related Distribution Date, the Servicer will be required to remit to the
Trustee for deposit in the applicable Collection Account an amount, to be
distributed on the related Distribution Date, equal to the sum of the interest
accrued on each Home Equity Loan through the related Due Date but not received
by the Servicer as of the close of business on the related Determination Date
(net of the Servicing Fee with respect to such Home Equity Loan), plus, with
respect to each REO Property which was acquired during or prior to the related
Due Period and as to which a final disposition thereof did not occur in the
related Due Period, an amount equal to the excess, if any, of interest for the
most recently ended Due Period on the Principal Balance of the Home Equity Loan
relating to such REO Property at the related Loan Rate (net of the Servicing Fee
with respect to such Home Equity Loan) over the net income from the REO Property
transferred to the related Collection Account for such Distribution Date
pursuant to the Agreement (the "Monthly Advance"). The Servicer may fund all or
a portion of any Monthly Advance from funds on deposit in the applicable
Collection Account that are not required to be distributed on the related
Distribution Date. Any funds so used must be replaced on or before the
Distribution Date on which such funds will be required to be distributed.
In the course of performing its servicing obligations, the Servicer
will pay all reasonable and customary "out-of-pocket" costs and expenses
incurred in the performance of its servicing obligations, including, but not
limited to, the cost of (i) the preservation, restoration and protection of the
Mortgaged Properties; (ii) any enforcement or judicial
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proceedings, including foreclosures, and (iii) the management and liquidation of
Mortgaged Properties acquired in satisfaction of the related Mortgage. Each such
expenditure will constitute a "Servicing Advance."
The Servicer's right to reimbursement for unreimbursed Servicing
Advances is limited to late collections on the related Home Equity Loan,
including Liquidation Proceeds, released Mortgaged Property proceeds, Insurance
Proceeds and such other amounts as may be collected by the Servicer from the
related Mortgagor or otherwise relating to the Home Equity Loan in respect of
which such unreimbursed amounts are owed. The Servicer's right to such
reimbursement is prior to the rights of Certificateholders. The Servicer's right
to reimbursement for unreimbursed Monthly Advances is limited to late
collections of interest on any Home Equity Loan and to Liquidation Proceeds and
Insurance Proceeds on the related Home Equity Loan (as to which it will have
priority over Certificateholders) unless such amounts are insufficient. In such
event (a "Nonrecoverable Advance"), the Servicer will be reimbursed for such
Nonrecoverable Advance from funds on deposit in the applicable Distribution
Account.
The Servicer is not required to make any Monthly Advance or Servicing
Advance which it determines would be nonrecoverable from amounts received in
respect of the related Home Equity Loan.
COMPENSATING INTEREST
The Agreement provides that not later than the close of business on the
second Business Day prior to the related Distribution Date, the Servicer will
remit to the Trustee for deposit to the applicable Collection Account an amount
equal to the lesser of (i) the aggregate of the Prepayment Interest Shortfalls
for the related Distribution Date resulting from principal prepayments by
Mortgagors during the related Due Period and (ii) the amount otherwise payable
to the Servicer as its aggregate Servicing Fee for such Due Period. The Servicer
will not have the right to reimbursement for any such amounts deposited to
either Collection Account.
SPREAD ACCOUNT
The Trustee will establish on the Closing Date the Spread Account into
which it will deposit upon receipt from the holder of the Class R Certificate an
amount, if any, specified by the Certificate Insurer (the "Initial Spread
Account Deposit"). Amounts on deposit in the Spread Account will be available
for withdrawal to fund any shortfall between the available funds for
distribution to Holders of a Class of Offered Certificates and the related
Interest Remittance Amount and Principal Remittance Amount. If the Initial
Spread Account Deposit is available to fund any such shortfall on each
Distribution Date, funds on deposit in the Spread Account equal to the amount of
such shortfall will be withdrawn by the Trustee and deposited into the
applicable Distribution Account for distribution to Holders of the affected
Class or Classes of Offered Certificates.
PRIORITY OF DISTRIBUTIONS
On or before each Distribution Date, the Trustee will determine the
Overcollateralization Amount for each Loan Group after giving effect to the
distribution of the Principal Remittance Amount to the related Class or Classes
of Offered Certificates on such Distribution Date and the amount of the related
Net Excess Spread. The "Amount Available" for a Loan Group on a Distribution
Date will equal the sum of (i) the Available Remittance Amount for such Loan
Group, (ii) if an Available Funds Shortfall exists in such Loan Group, (a)
first, the Net Excess Spread from the other Loan Group, to the extent of such
Available Funds Shortfall, (b) second, the Excess Principal from the other Loan
Group, to the extent of any remaining Available Funds Shortfall, and (c) third,
any amounts in respect of any remaining Available Funds Shortfall withdrawn from
the Spread Account and deposited in the applicable Distribution Account, (iii)
(a) first, the Available Transfer Cashflow to the extent necessary to reach the
Required Overcollateralization Amount for such Loan Group and (b) second, the
Net Excess Principal, to the extent necessary to reach the Required
Overcollateralization Amount for such Loan Group, and (iv) any Insured Payments
with respect to the related Class or Classes of Certificates. On each
Distribution Date the Trustee will withdraw from each Distribution Account the
Amount Available, and make distributions thereof in the following order of
priority and to the extent of such Amount Available:
(A) From the Distribution Account for Loan Group One:
(i) to the Certificate Insurer the monthly premium then due
with respect to Loan Group One;
(ii) to the Trustee, the Trustee Fee then due with respect to
Loan Group One;
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(iii) to the Back-Up Servicer, the Back-Up Servicing Fee then
due with respect to Loan Group One;
(iv) concurrently, to the Class A-1, Class A-2 and Class I
Certificates, an amount allocable to interest equal to the applicable
Interest Remittance Amount;
(v) sequentially, to the Class A-1 and Class A-2 Certificates,
in that order, an amount allocable to principal equal to the related
Principal Remittance Amount, until their respective Class Certificate
Balances have been reduced to zero;
(vi) to the Certificate Insurer an amount equal to previously
unreimbursed Insured Payments with respect to the Class A-1, Class A-2
or Class I Certificates, together with interest thereon at the rate
referred to in the Insurance Agreement;
(vii) sequentially, to the Class A-1 and Class A-2
Certificates, in that order, an amount allocable to principal equal to
the Additional Principal, until their respective Class Certificate
Balances have been reduced to zero;
(viii) to the Certificate Insurer, all other amounts owing to
the Certificate Insurer under the Insurance Agreement;
(ix) to the Depositor or the Servicer, as applicable, certain
reimbursable expenses pursuant to the Agreement;
(x) to the Servicer, Nonrecoverable Advances not previously
reimbursed with respect to Loan Group One; and
(xi) to the Class R Certificates, the balance, if any.
(B) From the Distribution Account for Loan Group Two:
(i) to the Certificate Insurer the monthly premium then due
with respect to Loan Group Two;
(ii) to the Trustee, the Trustee Fee then due with respect to
Loan Group Two;
(iii) to the Back-Up Servicer, the Back-Up Servicing Fee then
due with respect to Loan Group Two;
(iv) to the Class A-3 Certificates, an amount allocable to
interest equal to the related Interest Remittance Amount;
(v) to the Class A-3 Certificates, an amount allocable to
principal equal to the related Principal Remittance Amount;
(vi) to the Certificate Insurer an amount equal to previously
unreimbursed Insured Payments with respect to the Class A-3
Certificates, together with interest thereon at the rate referred to in
the Insurance Agreement;
(vii) to the Class A-3 Certificates, an amount allocable to
principal equal to the Additional Principal;
(viii) to the Certificate Insurer, all other amounts owing to
the Certificate Insurer under the Insurance Agreement;
(ix) to the Depositor or the Servicer, as applicable, certain
reimbursable expenses pursuant to the Agreement;
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(x) to the Servicer, Nonrecoverable Advances not previously
reimbursed with respect to Loan Group Two; and
(xi) to the Class R Certificates, the balance, if any.
Distributions allocable to principal of a Class of Offered Certificates
will not exceed the Class Certificate Balance of such Class immediately prior to
the applicable Distribution Date.
The "Additional Principal" for any Class or Classes of Offered
Certificates and any Distribution Date will equal the lesser of (i) the amount
required to be distributed as principal so that the Overcollateralization Amount
for the related Loan Group equals the related Required Overcollateralization
Amount and (ii) the sum of (x) the Remaining Net Excess Spread for such Loan
Group, (y) the Available Transfer Cashflow and (z) the Net Excess Principal.
The "Adjusted Net Loan Rate" for any Home Equity Loan and any
Distribution Date will equal the related Loan Rate minus the Expense Fee Rate.
An "Available Funds Shortfall" means with respect to any Loan Group and
Distribution Date, the amount by which the Available Remittance Amount for such
Loan Group is less than the Required Payments for such Loan Group.
The "Available Remittance Amount" with respect to any Loan Group and
Distribution Date is equal to the sum of all amounts received or required to be
paid by the Servicer or the Seller during the related Due Period with respect to
the Home Equity Loans in such Loan Group (exclusive of the Servicing Fee with
respect to each Home Equity Loan, other servicing compensation payable to the
Servicer as permitted by the Agreement and certain amounts available for
reimbursement of Monthly Advances and Servicing Advances, as described above
under "-- Advances") and deposited into the applicable Collection Account
pursuant to the Agreement as of the related Determination Date, including any
Monthly Advances, Compensating Interest and, through the end of the Pre-Funding
Period, amounts withdrawn from the Capitalized Interest Account with respect to
the related Class or Classes of Offered Certificates and any remaining amount on
deposit in the Pre-Funding Account at the end of the Pre-Funding Period and
allocable to the related Loan Group, in each case with respect to such
Distribution Date.
The "Available Transfer Cashflow" for any Loan Group and Distribution
Date will equal the Remaining Net Excess Spread for the other Loan Group
remaining after the payment, if any, of Additional Principal on the Class or
Classes of Offered Certificates related to such other Loan Group.
The "Basic Principal Amount" with respect to any Loan Group and
Distribution Date will equal the sum of (i) each payment of principal on a Home
Equity Loan received by the Servicer (exclusive of amounts described in clauses
(ii) and (iii) below during the calendar month preceding the calendar month in
which such Distribution Date occurs (with respect to any Distribution Date, the
"Due Period"); (ii) curtailments (i.e., partial prepayments) and prepayments in
full received during the related Due Period; (iii) all Insurance Proceeds and
Net Liquidation Proceeds allocable to recoveries of principal of Home Equity
Loans received during the related Due Period; (iv) an amount equal to the
excess, if any, of the Principal Balance (immediately prior to liquidation) of
each Home Equity Loan liquidated during the related Due Period over the
principal portion of Net Liquidation Proceeds received during such Due Period
(the "Unrecovered Class A Portion"); and (v) (a) the outstanding Principal
Balance of any Home Equity Loan repurchased by the Seller or purchased by the
Servicer as required or permitted by the Purchase Agreement or the Agreement as
of the related Determination Date and (b) with respect to any Defective Home
Equity Loan for which the Seller substitutes an Eligible Substitute Home Equity
Loan as of the related Determination Date, any excess of the Principal Balance
of such Defective Home Equity Loan over the Principal Balance of such Eligible
Substitute Home Equity Loan, plus the amount of any unreimbursed Servicing
Advances (defined herein) made by the Servicer with respect to the Home Equity
Loan to the extent received.
The "Carry-Forward Amount" for any Class of Offered Certificates on any
Distribution Date will equal the sum of (a) the excess of the aggregate Class
Remittance Amounts as of each preceding Distribution Date over the amount of the
actual distributions to the Holders of such Class of Offered Certificates made
on any such Distribution Date and not subsequently distributed, and (b) interest
on the amount, if any, of the interest component of the amount described in
clause (a) at one-twelfth of the applicable Certificate Rate.
The "Excess Principal" for any Loan Group and Distribution Date will
equal the lesser of (i) the portion, if any, of the Basic Principal Amount for
such Loan Group that is not required to be included in the Principal Remittance
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Amount for the related Class or Classes of Offered Certificates for such
Distribution Date and (ii) the amount of such portion remaining after the
application of the related Available Remittance Amount to the Required Payments
for such Loan Group.
The "Excess Spread" for any Loan Group and Distribution Date will equal
interest collected or advanced on the Home Equity Loans in such Loan Group
(including amounts allocated to the related Class of Offered Certificates in the
Capitalized Interest Account) minus the sum of (i) the Interest Remittance
Amount for the related Class or Classes of Offered Certificates and, in the case
of Loan Group One, the Interest Remittance Amount for the Class I Certificates
and (ii) the Expense Fees for such Loan Group.
The "Expense Fee Rate" will equal the sum of the per annum rates at
which the Servicing Fee, the Back-up Servicing Fee, the Trustee Fee and the
Premium are calculated which, will be 0.73%.
The "Interest Remittance Amount" for any Distribution Date will equal
interest accrued during the related Interest Period (a) in the case of a Class
of Offered Certificates, at the applicable Certificate Rate on the Class
Certificate Balance of such Class of Offered Certificates immediately prior to
the related Distribution Date, and (b) in the case of the Class I Certificates,
at the rate of 2.00% per annum on the notional balance of the Class I-1
Component and at the rate of 1.42% per annum on the notional balance of the
Class I-2 Component.
The "Principal Remittance Amount" for any Class of Offered Certificates
and any Distribution Date will be equal to the sum of:
(i) the lesser of (x) the Basic Principal Amount for the
related Loan Group and (y) the portion of such Basic Principal Amount
required to be distributed to increase the Overcollateralization Amount
for the related Loan Group to the Required Overcollateralization Amount
for such Loan Group on such Distribution Date;
(ii) the Carry-Forward Amount; and
(iii) on the Distribution Date at the end of the Pre-Funding
Period, amounts deposited in the related Distribution Account from the
Pre-Funding Account pursuant to the Agreement and allocable to the
related Loan Group.
A "Liquidated Home Equity Loan" means, as to any Distribution Date, any
Home Equity Loan in respect of which the Servicer has determined, based on the
servicing procedures specified in the Agreement, as of the end of the preceding
Due Period that all Liquidation Proceeds which it expects to recover with
respect to the disposition of the related Mortgaged Property have been
recovered.
The "Net Excess Principal" for any Loan Group and Distribution Date
will equal the Excess Principal for such Loan Group remaining after the
application thereof to cover an Available Funds Shortfall with respect to the
other Loan Group.
The "Net Excess Spread" for any Loan Group and Distribution Date will
equal the Excess Spread for such Loan Group remaining after the application
thereof to cover an Available Funds Shortfall with respect to such Loan Group.
"Net Liquidation Proceeds" with respect to a Home Equity Loan are equal
to the Liquidation Proceeds, reduced by related expenses, up to the unpaid
Principal Balance of the Home Equity Loan plus accrued and unpaid interest
thereon. "Liquidation Proceeds" are the proceeds received in connection with the
liquidation of any Home Equity Loan, whether through trustee's sale, foreclosure
sale or otherwise.
The "Overcollateralization Amount" for any Loan Group and Distribution
Date will equal the sum of (a) the excess, if any, of (i) the sum of the Loan
Group Balance and the amount on deposit in the Pre-Funding Account allocated to
such Loan Group (exclusive of any investment earnings included therein) as of
the close of business on the last day of the related Due Period, over (ii) the
Class Certificate Balance of the related Class or Classes of Offered
Certificates, after giving effect to the distributions of the related Principal
Remittance Amount on such Distribution Date, and (b) the amount, if any on
deposit in the Spread Account allocated to the related Class or Classes of
Offered Certificates.
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The "Remaining Net Excess Spread" for any Loan Group and Distribution
Date will equal the Net Excess Spread for such Loan Group remaining after the
application thereof to cover an Available Funds Shortfall with respect to the
other Loan Group.
The "Required Payments" for any Loan Group and Distribution Date will
equal the amount required to pay the Expense Fees, other than the Servicing Fee,
the related Interest Remittance Amount(s) and the related Principal Remittance
Amount and to reimburse the Certificate Insurer for previously unreimbursed
Insured Payments with respect to the related Class or Classes of Certificates,
together with interest thereon at the rate referred to in the Insurance
Agreement.
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to the Certificateholders, the
Trustee will forward to each Certificateholder a statement setting forth, among
other items, the following information with respect to each Class of Offered
Certificates:
(i) the Available Remittance Amount for the related
Distribution Date;
(ii) the related Interest Remittance Amount and Certificate
Rate;
(iii) the related Principal Remittance Amount, stating
separately the components thereof;
(iv) the amount of the Monthly Advances and Compensating
Interest Payments;
(v) the Servicing Fee for such Distribution Date;
(vi) the Additional Principal;
(vii) the Class Certificate Balance, after giving effect to
such distribution;
(viii) the related Loan Group Balance;
(ix) the number and aggregate Principal Balances of the Home
Equity Loans in the related Loan Group as to which the minimum monthly
payment is delinquent for 30-59 days, 60-89 days and 90 or more days,
respectively, as of the end of the preceding Due Period;
(x) the book value of any real estate which is acquired by the
Trust through foreclosure or grant of deed in lieu of foreclosure;
(xi) the amount of any Insured Payments for such Distribution
Date; and
(xii) the amount of the Unrecovered Class A Portions for each
Loan Group realized during the related Due Period; the cumulative
amount of losses realized since the Cut-Off Date for each Loan Group
with separate items indicating gross losses, principal losses,
recoveries, net losses and a break-out for recovery expenses.
In the case of information furnished pursuant to clauses (ii) and (iii)
above, the amounts shall be expressed as a dollar amount per Certificate with a
$1,000 denomination.
Within 60 days after the end of each calendar year, the Trustee will
forward to each Person who was a Certificateholder during the prior calendar
year a statement containing the information set forth in clauses (ii) and (iii)
above aggregated for such calendar year.
COLLECTION AND OTHER SERVICING PROCEDURES ON HOME EQUITY LOANS
The Servicer will make reasonable efforts to collect all payments
called for under the Home Equity Loans and will, consistent with the Agreement,
follow such collection procedures as it follows from time to time with respect
to the home equity loans in its servicing portfolio comparable to the Home
Equity Loans. Consistent with the above, the
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Servicer may in its discretion waive any late payment charge or any assumption
or other fee or charge that may be collected in the ordinary course of servicing
the Home Equity Loans.
With respect to the Home Equity Loans, the Servicer may arrange with a
borrower a schedule for the payment of interest due and unpaid for a period,
provided that any such arrangement is consistent with the Servicer's policies
with respect to the home equity loans it owns or services. With respect to Home
Equity Loans that are junior in priority to a First Lien on a Mortgaged
Property, the Servicer has the power under certain circumstances to consent to a
new mortgage lien on such Mortgaged Property having priority over such Home
Equity Loan in connection with the refinancing of such First Lien.
