<PAGE> 1
Filed Pursuant To Rule 424(b)(3)
Registration No. 333-43091
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 24, 1998)
$300,000,000
CHAMPION HOME EQUITY LOAN TRUST 1998-1
$300,000,000 CLASS A-1 VARIABLE RATE CERTIFICATES
CLASS A-2 8.12% FIXED RATE CERTIFICATES
CHAMPION MORTGAGE CO., INC.
SELLER AND SERVICER
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
---------------------------
The Home Equity Loan Asset-Backed Certificates, Series 1998-1 (the
"Certificates"), consist of two Classes (each, a "Class") of senior
Certificates, the Class A-1 Certificates and the Class A-2 Certificates (the
Class A-1 Certificates, the "Variable Rate Certificates" and the Class A-2
Certificates, the "Fixed Rate Certificates" and together with the Variable Rate
Certificates, the "Class A Certificates") and one Class of subordinated
Certificates (the "Class R Certificates"). Only the Class A Certificates are
being offered hereby.
The Certificates evidence in the aggregate the entire beneficial interest
in a pool (the "Mortgage Pool") of non-conforming closed-end fixed-rate home
equity loans (the "Mortgage Loans") held by Champion Home Equity Loan Trust
1998-1 (the "Trust") formed pursuant to a Pooling and Servicing Agreement among
Bear Stearns Asset Backed Securities, Inc., as depositor (the "Depositor"),
Champion Mortgage Co., Inc., as seller (the "Seller"), and as servicer (the
"Servicer"), and Harris Trust and Savings Bank, as trustee (the "Trustee"). The
assets of the Trust also include certain other property. The Mortgage Loans are
secured by first and second deeds of trust or mortgages primarily on one-to
four-family residential properties. All of the Mortgage Loans were acquired by
the Depositor from the Seller.
(Cover continued on next page)
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PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER "RISK
FACTORS" BEGINNING ON PAGE S-14 HEREIN AND ON PAGE 15 IN
THE ACCOMPANYING PROSPECTUS.
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THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST ONLY AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, THE SELLER, THE SERVICER, THE
TRUSTEE OR ANY AFFILIATE THEREOF, EXCEPT TO THE EXTENT PROVIDED HEREIN. NEITHER
THE CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------------
BEAR, STEARNS & CO. INC. MCDONALD INVESTMENTS
A KeyCorp Company
The date of this Prospectus Supplement is November 10, 1998
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(Cover continued from previous page)
Distributions on the Class A Certificates will be made on the 25th day of
each month or, if such date is not a Business Day, then on the next succeeding
Business Day (each, a "Distribution Date"), commencing in October 1998. On each
Distribution Date, holders of the Class A Certificates will be entitled to
receive, from and to the limited extent of funds available in the Distribution
Account (as defined herein), distributions with respect to interest and
principal calculated as set forth herein. The Certificates are not guaranteed by
the Depositor, the Seller, the Servicer, the Trustee or any affiliate thereof.
However, the Class A Certificates will have the benefit of an irrevocable and
unconditional certificate guaranty insurance policy (the "Policy") issued by
MBIA Insurance Corporation (the "Certificate Insurer") pursuant to which the
Certificate Insurer will guarantee certain payments to the Class A
Certificateholders as described herein. See "DESCRIPTION OF THE
CERTIFICATES -- The Policy" herein.
(LOGO)
There is currently no market for the Class A Certificates and there can be
no assurance that such a market will develop or if it does develop that it will
continue. See "RISK FACTORS" herein.
After the initial distribution of the Class A Certificates by the
Underwriters, the Prospectus and Prospectus Supplement may be used by McDonald
Investments Inc., A KeyCorp Company ("McDonald Investments"), an affiliate of
the Seller and the Servicer, in connection with market making transactions in
the Class A Certificates. McDonald Investments may act as principal or agent in
such transactions. 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 herein under
"Incorporation of Certain Documents by Reference."
For federal income tax purposes, the Trust Fund will include multiple
segregated asset pools, with respect to which elections will be made to treat
each as a "real estate mortgage investment conduit" (a "REMIC"). As described
more fully herein and in the Prospectus, the Class A Certificates will
constitute beneficial ownership of the "regular interests" in the Master REMIC.
The Class R Certificates will constitute the beneficial ownership of the
"residual interests" in both the Master REMIC and each Subsidiary REMIC. See
"CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" herein and in the Prospectus.
---------------------------
The Class A Certificates constitute part of a separate series of Home
Equity Loan Asset-Backed Certificates being offered by Bear Stearns Asset Backed
Securities, Inc. from time to time pursuant to its Prospectus dated September
24, 1998. This Prospectus Supplement does not contain complete information about
the offering of the Class A Certificates. Additional information is contained in
the Prospectus and investors are urged to read both this Prospectus Supplement
and the Prospectus in full. Sales of the Class A Certificates may not be
consummated unless the purchaser has received both this Prospectus Supplement
and the Prospectus.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by the Trustee or the Servicer, on
behalf of the Trust, 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 the
Prospectus shall be deemed incorporated by reference into this Prospectus
Supplement and the Prospectus and to be a part hereof. Any statement contained
herein or in a document deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus Supplement
and the Prospectus to the extent that a statement contained in any other
subsequently filed document which is also deemed to be incorporated by reference
herein modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as modified or superseded, to constitute
part of this Prospectus Supplement and the Prospectus.
In addition to the documents described in the Prospectus under
"Incorporation of Certain Documents by Reference," the consolidated financial
statements of the Certificate Insurer, a wholly-owned subsidiary of MBIA Inc.,
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 MBIA Inc. for the year ended December 31, 1997 and the consolidated
financial statements of the Certificate Insurer and its subsidiaries as of June
30, 1998 and for the six month periods ending June 30, 1998 and June 30, 1997
included in the Quarterly Report on Form 10-Q of MBIA Inc. for the period ending
June 30, 1998 are hereby incorporated by reference in 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 is also 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 the Certificate Insurer and its subsidiaries
included in documents filed by MBIA Inc. 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 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 Depositor on behalf of the Trust hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933, each filing of
the Trust's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act and each filing of the financial statements of the Certificate
Insurer included in or as an exhibit to the annual report of MBIA Inc. filed
pursuant to section 13(a) or section 15(d) of the Exchange Act that is
incorporated by reference in the Registration Statement (as defined in the
accompanying Prospectus) shall be deemed to be a new registration statement
relating to the Class A Certificates offered hereby, and the offering of such
Class A Certificates at that time shall be deemed to be the initial bona fide
offering thereof.
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SUMMARY
The following summary of certain pertinent information is qualified in its
entirety by reference to the detailed information appearing elsewhere in this
Prospectus Supplement and the accompanying Prospectus. Certain capitalized terms
used in the Summary are defined elsewhere in this Prospectus Supplement or in
the Prospectus. Reference is made to the Index of Defined Terms herein and the
Glossary of Terms in the Prospectus for the definitions of certain capitalized
terms.
Trust......................... Champion Home Equity Loan Trust 1998-1 (the
"Trust") will be formed pursuant to a pooling
and servicing agreement (the "Agreement"), to
be dated as of September 1, 1998, among Bear
Stearns Asset Backed Securities, Inc., as
depositor (the "Depositor"), Champion Mortgage
Co., Inc., as seller (the "Seller") and as
servicer (together with any successor in such
capacity, the "Servicer"), and Harris Trust and
Savings Bank, as trustee (the "Trustee"). The
property of the Trust will include: a pool (the
"Mortgage Pool") of non-conforming closed-end
fixed-rate home equity loans (the "Mortgage
Loans"), secured by first and second deeds of
trust or mortgages on residential properties
that are primarily one- to four-family
properties (the "Mortgaged Properties");
payments in respect of the Mortgage Loans
received after the Cut-Off Date; property that
secured a Mortgage Loan which has been acquired
by foreclosure or deed in lieu of foreclosure;
an assignment of the Depositor's rights under
the Purchase Agreement and the Support
Agreement (as defined herein); rights under
certain hazard insurance policies covering the
Mortgaged Properties; funds on deposit in trust
accounts (the "Collection Account" and the
"Distribution Account"); and certain other
property, as described more fully herein. In
addition, the Depositor has caused the
Certificate Insurer to issue an irrevocable and
unconditional financial guaranty insurance
policy (the "Policy") for the benefit of the
holders of the Class A Certificates, pursuant
to which the Certificate Insurer will guarantee
certain payments to such Certificateholders as
described herein. The "Cut-Off Date" for any
Mortgage Loan is the opening of business on
September 1, 1998.
The Trust property initially will include the
unpaid principal balance of each Mortgage Loan
as of the Cut-Off Date. With respect to any
date, the "Pool Principal Balance" will be
equal to the aggregate of the Principal
Balances of all Mortgage Loans as of such date.
The "Cut-Off Date Principal Balance" with
respect to each Mortgage Loan is the unpaid
principal balance thereof as of its Cut-Off
Date. The "Principal Balance" of a Mortgage
Loan (other than a Liquidated Mortgage Loan) on
any day is equal to its Cut-Off Date Principal
Balance, minus all collections applied in
reduction of the Cut-Off Date Principal Balance
of such Mortgage Loan. The Principal Balance of
a Liquidated Mortgage Loan (as defined herein)
after the Due Period in which such Mortgage
Loan becomes a Liquidated Mortgage Loan shall
be zero.
Securities.................... The Home Equity Loan Asset-Backed Certificates,
Series 1998-1 (the "Certificates") will consist
of two Classes of senior certificates, the
Class A-1 Certificates and the Class A-2
Certificates (the Class A-1 Certificates, the
"Variable Rate Certificates" and the Class A-2
Certificates, the "Fixed Rate Certificates" and
together with the Variable Rate Certificates,
the "Class A Certificates") and
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one Class of subordinated certificates (the
"Class R Certificates"). Only the Class A
Certificates are offered hereby. Each Class of
Class A Certificates represents the right to
receive payments of interest at the rates set
forth herein, payable monthly, and payments of
principal to the extent provided below. The
aggregate undivided interest in the Trust
represented by the Class A Certificates as of
the Closing Date will equal $300,000,000 of
principal, which represents approximately 100%
of the aggregate Cut-Off Date Principal
Balances of the Mortgage Loans. The principal
amount of the Class A-1 Certificates (the
"Class A-1 Principal Balance") on any date is
equal to the Class A-1 Principal Balance on the
Closing Date minus the aggregate of amounts
actually distributed as principal to the
holders of the Class A-1 Certificates. The
Class A-2 Certificates will be notional amount
certificates and will not be entitled to
distributions of principal. With respect to the
Class A-2 Certificates and each of the first 36
Distribution Dates, the "Notional Principal
Balance" thereof will be equal to the lesser of
(i) the Pool Principal Balance on the first day
of the related Due Period and (ii) $21,000,000.
With respect to the Class A-2 Certificates and
each Distribution Date after the 36th
Distribution Date, the "Notional Principal
Balance" of the Class A-2 Certificates will be
equal to zero.
The Mortgage Loans............ The Mortgage Pool consists of 4,620 Mortgage
Loans with an aggregate Cut-Off Date Principal
Balance of $300,034,624 (the "Cut-Off Date Pool
Principal Balance") of non-conforming closed-
end fixed-rate home equity loans secured by
first and second deeds of trust or mortgages on
Mortgaged Properties located in 12 states and
the District of Columbia.
As of the Cut-Off Date, the average Principal
Balance was $64,943; the Loan Rates ranged from
9.25% to 13.99%; the weighted average Loan Rate
was approximately 10.63%; and the weighted
average remaining term to stated maturity was
approximately 197 months (in each case weighted
by Cut-Off Date Principal Balance of each
Mortgage Loan). The remaining terms to stated
maturity as of the Cut-Off Date of the Mortgage
Loans ranged from 50 months to 360 months. The
maximum Principal Balance of any Mortgage Loan
as of the Cut-Off Date was $226,776.
Approximately 32.77% (by Cut-Off Date Pool
Principal Balance) of the Mortgage Loans are
Balloon Loans. No Mortgage Loan will mature
later than August 25, 2028. The Combined
Loan-to-Value Ratio of each Mortgage Loan,
computed on the date such loan was originated
and taking into account the amounts of any
related senior mortgage loans (the "Combined
Loan-to-Value Ratio"), ranged from
approximately 4.18% to approximately 89.99% and
had a weighted average Combined Loan-to-Value
Ratio of approximately 68.30%. See "DESCRIPTION
OF THE MORTGAGE LOANS" herein.
The Mortgage Loans were originated by the
Seller or an affiliate of the Seller.
Interest on each Mortgage Loan is payable
monthly on the outstanding Principal Balance
thereof at a rate per annum (the "Loan Rate")
specified in the related Mortgage Note. Each
Mortgage Loan will bear interest at a fixed
rate that is calculated on the "simple
interest"
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method. Certain of the Mortgage Loans 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").
Denominations................. The Class A Certificates will be offered for
purchase in denominations of $25,000 and
multiples of $1,000 in excess thereof.
Registration of Class A
Certificates.................. The Class A Certificates will initially be
issued in book-entry form. Persons acquiring
beneficial ownership interests in the Class A
Certificates ("Certificate Owners") will hold
their Class A Certificate interests through The
Depository Trust Company ("DTC"), in the United
States, or Cedel Bank societe anonyme ("Cedel")
or the Euroclear System ("Euroclear"), in
Europe. Transfers within DTC, Cedel or
Euroclear, as the case may be, will be in
accordance with the usual rules and operating
procedures of the relevant system. So long as
the Class A Certificates are Book-Entry
Certificates (as defined herein), such
Certificates will be evidenced by one or more
Certificates registered in the name of Cede &
Co. ("Cede"), as the nominee of DTC or one of
the relevant depositaries (collectively, the
"European Depositaries"). Cross-market
transfers between persons holding directly or
indirectly through DTC, on the one hand, and
counterparties holding directly or indirectly
through Cedel or Euroclear, on the other, will
be effected in DTC through Citibank, N.A.
("Citibank") or The Chase Manhattan Bank
("Chase"), the relevant depositaries of Cedel
and Euroclear, respectively, and each a
participating member of DTC. The interests of
such Certificateholders will be represented by
book-entries on the records of DTC and
participating members thereof. No Certificate
Owner will be entitled to receive a definitive
certificate representing such person's
interest, except in the event that Definitive
Certificates (as defined herein) are issued
under the limited circumstances described
herein. All references in this Prospectus
Supplement to any Class A Certificates reflect
the rights of Certificate Owners only as such
rights may be exercised through DTC and its
participating organizations for so long as such
Class A Certificates are held by DTC. See "RISK
FACTORS -- Book-Entry Certificates",
"DESCRIPTION OF THE CERTIFICATES -- Book-Entry
Certificates" herein and "ANNEX I" hereto.
Depositor..................... Bear Stearns Asset Backed Securities, Inc., a
Delaware corporation (the "Depositor"). The
principal executive offices of the Depositor
are located at 245 Park Avenue, New York, New
York 10167 (Telephone: (212) 272-2000). See
"THE DEPOSITOR" in the Prospectus.
Seller and Servicer of the
Mortgage Loans................ Champion Mortgage Co., Inc., a New Jersey
corporation (the "Seller" or the "Servicer," as
applicable). The corporate headquarters of the
Seller and Servicer 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.
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Certificate Rate.............. The "Certificate Rate" on any Distribution Date
with respect to the Class A-1 Certificates will
equal the lesser of (A) the Class A-1 Formula
Rate and (B) the Net Funds Cap for such
Distribution Date. The "Class A-1 Formula Rate"
is the sum of the interbank offered rate for
one-month United States dollar deposits in the
London market (the "Certificate Index")
(calculated as described under "DESCRIPTION OF
THE CERTIFICATES -- The Certificate Rate") as
of the related LIBOR Determination Date (as
defined herein) plus (a) with respect to any
Distribution Date which occurs on or prior to
the date on which the Pool Principal Balance is
less than 5% of the Cut-Off Date Pool Principal
Balance, 0.31% and (b) with respect to any
other Distribution Date, 0.62%. The "Net Funds
Cap" for any Distribution Date will equal the
percentage equivalent of (A) a fraction, (1)
the numerator of which is equal to (a) all
payments of interest due on the Mortgage Loans
during the related Due Period, less (b) the sum
of (i) the Servicing Fee payable on such
Distribution Date, (ii) the Trustee fee payable
on such Distribution Date, (iii) the monthly
premium owed to the Certificate Insurer payable
on such Distribution Date and (iv) the
Certificate Rate for the Class A-2 Certificates
times the Notional Principal Balance of the
Class A-2 Certificates and (2) the denominator
of which is the Class A-1 Principal Balance as
of the first day of the related Due Period,
times (B) a fraction, the numerator of which is
one and the denominator of which is the actual
number of days in the Interest Period for the
Class A-1 Certificates, times (C) 360.