HAZARD INSURANCE
The Servicer will cause to be maintained fire and hazard insurance with
extended coverage customary in the area where the Mortgaged Property is located,
in an amount which is at least equal to the least of (i) the outstanding
Principal Balance on the Home Equity Loan and any related First Lien, (ii) the
full insurable value of the premises securing the Home Equity Loan and (iii) the
minimum amount required to compensate for damage or loss on a replacement cost
basis in each case in an amount not less than such amount as is necessary to
avoid the application of any co-insurance clause contained in the related hazard
insurance policy. Generally, if the Mortgaged Property is in an area identified
in the Federal Register by the Federal Emergency Management Agency as Flood Zone
"A", such flood insurance has been made available and the Servicer determines
that such insurance is necessary in accordance with accepted mortgage servicing
practices of prudent lending institutions servicing similar mortgage loans, the
Servicer will cause to be purchased a flood insurance policy with a generally
acceptable insurance carrier, in an amount representing coverage not less than
the least of (a) the outstanding Principal Balance of the Home Equity Loan and
any related First Lien, (b) the full insurable value of the Mortgaged Property,
or (c) the maximum amount of insurance available under the National Flood
Insurance Act of 1968, as amended. The Servicer will also maintain on REO;
Property, to the extent such insurance is available, fire and hazard insurance
in the applicable amounts described above, liability insurance and, to the
extent required and available under the National Flood Insurance Act of 1968, as
amended, and the Servicer determines that such insurance is necessary in
accordance with accepted mortgage servicing practices of prudent lending
institutions servicing similar home equity loans, flood insurance in an amount
equal to that required above. Any amounts collected by the Servicer under any
such policies (other than amounts to be applied to the restoration or repair of
the Mortgaged Property, or to be released to the Mortgagor in accordance with
the Servicer's normal mortgage servicing procedures) will be deposited in the
applicable Collection Account, subject to retention by the Servicer to the
extent such amounts constitute servicing compensation or to withdrawal pursuant
to the Agreement.
In the event that the Servicer obtains and maintains a blanket policy
as provided in the Agreement insuring against fire and hazards of extended
coverage on all of the Home Equity Loans, then, to the extent such policy names
the Servicer as loss payee and provides coverage in an amount equal to the
aggregate unpaid principal balance of the Home Equity Loans without coinsurance
and otherwise complies with the requirements of the preceding paragraph, the
Servicer will be deemed conclusively to have satisfied its obligations with
respect to fire and hazard insurance coverage.
REALIZATION UPON DEFAULTED HOME EQUITY LOANS
The Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Home Equity Loans as come
into default when, in accordance with applicable servicing procedures under the
Agreement, no satisfactory arrangements can be made for the collection of
delinquent payments. In connection with such foreclosure or other conversion,
the Servicer will follow such practices as it deems necessary or advisable and
as are in keeping with its general mortgage servicing activities, provided the
Servicer will not be required to expend its own funds in connection with
foreclosure or other conversion, correction of default on a related First Lien
or restoration of any property unless, in its sole judgment, such foreclosure,
correction or restoration will increase Net Liquidation Proceeds. The Servicer
will be reimbursed out of Liquidation Proceeds for advances of its own funds as
liquidation expenses before any Net Liquidation Proceeds are distributed to
Certificateholders.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
When any Mortgaged 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 Home Equity Loan under the applicable
"due-on-sale" clause, if any, unless it reasonably believes that such clause is
not enforceable under applicable law. In such event, the Servicer is
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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 Home Equity 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 Home Equity Loan. Any fee collected in
connection with an assumption will be retained by the Servicer as additional
servicing compensation. The terms of a Home Equity Loan may not be changed in
connection with an assumption.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Due Period, the Servicer will receive from
interest payments actually received in respect of the Home Equity Loans a
portion of such interest payments as a monthly Servicing Fee in the amount equal
to 0.50% per annum (the "Servicing Fee Rate") on the Principal Balance of each
Home Equity Loan as of the first day of each such Due Period. All assumption
fees, late payment charges and other fees and charges, to the extent collected
from borrowers, will be retained by the Servicer as additional servicing
compensation. The Servicer will pay certain ongoing expenses associated with the
Trust and incurred by it in connection with its responsibilities under the
Agreement.
EVIDENCE AS TO COMPLIANCE
The Agreement provides for delivery on or before January 31 in each
year, beginning in January 1997, to the Depositor, the Trustee, the Certificate
Insurer and the Rating Agencies of an annual statement signed by an officer of
the Servicer to the effect that the Servicer has fulfilled its material
obligations under the Agreement throughout the preceding fiscal year, except as
specified in such statement.
On or before January 31 in each year, beginning in January 1997, the
Servicer will furnish a report prepared by a firm of nationally recognized
independent public accountants (who may also render other services to the
Servicer or the Seller) to the Depositor, the Trustee, the Certificate Insurer
and the Rating Agencies to the effect that such firm has examined certain
documents and the records relating to servicing of the Home Equity Loans under
the Uniform Single Audit Program for Mortgage Bankers and such firm's conclusion
with respect thereto.
CERTAIN MATTERS REGARDING THE SERVICER
The Agreement provides that the Servicer may not resign from its
obligations and duties thereunder, except in connection with a permitted
transfer of servicing, unless (i) such duties and obligations are no longer
permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it or (ii) upon the satisfaction of the following conditions: (a) the
Servicer has proposed a successor servicer to the Trustee in writing and such
proposed successor servicer is reasonably acceptable to the Trustee; (b) the
Rating Agencies have confirmed to the Trustee that the appointment of such
proposed successor servicer as the Servicer will not result in the reduction or
withdrawal of the then-current rating of the Offered Certificates, and (c) such
proposed successor servicer is reasonably acceptable to the Certificate Insurer.
No such resignation will become effective until the Trustee or a successor
servicer has assumed the Servicer's obligations and duties under the Agreement.
The Servicer may perform any of its duties and obligations under the
Agreement through one or more subservicers or delegates, which may be affiliates
of the Servicer. Notwithstanding any such arrangement, the Servicer will remain
liable and obligated to the Trustee and the Certificateholders for the
Servicer's duties and obligations under the Agreement, without any diminution of
such duties and obligations and as if the Servicer itself were performing such
duties and obligations.
The Agreement provides that none of the Depositor, the Seller or the
Servicer or any of their respective directors, officers, employees or agents
will be under any other liability to the Trust, the Trustee, the
Certificateholders or any other person for any action taken or for refraining
from taking any action pursuant to the Agreement. However, the Servicer will not
be protected against any liability which would otherwise be imposed by reason of
its willful misconduct, bad faith or negligence in the performance of its duties
under the Agreement or by reason of reckless disregard of its obligations
thereunder. In addition, the Agreement provides that the Servicer will not be
under any obligation to appear in, prosecute or defend any legal action which is
not incidental to the Servicer's servicing responsibilities under the Agreement.
The Servicer may, in its sole discretion, undertake any such legal action which
it may deem necessary or desirable with respect to the Agreement and the rights
and duties of the parties thereto and the interest of the Certificateholders
thereunder.
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Any corporation into which the Servicer may be merged or consolidated,
or any corporation resulting from any merger, conversion or consolidation to
which the Servicer shall be a party, or any corporation succeeding to the
business of the Servicer shall be the successor of the Servicer, without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, anything in the Agreement to the contrary notwithstanding.
THE BACK-UP SERVICER
The Bank of New York will be appointed as the Back-Up Servicer under
the Agreement. Prior to the occurrence of an Event of Servicer Termination, the
Agreement requires the Back-Up Servicer to maintain current records of each
Mortgagor's account and the activity therein. The Servicer will be required to
furnish electronically such records to the Back-Up Servicer on a monthly basis,
and the Back-Up Servicer will be required to recalculate the Servicer's
application of all funds received from or on behalf of the Mortgagors. Upon the
occurrence of an Event of Servicer Termination, the Back-Up Servicer will be
obligated to assume the obligations of the Servicer as described below. In
performing its obligations under the Agreement, the Back-Up Servicer will be
entitled to the same protections afforded to the Servicer under the Agreement.
EVENTS OF SERVICER TERMINATION
The Servicer's rights under the Agreement may be terminated upon the
occurrence of an Event of Default or a Trigger Event. "Events of Default" will
consist of: (i) any failure of the Servicer to deposit in either Collection
Account any deposit required to be made under the Agreement, which failure
continues unremedied for three Business Days after the giving of written notice
of such failure to the Servicer by the Trustee, or to the Servicer and the
Trustee by the Certificate Insurer or Certificateholders of any Class evidencing
Percentage Interests aggregating not less than 25% of such Class; (ii) any
failure by the Servicer duly to observe or perform in any material respect any
other of its covenants or agreements in the Agreement which continues unremedied
for 30 days after the giving of written notice of such failure to the Servicer
by the Trustee, or to the Servicer and the Trustee by the Certificate Insurer or
Certificateholders of any Class evidencing Percentage Interests aggregating not
less than 25% of such Class; (iii) any failure by the Servicer to make any
required Servicing Advance, which failure continues unremedied for a period of
30 days after the giving of written notice of such failure to the Servicer by
the Trustee, or to the Servicer and the Trustee by the Certificate Insurer or
Certificateholders of any Class evidencing Percentage Interests aggregating not
less than 25% of such Class; (iv) certain events of insolvency, readjustment of
debt, marshalling of assets and liabilities or similar proceedings relating to
the Servicer and certain actions by the Servicer indicating insolvency,
reorganization or inability to pay its obligations (an "Insolvency Event"); (v)
so long as the Seller is an affiliate of the Servicer, any failure of the Seller
to repurchase or substitute Eligible Substitute Home Equity Loans for Defective
Home Equity Loans as required by the Purchase Agreement; (vi) any failure to pay
any Monthly Advance or any Compensating Interest Payments which continues
unremedied for a period of one Business Day; or (vii) any insufficiency in
either Amount Available excluding Insured Payments occurs on a Distribution Date
resulting in the need for an Insured Payment.
A "Trigger Event " will consist of: (i) the failure by the Seller or
the Servicer to pay any amount due the Certificate Insurer pursuant to the
Insurance Agreement among the Depositor, the Seller, the Servicer and the
Certificate Insurer, which continues unremedied for three Business Days after
written notice of such failure by the Certificate Insurer; (ii) the Certificate
Insurer determines that the performance of the Servicer is not satisfactory; or
(iii) the Servicer is a party to a merger, consolidation or other corporate
transaction in which the Servicer is not the surviving entity, the debt of such
surviving entity is not investment grade or the Certificate Insurer determines
that the servicing capabilities of the surviving entity could materially and
adversely affect the servicing of the Home Equity Loans.
RIGHTS UPON AN EVENT OF SERVICER TERMINATION
So long as an Event of Default remains unremedied, either the Trustee,
or Certificateholders of any Class evidencing Percentage Interests of at least
51% of such Class, with the consent of the Certificate Insurer, or the
Certificate Insurer, may terminate all of the rights and obligations of the
Servicer under the Agreement and in and to the Home Equity Loans, whereupon the
Back-Up Servicer will succeed to all the responsibilities, duties and
liabilities of the Servicer under the Agreement (the "Successor Servicer") and
will be entitled to similar compensation arrangements. Upon the occurrence and
continuation beyond the applicable grace period of the event described in clause
(vi) in the second preceding paragraph, the Back-Up Servicer will immediately
assume the duties of the Servicer. The Back-Up Servicer, as Successor Servicer,
will be obligated to make Monthly Advances and Servicing Advances and certain
other advances unless it determines reasonably and in good faith that such
advances would not be recoverable. In the event that the Back-Up Servicer would
be obligated to succeed the Servicer but is unwilling or
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unable so to act, it may appoint, or petition a court of competent jurisdiction
for the appointment of, a housing and home finance institution or other mortgage
loan or home equity loan servicer with all licenses and permits required to
perform its obligations under the Agreement and having a net worth of at least
$15,000,000 and acceptable to the Certificate Insurer to act as Successor
Servicer under the Agreement. Pending such appointment, the Back-Up Servicer
will be obligated to act in such capacity unless prohibited by law. Such
successor will be entitled to receive the same compensation that the Servicer
would otherwise have received (or such lesser compensation as the Trustee and
such successor may agree). A trustee in bankruptcy for the Servicer may be
empowered to prevent the termination and replacement of the Servicer if the only
Event of Default has occurred is an Insolvency Event.
Upon the occurrence of a Trigger Event, the Certificate Insurer, in its
sole discretion, may direct the Trustee to remove the Servicer and to appoint a
Successor Servicer.
AMENDMENT
The Agreement may be amended from time to time by the Depositor, the
Servicer and the Trustee, with the consent of the Certificate Insurer, but
without the consent of the Certificateholders, to cure any ambiguity, to correct
or supplement any provisions therein which may be defective or inconsistent with
any other provisions of the Agreement, to add to the duties of the Depositor or
the Servicer to comply with any requirements imposed by the Code or any
regulation thereunder, or to add or amend any provisions of the Agreement as
required by the Rating Agencies in order to maintain or improve any rating of
the Offered Certificates (it being understood that, after obtaining the ratings
in effect on the Closing Date, none of the Depositor, the Seller, the Servicer
or the Trustee is obligated to obtain, maintain, or improve any such rating) or
to add any other provisions with respect to matters or questions arising under
the Agreement which shall not be inconsistent with the provisions of the
Agreement, provided that such action will not, as evidenced by an opinion of
counsel, materially and adversely affect the interests of any Certificateholder
or the Certificate Insurer; provided, that any such amendment will not be deemed
to materially and adversely affect the Certificateholders and no such opinion
will be required to be delivered if the person requesting such amendment obtains
a letter from the Rating Agencies stating that such amendment would not result
in a downgrading of the then-current rating of the Offered Certificates. The
Agreement may also be amended from time to time by the Depositor, the Servicer
and the Trustee, with the consent of Holders of Certificates evidencing
Percentage Interests aggregating not less than 51% of each Class affected
thereby and the Certificate Insurer for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of the Agreement
or of modifying in any manner the rights of the Certificateholders, provided
that no such amendment will (i) reduce in any manner the amount of, or delay the
timing of, collections of payments on the Certificates or distributions or
payments under the Policy which are required to be made on any Certificate
without the consent of the Certificateholder or (ii) reduce the aforesaid
percentage required to consent to any such amendment, without the consent of the
holders of all Certificates then outstanding. Notwithstanding the foregoing, the
provisions of the Agreement relating to overcollateralization may be reduced or
eliminated by the Certificate Insurer without the consent of any
Certificateholder so long as a Certificate Insurer Default does not exist.
TERMINATION; RETIREMENT OF THE CERTIFICATES
The Trust will terminate on the Distribution Date following the later
of (A) termination of the Policy and payment in full of all amounts owing to the
Certificate Insurer and (B) the earliest of (i) the Distribution Date on which
the Class Certificate Balance of each Class of Offered Certificates has been
reduced to zero, (ii) the final payment or other liquidation of the last Home
Equity Loan in the Trust, and (iii) the optional transfer to the Servicer of the
Home Equity Loans, as described below.
The Servicer will have the right to purchase all remaining Home Equity
Loans and REO Properties in the Trust and thereby effect early retirement of the
Certificates, subject to the Pool Balance of such Home Equity Loans and REO
Properties at the time of purchase being less than or equal to 10% of the sum of
the Pool Balance as of the Cut-Off Date and the Principal Balance of each
Subsequent Home Equity Loan as of the applicable Subsequent Cut-Off Date. In the
event the Servicer exercises such option, the purchase price will be at least
equal to (x) 100% of its then outstanding principal balance plus (y) the greater
of (i) the aggregate amount of accrued and unpaid interest on the Home Equity
Loans through the related Due Period and (ii) 30 days' accrued interest thereon
at the Loan Rate, in each case net of the Servicing Fee plus (z) any amounts due
to the Certificate Insurer.
The termination of the Trust will be effected in a manner consistent
with applicable federal income tax regulations and the status of the Trust as a
REMIC.
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OPTIONAL PURCHASE OF DEFAULTED HOME EQUITY LOANS
The Servicer has the option to purchase from the Trust any Home Equity
Loan 90 days or more delinquent at a purchase price equal to the outstanding
Principal Balance of such Home Equity Loan as of the date of purchase, plus the
greater of (i) all accrued and unpaid interest on such principal balance and
(ii) 30 days' interest on such principal balance, computed at the Loan Rate,
plus all unreimbursed amounts owing to the Certificate Insurer with interest
thereon at the rate referred to in the Insurance Agreement.
THE TRUSTEE
The Bank of New York, a banking corporation organized under the laws of
the State of New York, has been named Trustee pursuant to the Agreement.
The Trustee may have normal banking relationships with the Depositor,
the Seller and the Servicer.
The Trustee may resign at any time, in which event the Depositor will
be obligated to appoint a successor Trustee, as approved by the Certificate
Insurer and the Servicer. The Depositor may also remove the Trustee if the
Trustee ceases to be eligible to continue as such under the Agreement or if the
Trustee becomes insolvent. Upon becoming aware of such circumstances, the
Depositor will be obligated to appoint a successor Trustee, as approved by the
Certificate Insurer and the Servicer. 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.
No holder of a Certificate will have any right under the Agreement to
institute any proceeding with respect to the Agreement unless such holder
previously has given to the Trustee written notice of default and unless
Certificateholders evidencing Percentage Interests of at least 51% of the
applicable Class have made written requests 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. The Trustee will be under no obligation to
exercise any of the trusts or powers vested in it by the Agreement or to make
any investigation of matters arising thereunder or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order or
direction of any of the Certificateholders, unless such Certificateholders have
offered to the Trustee reasonable security or indemnity against the cost,
expenses and liabilities which may be incurred therein or thereby.
THE POLICY AND THE CERTIFICATE INSURER
THE POLICY
Simultaneously with the issuance of the Certificates, the Certificate
Insurer will issue the Policy pursuant to which it will irrevocably and
unconditionally guaranty payment on each Distribution Date to the Trustee for
the benefit of the Holders of each Class of Offered Certificates of a maximum
amount equal to the applicable Guaranteed Interest Payment Amount and the
applicable Guaranteed Principal Payment Amount for such Distribution Date. The
Offered Certificates, the Purchase Agreement and the Agreement may not be
amended unless the Certificate Insurer has given its prior written consent. The
amount of the actual payment (the "Insured Payment"), if any, made by the
Certificate Insurer under the Policy on each Distribution Date allocated to such
Class of Offered Certificates or the Class I Certificates, as the case may be,
is equal to the sum of (A) the excess, if any, of (1) the Interest Remittance
Amount with respect to such Class and Distribution Date over (2) the Amount
Available (net of Insured Payments) for the related Loan Group and (B) the
amount by which the Class Certificate Balance of such Class of Offered
Certificates (or in the case of the Fixed Rate Certificates, the aggregate Class
Certificate Balance of such Certificates) after giving effect to all allocations
and distributions to principal on such Class or Classes of Offered Certificates
on such Distribution Date exceeds the related Loan Group Balance as of such
Distribution Date. The Certificate Insurer's obligations under the Policy to
make Insured Payments will be discharged to the extent funds are transferred to
the Trustee as provided in the Policy, whether or not such funds are properly
applied by the Trustee.
Payment of claims under the Policy will be made by the Certificate
Insurer following Receipt by the Certificate Insurer of the appropriate notice
for payment on the later to occur of (a) 11:00 a.m., New York City time, on the
second Business Day following Receipt of such notice for payment, and (b) 11:00
a.m., New York City time, on the Business Day immediately preceding the relevant
Distribution Date.
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The terms "Receipt" and "Received," with respect to the Policy, means
actual delivery to the Certificate Insurer, prior to 2:00 pm., New York City
time, on a Business Day; delivery either on a day that is not a Business Day or
after 2:00 pm., New York City time, shall be deemed to be Receipt on the next
succeeding Business Day.
If the payment of the Guaranteed Interest Payment Amount or the
Guaranteed Principal Payment Amount is voided pursuant to a final and
non-appealable order (a "Preference Event") under any applicable bankruptcy,
insolvency, receivership or similar law in an Insolvency Proceeding, and, as a
result of such a Preference Event, the Trustee is required to return such voided
payment, or any portion of such voided payment, made in respect of the
Certificates (an "Avoided Payment"), the Certificate Insurer will pay an amount
equal to such Avoided Payment, upon receipt by the Certificate Insurer from the
Trustee of (x) a certified copy of a final order of a court exercising
jurisdiction in such Insolvency Proceeding to the effect that the Trustee is
required to return any such payment or portion thereof during the term of the
Policy because such payment was voided under applicable law, with respect to
which order the appeal period has expired without an appeal having been filed
(the "Final Order"), (y) an assignment, in form reasonably satisfactory to the
Certificate Insurer, irrevocably assigning to the Certificate Insurer all rights
and claims of the Trustee relating to or arising under such Avoided Payment and
(z) a notice for payment appropriately completed and executed by the Trustee.
Such payment shall be disbursed to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Final Order and not
to the Trustee directly.
Notwithstanding the foregoing, in no event shall the Certificate
Insurer be obligated to make any payment in respect of any Avoided Payment,
which payment represents a payment of the principal amount of a Class of Offered
Certificates, prior to the time the Certificate Insurer would have been required
to make a payment in respect of such principal in the absence of such Preference
Event.
The Certificate Insurer shall make payments due in respect of Avoided
Payments prior to 1:00 p.m., New York City time, on the second Business Day
following the Certificate Insurer's receipt of the documents required under
clauses (x) through (z) of the second preceding paragraph. Any such documents
received by the Certificate Insurer after 3:00 p.m., New York City time, on any
Business Day or on any day that is not a Business Day shall be deemed to have
been received by the Certificate Insurer prior to 3:00 p.m. on the next
succeeding Business Day.
Under the Policy, "Business Day" means any day other than (i) a
Saturday or Sunday or (ii) a day on which banking institutions in the City of
New York, New York, or the State of New Jersey are authorized or obligated by
law or executive order to be closed.
"Insolvency Proceeding" means the commencement, after the Closing Date,
of any bankruptcy, insolvency, readjustment of debt, reorganization, marshalling
of assets and liabilities or similar proceedings by or against any Person, or
the commencement, after the Closing Date, of any proceedings by or against any
Person for the winding up or liquidation of its affairs, or the consent after
the date hereof to the appointment of a trustee, conservator, receiver or
liquidator in any bankruptcy, insolvency, readjustment of debt, reorganization,
marshalling of assets and liabilities or similar proceedings of or relating to
any Person.
The terms of the Policy cannot be modified, altered or affected by any
other agreement or instrument, or by the merger, consolidation or dissolution of
the Depositor, the Seller or Servicer. The Policy by its terms may not be
canceled or revoked. The Policy is governed by the laws of the State of New
York.
Pursuant to the terms of the Agreement, unless a Certificate Insurer
Default exists, the Certificate Insurer will be entitled to exercise all rights
of the Holders of the Offered Certificates, without the consent of such
Certificateholders, and the Holders of the Offered Certificates may exercise
such rights only with the prior written consent of the Certificate Insurer. In
addition, the Certificate Insurer will, as a third party beneficiary to the
Agreement, have, among others, the following rights: (i) the right to give
notices of breach or to terminate the rights and obligations of the Servicer
under the Agreement in the event of an Event of Default by the Servicer and to
institute proceedings against the Servicer; (ii) the right to consent to or
direct any waivers of defaults by the Servicer; (iii) the right to remove the
Trustee pursuant to the Agreement; (iv) the right to direct the actions of the
Trustee during the continuation of a Servicer default; (v) the right to require
the Seller to repurchase Home Equity Loans for breach of representation and
warranty or defect in documentation; (vi) the right to direct foreclosures upon
the failure of the Servicer to do so in accordance with the Agreement; and (vii)
the right to direct the Trustee to investigate certain matters. The Certificate
Insurer's consent will be required prior to, among other things, (i) the removal
of the Trustee, (ii) the appointment of any successor Trustee or Servicer or
(iii) any amendment to the Agreement (which consent will not be withheld if an
opinion of counsel is
S-46
<PAGE> 47
delivered and addressed to the Certificate Insurer and the Trustee to the effect
that failure to amend the Agreement would adversely affect the interests of the
Certificateholders).
THE CERTIFICATE INSURER AND MBIA
Effective February 17, 1998, MBIA, Inc., a New York Stock Exchange
listed company (the "Company") acquired all of the outstanding stock of the
Certificate Insurer through a merger with its parent CapMAC Holdings Inc.
Pursuant to a reinsurance agreement, the Certificate Insurer has ceded all of
its net insured risks (including any amounts due but unpaid from third party
reinsurers), as well as its unearned premiums and contingency reserves, to MBIA
Insurance Corporation ("MBIA"). The Company is not obligated to pay the debts of
or claims against the Certificate Insurer.
MBIA is the principal operating subsidiary of the Company. The Company
is not obligated to pay the debts of or claims against MBIA. MBIA is domiciled
in the State of New York and licensed to do business in and is subject to
regulation under the laws of all 50 states, the District of Columbia, the
Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands,
the Virgin Islands of the United States and the Territory of Guam. MBIA has two
European branches, one in the Republic of France and the other in the Kingdom of
Spain. New York has laws prescribing minimum capital requirements, limiting
classes and concentrations of investments and requiring the approval of policy
rates and forms. State laws also regulate the amount of both the aggregate and
individual risks that may be insured, the payment of dividends by MBIA, changes
in control and transactions among affiliates. Additionally, MBIA is required to
maintain contingency reserves on its liabilities in certain amounts and for
certain periods of time.
The consolidated financial statements of MBIA, a wholly owned
subsidiary of the Company, and its subsidiaries as of December 31, 1997 and
December 31, 1996 and for each of the three years in the period ended December
31, 1997, prepared in accordance with generally accepted accounting principles,
included in the Annual Report on Form 10-K of the Company for the year ended
December 31, 1997, and the consolidated financial statements of MBIA and its
subsidiaries as of March 31, 1998 and for the three month periods ending March
31, 1998 and March 31, 1997 included in the Quarterly Report on Form 10-Q of the
Company for the period ending March 31, 1998, are hereby incorporated by
reference into this Prospectus Supplement and shall be deemed to be a part
hereof. Any statement contained in a document incorporated by reference herein
shall be modified or superseded for purposes of this Prospectus Supplement to
the extent that a statement contained herein or in any other subsequently filed
document which also is incorporated by reference herein modifies or supersedes
such statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus
Supplement.
All financial statements of MBIA and its subsidiaries included in
documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934, as amended, subsequent to the date of this
Prospectus Supplement and prior to the termination of the offering of the
Offered Certificates shall be deemed to be incorporated by reference into this
Prospectus Supplement and to be a part hereof from the respective dates of
filing such documents.
The tables below present selected financial information of MBIA
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP"):
<TABLE>
<CAPTION>
SAP
----------------------------------------------
December 31, 1997 March 31,1998
(Audited) (Unaudited)
--------- -----------
(In millions)
<S> <C> <C>
Admitted Assets............................................... $5,256 $5,475
Liabilities................................................... 3,496 3,658
Capital and Surplus........................................... 1,760 1,817
</TABLE>
S-47
<PAGE> 48
<TABLE>
<CAPTION>
GAAP
-----------------------------------------
December 31, 1997 March 31, 1998
----------------- --------------
(Audited) (Unaudited)
(In millions)
<S> <C> <C>
Assets........................................................ $5,988 $6,196
Liabilities................................................... 2,624 2,725
Shareholder's Equity.......................................... 3,364 3,471
</TABLE>
Copies of the financial statements of MBIA incorporated by reference
herein and copies of MBIA's 1997 year-end audited financial statements prepared
in accordance with statutory accounting practices are available, without charge,
from MBIA. The address of MBIA is 113 King Street, Armonk, New York 10504. The
telephone number of MBIA is (914) 273-4545.
MBIA does not accept any responsibility for the accuracy or
completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding MBIA set forth under the subheading "THE POLICY AND
THE CERTIFICATE INSURER -- The Certificate Insurer and MBIA". Additionally, MBIA
makes no representation regarding the Certificates or the advisability of
investing in the Certificates.
Moody's Investors Service, Inc. rates the claims paying ability of MBIA
"Aaa."
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. rates the claims paying ability of MBIA "AAA."
Fitch IBCA, Inc. (formerly known as Fitch Investors Service, L.P.)
rates the claims paying ability of MBIA "AAA."
Each rating of MBIA should be evaluated independently. The ratings
reflect the respective rating agency's current assessment of the
creditworthiness of MBIA and its ability to pay claims on its policies of
insurance. Any further explanation as to the significance of the above ratings
may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the
Certificates, and such ratings may be subject to revision or withdrawal at any
time by the rating agencies. Any downward revision or withdrawal of any of the
above ratings may have an adverse effect on the market price of the
Certificates. MBIA does not guaranty the market price of the Certificates nor
does it guaranty that the ratings on the Certificates will not be revised or
withdrawn.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Offered
Certificates will be used by the Depositor to purchase the Home Equity Loans.
The Home Equity Loans will have been acquired by the Depositor from the Seller
pursuant to the Purchase Agreement.
PLAN OF DISTRIBUTION
The Depositor has been advised by Bear, Stearns & Co. Inc. (the
"Underwriter") that it presently intends to make a market in the Offered
Certificates and by Key Capital Markets, Inc. that it may make a market in the
Offered Certificates; however, the Underwriter and Key Capital Markets, Inc. are
not obligated to do so, any market-making may be discontinued at any time, and
there can be no assurance that an active public market for the Offered
Certificates will develop.
The Depositor is an affiliate of the Underwriter.
S-48
<PAGE> 49
Key Capital Markets, Inc. is a broker-dealer registered as such with
the National Association of Securities Dealers, Inc., and commenced business on
February 26, 1996. Key Capital Markets, Inc. has acted as an underwriter in a
variety of public finance offerings as well as a number of asset-backed and
other debt offerings for subsidiaries of KeyCorp. The Seller and Servicer are an
affiliate of Key Capital Markets, Inc.
After the initial distribution of the Offered Certificates by the
Underwriter, the Prospectus and Prospectus Supplement may be used by Key Capital
Markets, Inc., an affiliate of the Seller and the Servicer, in connection with
market making transactions in the Offered Certificates. Key Capital Markets,
Inc. may act as principal or agent in such transactions, but has no obligation
to do so. Such transactions will be at prices related to prevailing market
prices at the time of sale.
EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1997 and 1996 and the related consolidated
statements of income, changes in shareholder's equity, and cash flows for each
of the three years in the period ended December 31, 1997, incorporated by
reference in this Prospectus Supplement, have been incorporated herein in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of that firm as experts in accounting and auditing.
RATINGS
It is a condition to issuance that each Class of Offered Certificates
be rated in the highest rating category by Standard & Poor's, a division of The
McGraw Hill Companies and Moody's Investors Service, Inc.
A securities rating addresses the likelihood of the receipt by Holders
of distributions on the Home Equity Loans to which they are entitled. The rating
takes into consideration the characteristics of the Home Equity Loans and the
structural, legal and tax aspects associated with the Offered Certificates. The
ratings on the Offered Certificates do not, however, constitute statements
regarding the likelihood or frequency of prepayments on the Home Equity Loans or
the possibility that Holders might realize a lower than anticipated yield. The
ratings assigned to the Offered Certificates will depend primarily upon the
creditworthiness of the Certificate Insurer. Any reduction in a rating assigned
to the claims-paying ability of the Certificate Insurer below the ratings
initially assigned to the Offered Certificates may result in a reduction of one
or more of the ratings assigned to the Offered Certificates.
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
LEGAL MATTERS
Certain legal matters with respect to the Certificates will be passed
upon for the Depositor by Stroock & Stroock & Lavan, New York, New York and for
the Underwriter by Brown & Wood, New York, New York.
S-49
<PAGE> 50
(This page has been left blank intentionally.)
<PAGE> 51
APPENDIX A
CERTAIN STATISTICAL INFORMATION
REGARDING THE INITIAL HOME EQUITY LOANS IN THE LOAN GROUPS
AS OF THE CUT-OFF DATE
<PAGE> 52
(This page has been left blank intentionally.)
<PAGE> 53
<TABLE>
<CAPTION>
APPENDIX A-1
LOAN GROUP ONE
FIXED RATE HOME EQUITY LOANS
DISTRIBUTION BY CUT-OFF DATE PRINCIPAL BALANCES
NUMBER OF INITIAL CUT-OFF DATE % OF CUT-OFF DATE
CUT OFF DATE HOME EQUITY AGGREGATE AGGREGATE
PRINCIPAL BALANCES LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------------- ------- ----------------- -----------------
<S> <C> <C> <C> <C>
Up to $ 9,999.99 21 $ 170,241.29 0.35 %
10,000.00 to 19,999.99 215 3,266,498.25 6.81
20,000.00 to 29,999.99 220 5,490,643.89 11.44
30,000.00 to 39,999.99 123 4,268,655.57 8.90
40,000.00 to 49,999.99 87 3,908,346.62 8.14
50,000.00 to 59,999.99 81 4,445,404.31 9.26
60,000.00 to 69,999.99 50 3,222,732.41 6.72
70,000.00 to 79,999.99 38 2,845,290.84 5.93
80,000.00 to 89,999.99 29 2,450,533.09 5.11
90,000.00 to 99,999.99 25 2,383,000.36 4.97
100,000.00 to 149,999.99 71 8,203,998.93 17.10
150,000.00 to 199,999.99 17 2,816,222.50 5.87
200,000.00 to 299,999.99 12 2,889,686.45 6.02
300,000.00 to 399,999.99 5 1,626,463.31 3.39
--- -------------- ------
Total 994 $47,987,717.82 100.00 %
=== ============== ======
<CAPTION>
DISTRIBUTION BY GEOGRAPHIC LOCATION
OF THE MORTGAGED PROPERTIES
NUMBER OF INITIAL CUT-OFF DATE % OF CUT-OFF DATE
HOME EQUITY AGGREGATE AGGREGATE
GEOGRAPHIC LOCATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------------------- ------- ----------------- -----------------
<S> <C> <C> <C>
Connecticut 9 $ 962,310.66 2.01 %
Delaware 15 786,979.45 1.64
District of Columbia 1 31,500.00 0.07
Maryland 49 2,572,678.33 5.36
New Jersey 415 19,367,012.40 40.36
New York 372 19,167,226.78 39.94
Pennsylvania 127 4,903,643.71 10.22
Virginia 6 196,366.49 0.41
--- -------------- ------
Total 994 $47,987,717.82 100.00 %
=== ============== ======
</TABLE>
A-1
<PAGE> 54
<TABLE>
<CAPTION>
APPENDIX A-1
LOAN GROUP ONE
FIXED RATE HOME EQUITY LOANS
DISTRIBUTION BY ORIGINAL COMBINED LOAN-TO-VALUE RATIOS (1)
NUMBER OF INITIAL CUT-OFF DATE % OF CUT-OFF DATE
HOME EQUITY AGGREGATE AGGREGATE
COMBINED LOAN-TO-VALUE RATIO LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------------------ ------- ----------------- -----------------
<S> <C> <C> <C>
Up to 5.00% 3 $ 45,950.32 0.10%
5.01% to 10.00% 23 367,122.20 0.77
10.01% to 15.00% 39 837,471.23 1.75
15.01% to 20.00% 68 1,801,814.86 3.75
20.01% to 25.00% 59 1,678,745.88 3.50
25.01% to 30.00% 67 2,371,657.55 4.94
30.01% to 35.00% 63 2,234,387.42 4.66
35.01% to 40.00% 47 2,240,571.64 4.67
40.01% to 45.00% 42 2,014,707.53 4.20
45.01% to 50.00% 33 1,949,217.84 4.06
50.01% to 55.00% 47 2,444,854.92 5.09
55.01% to 60.00% 48 2,931,003.02 6.11
60.01% to 65.00% 59 4,020,042.38 8.38
65.01% to 70.00% 88 5,100,980.79 10.63
70.01% to 75.00% 87 5,774,867.77 12.03
75.01% to 80.00% 220 12,140,322.47 25.30
80.01% to 85.00% 1 34,000.00 0.07
--- -------------- ------
Total 994 $47,987,717.82 100.00%
=== ============== ======
<FN>
- ------------------------
(1)The original Combined Loan-to-Value Ratios ("CLTV") shown above are equal,
with respect to each Home Equity Loan, to (i) the sum of (a) the original
principal balance of such Home Equity Loan at the date of the origination
plus (b) the remaining balance of the senior lien(s), if any, at the date of
origination of such Home Equity Loan divided by the value of the related
Mortgaged Property, based upon the appraisal made at the time of origination
of such Home Equity Loan. No assurance can be given that the values of such
Mortgaged Properties have remained or will remain at their levels as of the
dates of origination of the related Initial Home Equity loans. If the
residential real estate market should experience an overall decline in
property values such that the outstanding balances of such Home Equity Loans
together with the outstanding balances of the related first liens become
equal to or greater than the value of the related Mortgaged Properties, the
actual losses could be higher than those now generally experienced in the
mortgage lending industry.