Notwithstanding the foregoing, on any
Distribution Date on which the
overcollateralization exceeds the Class A-1
Principal Balance, the Net Funds Cap will equal
2 times the Adjusted Net Funds Cap. The
"Adjusted Net Funds Cap" with respect to any
such Distribution Date will be calculated in
the same manner as the Net Funds Cap except
that the denominator referred to in clause
(A)(2) of the definition of Net Funds Cap will
equal the Pool Principal Balance as of the
first day of the related Due Period.
The "Certificate Rate" on any Distribution Date
with respect to the Class A-2 Certificates is
8.12% per annum. With respect to the Class A-2
Certificates and each of the first 36
Distribution Dates, the "Notional Principal
Balance" thereof will be equal to the lesser of
(i) the Pool Principal Balance as of the first
day of the related Due Period and (ii)
$21,000,000. With respect to the Class A-2
Certificates and each Distribution Date after
the 36th Distribution Date, the "Notional
Principal Balance" of the Class A-2
Certificates will be equal to zero.
The "Interest Period" means, with respect to
each Distribution Date and the Fixed Rate
Certificates, the period from the first day of
the calendar month preceding the month of such
Distribution Date through the last day of such
calendar month. Interest on the Fixed Rate
Certificates in respect of any Distribution
Date will accrue during the related Interest
Period on the basis of a 360-day year
consisting of twelve 30-day months.
The "Interest Period" means, with respect to
each Distribution Date and the Variable Rate
Certificates, the period from the Distribution
Date in the month preceding the month of such
Distribution Date (or,
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in the case of the first Distribution Date,
from the Closing Date) through the day before
such Distribution Date. Interest on the
Variable Rate Certificates in respect of any
Distribution Date will accrue during the
related Interest Period on the basis of a
360-day year and the actual number of days
elapsed.
Record Date................... With respect to the Class A Certificates and
any Distribution Date, the "Record Date" will
be the day immediately preceding such
Distribution Date; provided, however, that if
any Class A Certificate becomes a Definitive
Certificate, the Record Date for such Class A
Certificate will be the last day of the month
immediately preceding the month in which the
related Distribution Date occurs.
Distributions................. On the 25th day of each month, or if such day
is not a Business Day, then the next succeeding
Business Day, commencing in October 1998 (each
such day, a "Distribution Date"), the Trustee
will be required to distribute from funds
available therefor in the Distribution Account
(as described herein) to the holders of the
Class A Certificates on the related Record
Date, in the priorities described below, an
aggregate amount equal to the sum of (a) the
Class Interest Distribution for each Class of
Class A Certificates, and (b) the Class A-1
Principal Distribution. See "DESCRIPTION OF THE
CERTIFICATES -- Priority of Distributions"
herein.
Interest
On each Distribution Date, to the extent of
funds available therefor as described herein,
interest will be distributed with respect to
each Class of Class A Certificates in an amount
(each, a "Class Interest Distribution") equal
to the sum of (a) interest at the related
Certificate Rate that accrued during the
related Interest Period on the Class A-1
Principal Balance or Notional Principal
Balance, as applicable, immediately prior to
such Distribution Date (the "Class Monthly
Interest Distributable Amount") and (b) any
Class Interest Carryover Shortfall for such
Class of Class A Certificates for such
Distribution Date. As to any Distribution Date
and Class of Class A Certificates, "Class
Interest Carryover Shortfall" is the sum of (i)
the excess of the sum of (A) the related Class
Monthly Interest Distributable Amount for the
preceding Distribution Date and (B) any
outstanding Class Interest Carryover Shortfall
with respect to such Class on such preceding
Distribution Date, over the amount in respect
of interest that is actually distributed to
such Class on such preceding Distribution Date
plus (ii) interest on such excess, to the
extent permitted by law, at the related
Certificate Rate for the related Interest
Period.
On each Distribution Date, the Class Interest
Distribution for each Class of Class A
Certificates will be distributed on an equal
priority and any shortfall in the amount
required to be distributed as interest thereon
to each such Class will be allocated between
such Classes pro rata based on the amount which
would have been distributed to each such Class
in the absence of such shortfall.
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Principal
On each Distribution Date, to the extent of
funds available therefor as described herein,
principal will be distributed to the holders of
the Class A-1 Certificates in an amount equal
to the lesser of (A) the Class A-1 Principal
Balance and (B) the Class A-1 Principal
Distribution for such Distribution Date. "Class
A-1 Principal Distribution" means, with respect
to any Distribution Date, the sum of the Class
A-1 Monthly Principal Distributable Amount for
such Distribution Date and any Class A-1
Principal Shortfall Amount for such
Distribution Date.
"Class A-1 Monthly Principal Distributable
Amount" means, with respect to any Distribution
Date, to the extent of funds available therefor
as described herein, the amount equal to the
sum of the following amounts (without
duplication) with respect to the immediately
preceding Due Period (as defined below): (i)
each payment of principal on a Mortgage Loan
received by the Servicer during such Due
Period, including all full and partial
principal prepayments, (ii) the Principal
Balance as of the end of the immediately
preceding Due Period of each Mortgage Loan that
became a Liquidated Mortgage Loan for the first
time during the related Due Period, (iii) the
portion of the Purchase Price allocable to
principal of all repurchased Mortgage Loans
with respect to such Due Period, (iv) any
Substitution Adjustments received on or prior
to the previous Determination Date and not yet
distributed and (v) the amount, if any,
required to be distributed on such Distribution
Date to satisfy the required level of
overcollateralization for such Distribution
Date (the "Distributable Excess Spread").
"Class A-1 Principal Shortfall Amount" means
for any Distribution Date, the amount, if any,
by which the Class A-1 Principal Balance
exceeds the Pool Principal Balance at the end
of the related Due Period after giving effect
to all distributions of amounts on deposit in
the Distribution Account available to pay the
Class A-1 Monthly Principal Distributable
Amount (exclusive of Distributable Excess
Spread) and draws under the Policy for such
Distribution Date.
If the required level of overcollateralization
is reduced below the then existing amount of
overcollateralization (described below) or if
the required level of overcollateralization is
satisfied, the amount of the Class A-1
Principal Distribution will be correspondingly
reduced by the amount of such reduction or by
the amount necessary such that the
overcollateralization will not exceed the
required level of overcollateralization after
giving effect to the distribution in respect of
principal to be made on such Distribution Date.
"Due Period" means, with respect to any
Determination Date or Distribution Date, the
calendar month immediately preceding such
Determination Date or Distribution Date, as the
case may be.
For a description of a "Liquidated Mortgage
Loan" see "DESCRIPTION OF THE
CERTIFICATES -- Principal" herein.
"Excess Spread" means, with respect to any
Distribution Date, the positive excess, if any,
of (x) Available Funds (as defined herein) for
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such Distribution Date over (y) the portion
thereof to be distributed pursuant to
subclauses (i) through (iv) as set forth under
the heading "DESCRIPTION OF
CERTIFICATES -- Priority of Distributions" on
such Distribution Date. Distributions of Excess
Spread will result in acceleration of principal
payments to the holders of Class A-1
Certificates creating overcollateralization to
the extent required by the Agreement. This
feature will have the effect of reducing the
weighted average lives of the Class A-1
Certificates. See "DESCRIPTION OF
CERTIFICATES -- Overcollateralization
Provisions" and "PREPAYMENT AND YIELD
CONSIDERATIONS" herein.
The last scheduled Distribution Date for each
Class of Class A Certificates is as follows:
Class A-1 Certificates, the Distribution Date
in September 2028; Class A-2 Certificates, the
Distribution Date in September 2001. It is
expected that the actual last Distribution Date
for the Class A-1 Certificates will occur
significantly earlier than the last scheduled
Distribution Date for the Class A-1
Certificates specified above. See "PREPAYMENT
AND YIELD CONSIDERATIONS."
Overcollateralization......... The credit enhancement provisions of the Trust
result in a limited acceleration of the Class
A-1 Certificates relative to the amortization
of the Mortgage Loans in the early months of
the transaction. The accelerated amortization
is achieved by the application of Excess Spread
as described herein to principal distributions
on the Class A-1 Certificates. This
acceleration feature creates
overcollateralization (i.e., the excess of the
Pool Principal Balance over the Class A-1
Principal Balance). Once the required level of
overcollateralization is reached and subject to
the provisions described in the next paragraph,
the acceleration feature will cease, until
necessary to maintain the required level of
overcollateralization.
The Agreement will provide that, subject to
certain floors, caps and triggers, the required
level of overcollateralization may increase or
decrease over time. An increase in the required
level of overcollateralization will result in a
temporary period of accelerated amortization of
the Class A-1 Certificates to increase the
actual level of overcollateralization to its
required level; a decrease would result in a
temporary period of decelerated amortization to
reduce the actual level of
overcollateralization to its required level. An
increase in the required level of
overcollateralization will result if the
delinquency or default experience on the
Mortgage Loans exceeds certain levels set forth
in the Agreement. In that event, amortization
of the Class A-1 Certificates would be
accelerated until the level of
overcollateralization reaches its required
level. The required level of
overcollateralization may be decreased (and may
be reduced to zero) under certain
circumstances, which will slow the amortization
of the Class A-1 Certificates. Accelerated
amortization and the resulting
overcollateralization is accomplished by
distributing a portion of the interest receipts
on the Mortgage Loans as a payment of principal
on the Class A-1 Certificates. See "PREPAYMENT
AND YIELD CONSIDERATIONS" and "DESCRIPTION OF
THE CERTIFICATES -- Overcollateralization
Provisions."
S-10
<PAGE> 11
The Policy.................... The Policy will unconditionally and irrevocably
guarantee principal payments as described below
on the Class A-1 Certificates plus accrued and
unpaid interest due on Class A Certificates. On
each Distribution Date, a draw will be made on
the Policy equal to the sum of (a) the amount
by which the Class Interest Distribution for
each Class of Class A Certificates for such
Distribution Date exceeds the amount on deposit
in the Distribution Account available to be
distributed therefor on such Distribution Date,
and (b) the amount, if any, (the "Guaranteed
Principal Amount") by which the Class A-1
Principal Balance exceeds the Pool Principal
Balance at the end of the related Due Period
(after giving effect to all amounts
distributable and allocable to principal on the
Class A-1 Certificates on such Distribution
Date) for such Distribution Date. In addition,
the Policy will guarantee the payment in full
of the Class A-1 Principal Balance on the
Distribution Date in September 2028 (after
giving effect to all other amounts
distributable and allocable to principal on the
Class A-1 Certificates on such Distribution
Date).
In the absence of payments under the Policy,
holders of the Class A Certificates will
directly bear the credit and other risks
associated with their undivided interest in the
Trust. See "DESCRIPTION OF THE
CERTIFICATES -- The Policy," herein.
The Certificate Insurer....... MBIA Insurance Corporation, a New York
domiciled stock insurance company (the
"Certificate Insurer"). See "THE CERTIFICATE
INSURER" herein.
Servicing..................... The Servicer will be responsible for servicing,
managing and making collections on the Mortgage
Loans. The Servicer will deposit all
collections in respect of the Mortgage Loans
into the Collection Account as described
herein. On the eighteenth day of the month
(each, a "Determination Date"), the Trustee
will calculate the amounts to be paid, as
described herein, to the Certificateholders on
the next Distribution Date. See "DESCRIPTION OF
THE CERTIFICATES -- Priority of Distributions."
With respect to each Due Period, the Servicer
will receive from payments in respect of
interest on the Mortgage Loans, on behalf of
itself, a portion of such payments as a monthly
servicing fee (the "Servicing Fee") in the
amount of 0.40% per annum (or, if Champion is
no longer the Servicer, 0.50% per annum) (the
"Servicing Fee Rate") on the Principal Balance
of each Mortgage Loan as of the first day of
each such Due Period. See "DESCRIPTION OF THE
CERTIFICATES -- Servicing Compensation and
Payment of Expenses." In 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 a
successor Servicer. See "DESCRIPTION OF THE
CERTIFICATES -- Certain Matters Regarding the
Servicer" herein.
Trustee....................... Harris Trust and Savings Bank, a banking
corporation organized under the laws of the
State of Illinois, will act as Trustee.
Monthly Advances.............. The Servicer is required to remit to the
Trustee no later than two Business Days prior
to each Distribution Date, for deposit in the
Distribution Account, an amount equal to the
scheduled installment of interest due on each
Mortgage Loan but not received by the
S-11
<PAGE> 12
Servicer during the related Due Period (a
"Monthly Advance"). Such obligation of the
Servicer continues with respect to each
Mortgage Loan until such Mortgage Loan becomes
a Liquidated Mortgage Loan. The Servicer is not
required to make any Monthly Advances which it
determines would be nonrecoverable. Monthly
Advances are reimbursable to the Servicer
subject to certain conditions and restrictions,
and are intended to provide liquidity for the
payment of interest on the Class A
Certificates. See "DESCRIPTION OF THE
CERTIFICATES -- Advances" herein.
Prepayment Interest
Shortfalls.................... Not later than two Business Days prior to each
Distribution Date, the Servicer is required to
remit to the Trustee, without any right of
reimbursement, an amount equal to, with respect
to each Mortgage Loan as to which a principal
prepayment in full was received during the
related Due Period, the lesser of (a) the
excess, if any, of 30 days' interest on the
Principal Balance of each such Mortgage Loan at
the Loan Rate (or at such lower rate as may be
in effect for such Mortgage 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 Mortgage
Loan as a result of a bankruptcy proceeding (a
"Debt Service Reduction"), minus the Servicing
Fee for each such Mortgage Loan over the amount
of interest actually paid by the related
Mortgagor in connection with such principal
prepayment (with respect to all such Mortgage
Loans, the "Prepayment Interest Shortfall") and
(b) the sum of the aggregate Servicing Fee
received by the Servicer in the most recently
ended Due Period.
Optional Termination by the
Servicer...................... The Servicer may, at its option, terminate the
Agreement on any date on which the Pool
Principal Balance is less than 5% of the
Cut-Off Date Pool Principal Balance, at the
price described herein under "DESCRIPTION OF
THE CERTIFICATES -- Termination; Purchase of
the Mortgage Loans."
Optional Purchase of Defaulted
Mortgage Loans.............. The Servicer has the option, but is not
obligated, to purchase from the Trust any
Mortgage Loan 90 days or more delinquent at the
Purchase Price (as defined herein). See
"DESCRIPTION OF THE CERTIFICATES -- Optional
Purchase of Defaulted Mortgage Loans" herein.
Certain Federal Tax
Considerations................ For federal income tax purposes, the Trust Fund
will include multiple segregated asset pools.
The Trust will make a REMIC election with
respect to each such segregated asset pool. The
Mortgage Loans and certain other property will
be held by one REMIC (the "Initial Subsidiary
REMIC"), which will issue various Classes of
uncertificated interests that will be
designated as regular and residual interests.
The Initial Subsidiary REMIC will be part of a
tiered REMIC structure in which the regular
interests issued by one REMIC will constitute
the assets of a higher tier REMIC (the Initial
Subsidiary REMIC and such other REMICs are
collectively referred to herein as the
"Subsidiary REMICs"). The Class A-1 and Class
A-2 Certificates (collectively, the "Regular
Certificates"), will represent ownership of
regular interests in a REMIC (the "Master
S-12
<PAGE> 13
REMIC"). The Class R Certificates will evidence
ownership of the residual interest in the
Master REMIC and in each Subsidiary REMIC. See
"Certain Federal Income Tax Considerations"
herein and "Certain Federal Income Tax
Considerations" in the Prospectus.
The holders of the Class A Certificates will be
required to include in income interest on such
Certificates in accordance with the accrual
method of accounting.
The Class A Certificates may, depending on
their issue price, be treated as having been
issued with original issue discount for federal
income tax purposes. For further information
regarding the federal income tax consequences
of investing in the Class A Certificates, see
"CERTAIN FEDERAL INCOME TAX CONSIDERATIONS"
herein and in the Prospectus.
ERISA Considerations.......... The acquisition of a Class A Certificate by a
pension or other employee benefit plan (a
"Plan") subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), could, in some instances, result in
a "prohibited transaction" or other violation
of the fiduciary responsibility provisions of
ERISA and Code Section 4975. Certain exemptions
from the prohibited transaction rules could be
applicable to the acquisition of such Class A
Certificates. Any Plan fiduciary considering
whether to purchase any Class A Certificate on
behalf of a Plan should consult with its
counsel regarding the applicability of the
provisions of ERISA and the Code.
Subject to the considerations and conditions
described under "ERISA CONSIDERATIONS" herein,
it is expected that the Class A Certificates
may be purchased by a Plan.
Legal Investment
Considerations................ The Class A Certificates will not constitute
"mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act
of 1984 ("SMMEA"), because some of the
Mortgages securing the Mortgage Loans are not
first mortgages. Accordingly, many institutions
with legal authority to invest in comparably
rated securities based solely on first
mortgages may not be legally authorized to
invest in the Class A Certificates. See "LEGAL
INVESTMENT CONSIDERATIONS" herein and "LEGAL
INVESTMENT" in the Prospectus.
Certificate Rating............ It is a condition to the issuance of the Class
A-1 Certificates that they receive ratings of
"AAA" by Standard & Poor's, a division of The
McGraw-Hill Companies ("S&P") and "Aaa" by
Moody's Investors Service, Inc. ("Moody's"). It
is a condition to the issuance of the Class A-2
Certificates that they receive ratings of
"AAAr" by S&P and "Aaa" by Moody's. In general,
ratings address credit risk and do not address
the likelihood of prepayments on Mortgage Loans
or the possibility that Class A
Certificateholders might realize a lower than
anticipated yield. See "RATINGS" herein and
"RISK FACTORS -- Rating of the Securities" in
the Prospectus.
S-13
<PAGE> 14
RISK FACTORS
Book-Entry Certificates. Issuance of the Class A Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
trading market since investors may be unwilling to purchase Class A Certificates
for which they cannot obtain physical certificates. Since transactions in the
Class A Certificates can be effected only through DTC, Cedel, Euroclear,
participating organizations, indirect participants and certain banks, the
ability of a Certificate Owner to pledge a Class A Certificate to persons or
entities that do not participate in DTC, Cedel or the Euroclear system or
otherwise to take actions in respect of such Certificates, may be limited due to
lack of a physical certificate representing the Class A Certificates.
Certificate Owners may experience some delay in their receipt of distributions
of interest and principal on the Class A Certificates since such distributions
will be forwarded by the Trustee to DTC and DTC will credit such distributions
to the accounts of its Participants (as defined herein) which will thereafter
credit them to the accounts of Certificate Owners either directly or indirectly
through indirect participants. See "DESCRIPTION OF THE CERTIFICATES --
Book-Entry Certificates" herein.
Cash Flow Considerations. With respect to approximately 32.77% of the
Mortgage Loans (by Cut-Off Date Pool Principal Balance), collections on such
Mortgage Loans may vary because, among other things, borrowers are not required
to make monthly payments of principal that will be sufficient to amortize such
Mortgage Loans by their maturity (collectively, "Balloon Loans"). In the case of
Balloon Loans, a borrower generally will be required to pay the entire remaining
principal amount of the Mortgage Loan at its maturity. With respect to Balloon
Loans, general credit risk may be greater to Certificateholders than to holders
of instruments representing interests only in level payment fully amortizing
first mortgage loans. The ability of a borrower to make such a payment may
depend on the ability of the borrower to obtain refinancing of the balance due
on a Balloon Loan. An increase in interest rates over the Loan Rate applicable
at the time a Balloon Loan was originated may have an adverse effect on the
borrower's ability to obtain refinancing or to pay the required monthly payment.
Risk of Early Defaults. Greater than 50.59% of the Mortgage Loans were
originated within 4 months prior to the Cut-Off Date. The weighted average
remaining term to stated maturity of the Mortgage Loans (by Cut-Off Date Pool
Principal Balance) is approximately 197 months. Although little data is
available, defaults on mortgage loans, including home equity loans similar to
the Mortgage Loans, are generally expected to occur with greater frequency in
the early years of the terms of mortgage loans.
Prepayment Considerations. All of the Mortgage Loans may be prepaid in
whole or in part at any time without penalty. Home equity loans, such as the
Mortgage Loans, have been originated in significant volume only during the past
few years and neither the Depositor nor the Servicer is aware of any publicly
available, universally accepted, 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 Mortgage Loans may experience a higher
rate of prepayment than traditional loans. The Trust's prepayment experience may
be affected by a wide variety of factors, including general economic conditions,
interest rates, the availability of alternative financing and homeowner
mobility. In addition, all of the Mortgage Loans contain due-on-sale provisions
and the Servicer will be required by the Agreement to enforce such provisions
unless such enforcement is not permitted by applicable law. To the extent
permitted by applicable law, such assumption will not release the original
borrower from its obligation under any such Mortgage Loan. See "CERTAIN LEGAL
ASPECTS OF LOANS -- Due-on-Sale Clauses in Mortgage Loans" in the Prospectus.
Certificate Rating. The rating of the Class A Certificates will depend
primarily on an assessment by the Rating Agencies of the Mortgage 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 Class A Certificates may result in a reduction in
the rating of the Class A Certificates. The rating by the Rating Agencies of the
Class A Certificates is not a recommendation to purchase, hold or sell the Class
A 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. In general, the ratings address
credit risk and do not address the likelihood of prepayments on Mortgage Loans
or the possibility that Class A Certificateholders might
S-14
<PAGE> 15
realize a lower than anticipated yield. The ratings of the Class A Certificates
do not address the possibility of the imposition of United States withholding
tax with respect to non-U.S. persons.
Nature of Collateral. Even assuming that the Mortgaged Properties provide
adequate security for the Mortgage Loans, substantial delays could be
encountered in connection with the liquidation of Mortgage Loans that are
delinquent and resulting shortfalls in distributions to Class A
Certificateholders could occur if the Certificate Insurer were unable to perform
its obligations under the Policy. Further, liquidation expenses (such as legal
fees, real estate taxes, and maintenance and preservation expenses) will reduce
the proceeds payable to Certificateholders and thereby reduce the security for
the Mortgage Loans. In the event any of the Mortgaged Properties fail to provide
adequate security for the related Mortgage Loans, Class A Certificateholders
could experience a loss if the Certificate Insurer were unable to perform its
obligations under the Policy.
The Mortgage Loans are secured by first and second mortgages or deeds of
trust (representing approximately 80.80% and 19.20%, respectively (by Cut-Off
Date Pool Principal Balance)). With respect to Mortgage Loans that are junior in
priority to liens having a first priority with respect to the related Mortgaged
Property ("First Liens"), the Servicer has the power under certain circumstances
to consent to a new mortgage lien on such Mortgaged Property having priority
over such Mortgage Loan in connection with the refinancing of such First Lien.
Mortgage Loans secured by second mortgages are entitled to proceeds that remain
from the sale of the related Mortgaged Property after any related senior
mortgage loan and prior statutory liens have been satisfied. In the event that
such proceeds are insufficient to satisfy such loans and prior liens in the
aggregate and the Certificate Insurer is unable to perform its obligations under
the Policy, the Trust and, accordingly, the holders of the Class A Certificates,
bear (i) the risk of delay in distributions while a deficiency judgment, if any,
against the borrower is sought and (ii) the risk of loss if the deficiency
judgment cannot be obtained or is not realized upon. See "CERTAIN LEGAL ASPECTS
OF LOANS" in the Prospectus.
Legal Considerations. The sale of the Mortgage Loans from the Seller to
the Depositor will be treated by the Seller, the Depositor and the Trust as a
sale of the Mortgage Loans. The Seller will warrant that such transfer is a sale
of its interest in the Mortgage Loans. The Depositor will warrant in the
Agreement that the transfer of the Mortgage Loans to the Trust is a valid
transfer and assignment of such Mortgage Loans to the Trustee. In the event of
an insolvency of the Seller, it is possible that a receiver or conservator for,
or a creditor of, the Seller, may argue that the transaction between the Seller
and the Depositor, with respect to the Mortgage Loans was a pledge of such
Mortgage Loans in connection with a borrowing by the Seller rather than a true
sale. Such an attempt, even if unsuccessful, could result in delays in
distributions on the Class A Certificates.
Payments on the Mortgage Loans. When a principal prepayment in full is
made on a Mortgage Loan, the Mortgagor is charged interest only up to the date
of such prepayment, instead of for a full month which may result in a Prepayment
Interest Shortfall. The Servicer is obligated to pay, without any right of
reimbursement, those shortfalls in interest collections payable on the Class A
Certificates that are attributable to Prepayment Interest Shortfalls, but only
to the extent of the aggregate Servicing Fee for the related Due Period.
All of the Mortgage Loans are simple interest mortgage loans ("Simple
Interest Loans") pursuant to which interest is computed and charged to the
Mortgagor on the outstanding Principal Balance of the related Mortgage Loan
based on the number of days elapsed between the date through which interest was
last paid on the Mortgage Loan through 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 Mortgage 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 Mortgage Loan. Conversely, if more
than a full month has elapsed between the interest paid to date and the next
payment on a Mortgage 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 Mortgage Loan. To the extent that the aggregate of such shortfalls
exceeds the aggregate of such excesses, a "Net Simple Interest Shortfall" will
result.
The Policy will be available to cover any shortfalls in the amount
available to pay interest on the Class A Certificates as a result of Prepayment
Interest Shortfalls in excess of the aggregate Servicing Fee and any Net Simple
Interest Shortfalls.
S-15
<PAGE> 16
Commingling Risk. The Servicer may commingle collections held by it and
may use such funds for its own purpose provided that the following conditions
are satisfied: (i) Champion is the Servicer, (ii) Key Bank USA has a rating with
respect to short-term deposit obligations of at least "A-1" by S&P and at least
"P-1" by Moody's, (iii) no Event of Default has occurred and is continuing under
the Agreement, and (iv) Key Bank USA has entered into a support agreement for
the benefit of the Trust. If all the conditions contained in the preceding
sentence are not met, the Servicer will deposit all payments with respect to the
Mortgage Loans (from whatever source) and all proceeds of the Mortgage Loans
collected during each Due Period into the Collection Account not later than two
Business Days after receipt. In the event that the Servicer commingles
collections, the Certificateholders will be subject to the risk of loss of such
collections, including as a result of the bankruptcy or insolvency of the
Servicer. See "-- Bankruptcy and Insolvency Risks". It is anticipated that on
the Closing Date Key Bank USA will enter into a support agreement that will
permit Champion to commingle funds.
Underwriting Standards. As described herein, the Seller'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 the Seller from making a loan; however, it will
reduce the size (and consequently the Combined Loan-to-Value Ratio) of the loan
that the Seller is willing to make. As a result of this approach to
underwriting, the Mortgage Loans in the Mortgage Pool may experience higher
rates of delinquencies, defaults and foreclosures than mortgage loans
underwritten in a more traditional manner.
Special Risks Associated with the Class A-2 Certificates. As the owner of
interest-only strip securities, the Certificateholders of the Class A-2
Certificates will be entitled to receive monthly distributions only of interest,
as described herein. Because they will not receive any distributions of
principal, the Certificateholders of the Class A-2 Certificates will generally
be affected by prepayments, liquidations and other dispositions (including any
optional redemption described herein) of the Mortgage Loans to a greater degree
than Class A-1 Certificateholders. Investors should note, however, that the
Notional Principal Balance applicable to interest calculations on the Class A-2
Certificates is (x) on each of the first 36 Distribution Dates, the lesser of
(i) the Pool Principal Balance on the first day of the related Due Period (ii)
$21,000,000, and (y) on each Distribution Date thereafter, zero. As a result,
except in the case of very rapid prepayments, the Notional Principal Balance is
not expected to decline while the Class A-2 Certificates are outstanding.
However, there can be no assurance that such will be the case. The Class A-2
Certificates will not be entitled to any distributions after the 36th
Distribution Date.
Geographic Concentration May Affect Performance. Approximately 33.62%,
33.48% and 9.87% (by Cut-Off Date Pool Principal Balance) of the Mortgage Loans
are secured by Mortgaged Properties in New Jersey, New York and Pennsylvania,
respectively. 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 Mortgage Loans may be expected to exacerbate the foregoing risks. The Seller
and the Depositor can neither quantify the impact of any recent property value
declines on the Mortgage Loans nor predict whether, to what extent or for how
long such declines may continue.
THE CERTIFICATE INSURER
The information set forth in this section and in the financial statements
of the Certificate Insurer incorporated by reference herein as described below
have been provided by the Certificate Insurer. No representation is made by the
Underwriters, the Seller, the Trustee, the Servicer or any of their affiliates
as to the accuracy or completeness of any such information.
The Certificate Insurer is the principal operating subsidiary of MBIA Inc.,
a New York Stock Exchange listed company ("MBIA Inc."). MBIA Inc. is not
obligated to pay the debts of or claims against the Certificate Insurer. The
Certificate Insurer is domiciled in the State of New York and licensed to do
business in and 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. The Certificate Insurer 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
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<PAGE> 17
amount of both the aggregate and individual risks that may be insured, the
payment of dividends by the Certificate Insurer, changes in control and
transactions among affiliates. Additionally, the Certificate Insurer is required
to maintain contingency reserves on its liabilities in certain amounts and for
certain periods of time.
Effective February 17, 1998, MBIA Inc. acquired all of the outstanding
stock of Capital Markets Assurance Corporation ("CMAC") through a merger with
its parent CapMAC Holdings Inc. Pursuant to a reinsurance agreement, CMAC 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 the Certificate Insurer. MBIA, Inc. is not obligated to pay the
debts of or claims against CMAC.
The consolidated financial statements of the Certificate Insurer, a wholly
owned subsidiary of MBIA Inc., 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 MBIA Inc. for the year ended
December 31, 1997 and the consolidated financial statements of the Certificate
Insurer and its subsidiaries as of June 30, 1998 and for the six month periods
ending June 30, 1998 and June 30, 1997 included in the Quarterly Report on Form
10-Q of MBIA Inc. for the period ending June 30, 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 the Certificate Insurer and its subsidiaries
included in documents filed by MBIA Inc. 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 Class A 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 the Certificate
Insurer 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 JUNE 30, 1998
----------------- --------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Admitted Assets....................................... $5,256 $6,048
Liabilities........................................... 3,496 3,962
Capital and Surplus................................... 1,760 2,086
</TABLE>
<TABLE>
<CAPTION>
GAAP
-----------------------------------
DECEMBER 31, 1997 JUNE 30, 1998
----------------- --------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Assets................................................ $5,988 $6,794
Liabilities........................................... 2,624 2,977
Shareholder's Equity.................................. 3,364 3,817
</TABLE>
Copies of the financial statements of the Certificate Insurer incorporated
by reference herein and copies of the Certificate Insurer's 1997 year-end
audited financial statements prepared in accordance with statutory accounting
practices are available, without charge, from the Certificate Insurer. The
address of the Certificate Insurer is 113 King Street, Armonk, New York 10504.
The telephone number of the Certificate Insurer is (914) 273-4545.
The Certificate Insurer 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 the Certificate Insurer set forth under the heading
"THE
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<PAGE> 18
CERTIFICATE INSURER". Additionally, the Certificate Insurer makes no
representation regarding the Certificates or the advisability of investing in
the Certificates.
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND
SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
Moody's Investors Service, Inc. rates the claims paying ability of the
Certificate Insurer "Aaa".
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. rates the claims paying ability of the Certificate Insurer
"AAA".
Fitch IBCA, Inc. (formerly known as Fitch Investors Service, L.P.) rates
the claims paying ability of the Certificate Insurer "AAA".
Each rating of the Certificate Insurer should be evaluated independently.
The ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Certificate Insurer and its ability to pay claims on its
policies of insurance. Any further explanation of 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 Class A
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 Class A
Certificates. The Certificate Insurer does not guaranty the market price of the
Class A Certificates nor does it guaranty that the ratings on the Class A
Certificates will not be revised or withdrawn.