<CAPTION>
DISTRIBUTION BY LIEN POSITION
NUMBER OF INITIAL CUT-OFF DATE % OF CUT-OFF DATE
HOME EQUITY AGGREGATE AGGREGATE
LIEN POSITION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- ----- ----------------- -----------------
<S> <C> <C> <C>
First Lien 520 $31,343,548.11 65.32%
Second Lien 474 16,644,169.71 34.68
Total 994 $47,987,717.82 100.00%
=== ============== ======
</TABLE>
A-2
<PAGE> 55
<TABLE>
<CAPTION>
APPENDIX A-1
LOAN GROUP ONE
FIXED RATE HOME EQUITY LOANS
DISTRIBUTION BY LOAN RATES AS OF THE CUT-OFF DATE
NUMBER OF INITIAL CUT-OFF DATE % OF CUT-OFF DATE
HOME EQUITY AGGREGATE AGGREGATE
LOAN RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
7.500% to 7.999% 8 $932,200.00 1.94%
8.000% to 8.499% 13 1,622,424.86 3.38
8.500% to 8.999% 46 3,220,543.24 6.71
9.000% to 9.499% 52 2,464,823.45 5.14
9.500% to 9.999% 117 8,189,529.59 17.07
10.000% to 10.499% 89 4,629,731.20 9.65
10.500% to 10.999% 141 7,989,846.49 16.65
11.000% to 11.499% 55 2,056,939.62 4.29
11.500% to 11.999% 86 3,787,007.62 7.89
12.000% to 12.499% 36 1,592,526.49 3.32
12.500% to 12.999% 89 3,056,011.32 6.37
13.000% to 13.499% 11 368,654.25 0.77
13.500% to 13.999% 105 3,172,033.53 6.61
14.000% to 14.499% 14 666,752.44 1.39
14.500% to 14.999% 53 1,814,375.09 3.78
15.000% to 15.499% 6 248,316.99 0.52
15.500% to 15.999% 39 1,011,359.04 2.11
16.500% to 16.999% 27 1,071,928.17 2.23
17.500% to 17.999% 4 67,048.37 0.14
19.500% to 19.999% 2 16,367.13 0.03
20.500% to 20.999% 1 9,298.93 0.02
--- --------------- ------
Total 994 $ 47,987,717.82 100.00%
=== =============== ======
<CAPTION>
DISTRIBUTION BY REMAINING MONTHS TO STATED MATURITY
NUMBER OF INITIAL CUT-OFF DATE % OF CUT-OFF DATE
REMAINING MONTHS TO HOME EQUITY AGGREGATE AGGREGATE
STATED MATURITY LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- ------- ----------------- -----------------
<S> <C> <C> <C>
Up to 120 months 186 $ 3,770,070.85 7.86%
121 to 180 months 673 35,294,175.27 73.55
181 to 240 months 115 7,801,076.39 16.26
241 to 360 months 20 1,122,395.31 2.34
--- -------------- ------
Total 994 $47,987,717.82 100.00%
=== ============== ======
</TABLE>
A-3
<PAGE> 56
<TABLE>
<CAPTION>
APPENDIX A-1
LOAN GROUP ONE
FIXED RATE HOME EQUITY LOANS
DISTRIBUTION BY MONTHS SINCE FUNDING
NUMBER OF INITIAL CUT-OFF DATE % OF CUT-OFF DATE
HOME EQUITY AGGREGATE AGGREGATE
MONTHS SINCE FUNDING LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------- ------- ----------------- -----------------
<S> <C> <C> <C>
Up to 12 months 763 $41,742,736.12 86.99%
13 to 24 months 75 2,452,343.15 5.11
25 to 36 months 60 1,578,978.17 3.29
37 to 48 months 61 1,561,856.51 3.25
49 to 60 months 24 480,940.00 1.00
61 to 72 months 11 170,863.87 0.36
--- -------------- ------
Total 994 $47,987,717.82 100.00%
=== ============== ======
<CAPTION>
DISTRIBUTION BY TYPE OF MORTGAGED PROPERTY
NUMBER OF INITIAL CUT-OFF DATE % OF CUT-OFF DATE
HOME EQUITY AGGREGATE AGGREGATE
PROPERTY TYPE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------- ------- ----------------- -----------------
<S> <C> <C> <C>
Single Family Detached 709 $35,634,458.73 74.26%
Single Family Attached 126 4,666,111.22 9.72
Two- to Four-Family 112 5,372,559.41 11.20
Condominium 37 1,395,456.18 2.91
Mixed Use 10 919,132.28 1.92
---- -------------- ------
Total 994 $47,987,717.82 100.00%
=== ============== ======
<CAPTION>
DISTRIBUTION BY OCCUPANCY STATUS*
NUMBER OF INITIAL CUT-OFF DATE % OF CUT-OFF DATE
HOME EQUITY AGGREGATE AGGREGATE
OCCUPANCY STATUS LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------- ------- ----------------- -----------------
<S> <C> <C> <C>
Owner Occupied 926 $44,770,315.53 93.30%
Investor Owned 54 2,483,988.48 5.18
Vacation 6 297,513.49 0.62
Other 8 435,900.32 0.91
--- -------------- ------
Total 994 $47,987,717.82 100.00%
=== ============== ======
<FN>
- ------------------------
*Based on representations by the Mortgagors at the time of origination of the Home Equity Loans.
</TABLE>
A-4
<PAGE> 57
<TABLE>
<CAPTION>
APPENDIX A-2
LOAN GROUP TWO
ADJUSTABLE RATE HOME EQUITY LOANS
DISTRIBUTION BY CUT-OFF DATE PRINCIPAL BALANCES
NUMBER OF INITIAL CUT-OFF DATE % OF CUT-OFF DATE
CUT OFF DATE HOME EQUITY AGGREGATE AGGREGATE
PRINCIPAL BALANCES LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------------- ------- ----------------- -----------------
<S> <C> <C> <C> <C>
Up to $ 9,999.99 1 $ 9,956.84 0.03%
10,000.00 to 19,999.99 60 935,216.09 2.90
20,000.00 to 29,999.99 56 1,413,154.92 4.38
30,000.00 to 39,999.99 39 1,351,775.10 4.19
40,000.00 to 49,999.99 47 2,084,813.97 6.47
50,000.00 to 59,999.99 42 2,302,752.98 7.14
60,000.00 to 69,999.99 41 2,659,932.27 8.25
70,000.00 to 79,999.99 36 2,712,659.50 8.41
80,000.00 to 89,999.99 26 2,205,360,54 6.84
90,000.00 to 99,999.99 25 2,375,826.92 7.37
100,000.00 to 149,999.99 67 8,107,203.21 25.14
150,000.00 to 199,999.99 20 3,411,439.02 10.58
200,000.00 to 299,999.99 9 2,056,037.33 6.38
300,000.00 to 399,999.99 2 618,276.44 1.92
--- -------------- ------
Total 471 $32,244,405.13 100.00%
=== ============== ======
<CAPTION>
DISTRIBUTION BY GEOGRAPHIC LOCATION
OF THE MORTGAGED PROPERTIES
NUMBER OF INITIAL CUT-OFF DATE % OF CUT-OFF DATE
HOME EQUITY AGGREGATE AGGREGATE
GEOGRAPHIC LOCATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------------------- ------- ----------------- -----------------
<S> <C> <C> <C>
Connecticut 3 $ 205,473.37 0.64%
Delaware 11 605,450.30 1.88
Maryland 43 2,419,878.47 7.50
New Jersey 177 11,758,570.44 36.47
New York 143 11,695,761.67 36.27
Pennsylvania 89 5,310,686.41 16.47
Virginia 5 248,584.47 0.77
--- -------------- ------
Total 471 $32,244,405.13 100.00%
=== ============== ======
</TABLE>
A-5
<PAGE> 58
<TABLE>
<CAPTION>
APPENDIX A-2
LOAN GROUP TWO
ADJUSTABLE RATE HOME EQUITY LOANS
DISTRIBUTION BY ORIGINAL COMBINED LOAN-TO-VALUE RATIOS (1)
NUMBER OF INITIAL CUT-OFF DATE % OF CUT-OFF DATE
COMBINED LOAN- HOME EQUITY AGGREGATE AGGREGATE
TO-VALUE RATIO LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
---------------- ------- ----------------- -----------------
<C> <C> <C> <C>
5.01% to 10.00% 1 $ 14,461.65 0.04%
10.01% to 15.00% 3 67,589.56 0.21
15.01% to 20.00% 7 228,614.14 0.71
20.01% to 25.00% 7 211,236.68 0.66
25.01% to 30.00% 10 332,646.95 1.03
30.01% to 35.00% 10 468,720.04 1.45
35.01% to 40.00% 17 798,727.06 2.48
40.01% to 45.00% 14 841,716.83 2.61
45.01% to 50.00% 21 963,741.25 2.99
50.01% to 55.00% 21 1,398,399.91 4.34
55.01% to 60.00% 35 2,010,026.80 6.23
60.01% to 65.00% 22 1,304,888.94 4.05
65.01% to 70.00% 52 3,622,962.89 11.24
70.01% to 75.00% 63 4,752,809.89 14.74
75.01% to 80.00% 188 15,227,862.54 47.23
--- -------------- ------
Total 471 $32,244,405.13 100.00%
=== ============== ======
- ------------------------
<FN>
(1) The original Combined Loan-to-Value Ratios ("CLTV") shown above are
equal, with respect to each Home Equity Loan, to (i) the sum of (a) the
original principal balance of such Home Equity Loan at the date of the
origination plus (b) the remaining balance of the senior lien(s), if
any, at the date of origination of such Home Equity Loan divided by the
value of the related Mortgaged Property, based upon the appraisal made
at the time of origination of such Home Equity Loan. No assurance can
be given that the values of such Mortgaged Properties have remained or
will remain at their levels as of the dates of origination of the
related Initial Home Equity Loans. If the residential real estate
market should experience an overall decline in property values such
that the outstanding balances of such Home Equity Loans together with
the outstanding balances of the related first liens become equal to or
greater than the value of the related Mortgaged Properties, the actual
losses could be higher than those now generally experienced in the
mortgage lending industry.
<CAPTION>
DISTRIBUTION BY LIEN POSITION
NUMBER OF INITIAL CUT-OFF DATE % OF CUT-OFF DATE
HOME EQUITY AGGREGATE AGGREGATE
LIEN POSITION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- ----- ----------------- -----------------
<S> <C> <C> <C>
First Lien 298 $25,893,625.72 80.30%
Second Lien 173 6,350,779.41 19.70
Total 471 $32,244,405.13 100.00%
=== ============== ======
</TABLE>
A-6
<PAGE> 59
<TABLE>
<CAPTION>
APPENDIX A-2
LOAN GROUP TWO
ADJUSTABLE RATE HOME EQUITY LOANS
DISTRIBUTION BY LOAN RATES AS OF THE CUT-OFF DATE
NUMBER OF INITIAL CUT-OFF DATE % OF CUT-OFF DATE
HOME EQUITY AGGREGATE AGGREGATE
LOAN RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------- ------- ----------------- -----------------
<S> <C> <C> <C>
7.500% to 7.999% 81 $ 8,280,567.76 25.68%
8.000% to 8.499% 18 1,182,335.12 3.67
8.500% to 8.999% 82 5,301,456.67 16.44
9.000% to 9.499% 52 4,344,004.28 13.47
9.500% to 9.999% 83 5,192,362.55 16.10
10.000% to 10.499% 40 2,894,985.40 8.98
10.500% to 10.999% 76 3,724,230.61 11.55
11.000% to 11.499% 24 861,030.53 2.67
11.500% to 11.999% 14 442,872.00 1.37
12.000% to 12.499% 1 20,560.21 0.06
--- -------------- ------
Total 471 $32,244,405.13 100.00%
=== ============== ======
<CAPTION>
DISTRIBUTION BY REMAINING MONTHS TO STATED MATURITY
NUMBER OF INITIAL CUT-OFF DATE % OF CUT-OFF DATE
REMAINING MONTHS HOME EQUITY AGGREGATE AGGREGATE
TO STATED MATURITY LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------ ------- ----------------- -----------------
<S> <C> <C> <C>
Up to 120 months 6 $ 121,107.01 0.38%
121 to 180 months 245 10,595,408.84 32.86
241 to 360 months 220 21,527,889.28 66.76
--- -------------- ------
Total 471 $32,244,405.13 100.00%
=== ============== ======
</TABLE>
A-7
<PAGE> 60
<TABLE>
<CAPTION>
APPENDIX A-2
LOAN GROUP TWO
ADJUSTABLE RATE HOME EQUITY LOANS
DISTRIBUTION BY MONTHS SINCE FUNDING
NUMBER OF INITIAL CUT-OFF DATE % OF CUT-OFF DATE
HOME EQUITY AGGREGATE AGGREGATE
MONTHS SINCE FUNDING LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------- ----- ----------------- -----------------
<S> <C> <C> <C> <C>
Up to 6 months 471 $32,244.405.13 100.00%
Total 471 $32,244,405.13 100.00%
=== ============== ======
<CAPTION>
DISTRIBUTION BY TYPE OF MORTGAGED PROPERTY
NUMBER OF INITIAL CUT-OFF DATE % OF CUT-OFF DATE
HOME EQUITY AGGREGATE AGGREGATE
PROPERTY TYPE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------- ------- ----------------- -----------------
<S> <C> <C> <C>
Single Family Detached 375 $26,397,089.29 81.87%
Single Family Attached 55 2,903,616.09 9.01
Two- to Four-Family 35 2,618,830.63 8.12
Condominium 6 324,869.12 1.01
--- -------------- ------
Total 471 $32,244,405.13 100.00%
=== ============== ======
<CAPTION>
DISTRIBUTION BY OCCUPANCY STATUS*
NUMBER OF INITIAL CUT-OFF DATE % OF CUT-OFF DATE
HOME EQUITY AGGREGATE AGGREGATE
OCCUPANCY STATUS LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------- ------- ----------------- -----------------
<S> <C> <C> <C>
Owner Occupied 452 $30,660,175.57 95.09
Investor Owned 13 1,133,766.11 3.52
Vacation 4 226,715.87 0.70
Other 2 223,747.58 0.69
--- -------------- ------
Total 471 $32,244,405.13 100.00%
=== ============== ======
<FN>
- ------------------------
*Based on representations by the Mortgagors at the time of origination of the Home Equity Loans.
</TABLE>
A-8
<PAGE> 61
<TABLE>
<CAPTION>
APPENDIX A-2
LOAN GROUP TWO
ADJUSTABLE RATE HOME EQUITY LOANS
DISTRIBUTION BY LIFETIME CAP
NUMBER OF INITIAL CUT-OFF DATE % OF CUT-OFF DATE
HOME EQUITY AGGREGATE AGGREGATE
LIFETIME CAP LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------ ----- ----------------- -----------------
<S> <C> <C> <C>
13.500% to 13.999% 81 $ 8,280,567.76 25.68%
14.000% to 14.499% 18 1,182,335.12 3.67
14.500% to 14.999% 82 5,301,456.67 16.44
15.000% to 15.499% 52 4,344,004.28 13.47
15.500% to 15.999% 83 5,192,362.55 16.10
16.000% to 16.499% 40 2,894,985.40 8.98
16.500% to 16.999% 76 3,724,230.61 11.55
17.000% to 17.499% 24 861,030.53 2.67
17.500% to 17.999% 14 442,872.00 1.37
18.000% to 18.499% 1 20,560.21 0.06
-- --------------
Total 471 $32,244,405.13 100.00%
=== ============== =======
<CAPTION>
DISTRIBUTION BY LIFETIME FLOOR
NUMBER OF INITIAL CUT-OFF DATE % OF CUT-OFF DATE
HOME EQUITY AGGREGATE AGGREGATE
LIFETIME FLOOR LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------- ----- ----------------- -----------------
<S> <C> <C> <C>
7.500% to 7.999% 81 $ 8,280,567.76 25.68%
8.000% to 8.499% 18 1,182,335.12 3.67
8.500% to 8.999% 82 5,301,456.67 16.44
9.000% to 9.499% 52 4,344,004.28 13.47
9.500% to 9.999% 83 5,192,362.55 16.10
10.000% to 10.499% 40 2,894,985.40 8.98
10.500% to 10.999% 76 3,724,230.61 11.55
11.000% to 11.499% 24 861,030.53 2.67
11.500% to 11.999% 14 442,872.00 1.37
12.000% to 12.499% 1 20,560.21 0.06
--- -------------- ------
Total 471 $32,244,405.13 100.00%
=== ============== =======
</TABLE>
A-9
<PAGE> 62
<TABLE>
<CAPTION>
APPENDIX A-2
LOAN GROUP TWO
ADJUSTABLE RATE HOME EQUITY LOANS
DISTRIBUTION BY MARGIN
NUMBER OF INITIAL CUT-OFF DATE % OF CUT-OFF DATE
HOME EQUITY AGGREGATE AGGREGATE
MARGIN LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------ ----- ----------------- -----------------
<S> <C> <C> <C>
4.000% to 4.499% 81 $ 8,280,353.07 25.68%
4.500% to 4.999% 21 1,469,713.80 4.56
5.000% to 5.499% 32 1,159,596.36 3.60
5.500% to 5.999% 94 7,973,256.05 24.73
6.000% to 6.499% 20 1,224,772.07 3.80
6.500% to 6.999% 109 7,117,746.51 22.07
7.000% to 7.499% 58 3,257,527.00 10.10
7.500% to 7.999% 46 1,514,689.30 4.70
8.000% to 8.499% 7 166,190.76 0.52
8.500% to 8.999% 3 80,560.21 0.25
--- -------------- -------
Total 471 $32,244,405.13 100.00%
=== ============== =======
<CAPTION>
DISTRIBUTION BY NEXT CHANGE DATE
NUMBER OF INITIAL CUT-OFF DATE % OF CUT-OFF DATE
NEXT HOME EQUITY AGGREGATE AGGREGATE
CHANGE DATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------- ----- ----------------- -----------------
<S> <C> <C> <C>
September 1996 2 $ 282,486.05 0.88%
October 1996 61 5,009,632.32 15.54
November 1996 145 9,853,582.75 30.56
December 1996 151 10,223,334.95 31.71
January 1997 85 4,999,169.06 15.50
February 1997 27 1,876,200.00 5.82
--- ------------- -----
Total 471 $32,244,405.13 100.00%
=== ============== =======
</TABLE>
A-10
<PAGE> 63
PROSPECTUS
ASSET-BACKED CERTIFICATES
ASSET-BACKED NOTES
(ISSUABLE IN SERIES)
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 and/or revolving home equity loans or certain balances thereof
(collectively, 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 17 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.
------------------------------------
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.
FEBRUARY 9, 1996
1
<PAGE> 64
(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.
2
<PAGE> 65
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
3
<PAGE> 66
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.
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 shall
be deemed to be incorporated by reference into the related Prospectus Supplement
and 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 in any Prospectus Supplement or in this
Prospectus shall be deemed to be modified or superseded for purposes of such
Prospectus Supplement and this Prospectus to the extent that a statement
contained 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 any Prospectus Supplement or 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> 67
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.
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
5
<PAGE> 68
"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 Principal
Payments Final Scheduled
Distribution Date of the
Securities Optional Termination
interest accrued during the
period specified in the related
Prospectus Supplement. See
"DESCRIPTION OF THE
SECURITIES--Payments of
Interest."
PRINCIPAL PAYMENTS........................... All payments of principal of a
Series of Securities will be
made in an aggregate amount
determined as set forth in the
related Prospectus Supplement
and will be paid at the times
and will be allocated among the
Classes of such Series in the
order and amounts, and will be
applied either on a pro rata or
a random lot basis among all
Securities of any such Class,
all as specified in the related
Prospectus Supplement.
FINAL SCHEDULED DISTRIBUTION DATE OF
THE SECURITIES............................... The Final Scheduled Distribution
Date with respect to each Class
of Notes is the date no later
than which principal thereof
will be fully paid and with
respect to each Class of
Certificates is the date after
which no Certificates of such
Class are expected to remain
outstanding, in each case
calculated on the basis of the
assumptions applicable to such
Series described in the related
Prospectus Supplement. The Final
Scheduled Distribution Date of a
Class may equal the maturity
date of the Primary Asset in the
related Trust Fund which has the
latest stated maturity or will
be determined as described
herein and in the related
Prospectus Supplement.
The actual final Distribution
Date of the Securities of a
Series will depend primarily
upon the rate of payment
(including prepayments,
liquidations due to default, the
receipt of proceeds from
casualty insurance policies and
repurchases) of the Loans or
Underlying Loans relating to the
Private Securities, as
applicable, in the related Trust
Fund. Unless otherwise specified
in the related Prospectus
Supplement, the actual final
Distribution Date of any
Security is likely to occur
earlier and may occur
substantially earlier or may
occur later than its Final
Scheduled Distribution Date as a
result of the application of
prepayments to the reduction of
the principal balances of the
Securities and as a result of
defaults on the Primary Assets.
The rate of payments on the
Loans or Underlying Loans
relating to the Private
Securities, as applicable, in
the Trust Fund for a Series will
depend on a variety of factors,
including certain
6
<PAGE> 69
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 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
7
<PAGE> 70
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 and/or
revolving home equity loans or
certain balances thereof
(collectively, "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."
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)
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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; (l) the
credit limit utilization rates
of any Revolving Credit Line
Loans; and (m) 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
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
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<PAGE> 72
Underlying Loans, (D) the
minimum and maximum stated
maturities of such Underlying
Loans at origination, (E) the
lien priority and the credit
utilization rates, if any, 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 in
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<PAGE> 73
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
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<PAGE> 74
Securities (collectively, the
"Rating Agency") for the
purposes specified in such
Prospectus Supplement. The
Enhancement Will support the
payments on the Securities and
may be used for other purposes,
to the extent and under the
conditions specified in such
Prospectus Supplement. See
"ENHANCEMENT."
Enhancement for a Series may
include one or more of the
following types of Enhancement,
or such other type of
Enhancement specified in the
related Prospectus Supplement.
A. Subordinate Securities.......... If stated in the related
Prospectus Supplement,
Enhancement for a Series may
consist of one or more Classes
of Subordinate Securities. The
rights of Holders of such
Subordinate Securities to
receive distributions on any
Distribution Date will be
subordinate in right and
priority to the rights of
holders of Senior Securities of
the Series, but only to the
extent described in the related
Prospectus Supplement.
B. Insurance....................... If stated in the related
Prospectus Supplement,
Enhancement for a Series may
consist of special hazard
insurance policies, bankruptcy
bonds and other types of
insurance supporting payments on
the Securities.
C. Reserve Funds................... If stated in the Prospectus
Supplement, the Depositor may
deposit cash, a letter or
letters of credit, short-term
investments, or other
instruments acceptable to the
Rating Agency in one or more
reserve funds to be established
in the name of the Trustee (each
a "Reserve Fund"), which will be
used, as specified in such
Prospectus Supplement, by the
Trustee to make required
payments of principal of or
interest on the Securities of
such Series, to make adequate
provision for future payments on
such Securities or for any other
purpose specified in the
Agreement, with respect to such
Series, to the extent that funds
are not otherwise available. In
the alternative or in addition
to such deposit, a Reserve Fund
for a Series may be funded
through application of all or a
portion of the excess cash flow
from the Primary Assets for such
Series, to the extent described
in the related Prospectus
Supplement.
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
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<PAGE> 75
"ENHANCEMENT-- Minimum Principal
Payment Agreement."
E. Deposit Agreement............... If stated in the Prospectus
Supplement, the Depositor and
the Trustee will enter into a
guaranteed investment contract
or an investment agreement (the
"Deposit Agreement") pursuant to
which all or a portion of
amounts held in the Collection
Account, the Distribution
Account or in any Reserve Fund
will be invested with the entity
specified in such Prospectus
Supplement. The Trustee will be
entitled to withdraw amounts so
invested, plus interest at a
rate equal to the Assumed
Reinvestment Rate, in the manner
specified in the Prospectus
Supplement. See
"ENHANCEMENT--Deposit
Agreement."
SERVICING.................................... The Servicer will be responsible
for servicing, managing and
making collections on the Loans
for a Series. In addition, the
Servicer, if so specified in the
related Prospectus Supplement,
will act as custodian and will
be responsible for maintaining
custody of the Loans and related
documentation on behalf of the
Trustee. Advances with respect
to delinquent payments of
principal or interest on a Loan
will be made by the Servicer
only to the extent described in
the related Prospectus
Supplement. Such advances will
be intended to provide liquidity
only and, unless otherwise
specified in the related
Prospectus Supplement,
reimbursable to the Servicer
from scheduled payments of
principal and interest, late
collections, or from the
proceeds of liquidation of the
related Loans or from other
recoveries relating to such
Loans (including any insurance
proceeds or payments from other
credit support). In performing
these functions, the Servicer
will exercise the same degree of
skill and care that it
customarily exercises with
respect to similar receivables
or Loans owned or serviced by
it. Under certain limited
circumstances, the Servicer may
resign or be removed, in which
event either the Trustee or a
third-party servicer will be
appointed as successor servicer.
The Servicer will receive a
periodic fee as servicing
compensation (the "Servicing
Fee") and may, as specified
herein and in the related
Prospectus Supplement, receive
certain additional compensation.
See "SERVICING OF
LOANS--Servicing Compensation
and Payment of Expenses" herein.
FEDERAL INCOME TAX CONSIDERATIONS
A. Debt Securities and REMIC
Residual Securities............. If (i) an election is made to
treat all or a portion of a
Trust Fund for a Series as a
"real estate mortgage investment
conduit" (a "REMIC") or (ii) so
provided in the related
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
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<PAGE> 76
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) except in certain
circumstances with respect to a
Holder classified as a thrift
institution under the Code, may
not be subject to offset by
losses from other activities or
investments, (ii) for a Holder
that is subject to tax under the
Code on unrelated business
taxable income, may be treated
as unrelated business taxable
income and (iii) for a foreign
holder, may not qualify for
exemption from or reduction of
withholding. In addition, (i)
Residual Interests are subject
to transfer restrictions and
(ii) certain transfers of
Residual Interests will not be
recognized for federal income
tax purposes. Further,
individual holders are subject
to limitations on the
deductibility of expenses of the
REMIC. See "CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS."
B. Non-REMIC Pass-Through
Securities...................... If so specified in the related
Prospectus Supplement, the Trust
Fund for a Series will be
treated as a grantor trust and
will not be classified as an
association taxable as a
corporation for federal income
tax purposes and Holders of
Securities of such Series
("Pass-Through Securities") will
be treated as owning directly
rights to receive certain
payments of interest or
principal, or both on the
Primary Assets held in the Trust
Fund for such Series. All income
with respect to a Stripped
Security (as defined herein)
will be accounted for as
original issue
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<PAGE> 77
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 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
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<PAGE> 78
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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<PAGE> 79
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.
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<PAGE> 80
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."
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
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<PAGE> 81
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 dependent 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.
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.
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The Home Improvement Contracts are also subject to the Preservation of
Consumers' Claims and Defenses regulations of the Federal Trade Commission and
other similar federal and state statutes and regulations (collectively, the
"Holder in Due Course Rules"), which protect the homeowner from defective
craftsmanship or incomplete work by a contractor. These laws permit the obligor
to withhold payment if the work does not meet the quality and durability
standards agreed to by the homeowner and the contractor. The Holder in Due
Course Rules have the effect of subjecting any assignee of the seller in a
consumer credit transaction to all claims and defenses which the obligor in the
credit sale transaction could assert against the seller of the goods.
Violations of certain provisions of these Federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Loans and in addition could subject the Trust Fund to damages and
administrative enforcement. See "CERTAIN LEGAL ASPECTS OF THE LOANS."
Contracts Will Not Be Stamped. In order to give notice of the right,
title and interest of Securityholders to the Home Improvement Contracts, the
Depositor will cause a UCC-1 financing statement to be executed by the Depositor
or the Seller identifying the Trustee as the secured party and identifying all
Home Improvement Contracts as collateral. Unless otherwise specified in the
related Prospectus Supplement, the Home Improvement Contracts will not be
stamped or otherwise marked to reflect their assignment to the Trust Fund.
Therefore, if, through negligence, 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.
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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. 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
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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.
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
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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
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influenced by the rate at which the amount financed under the Loans or
Underlying Loans relating to the Private Securities, as applicable, included in
the Trust Fund for a Series is paid, which may be in the form of scheduled
amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to
a prepayment standard or model. The Prospectus Supplement for a Series of
Securities will describe the prepayment standard or model, if any, used and may
contain tables setting forth the projected weighted average life of each Class
of Securities of such Series and the percentage of the original principal amount
of each Class of Securities of such Series that would be outstanding on
specified Distribution Dates for such Series based on the assumptions stated in
such Prospectus Supplement, including assumptions that prepayments on the Loans
or Underlying Loans relating to the Private Securities, as applicable, included
in the related Trust Fund are made at rates corresponding to various percentages
of the prepayment standard or model specified in such Prospectus Supplement.
There is, however, no assurance that prepayment of the Loans or
Underlying Loans relating to the Private Securities, as applicable, included in
the related Trust Fund will conform to any level of any prepayment standard or
model specified in the related Prospectus Supplement. The rate of principal
prepayments on pools of loans may be influenced by a variety of factors,
including job related factors such as transfers, layoffs or promotions and
personal factors such as divorce, disability or prolonged illness. Economic
conditions, either generally or within a particular geographic area or industry,
also may affect the rate of principal prepayments. Demographic and social
factors may influence the rate of principal prepayments in that some borrowers
have greater financial flexibility to move or refinance than do other borrowers.
The deductibility of mortgage interest payments, servicing decisions and other
factors also affect the rate of principal prepayments. As a result, there can be
no assurance as to the rate or timing of principal prepayments of the Loans or
Underlying Loans either from time to time or over the lives of such Loans or
Underlying Loans.
The rate of prepayments of conventional housing loans and other
receivables has fluctuated significantly in recent years. In general, however,
if prevailing interest rates fall significantly below the interest rates on the
Loans or Underlying Loans relating to the Private Securities, as applicable, for
a Series, such loans are likely to prepay at rates higher than if prevailing
interest rates remain at or above the interest rates borne by such loans. In
this regard, it should be noted that the Loans or Underlying Loans, as
applicable, for a Series may have different interest rates. In addition, the
weighted average life of the Securities may be affected by the varying
maturities of the Loans or Underlying Loans relating to the Private Securities,
as applicable. If any Loans or Underlying Loans relating to the Private
Securities, as applicable, for a Series have actual terms-to-stated maturity of
less than those assumed in calculating the Final Scheduled Distribution Date of
the related Securities, one or more Classes of the Series may be fully paid
prior to their respective Final Scheduled Distribution Date, even in the absence
of prepayments and a reinvestment return higher than the Assumed Reinvestment
Rate.
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,
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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 and/or revolving home equity loans or certain balances
thereof (the "Closed-End Loans" and "Revolving Credit Line Loans," respectively
and collectively, 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.
As more fully described in the related Prospectus Supplement, interest
on each Revolving Credit Line Loan, excluding introductory rates offered from
time to time during promotional periods, may be computed and payable monthly on
the average daily outstanding principal balance of such loan. Principal amounts
on the Revolving Credit Line Loans may be drawn down (up to a maximum amount as
set forth in the related Prospectus Supplement) or repaid under each Revolving
Credit Line Loan from time to time. If
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specified in the related Prospectus Supplement, new draws by borrowers under the
Revolving Credit Line Loans will automatically become part of the Trust Fund for
a Series. As a result, the aggregate balance of the Revolving Credit Line Loans
will fluctuate from day to day as new draws by borrowers are added to the Trust
Fund and principal payments are applied to such balances and such amounts will
usually differ each day, as more specifically described in the related
Prospectus Supplement. Unless otherwise described in the related Prospectus
Supplement, the full principal amount of a Closed-End 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 Closed-End Loan is calculated on the basis of the outstanding
principal balance of such loan multiplied by the Loan Rate thereon and further
multiplied by a fraction, the numerator of which is the number of days in the
period elapsed since the preceding payment of interest was made and the
denominator is the number of days in the annual period for which interest
accrues on such loan. Unless otherwise described in the related Prospectus
Supplement the original terms to stated maturity of Closed-End Loans will not
exceed 360 months. Under certain circumstances, under either a Revolving Credit
Line Loan or a Closed-End Loan, a borrower may choose an interest only payment
option and is obligated to pay only the amount of interest which accrues on the
loan during the billing cycle. An interest only payment option may be available
for a specified period before the borrower must begin paying at least the
minimum monthly payment of a specified percentage of the average outstanding
balance of the loan.
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, newsstands, 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 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 Loans arc 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 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.
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Unless otherwise specified in the related Prospectus Supplement, the
initial Combined Loan-to-Value Ratio of a Loan is computed in the manner
described in the related Prospectus Supplement, taking into account the amounts
of any related senior mortgage loans.
Home Improvement Contracts. The Primary Assets for a Series may
consist, in whole or part, of home improvement installment sales contracts and
installment loan agreements (the "Home Improvement Contracts") originated by a
home improvement contractor in the ordinary course of business. As specified in
the related Prospectus Supplement, the Home Improvement Contracts will either be
unsecured or secured by the Mortgages primarily on Single Family Properties
which are generally subordinate to other mortgages on the same Mortgaged
Property or by purchase money security interests in the Home Improvements
financed thereby. Unless otherwise specified in the applicable Prospectus
Supplement, the Home Improvement Contracts will be fully amortizing and may have
fixed interest rates or adjustable interest rates and may provide for other
payment characteristics as described below and in the related Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
home improvements (the "Home Improvements") securing the Home Improvement
Contracts include, but are not limited to, replacement windows, house siding,
new roofs, swimming pools, satellite dishes, kitchen and bathroom remodeling
goods and solar heating panels. The initial Loan-to-Value Ratio of a Home
Improvement Contract will be computed in the manner described in the related
Prospectus Supplement.
Additional Information. The selection criteria which will apply with
respect to the Loans, including, but not limited to, the Combined Loan-to-Value
Ratios or Loan-to-Value Ratios, as applicable, original terms to maturity and
delinquency information, will be specified in the related Prospectus Supplement.
The Loans for a Series may include Loans that do not amortize their
entire principal balance by their stated maturity in accordance with their terms
and require a balloon payment of the remaining principal balance at 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
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of the mortgage, or the recasting of payments due under the mortgage up to or
beyond the maturity date. In addition, when a default caused by such
circumstances is accompanied by certain other criteria, HUD may provide relief
by making payments to the Servicer in partial or full satisfaction of amounts
due under the Loan (which payments are to be repaid by the mortgagor to HUD) or
by accepting assignment of the loan from the Servicer. With certain exceptions,
at least three full monthly installments must be due and unpaid under the Loan
and HUD must have rejected any request for relief from the mortgagor before the
Servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Currently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The Servicer of each FHA-insured Loan will be obligated
to purchase any such debenture issued in satisfaction of such Loan upon default
for an amount equal to the principal amount of any such debenture.
The amount of insurance benefits generally paid by the FHA is equal to
the entire unpaid principal amount of the defaulted Loan adjusted to reimburse
the Servicer for certain costs and expenses and to deduct certain amounts
received or retained by the Servicer after default. When entitlement to
insurance benefits results from foreclosure (or other acquisition of possession)
and conveyance to HUD, the Servicer is compensated for no more than two-thirds
of its foreclosure costs, and is compensated for interest accrued and unpaid
prior to such date but in general only to the extent it was allowed pursuant to
a forbearance plan approved by HUD. When entitlement to insurance benefits
results from assignment of the Loan to HUD, the insurance payment includes full
compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA-insured Loan, bears
interest from a date 30 days after the mortgagor's first uncorrected failure to
perform any obligation to make any payment due under the Loan and, upon
assignment, from the date of assignment to the date of payment of the claim, in
each case at the same interest rate as the applicable HUD debenture interest
rate as described above.
Loans designated in the related Prospectus Supplement as guaranteed by
the VA will be partially guaranteed by the VA under the Serviceman's
Readjustment Act of 1944, as amended (a "VA Guaranty"). The Serviceman's
Readjustment Act of 1944, as amended, permits a veteran (or in certain instances
the spouse of a veteran) to obtain a mortgage loan guaranty by the VA covering
mortgage financing of the purchase of a one- to four-family dwelling unit at
interest rates permitted by the VA. The program has no mortgage loan limits,
requires no down payment from the purchaser and permits the guarantee of
mortgage loans of up to 30 years' duration.
The maximum guaranty that may be issued by the VA under a VA guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 1803(a), as amended. The
liability on the guaranty is reduced or increased pro rata with any reduction or
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
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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 (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 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; (l) the credit
limit utilization rate of any Revolving Credit Line Loans; and (m) the
delinquency status and year of origination of the Loans. The related Prospectus
Supplement will also specify any other limitations on the types or
characteristics of Loans for a Series.
If information of the nature described above respecting the Loans is
not known to the Depositor at the time the Securities are initially offered,
approximate or more general information of the nature described above will be
provided in the Prospectus Supplement and additional information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related Series and to be filed with the Commission within 15
days after the initial issuance of such Securities.
PRIVATE SECURITIES
General. Primary Assets for a Series may consist, in whole or in part,
of Private Securities which include pass-through certificates representing
beneficial interests in loans of the type that would otherwise be eligible to be
Loans (the "Underlying Loans") or (b) collateralized obligations secured by
Underlying Loans. Such pass-through certificates or collateralized obligations
will have previously been (a) offered and distributed to the public pursuant to
an effective registration statement or (b) purchased in a transaction not
involving any public offering from a person who is not an affiliate of the
issuer of such securities at the time of sale (nor an affiliate thereof at any
time during the three preceding months); provided a period of three years
elapsed since the later of the date the securities were acquired from the issuer
or an affiliate thereof. Although individual Underlying Loans may be insured or
guaranteed by the United States or an agency or instrumentality thereof, they
need not be, and Private Securities themselves will not be so insured or
guaranteed.
Private Securities will have been issued pursuant to a pooling and
servicing agreement, a trust agreement or similar agreement (a "PS Agreement").
The seller/servicer of the Underlying Loans will have entered into the PS
Agreement with the trustee under such PS Agreement (the "PS Trustee"). The PS
Trustee or its agent, or a custodian, will possess the Underlying Loans.
Underlying Loans will be serviced by a
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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 and
the credit utilization rates, if any, 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,
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insurance policies, letters of credit or guarantees relating to such Loans
underlying the Private Securities or to such Private Securities themselves;
(viii) the terms on which Underlying Loans may, or are required to, be purchased
prior to their stated maturity or the stated maturity of the Private Securities;
and (ix) the terms on which Underlying Loans may be substituted for those
originally underlying the Private Securities.
If information of the nature described above representing the Private
Securities is not known to the Depositor at the time the Securities are
initially offered, approximate or more general information of the nature
described above will be provided in the Prospectus Supplement and the additional
information, if available, will be set forth in a Current Report on Form 8-K to
be available to investors on the date of issuance of the related Series and to
be filed with the Commission within 15 days of the initial issuance of such
Securities.
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
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interest accrued on the Securities of such Series and (ii) if specified in the
related Prospectus Supplement, certain fees or expenses during the Pre-Funding
Period, over the amount of interest available therefor from the Primary Assets
in the Trust Fund. Any amounts on deposit in the Capitalized Interest Account at
the end of the Pre-Funding Period that are not necessary for such purposes will
be distributed to the person specified in the related Prospectus Supplement.
ENHANCEMENT
If stated in the Prospectus Supplement relating to a Series of
Securities, simultaneously with the Depositor's assignment of the Primary Assets
to the Trustee, the Depositor will obtain an irrevocable letter of credit,
surety bond or insurance policy, issue Subordinate Securities or obtain any
other form of enhancement or combination thereof (collectively, "Enhancement")
in favor of the Trustee on behalf of the Holders of the related Series or
designated Classes of such Series from an institution or by other means
acceptable to the Rating Agency. The Enhancement will support the payment of
principal and interest on the Securities, and may be applied for certain other
purposes to the extent and under the conditions set forth in such Prospectus
Supplement. Enhancement for a Series may include one or more of the following
forms, or such other form as may be specified in the related Prospectus
Supplement. If so specified in the related Prospectus Supplement, any of such
Enhancement may be structured so as to protect against losses relating to more
than one Trust Fund, in the manner described therein.