THE SELLER AND THE SERVICER
GENERAL
Champion Mortgage Co. Inc. ("Champion", "Seller" or "Servicer", 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.
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 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.
For the fiscal years ended September 30, 1997, September 30, 1996 and
September 30, 1995, Champion funded $580.4 million, $507.4 million and $298.3
million, respectively, of mortgage loans. During the fiscal year ended September
30, 1997, approximately 67.22% and 32.78% of Champion's originations were
secured by first liens and second liens, respectively. During the nine months
ended June 30, 1998, Champion funded approximately $645,028,883 of mortgage
loans, of which approximately 74.89% and 25.11% were secured by first liens and
second liens, respectively.
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
23 branch offices located in New Jersey, Illinois, Massachusetts, Connecticut,
Virginia, 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 June 30, 1998, Champion was originating mortgage loans secured by
residential properties in New Jersey, New York, Connecticut, Pennsylvania,
Delaware, Maryland, Virginia, Rhode Island, Colorado, Illinois, Massachusetts,
New Hampshire and the District of Columbia.
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
S-18
<PAGE> 19
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, and as of June 30, 1998, Champion
was servicing approximately $1,185,470,419 of mortgage loans for itself and
others.
As of the end of June 1998, Champion had approximately 532 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.
YEAR 2000
The Year 2000 issue refers to the fact that many computer systems were
originally programmed using two digits rather than four digits to identify the
applicable year. When the year 2000 occurs, these systems could interpret the
year as 1900 rather than 2000. Unless hardware, system software and applications
are corrected to be Year 2000 compliant, computers and the devices they control
could generate miscalculations and create operational problems. Various systems
could be affected ranging from complex computer systems to telephone systems,
ATMs and elevators.
To address this issue, KeyCorp, the parent of Key Bank USA, National
Association, for the operations of Key Bank USA, National Association as well as
its other operating subsidiaries, including Champion, developed an extensive
plan, including the formation of a team consisting of internal resources and
third-party experts. The plan, originally developed in 1995, has been in
implementation since that time and consists of five major phases:
awareness-ensuring a common understanding of the issue throughout KeyCorp;
assessment-identifying and prioritizing the systems and third parties with whom
KeyCorp has exposure to Year 2000 issues; renovation-enhancing, replacing or
retiring hardware, software and systems applications; validation-testing
modifications made; and implementation-certifying Year 2000 compliance and user
understanding and acceptance. The awareness and assessment phases have been
completed and the remaining phases are expected to be substantially complete by
the end of 1998, allowing 1999 as a year of final testing and refinement. In
conjunction with the assessment phase, KeyCorp prioritized the various operating
systems (including those maintained by its business suppliers) that could be
affected by the Year 2000 issue, and efforts to ensure compliance of core
systems deemed critical to KeyCorp's operations have been accelerated. As of
September 30, 1998, compliance efforts had been completed for approximately 55%
of the core systems identified.
In addition, financial institutions may experience increases in problem
loans and credit losses in the event that borrowers fail to properly respond to
this issue, and higher funding costs may come about if consumers react to
publicity about the issue by withdrawing deposits. KeyCorp also could be
impacted if third parties it deals with in conducting its business, such as
foreign banks, governmental agencies, clearing houses, telephone companies, and
other service providers, fail to properly address this issue. Accordingly,
KeyCorp has formed a separate internal team charged with the task of identifying
critical business interfaces; assessing potential problems relating to credit,
liquidity and counterparty risk; and where appropriate, developing contingency
plans. This team is conducting a survey of significant credit customers to
determine their Year 2000 readiness and to evaluate the level of potential
credit risk to KeyCorp. Based on the information obtained, specific follow-up
policies will be established and the adequacy of the allowance for loan losses
will be assessed. On an ongoing basis, KeyCorp is also contacting significant
third parties with whom it conducts business to determine the status of their
Year 2000 compliance efforts. Notwithstanding these actions, there can be no
assurance that significant customers or critical third parties will adequately
address their Year 2000 issues. Consequently, KeyCorp is developing contingency
plans to help mitigate the risks associated with potential delays in completing
the renovation, validation and implementation phases of its Year 2000 plan; and
the failure of external parties to adequately address their Year 2000 issues.
These plans are expected to be well underway by the 1998 year end and address
primarily back-up solutions for KeyCorp's core systems and the identification of
alternative business partners. Because the Year 2000 issue has never previously
occurred, it is not possible to foresee or quantify the overall financial and
operational impact and/or to determine whether it will be material to the
financial condition or operations of KeyCorp.
The cost of the project and timing of its implementation are based on
management's best estimates, which were derived using numerous assumptions about
future events, including the continued availability of certain
S-19
<PAGE> 20
resources and other factors. However, there can be no guarantee that these
estimates will be achieved, and actual results could differ materially from
those anticipated.
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.
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 nine month period ending June
30, 1998, approximately 96.01% 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.
Simple Interest Loans provide for a series of substantially equal monthly
payments which, (except in the case of Balloon Loans) 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 June 30, 1998, Champion employed 135 loan
officers and 14 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.
S-20
<PAGE> 21
The application process generally is conducted in person. 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 underwriter.
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
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 9.63% (by Cut-Off Date Pool Principal Balance) of the
Mortgage Loans were underwritten using such alternative approach to income
verification.
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. 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%. In addition, the
maximum Combined Loan-to-Value Ratio of any mortgage loan may not exceed 100%
and may be reduced depending on a number of factors, including the applicant's
credit history and employment status.
S-21
<PAGE> 22
Any exceptions to the underwriting policies may be approved by certain
members of the management of Champion. 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 internal quality control department.
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 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 Foreclose 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
S-22
<PAGE> 23
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
Set forth below is the delinquency and loss experience on the mortgage
loans serviced by the Servicer for the periods and dates indicated. The
delinquency and loss experience set forth below represents the experience with
respect to only a portion of Champion's loan production for the periods
indicated and has not been adjusted to eliminate the effect of the significant
growth in the size of Champion's portfolio of mortgage loans during the periods
shown. Accordingly, loss and delinquency as a percentage of mortgage loans
serviced for each period could be higher than those shown if a group of mortgage
loans were artificially isolated at a point in time and the information showed
the activity only in that isolated group.
DELINQUENCY EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDING SEPTEMBER 30, ENDING JUNE 30,
-------------------------------- ----------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Number of loans................ 4,416 9,058 14,327 12,890 18,037
Dollar amount of loans......... $214,860 $526,816 $866,673 $770,203 $1,185,470
Delinquency Period
30-59 days
% of number of loans...... 1.18% 1.30% 2.14% 1.40% 1.44%
% of dollar amount of
loans................... 1.12% 1.17% 2.16% 1.39% 1.19%
60-89 days
% of number of loans...... 0.25% 0.15% 0.34% 0.26% 0.24%
% of dollar amount of
loans................... 0.16% 0.14% 0.35% 0.30% 0.17%
90 days and over(1)
% of number of loans...... 0.38% 0.69% 1.20% 1.04% 1.50%
% of dollar amount of
loans................... 0.46% 0.81% 1.27% 1.09% 1.41%
Loans in Foreclosure
% of number of loans......... 0.21% 0.62% 0.51% 0.58% 0.58%
% of dollar amount of
loans..................... 0.30% 0.76% 0.60% 0.64% 0.62%
Total(1)
% of number of loans......... 1.81% 2.14% 3.68% 2.70% 3.18%
% of dollar amount of
loans..................... 1.74% 2.12% 3.78% 2.78% 2.77%
</TABLE>
- ---------------
(1) Includes loans in foreclosure and real estate owned.
S-23
<PAGE> 24
LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDING
YEAR ENDING SEPTEMBER 30, JUNE 30,
-------------------------------- -----------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Average dollar amount of loans
outstanding during period... $144,721 $367,584 $702,555 $657,227 $1,048,062
Net Losses(1)................. $ 145 $ 39 $ 488 $ 350 $ 956
Net Losses as a percentage of
average amount
outstanding................. 0.10% 0.01% 0.07% 0.07%(2) 0.12%(2)
</TABLE>
- ---------------
(1) "Net Losses" means Gross Losses minus Recoveries.
(2) Annualized.
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
The statistical information presented in this Prospectus Supplement is only
with respect to the Mortgage Loans and the characteristics of such Mortgage
Loans as of the Cut-Off Date.
The Mortgage Loans were originated by the Seller or an affiliate in
accordance with the policies set forth under "CHAMPION'S HOME EQUITY LOAN
PROGRAM." All of the Mortgage Loans are home equity loans bearing fixed interest
rates (the "Loan Rates") and evidenced by promissory notes (the "Mortgage
Notes") secured by deeds of trust or mortgages on Mortgaged Properties.
The Mortgage Loans are secured by either first or second mortgages or deeds
of trust on Mortgaged Properties located in 12 states and the District of
Columbia. The Mortgaged Properties securing the Mortgage 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).
Each Mortgage Loan will bear interest at a fixed rate that is calculated on
the "simple interest" method. Certain of the Mortgage Loans 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").
The Mortgage Pool consists of 4,620 Mortgage Loans with an aggregate
Cut-Off Date Principal Balance of $300,034,624 (the "Cut-Off Date Pool Principal
Balance"). The Mortgage Pool consists of non-conforming closed-end, fixed-rate
home equity loans. As of the Cut-Off Date, the maximum Cut-Off Date Principal
Balance of any of the Mortgage Loans was $226,776, the minimum Cut-Off Date
Principal Balance thereof was $7,414, and the Cut-Off Date Principal Balance of
such Mortgage Loans averaged $64,943. As of the Cut-Off Date, the Loan Rates on
the Mortgage Loans ranged from 9.25% to 13.99% per annum, and the weighted
average Loan Rate for the Mortgage Loans was approximately 10.63% per annum. As
of the Cut-Off Date, the original term to stated maturity of the Mortgage Loans
ranged from 60 months to 360 months, the remaining term to stated maturity
ranged from 50 months to 360 months, the weighted average original term to
stated maturity was approximately 202 months, the weighted average remaining
term to stated maturity was approximately 197 months and the Combined
Loan-to-Value Ratio ranged from approximately 4.18% to approximately 89.99% with
a weighted average Combined Loan-to-Value Ratio of approximately 68.30%. Each
Mortgage Loan was originated on or after October 1, 1997. The Mortgage Loans had
stated maturities ranging from October 2, 2002 to August 25, 2028. Approximately
80.80% of the Mortgage Loans (by Cut-Off Date Pool Principal Balance) are
secured by first liens, and approximately 19.20% by second liens. Approximately
67.23% of the Mortgage Loans require monthly payments of principal that will
fully amortize such Mortgage Loans by their respective maturity dates (assuming
all payments are received on the Due Date), and approximately 32.77% of the
Mortgage Loans are Balloon Loans. As of the Cut-Off Date, no Mortgage Loan was
30 or more days delinquent.
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<PAGE> 25
CUT-OFF DATE PRINCIPAL BALANCES
<TABLE>
<CAPTION>
% OF CUT-OFF
RANGE OF CUT-OFF DATE CUT-OFF DATE DATE POOL
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$0.01 - $25,000.00.......................... 953 $ 17,263,703.21 5.75%
25,000.01 - 50,000.00....................... 1,340 49,415,064.80 16.47
50,000.01 - 75,000.00....................... 801 49,610,601.74 16.53
75,000.01 - 100,000.00...................... 536 46,877,858.97 15.62
100,000.01 - 125,000.00..................... 433 48,847,919.87 16.28
125,000.01 - 150,000.00..................... 282 38,576,702.32 12.86
150,000.01 - 175,000.00..................... 135 21,900,399.00 7.30
175,000.01 - 200,000.00..................... 92 17,279,834.96 5.76
200,000.01 - 225,000.00..................... 47 10,035,762.94 3.34
225,000.01 - 250,000.00..................... 1 226,776.29 0.08
----- --------------- ------
Totals:........................... 4,620 $300,034,624.10 100.00%
===== =============== ======
</TABLE>
GEOGRAPHIC DISTRIBUTION BY STATE(1)
<TABLE>
<CAPTION>
% OF CUT-OFF
CUT-OFF DATE DATE POOL
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----- -------------- ----------------- -----------------
<S> <C> <C> <C>
New Jersey.................................. 1,574 $100,859,419.14 33.62%
New York.................................... 1,409 100,461,662.07 33.48
Pennsylvania................................ 563 29,608,840.38 9.87
Massachusetts............................... 270 18,903,282.42 6.30
Maryland.................................... 287 16,104,561.56 5.37
Connecticut................................. 165 11,239,489.77 3.75
Virginia.................................... 104 7,475,117.39 2.49
Rhode Island................................ 128 6,779,641.64 2.26
Illinois.................................... 52 4,088,937.79 1.36
District of Columbia........................ 35 2,576,207.52 0.86
Delaware.................................... 19 1,152,113.42 0.38
New Hampshire............................... 8 405,386.00 0.14
Colorado.................................... 6 379,965.00 0.13
----- --------------- ------
Totals:........................... 4,620 $300,034,624.10 100.00%
===== =============== ======
</TABLE>
- ---------------
(1) Determined by property address designated as such in the related Mortgage.
S-25
<PAGE> 26
COMBINED LOAN-TO-VALUE RATIOS(1)
<TABLE>
<CAPTION>
% OF CUT-OFF
CUT-OFF DATE DATE POOL
COMBINED LOAN-TO-VALUE RATIO MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0.01% - 5.00%............................... 3 $ 51,005.67 0.02%
5.01% - 10.00%.............................. 42 693,143.60 0.23
10.01% - 15.00%............................. 79 1,778,521.03 0.59
15.01% - 20.00%............................. 135 3,774,750.21 1.26
20.01% - 25.00%............................. 145 4,945,901.91 1.65
25.01% - 30.00%............................. 150 5,921,749.77 1.97
30.01% - 35.00%............................. 158 6,858,903.01 2.29
35.01% - 40.00%............................. 189 8,802,803.89 2.93
40.01% - 45.00%............................. 141 7,475,476.90 2.49
45.01% - 50.00%............................. 185 10,631,680.30 3.54
50.01% - 55.00%............................. 163 9,892,272.36 3.30
55.01% - 60.00%............................. 197 13,776,424.42 4.59
60.01% - 65.00%............................. 216 14,289,457.71 4.76
65.01% - 70.00%............................. 351 24,470,283.47 8.16
70.01% - 75.00%............................. 413 28,853,867.30 9.62
75.01% - 80.00%............................. 1,403 111,686,370.66 37.22
80.01% - 85.00%............................. 649 46,085,988.71 15.36
85.01% - 90.00%............................. 1 46,023.18 0.02
----- --------------- ------
Totals:........................... 4,620 $300,034,624.10 100.00%
===== =============== ======
</TABLE>
- ---------------
(1) The Combined Loan-to-Value Ratios ("CLTV") shown above are equal, with
respect to each Mortgage Loan, to (i) the sum of (a) the original principal
balance of such Mortgage Loan at the date of origination plus (b) the
remaining balance of the senior lien, if any, at the date of origination of
such Mortgage Loan divided by (ii) the value of the related Mortgaged
Property, based upon the appraisal made at the time of origination of such
Mortgage Loan.
LOAN RATES
<TABLE>
<CAPTION>
% OF CUT-OFF
CUT-OFF DATE DATE POOL
LOAN RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------- -------------- ----------------- -----------------
<S> <C> <C> <C>
9.001% - 10.000%........................... 1,471 $124,437,510.01 41.47%
10.001% - 11.000%........................... 1,339 89,725,299.34 29.90
11.001% - 12.000%........................... 790 45,386,727.65 15.13
12.001% - 13.000%........................... 625 26,806,291.82 8.93
13.001% - 14.000%........................... 395 13,678,795.28 4.56
----- --------------- ------
Totals:........................... 4,620 $300,034,624.10 100.00%
===== =============== ======
</TABLE>
S-26
<PAGE> 27
ORIGINAL TERM TO STATED MATURITY
<TABLE>
<CAPTION>
% OF CUT-OFF
ORIGINAL TERM CUT-OFF DATE DATE POOL
TO STATED MATURITY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
60.......................................... 87 $ 1,816,637.52 0.61%
84.......................................... 58 1,455,673.34 0.49
120......................................... 526 16,654,575.12 5.55
180......................................... 2,569 169,873,815.90 56.62
240......................................... 1,275 100,243,011.52 33.41
360......................................... 105 9,990,910.70 3.33
----- --------------- ------
Totals:........................... 4,620 $300,034,624.10 100.00%
===== =============== ======
</TABLE>
REMAINING MONTHS TO STATED MATURITY
<TABLE>
<CAPTION>
% OF CUT-OFF
REMAINING MONTHS CUT-OFF DATE DATE POOL
TO STATED MATURITY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
49 - 120.................................... 671 $ 19,926,885.98 6.64%
121 - 180................................... 2,569 169,873,815.90 56.62
181 - 240................................... 1,275 100,243,011.52 33.41
301 - 360................................... 105 9,990,910.70 3.33
----- --------------- ------
Totals: .......................... 4,620 $300,034,624.10 100.00%
===== =============== ======
</TABLE>
SEASONING
<TABLE>
<CAPTION>
% OF CUT-OFF
CUT-OFF DATE DATE POOL
SEASONING MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0 - 1....................................... 780 $ 55,339,671.62 18.44%
2 - 12...................................... 3,840 244,694,952.48 81.56
----- --------------- ------
Totals:........................... 4,620 $300,034,624.10 100.00%
===== =============== ======
</TABLE>
PROPERTY TYPE
<TABLE>
<CAPTION>
% OF CUT-OFF
CUT-OFF DATE DATE POOL
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Single Family Detached...................... 3,487 $234,113,034.25 78.03%
Single Family Attached...................... 537 25,047,689.61 8.35
Two- to Four-Family......................... 413 31,704,160.92 10.57
Condominium................................. 172 8,116,238.19 2.71
Other....................................... 11 1,053,501.13 0.35
----- --------------- ------
Totals:........................... 4,620 $300,034,624.10 100.00%
===== =============== ======
</TABLE>
OCCUPANCY TYPE(1)
<TABLE>
<CAPTION>
% OF CUT-OFF
CUT-OFF DATE DATE POOL
OCCUPANCY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Owner Occupied.............................. 4,343 $283,428,107.57 94.47%
Investor Owned.............................. 277 16,606,516.53 5.53
----- --------------- ------
Totals:........................... 4,620 $300,034,624.10 100.00%
===== =============== ======
</TABLE>
- ---------------
(1) Based upon representations made by the borrowers at the time of origination
of such Mortgage Loans.
S-27
<PAGE> 28
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The rate of principal payments on the Class A-1 Certificates, the aggregate
amount of distributions on the Class A Certificates and the yield to maturity of
the Class A Certificates will be related to the rate and timing of payments of
principal on the Mortgage Loans. The rate of principal payments on the Mortgage
Loans will in turn be affected by the amortization schedules of the Mortgage
Loans and by the rate of principal prepayments (including for this purpose
prepayments resulting from refinancing, liquidations of the Mortgage Loans due
to defaults, casualties, condemnations and repurchases by the Seller). The
Mortgage Loans may be prepaid by the Mortgagors at any time.
PREPAYMENTS
Prepayments, liquidations and purchases of the Mortgage Loans (including
any optional purchase by the Servicer of a Delinquent Mortgage Loan and any
optional purchase of the remaining Mortgage Loans in connection with the
termination of the Trust) will result in distributions on the Class A-1
Certificates of principal amounts which would otherwise be distributed over the
remaining terms of such Mortgage Loans. Since the rate of payment of principal
of the Mortgage 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 a Class A Certificate may vary from the
anticipated yield will depend upon the degree to which a Certificate is
purchased at a discount or premium, and the degree to which the timing of
payments thereon is sensitive to prepayments, liquidations and purchases of such
Mortgage Loans.
The rate of prepayment on the Mortgage Loans cannot be predicted. Home
equity loans such as the Mortgage Loans have been originated in significant
volume only during the past few years and neither the Depositor nor the Seller
is aware of any publicly available, universally accepted studies or statistics
on the rate of prepayment of such Mortgage Loans. Generally, home equity loans
are not viewed by borrowers as permanent financing. Accordingly, the Mortgage
Loans may experience a higher rate of prepayment than traditional first mortgage
loans. The prepayment experience of the Trust with respect to the Mortgage 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 Mortgage
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 Mortgage Loan. See "CERTAIN LEGAL
ASPECTS OF LOANS -- Due-on-Sale Clauses in Mortgage Loans" in the Prospectus.
As with fixed rate obligations generally, the rate of prepayment on a pool
of mortgage loans with fixed rates such as the Mortgage Loans is affected by
prevailing market rates for mortgage loans of a comparable term and risk level.
When the market interest rate is below the mortgage coupon, mortgagors may have
an increased incentive to refinance their mortgage loans. Depending on
prevailing market rates, the future outlook for market rates and economic
conditions generally, some mortgagors may sell or refinance mortgaged properties
in order to realize their equity in the mortgaged properties, to meet cash flow
needs or to make other investments.
In addition to the foregoing factors affecting the weighted average life of
the Class A Certificates, the use of Excess Spread to pay principal of the Class
A-1 Certificates to the extent required by the Agreement will result in the
acceleration of the Class A-1 Certificates, relative to the amortization of the
Mortgage Loans in early months of the transaction. This acceleration feature
creates overcollateralization which results from the excess of the Pool
Principal Balance of the Mortgage Loans over the Class A-1 Principal Balance.
Once the required level of overcollateralization is reached, the acceleration
feature will cease, unless necessary to maintain the required level of
overcollateralization. See "DESCRIPTION OF THE
CERTIFICATES -- Overcollateralization Provisions."
S-28
<PAGE> 29
YIELD SENSITIVITY OF THE CLASS A-2 CERTIFICATES
As the owner of interest-only strip securities, the Certificateholders of
the Class A-2 Certificates will be entitled to receive monthly distributions
only of interest, as described herein. Because they will not receive any
distributions of principal, the Certificateholders of the Class A-2 Certificates
will generally be affected by prepayments, liquidations and other dispositions
(including any optional redemptions described herein) of the Mortgage Loans to a
greater degree than Class A-1 Certificateholders. Investors should note,
however, that the Notional Principal Balance applicable to interest calculations
on the Class A-2 Certificates is (x) on each of the first 36 Distribution Dates,
the lesser of (i) the Pool Principal Balance as of the first day of the related
Due Period and (ii) $21,000,000, and (y) on each Distribution Date thereafter,
zero. As a result, except in the case of very rapid prepayments, the Notional
Principal Balance is not expected to decline while the Class A-2 Certificates
are outstanding. However, there can be no assurance that such will be the case.
The Class A-2 Certificates will not be entitled to any distributions after the
36th Distribution Date.
PAYMENT DELAY FEATURE OF CLASS A-2 CERTIFICATES
The effective yield to the Certificateholders of the Class A-2 Certificates
will be lower than the yield otherwise produced by the Certificate Rate for such
Class and the purchase price of such Certificates because distributions will not
be payable to the Certificateholders of the Class A-2 Certificates until the
Distribution Date following the month of accrual (without any additional
distribution of interest or earnings thereon in respect of such delay).
WEIGHTED AVERAGE LIVES
Generally, greater than anticipated prepayments of principal will increase
the yield on Class A-1 Certificates purchased at a price less than par and will
decrease the yield on Class A-1 Certificates purchased at a price greater than
par. The effect on an investor's yield due to principal prepayments on the
Mortgage Loans occurring at a rate that is faster (or slower) than the rate
anticipated by the investor in the period immediately following the issuance of
the Certificates will not be entirely offset by a subsequent like reduction (or
increase) in the rate of principal payments. The weighted average life of the
Class A-1 Certificates will also be affected by the amount and timing of
delinquencies and defaults on the Mortgage Loans and the recoveries, if any, on
defaulted Mortgage Loans and foreclosed properties.
The "weighted average life" of a Certificate refers to the average amount
of time that will elapse from the date of issuance to the date each dollar in
respect of principal of such Certificate is repaid. The weighted average life of
the Class A-1 Certificates will be influenced by, among other factors, the rate
at which principal payments are made on the Mortgage Loans, including final
payments made upon the maturity of Balloon Loans.
Prepayments on Mortgage Loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement is
the prepayment assumption (the "Prepayment Assumption"), which represents an
assumed rate of prepayment each month relative to the then outstanding principal
balance of the pool of mortgage loans for the life of such mortgage loans. A
100% Prepayment Assumption assumes a conditional prepayment rate ("CPR") of 4%
per annum of the outstanding principal balance of such mortgage loans in the
first month of the life of the mortgage loans and approximately an additional
1.45% (precisely 16/11) (expressed as a percentage per annum) in each month
thereafter until the twelfth month; beginning in the twelfth month and in each
month thereafter during the life of the mortgage loans, a conditional prepayment
rate of 20% per annum each month is assumed. As used in the table below, 0%
Prepayment Assumption assumes a conditional prepayment rate equal to 0% of the
Prepayment Assumption, i.e., no prepayments. Correspondingly, 115% Prepayment
Assumption assumes prepayment rates equal to 115% of the Prepayment Assumption,
and so forth. The Prepayment Assumption does not purport to be a historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of mortgage loans, including the Mortgage Loans. The
Depositor believes that no existing statistics of which it is aware provide a
reliable basis for holders of Class A Certificates to predict the amount or the
timing of receipt of prepayments on the Mortgage Loans.
Since the following table was prepared on the basis of the assumptions in
the following paragraph, there are discrepancies between characteristics of the
actual Mortgage Loans and the characteristics of the Mortgage Loans
S-29
<PAGE> 30
assumed in preparing the table. Any such discrepancy may have an effect upon the
percentages of the Principal Balances outstanding and weighted average lives of
the Class A-1 Certificates set forth in the table. In addition, since the actual
Mortgage Loans in the Trust have characteristics which differ from those assumed
in preparing the table set forth below, the distributions of principal on the
Class A-1 Certificates may be made earlier or later than as indicated in the
table.
For the purpose of the table below, it is assumed that: (i) the Mortgage
Loans consist of pools of loans with the level-pay and balloon amortization
characteristics set forth below, (ii) the Closing Date for the Class A
Certificates is September 30, 1998, (iii) distributions on the Class A
Certificates are made on the 25th day of each month regardless of the day on
which the Distribution Date actually occurs, commencing in October 1998 and are
made in accordance with the priorities described herein, (iv) the scheduled
monthly payments of principal and interest on the Mortgage Loans will be timely
delivered on the first day of each month (with no defaults), (v) the Mortgage
Loans' prepayment rates are a multiple of the Prepayment Assumption, (vi) all
prepayments are prepayments in full received on the last day of each month and
include 30 days' interest thereon, (vii) no optional termination is exercised,
(viii) the Class A Certificates have the Certificate Rate and the initial Class
A Principal Balance or notional balance as applicable as set forth herein, (ix)
the overcollateralization levels are set initially as specified in the
Agreement, and thereafter decrease in accordance with the provisions of the
Agreement, and (x) the Certificate Index for each Interest Period will be
5.52734%.
<TABLE>
<CAPTION>
ORIGINAL REMAINING ORIGINAL
AMORTIZATION TERM TO TERM TO
AMORTIZATION PRINCIPAL LOAN TERM MATURITY MATURITY
METHODOLOGY BALANCE RATE (MONTHS) (MONTHS) (MONTHS)
- ------------ --------------- ---- ------------ --------- --------
<S> <C> <C> <C> <C> <C>
Level Pay........................... $ 19,926,885.98 11.029% 112 107 112
Level Pay........................... $ 71,556,959.16 10.876% 180 175 180
Level Pay........................... $100,243,011.52 10.445% 240 235 240
Level Pay........................... $ 9,990,910.70 10.275% 360 355 360
Balloon............................. $ 98,316,856.74 10.584% 360 176 180
</TABLE>
Subject to the foregoing discussion and assumptions, the following table
indicates the weighted average life of the Class A-1 Certificates and the
percentages of the initial Class A-1 Principal Balance that would be outstanding
after each of the dates shown at various percentages of the Prepayment
Assumption.
S-30
<PAGE> 31
PERCENT OF INITIAL CLASS A-1 PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-1
----------------------------------------
DISTRIBUTION DATE 0% 50% 100% 115% 150% 200%
- ----------------- ----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage.......................................... 100 100 100 100 100 100
September 25, 1999.......................................... 96 88 79 77 71 62
September 25, 2000.......................................... 94 77 62 58 48 36
September 25, 2001.......................................... 92 68 48 43 33 21
September 25, 2002.......................................... 89 59 37 32 22 12
September 25, 2003.......................................... 86 51 29 24 15 7
September 25, 2004.......................................... 83 44 22 18 10 4
September 25, 2005.......................................... 79 38 17 13 7 2
September 25, 2006.......................................... 75 33 13 9 4 1
September 25, 2007.......................................... 71 28 10 7 3 0
September 25, 2008.......................................... 67 24 7 5 2 0
September 25, 2009.......................................... 63 20 5 3 1 0
September 25, 2010.......................................... 58 17 4 2 0 0
September 25, 2011.......................................... 53 14 3 1 0 0
September 25, 2012.......................................... 48 11 2 1 0 0
September 25, 2013.......................................... 17 3 0 0 0 0
September 25, 2014.......................................... 14 2 0 0 0 0
September 25, 2015.......................................... 11 1 0 0 0 0
September 25, 2016.......................................... 8 1 0 0 0 0
September 25, 2017.......................................... 4 0 0 0 0 0
September 25, 2018.......................................... 2 0 0 0 0 0
September 25, 2019.......................................... 2 0 0 0 0 0
September 25, 2020.......................................... 1 0 0 0 0 0
September 25, 2021.......................................... 1 0 0 0 0 0
September 25, 2022.......................................... 1 0 0 0 0 0
September 25, 2023.......................................... 1 0 0 0 0 0
September 25, 2024.......................................... 1 0 0 0 0 0
September 25, 2025.......................................... 0 0 0 0 0 0
September 25, 2026.......................................... 0 0 0 0 0 0
September 25, 2027.......................................... 0 0 0 0 0 0
Weighted Average Life (years to Maturity)*.................. 11.74 6.30 3.89 3.44 2.66 1.96
Weighted Average Life (years to Call)*...................... 11.63 6.23 3.80 3.35 2.58 1.90
</TABLE>
- ---------------
* The weighted average life of a Class A-1 Certificate is determined by (i)
multiplying the amount of each distribution in reduction of the related Class
A-1 Principal Balance by the number of years from the date of issuance of the
Certificate to the related Distribution Date, (ii) adding the results, and
(iii) dividing by the original Principal Balance of the Certificate.
This table has been prepared based on the assumptions described above
(including the assumptions regarding the characteristics and performance of the
Mortgage Loans, which differ from the actual characteristics and performance
thereof) and should be read in conjunction therewith.
S-31
<PAGE> 32
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement. The form of the
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus Supplement and the Prospectus is a part. 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
The Class A Certificates will be issued in denominations of $25,000 and
multiples of $1,000 in excess thereof and 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 Mortgage Loans; (ii) payments on the Mortgage
Loans received on and after the Cut-Off Date; (iii) Mortgaged Properties
relating to the Mortgage Loans that are acquired by foreclosure or deed in lieu
of foreclosure; (iv) the Collection Account and the Distribution Account and
funds on deposit therein (excluding net earnings thereon); (v) rights under
certain hazard insurance policies covering the Mortgaged Properties and (vi) an
assignment of the Depositor's rights under the Purchase Agreement and the
Support Agreement. In addition, the Depositor has caused the Certificate Insurer
to issue an irrevocable and unconditional certificate guaranty insurance policy
(the "Policy") for the benefit of the holders of the Class A Certificates,
pursuant to which the Certificate Insurer will guarantee certain payments to the
Class A Certificateholders as described herein. Definitive Certificates (as
defined below) will be transferable and exchangeable at the corporate trust
office of the Trustee, which will initially act as Certificate Registrar. See
"-- Book-Entry Certificates" below. No service charge will be made for any
registration of exchange or transfer of Certificates, but the Trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge.