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
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expenses incurred by the Servicer with respect to such Property. If the unpaid
principal balance plus accrued interest and certain expenses is paid by the
special hazard insurer, the amount of further coverage under the special hazard
insurance policy will be reduced by such amount less any net proceeds from the
sale of such Property. Any amount paid as the cost of repair of such Property
will reduce coverage by such amount. Special hazard insurance policies typically
do not cover losses occasioned by war, civil insurrection, certain governmental
actions, errors in design, faulty workmanship or materials (except under certain
circumstances), nuclear reaction, flood (if the mortgaged property is in a
federally designated flood area), chemical contamination and certain other
risks.
Restoration of the Property with the proceeds described under (i) above
is expected to satisfy the condition under any pool insurance policy that such
Property be restored before a claim under such pool insurance policy may be
validly presented with respect to the defaulted Loan secured by such Property.
The payment described under (ii) above will render unnecessary presentation of a
claim in respect of such Loan under any pool insurance policy. Therefore, so
long as such pool insurance policy remains in effect, the payment by the special
hazard insurer of the cost of repair or of the unpaid principal balance of the
related Loan plus accrued interest and certain expenses will not affect the
total insurance proceeds paid to Holders of the Securities, but will affect the
relative amounts of coverage remaining under the special hazard insurance policy
and pool insurance policy.
Bankruptcy Bond. In the event of a bankruptcy of a borrower, the
bankruptcy court may establish the value of the Property securing the related
Loan at an amount less than the then-outstanding principal balance of such Loan.
The amount of the secured debt could be reduced to such value, and the holder of
such Loan thus would become an unsecured creditor to the extent the outstanding
principal balance of such Loan exceeds the value so assigned to the Property by
the bankruptcy court. In addition, certain other modifications of the terms of a
Loan can result from a bankruptcy proceeding. See "CERTAIN LEGAL ASPECTS OF
LOANS." If so provided in the related Prospectus Supplement, the Depositor or
other entity specified in the related Prospectus Supplement will obtain a
bankruptcy bond or similar insurance contract (the "bankruptcy bond") covering
losses resulting from proceedings with respect to borrowers under the Bankruptcy
Code. The bankruptcy bond will cover certain losses resulting from a reduction
by a bankruptcy court of scheduled payments of principal of and interest on a
Loan or a reduction by such court of the principal amount of a Loan and will
cover certain unpaid interest on the amount of such a principal reduction from
the date of the filing of a bankruptcy petition.
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.
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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.
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,
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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;
(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;
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(vi) All Advances made by the Servicer required pursuant to
the related Agreement; and
(vii) All repurchase prices of any such Primary Assets
repurchased by the Depositor, the Servicer or the Seller pursuant to
the related Agreement.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer is permitted, from time to time, to make withdrawals from the
Collection Account for each Series for the following purposes:
(i) to reimburse itself for Advances for such Series made by
it pursuant to the related Agreement; the Servicer's right to reimburse
itself is limited to amounts received on or in respect of particular
Loans (including, for this purpose, Liquidation Proceeds and amounts
representing proceeds of insurance policies covering the related
Property) which represent late recoveries of Scheduled Payments
respecting which any such Advance was made;
(ii) to the extent provided in the related Agreement, to
reimburse itself for any Advances for such Series that the Servicer
determines in good faith it will be unable to recover from amounts
representing late recoveries of Scheduled Payments respecting which
such Advance was made or from Liquidation Proceeds or the proceeds of
insurance policies;
(iii) to reimburse itself from Liquidation Proceeds for
liquidation expenses and for amounts expended by it in good faith in
connection with the restoration of damaged Property and, in the event
deposited in the Collection Account and not previously withheld, and to
the extent that Liquidation Proceeds after such reimbursement exceed
the outstanding principal balance of the related Loan, together with
accrued and unpaid interest thereon to the Due Date for such Loan next
succeeding the date of its receipt of such Liquidation Proceeds, to pay
to itself out of such excess the amount of any unpaid Servicing Fee and
any assumption fees, late payment charges, or other charges on the
related Loan;
(iv) in the event it has elected not to pay itself the
Servicing Fee out of the interest component of any Scheduled Payment,
late payment or other recovery with respect to a particular Loan prior
to the deposit of such Scheduled Payment, late payment or recovery into
the Collection Account, to pay to itself the Servicing Fee, as adjusted
pursuant to the related Agreement, from any such Scheduled Payment,
late payment or such other recovery, to the extent permitted by the
related Agreement;
(v) to reimburse itself for expenses incurred by and
recoverable by or reimbursable to it pursuant to the related Agreement;
(vi) to pay to the applicable person with respect to each
Primary Asset or REO Property acquired in respect thereof that has been
repurchased or removed from the Trust Fund by the Depositor, the
Servicer or the Seller pursuant to the related Agreement, all amounts
received thereon and not distributed as of the date on which the
related repurchase price was determined;
(vii) to make payments to the Trustee of such Series for
deposit into the Distribution Account, if any, or for remittance to the
Holders of such Series in the amounts and in the manner provided for in
the related Agreement; and
(viii) to clear and terminate the Collection Account pursuant
to the related Agreement.
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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
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specified percentage of the full replacement cost of such Property and
improvements. Since the amount of hazard insurance to be maintained on the
improvements securing the Loans declines as the principal balances owing thereon
decrease, and since the value of the Properties will fluctuate in value over
time, the effect of this requirement in the event of partial loss may be that
hazard insurance proceeds will be insufficient to restore fully the damage to
the affected Property.
Unless otherwise specified in the related Prospectus Supplement,
coverage will be in an amount at least equal to the greater of (i) the amount
necessary to avoid the enforcement of any co-insurance clause contained in the
policy or (ii) the outstanding principal balance of the related Loan. Unless
otherwise specified in the related Prospectus Supplement, the Servicer will also
maintain on REO Property that secured a defaulted Loan and that has been
acquired upon foreclosure, deed in lieu of foreclosure, or repossession, a
standard hazard insurance 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.
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ENFORCEMENT OF DUE-ON-SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement for a
Series, when any Property is about to be conveyed by the obligor, the Servicer
will, to the extent it has knowledge of such prospective conveyance and prior to
the time of the consummation of such conveyance, exercise its rights to
accelerate the maturity of the related Loan under the applicable "due-on-sale"
clause, if any, unless it reasonably believes that such clause is not
enforceable under applicable law or if the enforcement of such clause would
result in loss of coverage under any primary mortgage insurance policy. In such
event, the Servicer is authorized to accept from or enter into an assumption
agreement with the person to whom such property has been or is about to be
conveyed, pursuant to which such person becomes liable under the Loan and
pursuant to which the original obligor is released from liability and such
person is substituted as the obligor and becomes liable under the Loan. Any fee
collected in connection with an assumption will be retained by the Servicer as
additional servicing compensation. The terms of a Loan may not be changed in
connection with an assumption.
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.
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Unless otherwise specified in the related Prospectus Supplement, the
rights of the Servicer to receive funds from the Collection Account for a
Series, whether as the Servicing Fee or other compensation, or for the
reimbursement of Advances, expenses or otherwise, are not subordinate to the
rights of Holders of such Series.
EVIDENCE AS TO COMPLIANCE
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will provide that each year, a firm of independent
public accountants will furnish a statement to the Trustee to the effect that
such firm has examined certain documents and records relating to the servicing
of the Loans by the Servicer and that, on the basis of such examination, such
firm is of the opinion that the servicing has been conducted in compliance with
such Agreement, except for (i) such exceptions as such firm believes to be
immaterial and (ii) such other exceptions as are set forth in such statement.
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will also provide for delivery to the Trustee for such
Series of an annual statement signed by an officer of the Servicer to the effect
that the Servicer has fulfilled its obligations under such Agreement throughout
the preceding calendar year.
CERTAIN MATTERS REGARDING THE SERVICER
The Servicer for each Series will be identified in the related
Prospectus Supplement. The Servicer may be an affiliate of the Depositor and may
have other business relationships with the Depositor and its affiliates.
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.
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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.
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.
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Unless otherwise specified in the related Prospectus Supplement, the
Depositor will as to each Home Improvement Contract deliver or cause to be
delivered to the Trustee (or the Custodian) the original Home Improvement
Contract and copies of documents and instruments related to each Home
Improvement Contract and, other than in the case of unsecured Home Improvement
Contracts, the security interest in the property securing such Home Improvement
Contract. In order to give notice of the right, title and interest of
Securityholders to the Home Improvement Contracts, the Depositor will cause a
UCC-1 financing statement to be executed by the Depositor or the Seller
identifying the Trustee as the secured party and identifying all Home
Improvement Contracts as collateral. Unless otherwise specified in the related
Prospectus Supplement, the Home Improvement Contracts will not be stamped or
otherwise marked to reflect their assignment to the Trust. Therefore, if,
through negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the Home Improvement Contracts without notice of such
assignment, the interest of Securityholders in the Home Improvement Contracts
could be defeated. See "CERTAIN LEGAL ASPECTS OF THE LOANS -- The Home
Improvement Contracts."
With respect to Loans secured by Mortgages, if so specified in the
related Prospectus Supplement, the Depositor will, at the time of issuance of
the Securities, cause assignments to the Trustee of the Mortgages relating to
the Loans for a Series to be recorded in the appropriate public office for real
property records, except in states where, in the opinion of counsel acceptable
to the Trustee, such recording is not required to protect the Trustee's interest
in the related Loans. If specified in the related Prospectus Supplement, the
Depositor will cause such assignments to be so recorded within the time after
issuance of the Securities as is specified in the related Prospectus Supplement,
in which event, the Agreement may, as specified in the related Prospectus
Supplement, require the Depositor to repurchase from the Trustee any Loan the
related Mortgage of which is not recorded within such time, at the price
described below with respect to repurchases by reason of defective
documentation. Unless otherwise provided in the related Prospectus Supplement,
the enforcement of the repurchase obligation would constitute the sole remedy
available to the Holders or the Trustee for the failure of a Mortgage to be
recorded.
Each Loan will be identified in a schedule appearing as an exhibit to
the related Agreement (the "Loan Schedule"). Such Loan Schedule will specify
with respect to each Loan: the original principal amount and unpaid principal
balance as of the Cut-off Date; the current interest rate; the current Scheduled
Payment of principal and interest; the maturity date, if any, of the related
Mortgage Note; if the Loan is an adjustable rate Loan, the Lifetime Rate Cap, if
any, and the current index.
Assignment of Private Securities. The Depositor will cause Private
Securities to be registered in the name of the Trustee (or its nominee or
correspondent). The Trustee (or its nominee or correspondent) will have
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
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Depositor to the Trustee (or Custodian) is found by the Trustee within 90 days
of the execution of the related Agreement (or promptly after the Trustee's
receipt of any document permitted to be delivered after the Closing Date) to be
defective in any material respect and the Depositor or Seller does not cure such
defect within 90 days, or within such other period specified in the related
Prospectus Supplement, the Depositor or Seller will, not later than 90 days or
within such other period specified in the related Prospectus Supplement, after
the Trustee's notice to the Depositor or the Seller, as the case may be, of the
defect, repurchase the related Primary Asset or any property acquired in respect
thereof from the Trustee at a price equal to, unless otherwise specified in the
related Prospectus Supplement, (a) the lesser of (i) the outstanding principal
balance of such Primary Asset and (ii) the Trust Fund's federal income tax basis
in the Primary Asset and (b) accrued and unpaid interest to the date of the next
scheduled payment on such Primary Asset at the rate set forth in the related
Agreement, provided, however, the purchase price shall not be limited in (i)
above to the Trust Fund's federal income tax basis if the repurchase at a price
equal to the outstanding principal balance of such Primary Asset will not result
in any prohibited transaction tax under Section 860F(a) of the Code.
If provided in the related Prospectus Supplement, the Depositor or
Seller, as the case may be, may, rather than repurchase the Primary Asset as
described above, remove such Primary Asset from the Trust Fund (the "Deleted
Primary Asset") and substitute in its place one or more other Primary Assets
(each, a "Qualifying Substitute Primary Asset") provided, however, that (i) with
respect to a Trust Fund for which no REMIC election is made, such substitution
must be effected within 120 days of the date of initial issuance of the
Securities and (ii) with respect to a Trust Fund for which a REMIC election is
made, after a specified time period, the Trustee must have received a
satisfactory opinion of counsel that such substitution will not cause the Trust
Fund to lose its status as a REMIC or otherwise subject the Trust Fund to a
prohibited transaction tax.
Unless otherwise specified in the related Prospectus Supplement, any
Qualifying Substitute Primary Asset will have, on the date of substitution, (i)
an outstanding principal balance, after deduction of all Scheduled Payments due
in the month of substitution, not in excess of the outstanding principal balance
of the Deleted Primary Asset (the amount of any shortfall to be deposited to the
Collection Account in the month of substitution for distribution to Holders),
(ii) an interest rate not less than (and not more than 2% greater than) the
interest rate of the Deleted Primary Asset, (iii) a remaining term-to-stated
maturity not greater than (and not more than two years less than) that of the
Deleted Primary Asset, and will comply with all of the representations and
warranties set forth in the applicable Agreement as of the date of substitution.
Unless otherwise provided in the related Prospectus Supplement, the
above-described cure, repurchase or substitution obligations constitute the sole
remedies available to the Holders or the Trustee for a material defect in a
document for a Primary Asset.
The Depositor or another entity will make representations and
warranties with respect to Primary Assets for a Series. If the Depositor or such
entity cannot cure a breach of any such representations and warranties in all
material respects within the time period specified in the related Prospectus
Supplement after notification by the Trustee of such breach, and if such breach
is of a nature that materially and adversely affects the value of such Primary
Asset, the Depositor or such entity is obligated to repurchase the affected
Primary Asset or, if provided in the related Prospectus Supplement, provide a
Qualifying Substitute Primary Asset therefor, subject to the same conditions and
limitations on purchases and substitutions as described above.
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."
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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.
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If so specified in the Prospectus Supplement for a Series of
Securities, such Series or one or more Classes of such Series will be issued in
book-entry form. In such event, owners of beneficial interests in such
Securities will not be considered Holders and will not receive such reports
directly from the Trustee. The Trustee will forward such reports only to the
entity or its nominee which is the registered holder of the global certificate
which evidences such book-entry securities. Beneficial owners will receive such
reports from the participants and indirect participants of the applicable
book-entry system in accordance with the practices and procedures of such
entities.
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
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proceeding for any remedy available to the Trustee or exercising any trust or
power conferred upon that Trustee. However, the Trustee will not be under any
obligation to pursue any such remedy or to exercise any of such trusts or powers
unless such Holders have offered the Trustee reasonable security or indemnity
against the cost, expenses and liabilities which may be incurred by the Trustee
therein or thereby. The Trustee may decline to follow any such direction if the
Trustee determines that the action or proceeding so directed may not lawfully be
taken or would involve it in personal liability or be unjustly prejudicial to
the nonassenting Holders.
Indenture. Unless otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for thirty (30) days or more in the payment of any
principal of or interest on any Note of such Series; (ii) failure to perform any
other covenant of the Depositor or the Trust Fund in the Indenture which
continues for a period of sixty (60) days after notice thereof is given in
accordance with the procedures described in the related Prospectus Supplement;
(iii) any representation or warranty made by the Depositor or the Trust Fund in
the Indenture or in any certificate or other writing delivered pursuant thereto
or in connection therewith with respect to or affecting such Series having been
incorrect in a material respect as of the time made, and such breach is not
cured within sixty (60) days after notice thereof is given in accordance with
the procedures described in the related Prospectus Supplement; (iv) certain
events of bankruptcy, insolvency, receivership or liquidation of the Depositor
or the Trust Fund; or (v) any other Event of Default provided with respect to
Notes of that Series.
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
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enforcement of the lien of the Indenture for the benefit of the Noteholders
after the occurrence of such an Event of Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a Series is declared due and payable, as
described above, the Holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of
the Trustee, in case an Event of Default shall occur and be continuing with
respect to a Series of Notes, the Trustee will be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the Holders of Notes of such Series, unless such Holders
offered to the Trustee security or indemnity satisfactory to it against the
costs, expenses and liabilities which might be incurred by it in complying with
such request or direction. Subject to such provisions for indemnification and
certain limitations contained in the Indenture, the Holders of a majority of the
then aggregate outstanding amount of the Notes of such Series shall have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
the Trustee with respect to the Notes of such Series, and the Holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may, in certain cases, waive any default with respect thereto, except a default
in the payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the Holders of the outstanding Notes of such Series affected thereby.
THE TRUSTEE
The identity of the commercial bank, savings and loan association or
trust company named as the Trustee for each Series of Securities will be set
forth in the related Prospectus Supplement. The entity serving as Trustee may
have normal banking relationships with the Depositor or the Servicer. In
addition, for the purpose of meeting the legal requirements of certain local
jurisdictions, the Trustee will have the power to appoint co-trustees or
separate trustees of all or any part of the Trust Fund relating to a Series of
Securities. In the event of such appointment, all rights, powers, duties and
obligations conferred or imposed upon the Trustee by the 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
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taken, suffered or omitted to be taken by it in good faith in accordance with
the direction of the Holders in an Event of Default. The Trustee is not required
to expend or risk its own funds or otherwise incur any financial liability in
the performance of any of its duties under the Agreement, or in the exercise of
any of its rights or powers, if it has reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it.
RESIGNATION OF TRUSTEE
The Trustee may, upon written notice to the Depositor, resign at any
time, in which event the Depositor will be obligated to use its best efforts to
appoint a successor Trustee. If no successor Trustee has been appointed and has
accepted the appointment within 30 days after the giving of such notice of
resignation, the resigning Trustee may petition any court of competent
jurisdiction for appointment of a successor Trustee. The Trustee may also be
removed at any time (i) if the Trustee ceases to be eligible to continue as such
under the Agreement, (ii) if the Trustee becomes insolvent or (iii) by the
Holders of Securities evidencing over 50% of the aggregate voting rights of the
Securities in the Trust Fund upon written notice to the Trustee and to the
Depositor. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the appointment
by the successor Trustee.
AMENDMENT OF AGREEMENT
Unless otherwise specified in the Prospectus Supplement, the Agreement
for each Series of Securities may be amended by the Depositor, the Servicer
(with respect to a Series relating to Loans), and the Trustee with respect to
such Series, without notice to or consent of the Holders (i) to cure any
ambiguity, (ii) to correct any defective provisions or to correct or supplement
any provision therein, (iii) to add to the duties of the Depositor, the Trust
Fund or Servicer, (iv) to add any other provisions with respect to matters or
questions arising under such Agreement or related Enhancement, (v) to add or
amend any provisions of such Agreement as required by a Rating Agency in order
to maintain or improve the rating of the Securities (it being understood that
none of the Depositor, the Seller, the Servicer or Trustee is obligated to
maintain or improve such rating), or (vi) to comply with any requirements
imposed by the Code; provided that any such amendment except pursuant to clause
(vi) above will not adversely affect in any material respect the interests of
any Holders of such Series, as evidenced by an opinion of counsel. Any such
amendment except pursuant to clause (vi) of the preceding sentence shall be
deemed not to adversely affect in any material respect the interests of any
Holder if the Trustee receives written confirmation from each Rating Agency
rating such Securities that such amendment will not cause such Rating Agency to
reduce the then current rating thereof. Unless otherwise specified in the
Prospectus Supplement, the Agreement for each Series may also be amended by the
Trustee, the Servicer, if applicable, and the Depositor with respect to such
Series with the consent of the Holders possessing not less than 66 2/3% of the
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.