The principal amount of the Class A-1 Certificates (the "Class A-1
Principal Balance") on any Distribution Date is equal to the Class A-1 Principal
Balance on the Closing Date minus the aggregate of amounts actually distributed
as principal to the holders of the Class A-1 Certificates. With respect to the
Class A-2 Certificates and each of the first 36 Distribution Dates, the
"Notional Principal Balance" thereof will be equal to the lesser of (i) the Pool
Principal Balance as of the first day of the related Due Period and (ii)
$21,000,000. With respect to the Class A-2 Certificates and each Distribution
Date after the 36th Distribution Date, the "Notional Principal Balance" of the
Class A-2 Certificates will be equal to zero.
The Class A Certificates will be issued in two Classes, Class A-1 (the
"Class A-1 Certificates"), and Class A-2 (the "Class A-2 Certificates"). Only
the Class A Certificates are being offered hereby. Each Class of Class A
Certificates represents the right to receive payments of interest at the
Certificate Rate for such Class and, in the case of the Class A-1 Certificates,
payments of principal as described below.
The Person in whose name a Certificate is registered as such in the
Certificate Register is referred to herein as a "Certificateholder."
The "Percentage Interest" represented by a Class A Certificate of a Class
as of any date of determination will be equal to the percentage obtained by
dividing the denomination of such Certificate by the Class A-1 Principal Balance
or the Notional Principal Balance, as applicable, for the related Class as of
the Cut-Off Date.
SEPARATE REMIC STRUCTURE
For federal income tax purposes, the Trust Fund will include multiple
segregated asset pools. The Trust will make a REMIC election with respect to
each such segregated asset pool. The Mortgage Loans and certain other property
will be held by one REMIC (the "Initial Subsidiary REMIC"), which will issue
various Classes of uncertificated interests that will be designated as regular
and residual interests. The Initial Subsidiary REMIC will be part of a tiered
REMIC structure in which the regular interests issued by one REMIC will
constitute the assets of a higher tier REMIC (the Initial Subsidiary REMIC and
such other REMICs are collectively referred to herein as the "Subsidiary
REMICs"). The Class A-1 and Class A-2 Certificates (collectively, the "Regular
Certifi
S-32
<PAGE> 33
cates"), will represent ownership of regular interests in a REMIC (the "Master
REMIC"). The Class R Certificates will evidence ownership of the residual
interest in the Master REMIC and in each Subsidiary REMIC. See "Certain Federal
Income Tax Considerations" herein and "Certain Federal Income Tax
Considerations" in the Prospectus.
BOOK-ENTRY CERTIFICATES
The Class A Certificates will be book-entry Certificates (the "Book-Entry
Certificates"). Persons acquiring beneficial ownership interests in the Class A
Certificates ("Certificate Owners") will hold their Class A Certificates through
the Depository Trust Company ("DTC") in the United States, or Cedel or Euroclear
(in Europe) if they are participants of such systems, or indirectly through
organizations which are participants in such systems. The Book-Entry
Certificates will be issued in one or more certificates which equal the
aggregate principal balance or notional amount, as applicable, of the Class A
Certificates and will initially be registered in the name of Cede & Co., the
nominee of DTC. Cedel and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in Cedel's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank will act as depositary for Cedel and Chase
will act as depositary for Euroclear (in such capacities, individually the
"Relevant Depositary" and collectively the "European Depositaries"). Investors
may hold such beneficial interests in the Book-Entry Certificates in minimum
denominations representing Certificate Principal Balances or Notional Principal
Balances, as applicable, of $25,000 and in multiples of $1,000 in excess
thereof. Except as described below, no person acquiring a Book-Entry Certificate
(each, a "beneficial owner") will be entitled to receive a physical certificate
representing such Certificate (a "Definitive Certificate"). Unless and until
Definitive Certificates are issued, it is anticipated that the only
"Certificateholder" of the Class A Certificates will be Cede & Co., as nominee
of DTC. Certificate Owners will not be Certificateholders as that term is used
in the Agreement. Certificate Owners are only permitted to exercise their rights
indirectly through Participants and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant and on
the records of Cedel or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of, and
interest on, the Class A Certificates from the Trustee through DTC and DTC
participants. While the Class A Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Class A Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Class A Certificates.
Participants and indirect participants with whom Certificate Owners have
accounts with respect to Class A Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions 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
interest.
Certificate Owners will not receive or be entitled to receive certificates
representing their respective interests in the Class A Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Certificate Owners who are not Participants may
transfer ownership of Class A Certificates only through Participants and
indirect participants by instructing such Participants and indirect participants
to transfer Class A Certificates, by book-entry transfer, through DTC for the
account of the purchasers of such Class A Certificates, which account is
maintained with their respective Participants. Under the Rules and in accordance
with DTC's normal procedures, transfers of ownership of Class A Certificates
will be executed through DTC and the accounts of the respective Participants at
DTC will be debited and credited.
S-33
<PAGE> 34
Similarly, the Participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Certificate Owners.
Because of time zone differences, credits of securities received in Cedel
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
Cedel Participants on such business day. Cash received in Cedel or Euroclear as
a result of sales of securities by or through a Cedel Participant (as defined
below) or Euroclear Participant (as defined below) to a DTC Participant will be
received with value on the DTC settlement date but will be available in the
relevant Cedel or Euroclear cash account only as of the business day following
settlement in DTC. For information with respect to tax documentation procedures
relating to the Certificates, see "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS -- Federal Income Tax Consequences to Foreign Investors" and
"Backup Withholding" herein and "GLOBAL CLEARANCE, SETTLEMENT AND TAX
DOCUMENTATION PROCEDURES -- Certain U.S. Federal Income Tax Documentation
Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book-Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 28
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Cedel is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Cedel Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and
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interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by the Brussels, Belgium office of Morgan Guaranty Trust Company of New
York (the "Euroclear Operator"), under contract with Euroclear Clearance Systems
S.C., a Belgian cooperative corporation (the "Cooperative"). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative. The Cooperative establishes policy for Euroclear on behalf
of Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Distributions with respect to Certificates
held through Cedel or Euroclear will be credited to the cash accounts of Cedel
Participants or Euroclear Participants in accordance with the relevant system's
rules and procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. See "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS -- Federal Income Tax Consequences to Foreign Investors" and
"Backup Withholding" herein. Because DTC can only act on behalf of Financial
Intermediaries, the ability of a beneficial owner to pledge Book-Entry
Certificates to persons or entities that do not participate in the Depository
system, or otherwise take actions in respect of such Book-Entry Certificates,
may be limited due to the lack of physical certificates for such Book-Entry
Certificates. In addition, issuance of the Book-Entry Certificates in book-entry
form may reduce the liquidity of such Certificates in the secondary market since
certain potential investors may be unwilling to purchase Certificates for which
they cannot obtain physical certificates.
Monthly and annual reports on the Trust will be provided to Cede & Co., as
nominee of DTC, and may be made available by Cede & Co. to beneficial owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such beneficial owners are credited.
DTC has advised the Trustee that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Certificates under the Agreement only at the direction of one or more
Financial Intermediaries to whose DTC accounts the Book-Entry Certificates are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Certificates. Cedel or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a Certificateholder under the Agreement on behalf of a Cedel
Participant or Euroclear Participant only in accordance with its relevant rules
and procedures and subject to the ability of the Relevant
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Depositary to effect such actions on its behalf through DTC. DTC may take
actions, at the direction of the related Participants, with respect to some
Class A Certificates which conflict with actions taken with respect to other
Class A Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor, at its
sole option, with the consent of the Trustee, elects to terminate a book-entry
system through DTC or (c) after the occurrence of an Event of Default (as
defined herein), beneficial owners having Percentage Interests in the Book-Entry
Certificates aggregating not less than 51% of the Class A-1 Principal Balance
and 51% of the Notional Principal Balance of the Class A-2 Certificates advise
the Trustee and DTC through the Financial Intermediaries and the DTC
participants in writing that the continuation of a book-entry system through DTC
(or a successor thereto) is no longer in the best interests of beneficial
owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
Certificateholders under the Agreement.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Class A Certificates among participants of
DTC, Cedel and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
Neither the Depositor, the Seller, the Servicer, the Certificate Insurer
nor the Trustee will have any responsibility for any aspect of the records
relating to or payments made on account of beneficial ownership interests of the
Book-Entry Certificates held by Cede & Co., as nominee for DTC, or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
ASSIGNMENT OF MORTGAGE LOANS
On the Closing Date the Depositor will transfer to the Trust all of its
right, title and interest in and to each Mortgage Loan, the related Mortgage
Notes, Mortgages and other related documents (collectively, the "Related
Documents"), including all payments received on or with respect to each such
Mortgage Loan after the Cut-Off Date. The Trustee, concurrently with such
transfer, will deliver the Certificates to the Depositor. Each Mortgage Loan
transferred to the Trust will be identified on a schedule (the "Mortgage Loan
Schedule") delivered to the Trustee pursuant to the Agreement. Such schedule
will include information such as the Principal Balance of each Mortgage Loan as
of the Cut-Off Date, its Loan Rate as well as other information.
The Agreement will require that, within the time period specified therein,
the Seller will deliver or cause to be delivered to the Trustee (or a custodian,
as the Trustee's agent for such purpose) the Mortgage Loans endorsed in blank
and the Related Documents. In lieu of delivery of original mortgages, if such
original is not available, the Seller 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.
Within 30 days of the Closing Date the Trustee will review the Mortgage
Loans and the Related Documents pursuant to the Agreement and if any Mortgage
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 by the Trustee, the Seller will be obligated to either (i) substitute for
such Mortgage Loan an Eligible Substitute Mortgage 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 any REMIC in the Trust as a REMIC or result in
a prohibited transaction tax under the Code or (ii) purchase such Mortgage Loan
at a price (the "Purchase Price") equal to the outstanding Principal Balance of
such Mortgage Loan as of the date of purchase, plus all accrued and unpaid
interest thereon, computed at the Loan Rate, plus the amount of any unreimbursed
Servicing Advances made by the Servicer. The Purchase Price will be deposited in
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the 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 Mortgage Loan is the sole remedy regarding any
defects in the Mortgage Loans and Related Documents available to the Trustee or
the Certificateholders.
In connection with the substitution of an Eligible Substitute Mortgage
Loan, the Seller will be required to deposit in the Collection Account on or
prior to the next succeeding Determination Date after such obligation arises an
amount (the "Substitution Adjustment") equal to the excess of the Principal
Balance of the related Defective Mortgage Loan over the Principal Balance of
such Eligible Substitute Mortgage Loan.
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted by
the Seller for a Defective Mortgage 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 Mortgage Loan for a Defective Mortgage Loan, an
aggregate Principal Balance), not in excess of, and not more than 5% less than,
the Principal Balance of the Defective Mortgage Loan; (ii) have a Loan Rate not
less than the Loan Rate of the Defective Mortgage Loan and not more than 1% in
excess of the Loan Rate of such Defective Mortgage Loan; (iii) have a mortgage
of the same or higher level of priority as the mortgage relating to the
Defective Mortgage 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 Mortgage Loan; (v) comply with each representation and warranty as to
the Mortgage Loans set forth in the Agreement (deemed to be made as of the date
of substitution); and (vi) satisfy certain other conditions specified in the
Agreement.
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan (e.g., Cut-Off Date Principal Balance
and the Loan Rate). In addition, the Seller will represent and warrant, on the
Closing Date, that, among other things: (i) at the time of transfer to the
Depositor, the Seller has transferred or assigned all of its right, title and
interest in each Mortgage Loan and the Related Documents, free of any lien; and
(ii) each Mortgage Loan complied, at the time of origination, in all material
respects with applicable state and federal 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
Mortgage Loan and Related Documents, 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 Mortgage Loan an Eligible Substitute Mortgage Loan
or (ii) purchase such Defective Mortgage Loan from the Trust. The same procedure
and limitations that are set forth above for the substitution or purchase of
Defective Mortgage Loans as a result of deficient documentation relating thereto
will apply to the substitution or purchase of a Defective Mortgage Loan as a
result of a breach of a representation or warranty in the Agreement that
materially and adversely affects the interests of the Certificateholders or the
Certificate Insurer.
Mortgage Loans required to be transferred to the Seller as described in the
preceding paragraphs are referred to as "Defective Mortgage Loans."
Pursuant to the Agreement, the Servicer will service and administer the
Mortgage Loans as more fully set forth below.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The Servicer shall establish and maintain in the name of the Trustee a
separate trust account (the "Collection Account") for the benefit of the holders
of the Certificates. The 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 Mortgage
Loans (excluding amounts representing the Servicing Fee, reimbursement for
Monthly Advances and Servicing Advances and 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 within two business
days of receipt. 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 date if approved by the Rating Agencies and
the Certificate Insurer.
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Notwithstanding the above paragraph, the Servicer may commingle collections
held by it, may use such funds for its own purpose and may remit such amounts to
the Collection Account provided that the following conditions are satisfied: (i)
Champion is the Servicer, (ii) Key Bank USA has a rating with respect to
short-term deposit obligations of at least "A-1" by S&P and "P-1" by Moody's,
(iii) no Event of Default under the Agreement has occurred and is continuing,
and (iv) Key Bank USA has entered into a support agreement for the benefit of
the Trust (the "Support Agreement"). If all the conditions contained in this
paragraph are not met, the Servicer will deposit all payments on Mortgage Loans
(from whatever source) and all proceeds of Mortgage Loans collected during each
Due Period into the Collection Account not later than two Business Days after
receipt. It is anticipated that on the Closing Date, Key Bank USA will enter
into a support agreement that will permit Champion to commingle funds. Pending
deposit into the Collection Account, collections may be invested by the Servicer
at its own risk and for its own benefit, and will not be segregated from funds
of the Servicer. See "Risk Factors -- Commingling Risk".
The Trustee will establish an account (the "Distribution Account") into
which will be deposited amounts withdrawn from the Collection Account for
distribution to Certificateholders on a Distribution Date. The 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 a segregated account that is (i) maintained with a
depository institution whose debt obligations at the time of any deposit therein
have the highest short-term debt rating by the Rating Agencies and whose
accounts are fully insured by either the Savings Association Insurance Fund
("SAIF") or the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation established by such fund with a minimum long-term unsecured debt
rating of "A2" by Moody's and "A" by S&P and Fitch, and which is any of (a) a
federal savings and loan association duly organized, validly existing and in
good standing under the applicable banking laws of any state, (b) an institution
duly organized, validly existing and in good standing under the applicable
banking laws of any state, (c) a national banking association duly organized,
validly existing and in good standing under the federal banking laws or (d) a
principal subsidiary of a bank holding company, and in each case of (a)-(d),
approved in writing by the Certificate Insurer, (ii) a segregated trust account
maintained with the corporate trust department of a federal or state chartered
depository institution or trust company, having capital and surplus of not less
than $50,000,000, acting in its fiduciary capacity or (iii) otherwise acceptable
to each Rating Agency and the Certificate Insurer as evidenced by a letter from
each Rating Agency and the Certificate Insurer to the Trustee, without reduction
or withdrawal of their then current ratings of the Certificates.
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.
ADVANCES
Not later than two Business Days prior to each Distribution Date, the
Servicer will remit to the Trustee for deposit in the Distribution Account an
amount, to be distributed on the related Distribution Date, equal to the sum of
the interest accrued on each Mortgage Loan through the related due date for such
Mortgage Loan but not received by the Servicer as of the close of business on
the related Determination Date (net of the Servicing Fee) (the "Monthly
Advance"). Such obligation of the Servicer continues with respect to each
Mortgage Loan until such Mortgage Loan becomes a Liquidated Mortgage Loan.
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 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 Servicing Advances is limited to
late collections on the related Mortgage 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 Mortgage Loan in respect of which such unreimbursed amounts are
owed. The Servicer's right to reimbursement
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for Monthly Advances shall be limited to late collections of interest on any
Mortgage Loan and to Liquidation Proceeds and Insurance Proceeds on the related
Mortgage Loan. The Servicer's right to such reimbursements is prior to the
rights of Certificateholders.
Notwithstanding the foregoing, the Servicer is not required to make any
Monthly Advance or Servicing Advance if in the good faith judgment and sole
discretion of the Servicer, the Servicer determines that such advance will not
be ultimately recoverable from collections received from the Mortgagor in
respect of the related Mortgage Loan or other recoveries in respect of such
Mortgage Loan (a "Nonrecoverable Advance"). However, if any Servicing Advance or
Monthly Advance is determined by the Servicer to be nonrecoverable from such
sources, the amount of such Nonrecoverable Advance may be reimbursed to the
Servicer from other amounts on deposit in the Collection Account.
DISTRIBUTION DATES
On each Distribution Date, the holders of the Class A Certificates will be
entitled to receive, from amounts then on deposit in the Distribution Account,
to the extent of funds available therefor in accordance with the priorities and
in the amounts described below under "Priority of Distributions," an aggregate
amount equal to the sum of (a) the Class Interest Distribution for each Class of
Class A Certificates and (b) in the case of the holders of the Class A-1
Certificates, the Class A-1 Principal Distribution. Distributions will be made
(i) in immediately available funds to holders of Class A Certificates holding
Certificates, the aggregate principal balance (or notional amount) of which is
at least $1,000,000, by wire transfer or otherwise, to the account of such
Certificateholder at a domestic bank or other entity having appropriate
facilities therefor, if such Certificateholder has so notified the Trustee in
accordance with the Agreement, or (ii) by check mailed to the address of the
person entitled thereto as it appears on the register (the "Certificate
Register") maintained by the Trustee as registrar (the "Certificate Registrar").
DEPOSITS TO THE DISTRIBUTION ACCOUNT
On each Distribution Date, the following amounts in respect of the previous
Due Period shall be withdrawn from the Collection Account and deposited into the
Distribution Account and shall constitute the "Available Funds" for such
Distribution Date: (i) payments of principal and interest on the Mortgage Loans
(net of amounts representing the Servicing Fee with respect to each Mortgage
Loan and reimbursement for related Monthly Advances and Servicing Advances);
(ii) Net Liquidation Proceeds and Insurance Proceeds with respect to the
Mortgage Loans (net of amounts applied to the restoration or repair of a
Mortgaged Property); (iii) the Purchase Price for repurchased Defective Mortgage
Loans with respect to the Mortgage Loans and any related Substitution
Adjustments; (iv) payments from the Servicer in connection with (a) Monthly
Advances, (b) Prepayment Interest Shortfalls and (c) the termination of the
Trust with respect to the Mortgage Loans as provided in the Agreement; and (v)
any amounts paid under the Policy.
PRIORITY OF DISTRIBUTIONS
On each Distribution Date the Trustee shall withdraw from the Distribution
Account the Available Funds, and make the following disbursements and transfers
as described below and to the extent of Available Funds (except that amounts
paid under the Policy shall only be available for distribution to Class A
Certificateholders):
(i) to the Trustee, the Trustee fee for such Distribution Date and to
the Certificate Insurer, the amount owing to the Certificate Insurer under
the Insurance Agreement for the premium;
(ii) concurrently to the holders of the Class A-1 Certificates and
Class A-2 Certificates, an amount equal to the related Class Interest
Distribution for the Class A-1 Certificates and Class A-2 Certificates for
such Distribution Date;
(iii) to the holders of the Class A-1 Certificates, the Class A-1
Principal Distribution for such Distribution Date (other than the portion
constituting Distributable Excess Spread);
(iv) to the Certificate Insurer, the amount owing to the Certificate
Insurer under the Insurance Agreement for reimbursement for prior draws
made on the Policy;
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(v) to the holders of the Class A-1 Certificates to the extent of
Available Funds remaining, the Distributable Excess Spread for such
Distribution Date;
(vi) to the Servicer, the amount of any accrued and unpaid Servicing
Fee;
(vii) to the Servicer, the amount of Nonrecoverable Advances not
previously reimbursed;
(viii) to the Certificate Insurer, any other amounts owing to the
Certificate Insurer under the Insurance Agreement; and
(ix) to the Class R Certificateholders, the balance.
THE CERTIFICATE RATE
The "Certificate Rate" on any Distribution Date with respect to the Class
A-1 Certificates will equal the lesser of (A) the Class A-1 Formula Rate and (B)
the Net Funds Cap for such Distribution Date. The "Class A-1 Formula Rate" is
(a) with respect to any Distribution Date which occurs on or prior to the date
on which the Pool Principal Balance is less than 5% of the Cut-Off Date Pool
Principal Balance, the sum of the interbank offered rates for one-month United
States dollar deposits in the London market (the "Certificate Index") as of the
related LIBOR Determination Date, plus 0.31%, and (b) with respect to any other
Distribution Date, the sum of the Certificate Index as of the related LIBOR
Determination Date, plus 0.62%. The "Net Funds Cap" for any Distribution Date
will equal the percentage equivalent of (A) a fraction, (1) the numerator of
which is equal to (a) all payments of interest due on the Mortgage Loans during
the related Due Period, less (b) the sum of (i) the Servicing Fee payable on
such Distribution Date, (ii) the Trustee fee payable on such Distribution Date,
(iii) the monthly premium owed to the Certificate Insurer payable on such
Distribution Date and (iv) the Certificate Rate for the Class A-2 Certificates
times the Notional Principal Balance of the Class A-2 Certificates and (2) the
denominator of which is the Class A-1 Principal Balance as of the first day of
the related Due Period, times (B) a fraction, the numerator of which is one and
the denominator of which is the actual number of days in the Interest Period of
the Class A-1 Certificates, times (C) 360. Nothwithstanding the foregoing, on
any Distribution Date on which the overcollateralization exceeds the Class A-1
Principal Balance, the Net Funds Cap will equal 2 times the Adjusted Net Funds
Cap. The "Adjusted Net Funds Cap" with respect to any such Distribution Date
will be calculated in the same manner as the Net Funds Cap except that the
denominator referred to in clause (A)(2) of the definition of Net Funds Cap will
equal the Pool Principal Balance as of the first day of the related Due Period.
With respect to each Distribution Date, the Certificate Index shall be
established by the Trustee and will equal the rate for one month United States
dollar deposits quoted on Telerate Page 3750 as of 11:00 A.M., London time, on
the second LIBOR Business Day prior to the first day of the related Interest
Period (or the second LIBOR Business Day prior to the Closing Date, in the case
of the first Distribution Date) (each, a "LIBOR Determination Date"). "Telerate
Page 3750" means the display designated as page 3750 on the Bridge Telerate
Service (or such other page as may replace page 3750 on that service for the
purpose of displaying London interbank offered rates of major banks). If such
rate does not appear on such page (or such other page as may replace that page
on that service, or if such service is no longer offered, such other service for
displaying LIBOR or comparable rates as may be selected by the Trustee after
consultation with the Servicer), the rate will be the Reference Bank Rate. The
"Reference Bank Rate" will be determined on the basis of the rates at which
deposits in U.S. Dollars are offered by the reference banks (which shall be
three major banks that are engaged in transactions in the London interbank
market, selected by the Trustee after consultation with the Servicer) as of
11:00 A.M., London time, on the day that is two LIBOR Business Days prior to the
immediately preceding Distribution Date to prime banks in the London interbank
market for a period of one month in amounts approximately equal to the Class A-1
Principal Balance then outstanding. The Trustee will request the principal
London office of each of the reference banks to provide a quotation of its rate.
If at least two such quotations are provided, the rate will be the arithmetic
mean of the quotations. If on such date fewer than two quotations are provided
as requested, the rate will be the arithmetic mean of the rates quoted by one or
more major banks in New York City, selected by the Trustee after consultation
with the Servicer, as of 11:00 A.M., New York City time, on such date for loans
in U.S. Dollars to leading European banks for a period of one month in amounts
approximately equal to the Class A-1 Principal Balance then outstanding. If no
such quotations can be obtained, the rate will be LIBOR for the prior
Distribution Date. "LIBOR Business Day" means any day other than (i) a
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Saturday or a Sunday or (i) a day on which banking institutions in the State of
New York or in the city of London, England are required or authorized by law to
be closed.
The "Interest Period" means, with respect to each Distribution Date and the
Class A-1 Certificates, the period from the Distribution Date in the month
preceding the month of such Distribution Date (or, in the case of the first
Distribution Date, from the Closing Date) through the day before such
Distribution Date. Interest on the Class A-1 Certificates in respect of any
Distribution Date will accrue during the related Interest Period on the basis of
a 360-day year and the actual number of days elapsed.
The "Certificate Rate" on any Distribution Date with respect to the Class
A-2 Certificates will be 8.12% per annum.
The "Interest Period" means, with respect to each Distribution Date and the
Class A-2 Certificates, the period from the first day of the calendar month
preceding the month of such Distribution Date through the last day of such
calendar month. Interest on the Class A-2 Certificates in respect of any
Distribution Date will accrue during the related Interest Period on the basis of
a 360-day year consisting of twelve 30-day months.
INTEREST
On each Distribution Date, to the extent of funds available therefor in
accordance with the priorities described above under "-- Priorities of
Distributions," interest will be distributed to each Class of Class A
Certificates in an amount equal to the related Class Interest Distribution. For
each Distribution Date and each Class of Class A Certificates, the "Class
Interest Distribution" is the sum of (a) interest at the related Certificate
Rate that accrued during the related Interest Period on the Class A-1 Principal
Balance or Notional Principal Balance, as applicable, immediately prior to such
Distribution Date (the "Class Monthly Interest Distributable Amount") and (b)
any Class Interest Carryover Shortfall. As to any Distribution Date and Class of
Class A Certificates, the "Class Interest Carryover Shortfall" is the sum of (a)
the excess of the sum of (A) the related Class Monthly Interest Distributable
Amount for the preceding Distribution Date and (B) any outstanding Class
Interest Carryover Shortfall with respect to such Class on such preceding
Distribution Date, over the amount in respect of interest that is actually
distributed to such Class on such preceding Distribution Date plus (b) interest
on such excess, to the extent permitted by law, at the related Certificate Rate
for the related Interest Period.
On each Distribution Date, the Class Interest Distribution for each Class
of Class A Certificates will be distributed on an equal priority and any
shortfall in the amount required to be distributed as interest thereon to each
such Class will be allocated between such Classes pro rata based on the amount
which would have been distributed to each such Class in the absence of such
shortfall.
PRINCIPAL
On each Distribution Date, to the extent of funds available therefor, in
accordance with the priorities described above under "-- Priorities of
Distributions," principal will be distributed to the holders of Class A-1
Certificates in an amount equal to the lesser of (A) the Class A-1 Principal
Balance and (B) the Class A-1 Principal Distribution for such Distribution Date.
"Class A-1 Principal Distribution" means, with respect to any Distribution Date,
the sum of the Class A-1 Monthly Principal Distributable Amount for such
Distribution Date and any Class A Principal Shortfall Amount for such
Distribution Date.
"Class A-1 Monthly Principal Distributable Amount" means, with respect to
any Distribution Date, to the extent of funds available therefor as described
herein, the amount equal to the sum of the following amounts (without
duplication) with respect to the immediately preceding Due Period (as defined
below): (i) each payment of principal on a Mortgage Loan received by the
Servicer during such Due Period, including all full and partial principal
prepayments, (ii) the Principal Balance as of the end of the immediately
preceding Due Period of each Mortgage Loan that became a Liquidated Mortgage
Loan for the first time during the related Due Period, (iii) the portion of the
Purchase Price allocable to principal of all repurchased Defective Mortgage
Loans with respect to such Due Period, (iv) any Substitution Adjustments
received on or prior to the previous Determination Date and not yet distributed,
and (v) the amount, if any, required to be distributed on such Distribution Date
to satisfy the required level of overcollateralization for such Distribution
Date (the "Distributable Excess Spread").
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"Class A-1 Principal Shortfall Amount" means for any Distribution Date, the
amount, if any, by which the Class A-1 Principal Balance exceeds the Pool
Principal Balance at the end of the related Due Period after giving effect to
all distributions of amounts on deposit in the Distribution Account available to
pay the Class A-1 Monthly Principal Distributable Amount (exclusive of
Distributable Excess Spread) and draws under the Policy for such Distribution
Date.
If the required level of overcollateralization is reduced below the then
existing amount of overcollateralization (described below) or if the required
level of overcollateralization is satisfied, the amount of the Class A-1 Monthly
Principal Distributable Amount will be correspondingly reduced by the amount of
such reduction or by the amount necessary such that the overcollateralization
will not exceed the required level of overcollateralization after giving effect
to the distribution in respect of principal to be made on such Distribution
Date.
The application of Excess Spread as described below is intended to create
overcollateralization to provide a source of additional cashflow to cover losses
on the Mortgage Loans. A draw on the Policy in respect of principal will not be
made until the Class A-1 Principal Balance exceeds the Pool Principal Balance of
the Mortgage Loans. See "-- The Policy" herein. Accordingly, there may be
Distribution Dates on which Class A-1 Certificateholders receive little or no
distributions in respect of principal.
On each Distribution Date, net losses realized in respect of Liquidated
Mortgage Loans (to the extent such amount is not covered by Available Funds)
will reduce the amount of overcollateralization, if any.
"Due Period" means, with respect to any Determination Date or Distribution
Date, the calendar month immediately preceding such Determination Date or
Distribution Date, as the case may be.
"Liquidated Mortgage Loan" means, as to any Distribution Date, is a
Mortgage Loan with respect to which the Servicer has determined, in accordance
with 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 such Mortgage Loan have been recovered.
"Excess Spread" means, with respect to any Distribution Date, the positive
excess, if any, of (x) Available Funds for such Distribution Date over (y) the
portion thereof required to be distributed pursuant to subclauses (i) through
(iv) as set forth under the heading "DESCRIPTION OF CERTIFICATES -- Priority of
Distributions" on such Distribution Date.
An "Insurer Default" will occur in the event the Certificate Insurer fails
to make a payment required under the Policy.
THE POLICY
On or before the Closing Date, the Policy will be issued by the Certificate
Insurer pursuant to the provisions of the Insurance and Reimbursement Agreement
(the "Insurance Agreement") dated as of September 1, 1998, among the Seller, the
Servicer, Key Bank USA, the Depositor and the Certificate Insurer, including
without limitation all schedules, exhibits and attachments thereto.
The Policy will unconditionally and irrevocably guarantee principal
payments as described below on the Class A-1 Certificates plus accrued and
unpaid interest due on the Class A Certificates. On each Distribution Date, a
draw will be made on the Policy equal to the sum of (a) the amount by which the
Class Interest Distribution for each Class of Class A Certificates for such
Distribution Date exceeds the amount on deposit in the Distribution Account
available to be distributed therefor on such Distribution Date, and (b) the
amount, if any (the "Guaranteed Principal Amount"), by which the Class A-1
Principal Balance exceeds the Pool Principal Balance at the end of the related
Due Period (after giving effect to all amounts distributable and allocable to
principal on the Class A-1 Certificates on such Distribution Date).
OVERCOLLATERALIZATION PROVISIONS
The Agreement requires that, on each Distribution Date, the Distributable
Excess Spread will be applied on such Distribution Date as an accelerated
payment of principal on the Class A-1 Certificates. This has the effect of
accelerating the amortization of the Class A-1 Certificates relative to the
amortization of the Mortgage Loans.
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The required level of overcollateralization will be satisfied as of each
Distribution Date when the aggregate of the Principal Balances of the Mortgage
Loans at the end of the related Due Period exceeds the Class A-1 Principal
Balance by an amount specified in the Agreement. Thereafter, the level of
overcollateralization necessary to satisfy the required level of
overcollateralization may be increased or decreased from time to time based on
the loss and delinquency experience of the Mortgage Loans in accordance with the
provisions of the Agreement. In addition, the required level of
overcollateralization may be decreased (and may be decreased to zero), in the
sole discretion of the Certificate Insurer and with the prior consent of each
Rating Agency, as low as zero, which would have the effect of reducing the
amortization of the Class A-1 Certificates below what it otherwise would have
been.