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VOTING RIGHTS
The related Prospectus Supplement will set forth the method of
determining allocation of voting rights with respect to a Series.
LIST OF HOLDERS
Upon written request of three or more Holders of record of a Series for
purposes of communicating with other Holders with respect to their rights under
the Agreement, which request is accompanied by a copy of the communication which
such Holders propose to transmit, the Trustee will afford such Holders access
during business hours to the most recent list of Holders of that Series held by
the Trustee.
No Agreement will provide for the holding of any annual or other
meeting of Holders.
BOOK-ENTRY SECURITIES
If specified in the Prospectus Supplement for a Series of Securities,
such Series or one or more Classes of such Series may be issued in book-entry
form. In such event, beneficial owners of such Securities will not be considered
"Holders" under the Agreements and may exercise the rights of Holders only
indirectly through the participants in the applicable book-entry system.
REMIC ADMINISTRATOR
For any Series with respect to which a REMIC election is made,
preparation of certain reports and certain other administrative duties with
respect to the Trust Fund may be performed by a REMIC administrator, who may be
an affiliate of the Depositor.
TERMINATION
Pooling and Servicing Agreement; Trust Agreement. The obligations
created by the Pooling and Servicing Agreement or Trust Agreement for a Series
will terminate upon the distribution to Holders of all amounts distributable to
them pursuant to such Agreement after the earlier of (i) the later of (a) the
final payment or other liquidation of the last Primary Asset remaining in the
Trust Fund for such Series and (b) the disposition of all property acquired upon
foreclosure or deed in lieu of foreclosure or repossession in respect of any
Primary Asset or (ii) the repurchase, as described below, by the Servicer or
other entity specified in the related Prospectus Supplement from the Trustee for
such Series of all Primary Assets and other property at that time subject to
such Agreement. The Agreement for each Series permits, but does not require, the
Servicer or other entity specified in the related Prospectus Supplement to
purchase from the Trust Fund for such Series all remaining Primary Assets at a
price equal to, unless otherwise specified in the related Prospectus Supplement,
100% of the aggregate Principal Balance of such Primary Assets plus, with
respect to any property acquired in respect of a Primary Asset, if any, the
outstanding Principal Balance of the related Primary Asset at the time of
foreclosure, less, in either case, related unreimbursed Advances (in the case of
the Primary Assets, only to the extent not already reflected in the computation
of the aggregate Principal Balance of such Primary Assets) and unreimbursed
expenses (that are reimbursable pursuant to the terms of the Pooling and
Servicing Agreement) plus, in either case, accrued interest thereon at the
weighted average rate on the related Primary Assets through the last day of the
Due Period in which such repurchase occurs; provided, however, that if an
election is made for treatment as a REMIC under the Code, the repurchase price
may equal the greater of (a) 100% of the 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
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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 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
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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
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mortgage as made and cannot be relieved from his default if the mortgagee has
exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith,
or oppressive or unconscionable conduct such as to warrant a court of equity to
refuse affirmative relief to the mortgagee. Under certain circumstances a court
of equity may relieve the mortgagor from an entirely technical default where
such default was not willful.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, sometimes requiring
up to several years to complete. Moreover, a non- collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and such sale occurred while the mortgagor was insolvent and
within one year (or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law) of the
filing of bankruptcy. Similarly, a suit against the debtor on the related
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is a
public sale. However, because of the difficulty potential third party purchasers
at the sale have in determining the exact status of title and because the
physical condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for an amount which may be equal to the unpaid
principal amount of the mortgage note secured by the mortgage or deed of trust
plus accrued and unpaid interest and the expenses of foreclosure, in which event
the mortgagor's debt will be extinguished or the lender may purchase for a
lesser amount in order to preserve its right against a borrower to seek a
deficiency judgment in states where such a judgment is available. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burdens of ownership,
including obtaining hazard insurance, paying taxes and making such repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Any loss may be reduced by the
receipt of any mortgage guaranty insurance proceeds.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the trustor or mortgagor and foreclosed junior lienors are given
a statutory period in which to redeem the property from the foreclosure sale.
The right of redemption should be distinguished from the equity of redemption,
which is a non-statutory right that must be exercised prior to the foreclosure
sale. In some states, redemption may occur only upon payment of the entire
principal balance of the loan, accrued interest and expenses of foreclosure. In
other states, redemption may be authorized if the former borrower pays only a
portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The exercise
of a right of redemption would defeat the title of any purchaser at a
foreclosure sale, or of any purchaser from the lender subsequent to foreclosure
or sale under a deed of trust. Consequently the practical effect of a right of
redemption is to force the lender to retain the property and pay the expenses of
ownership until the redemption period has run. In some states, there is no right
to redeem property after a trustee's sale under a deed of trust.
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JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGES
The mortgage loans comprising or underlying the Primary Assets included
in the Trust Fund for a Series will be secured by mortgages or deeds of trust
which may be second or more junior mortgages to other mortgages held by other
lenders or institutional investors. The rights of the Trust Fund (and therefore
the Holders), as mortgagee under a junior mortgage, are subordinate to those of
the mortgagee under the senior mortgage, including the prior rights of the
senior mortgagee to receive hazard insurance and condemnation proceeds and to
cause the property securing the mortgage loan to be sold upon default of the
mortgagor, thereby extinguishing the junior mortgagee's lien unless the junior
mortgagee asserts its subordinate interest in the property in foreclosure
litigation and, possibly, satisfies the defaulted senior mortgage. A junior
mortgagee may satisfy a defaulted senior loan in full and, in some states, may
cure such default and bring the senior loan current, in either event adding the
amounts expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed
of trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the mortgagor. All sums so expended by
the mortgagee become part of the indebtedness secured by the mortgage.
The form of credit line trust deed or mortgage used by most
institutional lenders which make revolving home equity loans typically contains
a "future advance" clause, which provides, in essence, that additional amounts
advanced to or on behalf of the borrower by the beneficiary or lender are to be
secured by the deed of trust or mortgage. The priority of the lien securing any
advance made under the clause may depend in most states on whether the deed of
trust or mortgage is called and recorded as a credit line deed of trust or
mortgage. If the beneficiary or lender advances additional amounts, the advance
is entitled to receive the same priority as amounts initially advanced under the
trust deed or mortgage, notwithstanding the fact that there may be junior trust
deeds or mortgages and other liens which intervene between the date of recording
of the trust deed or mortgage and the date of the future advance, and
notwithstanding that the beneficiary or lender had actual knowledge of such
intervening junior trust deeds or mortgages and other liens at the time of the
advance. In most states, the trust deed or mortgage lien securing mortgage loans
of the type which includes revolving home equity credit lines applies
retroactively to the date of the original recording of the trust deed or
mortgage, provided that the total amount of advances under the home equity
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credit line does not exceed the maximum specified principal amount of the
recorded trust deed or mortgage, except as to advances made after receipt by the
lender of a written notice of lien from a judgment lien creditor of the trustor.
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 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
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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 Title V. Title V authorizes any state to reimpose
interest rate limits by adopting, before April 1, 1983, a state law, or by
certifying that the voters of such state have voted in favor of any provision,
constitutional or otherwise, which expressly rejects an application of the
federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V.
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
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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-I financing statement in the appropriate states to
give notice of the Trustee's ownership of the contracts. Unless otherwise
specified in the related Prospectus Supplement, the contracts will not be
stamped or otherwise marked to reflect their assignment from the Depositor to
the Trustee. Therefore, if through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the contracts without notice
of such assignment, the Trustee's interest in the contracts could be defeated.
Security Interests in Home Improvements
The contracts that are secured by the Home Improvements financed
thereby grant to the originator of such contracts a purchase money security
interest in such Home Improvements to secure all or part of the purchase price
of such Home Improvements and related services. A financing statement generally
is not required to be filed to perfect a purchase money security interest in
consumer goods. Such purchase money security interests are assignable. In
general, a purchase money security interest grants to the holder a security
interest that has priority over a conflicting security interest in the same
collateral and the proceeds of such collateral. However, to the extent that the
collateral subject to a purchase money security interest becomes a fixture, in
order for the related purchase money security interest to take priority over a
conflicting interest in the fixture, the holder's interest in such Home
Improvement must generally be perfected by a timely fixture filing. In general,
under the UCC, a security interest does not exist under the UCC in ordinary
building material incorporated into an improvement on land. Home Improvement
Contracts that finance lumber, bricks, other types of ordinary building material
or other goods that are deemed to lose such characterization, upon incorporation
of such materials into the related property, will not be secured by a purchase
money security interest in the Home Improvement being financed.
Enforcement of Security Interest in Home Improvements
So long as the Home Improvement has not become subject to the real
estate law, a creditor can repossess a Home Improvement securing a contract by
voluntary surrender, by "self-help" repossession that is "peaceful" (i.e.,
without breach of the peace) or, in the absence of voluntary surrender and the
ability to repossess without breach of the peace, by judicial process. The
holder of a contract must give the debtor a number of days' notice, which varies
from 10 to 30 days depending on the state, prior to commencement of any
repossession. The UCC and consumer protection laws in most states place
restrictions on repossession sales, including requiring prior notice to the
debtor and commercial reasonableness in effecting such a sale. The law in most
states also requires that the debtor be given notice of any sale prior to resale
of the unit that the debtor may redeem it at or before such resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment 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 judgments, and in many cases
the defaulting borrower would have no assets with which to pay a judgment.
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 judgment.
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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.
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
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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.
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
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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 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.
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TAXATION OF DEBT SECURITIES
Status of Regular Interest Securities as Real Property Loans. The
regular interests in a REMIC ("Regular Interest Securities") will be "qualifying
real property loans" within the meaning of Section 593(d) of the Code, "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
more 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 all three 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, and Loans that are not secured by improved real
property or real property which is to be improved using Loan proceeds will not
constitute qualifying assets under Section 593(d) 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.
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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
late payment of interest (other than late payment that occurs within a
reasonable grace period) or nonpayment of interest is expected to be penalized
or reasonable remedies exist to compel payment. The meaning of "penalized" under
the OID regulations is unclear. Therefore, interest payments on Debt Securities
which do not have reasonable remedies to compel timely payment of interest may
not be qualified stated interest, and such Debt Securities may have original
issue discount.
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
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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 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.
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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 and (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.
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 zero but not
more than 1.35 or (ii) the product of a qualified floating rate and a fixed
multiple that is greater than zero but not more than 1.35, increased or
decreased by a fixed rate will constitute a qualified floating rate for purposes
of the OID Regulations. In addition, under the OID Regulations, two or more
qualified floating rates that can reasonably be expected to have approximately
the same values throughout the term of the Variable Rate Debt Security will be
treated as a single qualified floating rate (a "Presumed Single Qualified
Floating Rate"). Two or more qualified floating rates with values within 25
basis points of each other as determined on the Variable Rate Debt Security's
issue date will be conclusively presumed to be a Presumed Single Qualified
Floating Rate. Notwithstanding the foregoing, a variable rate that would
otherwise constitute a qualified floating rate but which is subject to one or
more restrictions such as a cap or floor, will not be a qualified floating rate
for purposes of the OID Regulations unless the restriction is fixed throughout
the term of the Variable Rate Debt Security or the restriction will not
significantly affect the yield of the Variable Rate Debt Security.
An "objective rate" is a rate that is not itself a qualified floating
rate but which is determined using a single fixed formula and which is based
upon (i) one or more qualified floating rates, (ii) one or more rates where each
rate would be a qualified floating rate for a debt instrument denominated in a
currency other than the currency in which the Variable Rate Debt Security is
denominated, (iii) either the yield or changes in the price of one or more items
of actively traded personal property or (iv) a combination of rates described in
(i), (ii) and (iii). 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. 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. 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 cost of newly borrowed
funds. 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
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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 and (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.
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 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.
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The OID Regulations do not clearly address the treatment of a Variable
Rate Debt Security that is based on a weighted average of the interest rates on
underlying Loans. Under the OID Regulations, interest payments on such a
Variable Rate Debt Security may be characterized as qualified stated interest
which is includible in income in a manner similar to that described in the
previous paragraph. However, it is also possible that interest payments on such
a Variable Rate Debt Security would be treated as contingent interest (possibly
includible in income when the payments become fixed) or in some other manner.
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.
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 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
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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 mutual savings bank or domestic building and loan association will
represent interests in "qualifying real property loans" within the meaning of
Code Section 593(d) (assuming that at least 95% of the REMIC's assets are
"qualifying real property loans"); (ii) 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 (iii) 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 Saturates 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), (ii) or (iii) above, then a Security will qualify for the tax
treatment described in (i), (ii) or (iii) in the proportion that such REMIC
assets are qualifying assets.
REMIC EXPENSES; SINGLE CLASS REMLCS
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 extern 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
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for the taxable year for an individual whose adjusted gross income exceeds the
applicable amount (which amount will be adjusted for inflation for taxable years
beginning after 1990) will be reduced by the lesser of (i) 3% of the excess of
adjusted gross income over the applicable amount, or (ii) 80% of the amount of
itemized deductions otherwise allowable for such taxable year. The reduction or
disallowance of this deduction may have a significant impact on the yield of the
Regular Interest Security to such a Holder. In general terms, a single class
REMIC is one that either (i) would qualify, under existing Treasury regulations,
as a grantor trust if it were not a REMIC (treating all interests as ownership
interests, even if they would be classified as debt for federal income tax
purposes) or (ii) is similar to such a trust and which is structured with the
principal purpose of avoiding the single class REMIC rules. Unless otherwise
stated in the applicable Prospectus Supplement, the expenses of the REMIC will
be allocated to Holders of the related Residual Interest Securities.
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
Tiered REMIC Structures. For certain Series of Securities, two or more
separate elections may be held to treat designated portions of the related Trust
Fund as REMICs ("Tiered REMICs") for federal income tax purposes. Upon the
issuance of any such Series of Securities, Federal Tax Counsel will deliver its
opinion generally to the effect that, assuming compliance with all provisions of
the related Pooling and Servicing Agreement, the Tiered REMICs will each qualify
as a REMIC and the REMIC Certificates issued by the Tiered REMICs, respectively,
will be considered to evidence ownership of Regular Certificates or Residual
Certificates in the related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will
be "qualifying real property loans" under Section 593(d) of the Code, "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.
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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 Securities include such discount in income, but without regard to the
de minimis rules. See "Taxation of Debt Securities" above. However, a REMIC that
acquires loans at a market discount must include such market discount in income
currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before such date, it is possible that
such premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be
subject to a 100% tax on any net income derived from a "prohibited transaction."
For this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include: (i) subject to limited exceptions, the sale or other
disposition of any qualified mortgage transferred to the REMIC; (ii) subject to
a limited exception, the sale or other disposition of a cash flow investment;
(iii) the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or (iv) the receipt of any fees or other
compensation for services rendered by the REMIC. It is anticipated that a REMIC
will not engage in any prohibited transactions in which it would recognize a
material amount of net income. In addition, subject to a number of exceptions, a
tax is imposed at the rate of 100% on amounts contributed to a REMIC after the
close of the three-month period beginning on the Startup Day. The Holders of
Residual Interest Securities will generally be responsible for the payment of
any such taxes imposed on the REMIC. To the extent not paid by such Holders or
otherwise, however, such taxes will be paid out of the Trust Fund and will be
allocated pro rata to all outstanding Classes of Securities of such REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
The Holder of a Security representing a residual interest (a "Residual
Interest Security") will take into account the "daily portion" of the taxable
income or net loss of the REMIC for each day during the taxable year on which
such Holder held the Residual Interest Security. The daily portion is determined
by allocating to each day in any calendar quarter its ratable portion of the
taxable income or net loss of the REMIC for such quarter, and by allocating that
amount among the Holders (on such day) of the Residual Interest Securities in
proportion to their respective holdings on such day.
The Holder of a Residual Interest Security must report its
proportionate share of the taxable income of the REMIC whether or not it
receives cash distributions from the REMIC attributable to such income or loss.
The reporting of taxable income without corresponding distributions could occur,
for example, in certain REMIC issues in which the loans held by the REMIC were
issued or acquired at a discount, since mortgage prepayments cause recognition
of discount income, while the corresponding portion of the prepayment could be
used in whole or in part to make principal payments on REMIC Regular Interests
issued without any discount or at an insubstantial discount. (If this occurs, it
is likely that cash distributions will exceed taxable income in later years.)
Taxable income may also be greater in earlier years of certain REMIC issues as a
result of the fact that interest expense deductions, as a percentage of
outstanding principal on
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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 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. An exception applies to organizations to
which Code Section 593 applies (generally, certain thrift institutions);
however, such exception will not apply if the aggregate value of the Residual
Interest Securities is not considered to be "significant," as described below.
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." Regulations
provide that a Residual Interest Security has significant value only if (i) the
aggregate issue price of the Residual Interest Security is at least 2% of the
aggregate of the issue prices of all Regular Interest Securities and Residual
Interest Securities in the
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REMIC and (ii) the anticipated weighted average life (determined as specified in
the Proposed Regulations) of the Residual Interest Securities is at least 20% of
the weighted average life of the REMIC.
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.
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 1-1399 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 acting on behalf of a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31,1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
Interest Security at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
Residual Interest Security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all federal
tax purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. A Residual Interest Security is a "noneconomic
residual interest" unless, at the time of the transfer (i) the present value of
the expected future distributions on the Residual Interest Security at least
equals the product of the present value of the anticipated excess inclusions and
the highest rate of tax for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes. If a
transfer of a Residual Interest Security is disregarded, the transferor would be
liable for any federal income tax imposed upon taxable income
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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-mark 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.
TAX STATUS AS A GRANTOR BUST
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
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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 non-corporate 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 (general, the excess
of the principal amount of the Loan over the purchaser's allocable purchase
price) will
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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.
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.
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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.
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
"qualifying real property loans" within the meaning of Section 593(d) of the
Code, "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
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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 nonresident alien individual, foreign partnership or foreign corporation
("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.
Interest and OID of Holders who are foreign persons 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 foreign
persons will generally be treated as interest for purposes of the 30% (or lower
treaty rate) United States withholding tax. Holders 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
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purposes. A Residual Interest Security has tax avoidance potential unless, at
the time of the transfer the transferor reasonably expects that the REMIC will
distribute to the transferee residual interest holder amounts that will equal at
least 30% of each excess inclusion, and that such amounts will be distributed at
or after the time at which the excess inclusions accrue and not later than the
calendar year following the calendar year of accrual. If a Nonresident transfers
a Residual Interest Security to a United States person, and if the transfer has
the effect of allowing the transferor to avoid tax on accrued excess inclusions,
then the transfer is disregarded and the transferor continues to be treated as
the owner of the Residual Interest Security for purposes of the withholding tax
provisions of the Code. See "-- Excess Inclusions."
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
Federal Tax Counsel will deliver its opinion that a Trust Fund for
which a partnership election is made will not be an association (or publicly
traded partnership) taxable as a corporation for federal income tax purposes.
This opinion will be based on the assumption that the terms of the Trust
Agreement and related documents will be complied with, and on counsel's
conclusions that (1) the Trust Fund will not have certain characteristics
necessary for a business trust to be classified as an association taxable as a
corporation and (2) the nature of the income of the Trust Fund will exempt it
from the rule that certain publicly traded partnerships are taxable as
corporations or the issuance of the Certificates has been structured as a
private placement under an IRS safe harbor, so that the Trust Fund will not be
characterized as a publicly traded partnership taxable as a corporation.
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
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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 non-government debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
Sale or Other Disposition. If a Noteholder sells a Note, the Holder
will recognize gain or loss in an amount equal to the difference between the
amount realized on the sale and the Holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the Holder's
cost for the Note, increased by any market discount, acquisition discount, OID
and gain previously included by such Noteholder in income with respect to the
Note and decreased by the amount of bond premium (if any) previously amortized
and by the amount of principal payments previously received by such Noteholder
with respect to such Note. Any such gain or loss will be capital gain or loss if
the Note was held as a capital asset, except for gain representing accrued
interest and accrued market discount not previously included in income.
Capital losses generally may be used only to offset capital gains.
Foreign Holders. Interest payments made (or accrued) to a Noteholder
who is a nonresident alien, foreign corporation or other non-United States
person (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.
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
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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.
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.
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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.
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
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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.
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.
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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 Manners. 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 non-U.S.
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
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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
foreign Certificateholders 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 foreign Holders that are taxable as corporations and 39.6% for all other
foreign Holders. 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 foreign Holder 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 foreign Holder 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 foreign Holder 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 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 foreign Holder
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.
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However, any such governmental or church plan which is qualified under Section
401(a) of the Code and exempt from taxation under Section 501(a) of the Code is
subject to the prohibited transaction rules set forth in Section 503 of the
Code.
A fiduciary of an employee benefit plan subject to Title I of ERISA
should consider the fiduciary standards under ERISA in the context of the plan's
particular circumstances before authorizing an investment of a portion of such
plan's assets in the Securities. Accordingly, among other factors, such
fiduciary should consider (i) whether the investment is for the exclusive
benefit of plan participants and their beneficiaries; (ii) whether the
investment satisfies the diversification requirements of Section 404 of ERISA:
(iii) whether the investment is in accordance with the documents and instruments
governing the plan and (iv) whether the investment is prudent, considering the
nature of the investment. Fiduciaries of such plans also should consider ERISA's
prohibition on improper delegation of control over, or responsibility for, plan
assets.
In addition, fiduciaries of employees 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 Sec. 2510.3-101 (the "Regulation"), thereby subjecting the
Plan to the prohibited transaction rules with respect to the Trust Fund and the
Trustee, or any entities providing services with respect to the operation of the
Trust, to the fiduciary investment standards of ERISA, or cause the excise tax
provisions of Section 4975 of the Code to apply to the Trust Fund, unless a
statutory or regulatory exception or an administrative exemption granted by the
Department of Labor ("DOL") applies to the purchase, sale, transfer or holding
of the Securities.
The Regulation contains rules for determining what constitutes the
assets of a Plan. The Regulation provides that, as a general rule, the
underlying assets and properties of corporations, partnerships, trusts and
certain other entities in which a Plan makes an investment in an "equity
interest" will be deemed for purposes of ERISA to be assets of the Plan unless
certain exceptions apply.
Under the terms of the Regulation, the Trust Fund may be deemed to hold
plan assets by reason of a Plan's investment in a Security; such plan assets
would include an undivided interest in the Primary Assets and any other assets
held by the Trust Fund. In such an event, persons providing services with
respect to the operation of the Trust Fund may be parties in interest, subject
to the fiduciary responsibility provisions of Title I of ERISA, including the
prohibited transaction provisions of Section 406 of ERISA and of Section 4975 of
the Code, with respect to transactions involving such assets unless such
transactions are subject to a statutory or regulatory exception or an
administrative exemption.
One such exception applies if the interest described is treated as
indebtedness under applicable local law and which has no substantial equity
features. Generally, a profits interest in a partnership, an undivided ownership
interest in property and a beneficial ownership interest in a trust are deemed
to be "equity interests" under the final regulation. If Notes of a particular
Series were deemed to be indebtedness under applicable local law without any
substantial equity features, an investing Plan's assets would include such
Notes, but not, by reason of such purchase, the underlying assets of the Trust
Fund. However, without regard to whether the Notes are treated as an equity
interest for such purposes, the purchase, holding or transfer of Notes by or on
behalf of a Plan could be considered a prohibited transaction if the Depositor
or the Trustee or any of their respective affiliates is, or becomes, a party in
interest or disqualified person with respect to such Plan.
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Another such exception applies if the class of equity interests in
question is: (i) "widely held" (held by 100 or more investors who are
independent of the Depositor and each other); (ii) freely transferable; and
(iii) sold as part of an offering pursuant to (A) an effective registration
statement under the Securities Act of 1933, and then subsequently registered
under the Securities Exchange Act of 1934 or (B) an effective registration
statement under Section 12(b) or 12(g) of the Securities Exchange Act of 1934
("Publicly Offered Securities"). In addition, the regulation provides that if at
all times more than 75% of the value of all classes of equity interests in the
Depositor or the Trust Fund are held by investors other than benefit plan
investors (which is defined as including both Plans and government plans), the
investing Plan's assets will not include any of the underlying assets of the
Depositor or the Trust Fund.
An additional exemption may also be available to the purchase, holding
and transfer of the Securities. The DOL granted to Bear, Stearns & Co. Inc., an
administrative exemption, Prohibited Transaction Exemption 90-30 (Application
No. D-8207, 55 Fed. Reg. 21461) (1990) (the "Exemption"), from certain of the
prohibited transaction rules of ERISA with respect to the initial purchase, the
holding and the subsequent resale by Plans of securities representing interests
in asset-backed pass-through trusts that consist of certain receivables, loans
and other obligations that meet the conditions and requirements of the
Exemption, wherever Bear, Stearns & Co. Inc. or its affiliate is the sole
underwriter, manager or co-manager of an underwriting syndicate or is the
selling or placement agent. The obligations covered by the Exemption include
obligations such as the Primary Assets (other than Private Securities which are
not insured or guaranteed by the United States or an agency or instrumentality
thereof, or Home Improvement Contracts that are unsecured). The Exemption will
apply to the acquisition, holding and transfer of the Securities by a Plan,
provided that certain conditions (certain of which are described below) are met.
Among the conditions which must be satisfied for the Exemption to apply
are the following:
(i) The acquisition of the Securities by a Plan is on terms
(including the price for the Securities) that are at least as favorable
to the Plan as they would be in an arm's-length transaction with an
unrelated party;
(ii) The rights and interests evidenced by the Securities
acquired by the Plan are not subordinated to the rights and interests
evidenced by other securities of the trust;
(iii) The Securities acquired by the Plan have received a
rating at the time of such acquisition that is in one of the three
highest generic rating categories from either Standard & Poor's Ratings
Group ("Standard & Poor's"), Moody's Investors Service, Inc.
("Moody's"), Duff & Phelps Inc. ("D&P") or Fitch Investors Service,
Inc. ("Fitch");
(iv) The sum of all payments made to the underwriter in
connection with the distribution of the Securities represents not more
than reasonable compensation for underwriting the Securities. The sum
of all payments made to and retained by the seller pursuant to the sale
of the obligations to the trust represents not more than the fair
market value of such obligations. The sum of all payments made to and
retained by the servicer represents not more than reasonable
compensation for the servicer's services under the related servicing
agreement and reimbursement of the servicer's reasonable expenses in
connection therewith;
(v) The Trustee must not be an affiliate of any other member
of the Restricted Group (as defined below); and
(vi) The Plan investing in the Securities is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act
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of 1933. The Depositor assumes that only Plans which are accredited
investors under the federal securities laws will be permitted to
purchase the Securities.
The trust also must meet the following requirements:
(i) the corpus of the trust must consist solely of assets of
the type which have been included in other investment pools;
(ii) securities in such other investment pools must have been
rated in one of the three highest generic rating categories of Standard
& Poor's, Moody's, D&P or Fitch for at least one year prior to the
Plan's acquisition of securities; and
(iii) securities evidencing interests in such other investment
pools must have been purchased by investors other than Plans for at
least one year prior to any Plan's acquisition of Securities.
Moreover, the Exemption provides relief from certain self
dealing/conflict of interest prohibited transactions that may occur when the
Plan fiduciary causes a Plan to acquire securities in a trust in which the
fiduciary (or its affiliate) is an obligor on the receivables held in the trust
provided that, among other requirements: (i) in the case of an acquisition in
connection with the initial issuance of Securities, at least fifty (50) percent
of each Class of Securities in which Plans have invested is acquired by persons
independent of the Restricted Group and at least fifty (50) percent of the
aggregate interest in the trust is acquired by persons independent of the
Restricted Group; (ii) such fiduciary (or its affiliate) is an obligor with
respect to five (5) percent or less of the fair market value of the obligations
contained in the trust; (iii) the Plan's investment in Securities does not
exceed twenty-five (25) percent of all of the Securities outstanding after the
acquisition; and (iv) no more than twenty-five (25) percent of the assets of the
Plan are invested in securities representing an interest in one or more trusts
containing assets sold or serviced by the same entity. The Exemption does not
apply to Plans sponsored by the Depositor, the underwriters of the Securities,
the Trustee, the Servicer, any obligor with respect to obligations included in a
Trust Fund constituting more than five (5) percent of the aggregate unamortized
principal balance of the assets in a Trust Fund, or any affiliate of such
parties (the "Restricted Group").
In the event that the Exemption is not applicable, some other
prohibited transaction class exemption issued by the DOL, including PTCE 95-60
(relating to insurance company general accounts), PTCE 91-38 (relating to 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
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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.
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"Collection Account" means, with respect to a Series, the account
established in the name of the Servicer for the deposit by the Servicer of
payments received from the Primary Assets.
"Combined Loan-to-Value Ratio" means, with respect to a Loan, the ratio
determined as set forth in the related Prospectus Supplement taking into account
the amounts of any related senior mortgage loans on the related Mortgaged
Property.
"Commission" means the Securities and Exchange Commission.
"Compound Interest Security" means any Security of a Series on which
all or a portion of the interest accrued thereon is added to the principal
balance of such Security on each Distribution Date, through the Accrual
Termination Date, and with respect to which no interest shall be payable until
such Accrual Termination Date, after which interest payments will be made on the
Compound Value thereof.
"Compound Value" means, with respect to a Class of Compound Interest
Securities, the original principal balance of such Class, plus all accrued and
unpaid interest, if any, previously added to the principal balance 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.
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"Deferred Interest" means the excess of the interest accrued on the
outstanding principal balance of a Loan during a specified period over the
amount of interest required to be paid by an obligor on such Loan on the related
Due Date.
"Deposit Agreement" means a guaranteed investment contract or
reinvestment agreement providing for the investment of funds held in a fund or
account, guaranteeing a minimum or a fixed rate of return on the investment of
moneys deposited therein.
"Depositor" means Bear Stearns Asset Backed Securities, Inc.
"Disqualified Organization" means the United States, any State or
political subdivision thereof, any possession of the United States, any foreign
government, any international organization, or any agency or instrumentality of
any of the foregoing, a rural electric or telephone cooperative described in
Section 1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
Sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income.
"Distribution Account" means, with respect to a Series, the account
established in the name of the Trustee for the deposit of remittances received
from the Servicer with respect to the Primary Assets.
"Distribution Date" means, with respect to a Series or Class of
Securities, each date specified as a distribution date for such Series or Class
in the related Prospectus Supplement.
"Due Date" means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest is due
and payable by the obligor on any Primary Asset pursuant to the terms thereof.
"Eligible Investments" means any one or more of the obligations or
securities described as such in the related Agreement.
"Enhancement" means the enhancement for a Series, if any, specified in
the related Prospectus Supplement.
"Enhancer" means the provider of the Enhancement for a Series specified
in the related Prospectus Supplement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"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.
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"Holder" means the person or entity in whose name a Security is
registered.
"Home Improvements" means the home improvements financed by a Home
Improvement Contract.
"Home Improvement Contract" means any home improvement installment
sales contracts and installment loan agreement which may be unsecured or secured
by purchase money security interest in the Home Improvement financed thereby.
"HUD" means the United States Department of Housing and Urban
Development.
"Indenture" means the indenture relating to a Series of Notes between
the Trust Fund and the Trustee.
"Insurance Policies" means certain mortgage insurance, hazard insurance
and other insurance policies required to be maintained with respect to Loans.
"Insurance Proceeds" means amount paid by the insurer under any of the
Insurance Policies covering any Loan or Mortgaged Property.
"Interest Only Securities" means a Class of Securities entitled solely
or primarily to distributions of interest and which is identified as such in the
related Prospectus Supplement.
"IRS" means the Internal Revenue Service.
"Lifetime Rate Cap" means the lifetime limit if any, on the Loan Rate
during the life of each adjustable rate Loan.
"Liquidation Proceeds" means amounts received by the Servicer in
connection with the liquidation of a Loan, net of liquidation expenses.
"Loan Rate" means, unless otherwise indicated herein or in the
Prospectus Supplement, the interest rate borne by a Loan.
"Loans" mean Mortgage Loans and/or Home Improvement Contracts,
collectively. A Loan refers to a specific Mortgage Loan or Home Improvement
Contract, as the context requires.
"Loan-to-Value Ratio" means, with respect to a Loan, the ratio
determined as set forth in the related Prospectus Supplement.
"Minimum Rate" means the lifetime minimum Loan Rate during the life of
each adjustable rate Loan.
"Minimum Principal Payment Agreement" means a minimum principal payment
agreement with an entity meeting the criteria of the Rating Agencies.
"Modification" means a change in any term of a Loan.
"Mortgage" means the mortgage, deed of trust or other similar security
instrument securing a Mortgage Note.
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"Mortgage Loan" means a closed-end and/or revolving home equity loan or
balance thereof 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.
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<PAGE> 155
"Property" means either a Home Improvement or a Mortgaged Property
securing a Loan, as the context requires.
"PS Agreement" means the pooling and servicing agreement, indenture,
trust agreement or similar agreement pursuant to which a Private Security is
issued.
"PS Servicer" means the servicer of the Underlying Loans.
"PS Sponsor" means, with respect to Private Securities, the sponsor or
depositor under a PS Agreement.
"PS Trustee" means the trustee designated under a PS Agreement.
"Qualified Insurer" means a mortgage guarantee or insurance company
duly qualified as such under the laws of the states in which the Mortgaged
Properties are located duly authorized and licensed in such states to transact
the applicable insurance business and to write the insurance provided.
"Rating Agency" means the nationally recognized statistical rating
organization (or organizations) which was (or were) requested by the Depositor
to rate the Securities upon the original issuance thereof.
"Regular Interest" means a regular interest in a REMIC.
"REMIC" means a real estate mortgage investment conduit.
"REMIC Administrator" means the Person, if any, specified in the
related Prospectus Supplement for a Series for which a REMIC election is made,
to serve as administrator of the Series.
"REMIC Provisions" means the provisions of the federal income tax law
relating to real estate mortgage investment conduits, which appear at Sections
860A through 860G of Subchapter M of Chapter 1 of the Code, and related
provisions, and regulations, including proposed regulations and rulings, and
administrative pronouncements promulgated thereunder, as the foregoing may be in
effect from time to time.
"REO Property" means real property which secured a defaulted Loan,
beneficial ownership of which has been acquired upon foreclosure, deed in lieu
of foreclosure, repossession or otherwise.
"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 percentage 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.
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"Senior Securityholder" means a holder of a Senior Security.
"Senior Securities" means a Class of Securities as to which the
holders' rights to receive distributions of principal and interest are senior to
the rights of holders of Subordinate Securities, to the extent specified in the
related Prospectus Supplement.
"Series" means a separate series of Securities sold pursuant to this
Prospectus and the related Prospectus Supplement.
"Servicer" means, with respect to a Series relating to Loans, the
Person if any, designated in the related Prospectus Supplement to service Loans
for that Series, or the successors or assigns of such Person.
"Single Family Property" means property securing a Loan consisting of
one-to four-family attached or detached residential housing, including
Cooperative Dwellings.
"Stripped Securities" means Pass-Through Securities representing
interests in Primary Assets with respect to which all or a portion of the
principal payments have been separated from all or a portion of the interest
payments.
"Subordinate Securityholder" means a Holder of a Subordinate Security.
"Subordinated Securities" means a Class of Securities as to which the
rights of holders to receive distributions of principal, interest or both is
subordinated to the rights of holders of Senior Securities, and may be allocated
losses and 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 IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE SELLER OR THE UNDERWRITER. THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
CERTIFICATES OFFERED HEREBY NOR AN OFFER OF SUCH CERTIFICATES TO ANY PERSON IN
ANY STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER WOULD BE UNLAWFUL. THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AT ANY
TIME DOES NOT IMPLY THAT INFORMATION HEREIN CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
--------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
<TABLE>
<CAPTION>
<S> <C>
Summary of Terms................................................................................................S-3
Risk Factors...................................................................................................S-15
Description of the Home Equity Loans...........................................................................S-18
The Seller and the Servicer....................................................................................S-20
Champion's Home Equity Loan Program............................................................................S-20
Prepayment and Yield Considerations............................................................................S-25
Description of the Certificates................................................................................S-31
The Policy and the Certificate Insurer.........................................................................S-45
Use of Proceeds................................................................................................S-48
Plan of Distribution...........................................................................................S-48
Report of Experts..............................................................................................S-49
Ratings........................................................................................................S-49
Legal Matters..................................................................................................S-49
Appendix A--Certain Statistical Information....................................................................S-50
PROSPECTUS
Prospectus Supplement.............................................................................................3
Reports to Holders................................................................................................3
Available Information ............................................................................................3
Incorporation of Certain Documents by Reference...................................................................4
Summary of Terms..................................................................................................5
Risk Factors.....................................................................................................17
Description of the Securities....................................................................................20
The Trust Funds..................................................................................................24
Enhancement......................................................................................................32
Servicing of Loans...............................................................................................34
The Agreements...................................................................................................41
Certain Legal Aspects of Loans...................................................................................50
The Depositor....................................................................................................59
Use of Proceeds..................................................................................................60
Certain Federal Income Tax Considerations........................................................................60
State Tax Considerations.........................................................................................83
ERISA Considerations.............................................................................................83
Legal Investment.................................................................................................86
Plan of Distribution.............................................................................................87
Legal Matters....................................................................................................87
Glossary of Terms................................................................................................88
</TABLE>
$100,000,000
Champion Home Equity
Loan Trust 1996-1
CHAMPION MORTGAGE
SERVICING CORP.
Servicer
BEAR STEARNS ASSET
BACKED SECURITIES, INC.
Depositor
-------------------
PROSPECTUS SUPPLEMENT
-------------------
BEAR, STEARNS & CO. INC.
KEY CAPITAL MARKETS, INC.
July 21, 1998