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to the Certificateholders, the Trustee
will forward each Certificateholder a statement (based solely on information
received from the Servicer) setting forth among other items with respect to each
Distribution Date:
(i) the aggregate amount of the distribution to each Class of
Certificateholders on such Distribution Date;
(ii) the amount of distribution set forth in paragraph (i) above in
respect of interest and the amount thereof in respect of any Class Interest
Carryover Shortfall, and the amount of any Class Interest Carryover
Shortfall remaining;
(iii) the amount of distribution set forth in paragraph (i) above in
respect of principal and the amount thereof in respect of the Class A-1
Principal Shortfall Amount, and any remaining Class A-1 Principal Shortfall
Amount;
(iv) the amount of Excess Spread and the amount applied as a
distribution of Distributable Excess Spread on the Certificates;
(v) Guaranteed Principal Amount for such Distribution Date;
(vi) the amount paid under the Policy for such Distribution Date in
respect of the Class Interest Distribution to each Class of Certificates;
(vii) the Servicing Fee;
(viii) the Pool Principal Balance, as of the close of business on the
last day of the preceding Due Period;
(ix) the Class A-1 Principal Balance after giving effect to payments
allocated to principal above;
(x) the amount of overcollateralization as of the close of business on
the Distribution Date, after giving effect to distributions of principal on
such Distribution Date;
(xi) the number and aggregate Principal Balances of the Mortgage Loans
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;
(xii) the book value of any real estate which is acquired by the Trust
through foreclosure or grant of deed in lieu of foreclosure;
(xiii) the aggregate amount of prepayments received on the Mortgage
Loans during the previous Due Period;
(xiv) the weighted average Loan Rate on the Mortgage Loans as of the
first day of the month prior to the Distribution Date; and
(xv) the Certificate Rate on the Class A-1 Certificates for such
Distribution Date.
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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, if requested in writing by such 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.
LAST SCHEDULED DISTRIBUTION DATE
The last scheduled Distribution Date for each Class of Class A Certificates
is as follows: Class A-1 Certificates, the Distribution Date in September 2028;
and Class A-2 Certificates, the Distribution Date in September 2001. It is
expected that the actual last Distribution Date for the Class A-1 Certificates
will occur significantly earlier than the last scheduled Distribution Date for
the Class A-1 Certificates specified above. See "PREPAYMENT AND YIELD
CONSIDERATIONS."
The last scheduled Distribution Date for the Class A-1 Certificates has
been calculated assuming that the Mortgage Loans having the latest maturity date
amortizes according to its term. The last scheduled Distribution Date for the
Class A-2 Certificates is the 36th Distribution Date.
COLLECTION AND OTHER SERVICING PROCEDURES ON MORTGAGE LOANS
The Servicer will make reasonable efforts to collect all payments called
for under the Mortgage 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 Mortgage Loans.
Consistent with the above, the 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 Mortgage Loans.
With respect to the Mortgage 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 mortgage loans it owns or services. With respect
to Mortgage 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 Mortgage
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 lesser of (i) the outstanding
Principal Balance on the Mortgage Loan and any related First Lien(s), (ii) the
full insurable value of the premises securing the Mortgage 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 Flood 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, 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 Mortgage Loan and the First Lien, if any,
(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, 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
customary mortgage servicing procedures) will be deposited in the Collection
Account, subject
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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 Mortgage 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 Mortgage Loans without coinsurance, and otherwise
complies with the requirements of the first paragraph of this subsection, the
Servicer will be deemed conclusively to have satisfied its obligations with
respect to fire and hazard insurance coverage.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Mortgage 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 senior
mortgage loan 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.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Due Period, the Servicer will receive from interest
payments in respect of the Mortgage Loans a portion of such interest payments as
a monthly Servicing Fee in the amount equal to 0.40% per annum (or, if Champion
is no longer the Servicer, 0.50% per annum) per annum (the "Servicing Fee Rate")
on the Principal Balance of each Mortgage 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's right to reimbursement for unreimbursed Servicing Advances
is limited to late collections on the related Mortgage 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 Mortgage Loan in respect of which such
unreimbursed amounts are owed. The Servicer's right to reimbursement for
unreimbursed Monthly Advances shall be limited to late collections of interest
on any Mortgage Loan and to Liquidation Proceeds and Insurance Proceeds on the
related Mortgage Loan. The Servicer's right to such reimbursements is prior to
the rights of Certificateholders. However, if any Servicing Advance or Monthly
Advance is determined by the Servicer to be non-recoverable from such sources,
the amount of such non-recoverable advances may be reimbursed to the Servicer
from other amounts on deposit in the Collection Account.
Not later than two Business Days prior to each Distribution Date, the
Servicer is required to remit to the Trustee, without any right of
reimbursement, an amount equal to, with respect to each Mortgage Loan as to
which a principal prepayment in full was received during the related Due Period,
the lesser of (a) the excess, if any, of 30 days' interest on the Principal
Balance of such Mortgage Loan at the Loan Rate (or at such lower rate as may be
in effect for such Mortgage Loan because of application of the Civil Relief
Act), or as a result of any reduction of the monthly payment due on such
Mortgage Loan as a result of a bankruptcy proceeding (a "Debt Service
Reduction"), minus the Servicing Fee for such Mortgage Loan, over the amount of
interest actually paid by the related Mortgagor in connection with such
principal prepayment (with respect to all such Mortgage Loans, the "Prepayment
Interest Shortfall") and (b) the sum of the aggregate Servicing Fee received by
the Servicer in the most recently ended Due Period.
The Servicing Fee will not be reduced to cover shortfalls in interest
collections resulting from partial prepayments on the Mortgage Loans.
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EVIDENCE AS TO COMPLIANCE
The Agreement provides for delivery on or before the last day of the fifth
month following the end of the Servicer's fiscal year, beginning with the fiscal
year ending in 1999, to the Trustee, the Depositor, 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 the last day of the fifth month following the end of the
Servicer's fiscal year, beginning with the fiscal year ending in 1999, 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 Depositor) to the Trustee, the Depositor, 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 Mortgage Loans
under the Uniform Single Attestation Program for Mortgage Bankers and such
firm's conclusion with respect thereto.
The Servicer's fiscal year ends on September 30.
CERTAIN MATTERS REGARDING THE DEPOSITOR, SELLER AND 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 as evidenced by an opinion of counsel delivered
to the Certificate Insurer 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 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 the Servicer will indemnify the Trust and the
Trustee from and against any loss, liability, expense, damage or injury suffered
or sustained as a result of the Servicer's willful misconduct, bad faith or
negligence in connection with the servicing and administration of the Mortgage
Loans. The Agreement provides that neither the Depositor, the Seller nor the
Servicer nor their 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, neither the Depositor, the Seller nor the Servicer will
be protected against any liability which would otherwise be imposed by reason of
willful misconduct, bad faith or gross negligence of the Depositor, the Seller
or the Servicer, as the case may be, 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 its 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.
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 under the Agreement, without
the execution or filing of any paper or any further act on the part of any of
the parties to the Agreement, anything in the Agreement to the contrary
notwithstanding.
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VOTING RIGHTS
Certain actions specified herein that may be taken by holders of
Certificates evidencing a specified percentage of all undivided interests in the
Trust may be taken by holders of Certificates entitled in the aggregate to such
percentage of the "Voting Rights." 98% of all Voting Rights will be allocated
among all holders of the Class A-1 Certificates and 2% of all Voting Rights will
be allocated among the holders of the Class A-2 Certificates, in each case in
proportion to the Percentage Interests evidenced by their respective
Certificates.
EVENTS OF DEFAULT
"Events of Default" will consist of: (i)(A) any failure by the Servicer to
make any required Monthly Advance or (B) any other failure of the Servicer to
deposit in the Collection Account or Distribution Account any deposit required
to be made under the Agreement, which failure continues unremedied for two
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 holding Certificates evidencing the Voting Rights in the
Trust of at least 25%; (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 any Certificateholders holding
Certificates evidencing the Voting Rights in the Trust of at least 25%; (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 any Certificateholders holding
Certificates evidencing the Voting Rights in the Trust of at least 25%; (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 the Servicer,
any failure of the Seller to repurchase or substitute Eligible Substitute
Mortgage Loans for Defective Mortgage Loans as required pursuant to the Purchase
Agreement or the Agreement; and (vi) any insufficiency in the Available Funds
excluding any payment made under the Policy occurs on a Distribution Date
resulting in the need for a draw on the Policy.
In addition the Certificate Insurer in its sole discretion may terminate
the Servicer upon a Trigger Event. A "Trigger Event" will consist of, among
other things, (i) the failure by the Seller or the Servicer to pay any amount
due the Certificate Insurer pursuant to the Insurance Agreement 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 in material compliance with the terms of the
Agreement; 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 Mortgage Loans.
RIGHTS UPON AN EVENT OF DEFAULT
So long as an Event of Default remains unremedied, either the Trustee,
Certificateholders holding Certificates evidencing at least 51% of the Voting
Rights in the Trust, 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 Mortgage Loans, whereupon the
Trustee will succeed to all the responsibilities, duties and liabilities of the
Servicer under the Agreement and will be entitled to similar compensation
arrangements. In the event that the Trustee would be obligated to succeed the
Servicer but is unwilling or 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 $50,000,000 and acceptable to the Certificate
Insurer to act as successor to the Servicer under the Agreement. Pending such
appointment, the Trustee will be obligated to act in such capacity unless
prohibited by law. Such successor will be entitled to receive a Servicing Fee of
0.50% and such other compensation that the Servicer would otherwise have
received (or such lesser fee and compensation as the Trustee and such successor
may agree). A receiver or conservator for the Servicer may be empowered to
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prevent the termination and replacement of the Servicer if the only Event of
Default that has occurred is an Insolvency Event.
AMENDMENT
The Agreement may be amended from time to time by the Seller, the Servicer,
the Depositor and the Trustee and with the consent of the Certificate Insurer
(which consent will not be unreasonably withheld), but without the consent of
the Certificateholders, to cure any ambiguity, to correct or supplement any
provisions therein which may be 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 Internal Revenue 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 Class A
Certificates (it being understood that, after obtaining the ratings in effect on
the Closing Date, neither the Depositor, the Seller, the Trustee, the
Certificate Insurer nor the Servicer 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 Class A Certificates. The Agreement may also be amended
from time to time by the Seller, the Servicer, the Depositor, and the Trustee,
with the consent of Certificateholders evidencing at least 51% of the Percentage
Interests of each Class affected thereby (or 51% of the Percentage Interests of
all Classes if all Classes are affected) and the Certificate Insurer (which
consent will not be unreasonably withheld) 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 Class A Certificates then outstanding.
Notwithstanding the foregoing, the provisions of the Agreement relative to
overcollateralization may be reduced or eliminated by the Certificate Insurer
without the consent of the Certificateholders so long as an Insurer Default does
not exist.
TERMINATION; PURCHASE OF MORTGAGE LOANS
The Trust will terminate on the Distribution Date following the later of
(A) payment in full of all amounts owing to the Certificate Insurer unless the
Certificate Insurer shall otherwise consent and (B) the earliest of (i) the
Distribution Date on which the Class A-1 Principal Balance has been reduced to
zero, (ii) the final payment or other liquidation of the last Mortgage Loan in
the Trust, (iii) the optional purchase by the Servicer of the Mortgage Loans, as
described below and (iv) the Distribution Date on which date the Policy will be
available to pay the outstanding Class A-1 Principal Balance.
Subject to provisions in the Agreement concerning adopting a plan of
complete liquidation, the Servicer may, at its option, terminate the Agreement
on any date on which the Pool Principal Balance is less than 5% of the Cut-Off
Date Pool Principal Balance by purchasing, on the next succeeding Distribution
Date, all of the outstanding Mortgage Loans at a price equal to the sum of the
outstanding Pool Principal Balance and accrued and unpaid interest thereon at
the weighted average of the Loan Rates through the end of the Due Period
preceding the final Distribution Date together with all amounts due and owing to
the Certificate Insurer.
Any such purchase shall be accomplished by deposit into the Distribution
Account of the purchase price specified above.
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OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
The Servicer has the option, but is not obligated, to purchase from the
Trust any Mortgage Loan 90 days or more delinquent at the Purchase Price.
THE TRUSTEE
Harris Trust and Savings Bank, a banking corporation organized under the
laws of the State of Illinois, 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 (such Servicer approval not to be unreasonably
withheld). 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 holding Certificates evidencing at least 51% of the
Percentage Interests in the Trust, 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.
DESCRIPTION OF THE PURCHASE AGREEMENT
The Mortgage Loans to be transferred to the Trust by the Depositor will be
purchased by the Depositor from Champion Mortgage Co., Inc. (the "Seller")
pursuant to the Purchase Agreement to be entered into between the Depositor, as
purchaser of the Mortgage Loans, and the Seller, as seller of the Mortgage Loans
(the "Purchase Agreement"). Under the Purchase Agreement, the Seller will agree
to transfer the Mortgage Loans to the Depositor. Pursuant to the Agreement, the
Mortgage Loans will be immediately transferred by the Depositor to the Trust,
and the Depositor will assign its rights in, to and under the Purchase
Agreement, to the Trust.
In the Purchase Agreement the Seller will make representations and
warranties similar to those representations and warranties made by the Seller in
the Agreement. In the event of a breach of any such representations and
warranties which has a material adverse effect on the interests of the
Certificateholders or the Certificate Insurer, the Seller will repurchase or
substitute for the Mortgage Loans as described herein under "DESCRIPTION OF THE
CERTIFICATES -- Assignment of Mortgage Loans."
The Seller has also agreed to indemnify the Depositor and the Trust from
and against certain losses, liabilities and expenses (including reasonable
attorneys' fees) suffered or sustained pursuant to the Purchase Agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will be
applied by the Depositor towards the purchase of the Mortgage Loans.
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<PAGE> 50
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The Agreement provides that the Trust will comprise several Subsidiary
REMICs and a Master REMIC organized in a tiered REMIC structure. Each Subsidiary
REMIC will issue uncertificated regular interests and those interests will be
held entirely by the REMIC immediately above it in the tiered structure. Each of
the Subsidiary REMICs and the Master REMIC will designate a single class of
interests as the residual interest in that REMIC. The Class R Certificates will
represent ownership of the residual interests in each of the REMICs. Elections
will be made to treat each Subsidiary REMIC and the Master REMIC as a REMIC for
federal income tax purposes.
Upon the issuance of the Class A Certificates, Brown & Wood LLP ("Tax
Counsel"), will deliver its opinion concluding, assuming compliance with the
Agreement, for federal income tax purposes, each Subsidiary REMIC and the Master
REMIC will qualify as a REMIC within the meaning of Section 860D of the Internal
Revenue Code of 1986, as amended (the "Code"). The Class A-1 and Class A-2
Certificates will represent beneficial ownership of regular interests issued by
the Master REMIC.
The Class A Certificates generally will be treated as debt instruments
issued by the Master REMIC for federal income tax purposes. Income on such
Certificates must be reported under an accrual method of accounting.
The Class A Certificates may, depending on their issue price, be issued
with original issue discount ("OID") for federal income tax purposes. Holders of
such Certificates issued with OID will be required to include OID in income as
it accrues under a constant yield method, in advance of the receipt of cash
attributable to such income. The OID Regulations do not contain provisions
specifically interpreting Code Section 1272(a)(6) which applies to prepayable
securities such as the Class A Certificates. Until the Treasury issues guidance
to the contrary, the Trustee intends to base its OID computation on Code Section
1272(a)(6) and the OID Regulations as described in the Prospectus. However,
because no regulatory guidance currently exists under Code Section 1272(a)(6),
there can be no assurance that such methodology represents the correct manner of
calculating OID.
The yield used to calculate accruals of OID with respect to the Class A
Certificates with OID will be the original yield to maturity of such
Certificates, determined by assuming that the Mortgage Loans will prepay in
accordance with 115% of the Prepayment Assumption. No representation is made as
to the actual rate at which the Mortgage Loans will prepay.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The Prepayment Assumption model used in this
Prospectus Supplement is based on a Constant Prepayment Rate ("CPR"). CPR
represents a constant rate of prepayment on the Mortgage Loans each month
relative to the aggregate outstanding principal balance of the Mortgage Loans.
CPR does not purport to be either an historical description of the prepayment
experience of any pool of mortgage loans or a prediction of the anticipated rate
of prepayment of any pool of mortgage loans, including the Mortgage Loans, and
there is no assurance that the Mortgage Loans will prepay at the specified CPR.
The Depositor does not make any representation about the appropriateness of the
CPR model.
A reasonable application of the principles of the OID Regulations to the
Variable Rate Certificates generally would be to report all income with respect
to such Certificates as original issue discount for each period, computing such
original issue discount (i) by assuming that the value of the applicable
Certificate Index will remain constant for purposes of determining the original
yield to maturity of each such Class of Certificates and projecting future
distributions on such Certificates, thereby treating such Certificates as fixed
rate instruments to which the original issue discount computation rules
described in the Prospectus can be applied, and (ii) by accounting for any
positive or negative variation in the actual value of the applicable index in
any period from its assumed value as a current adjustment to original issue
discount with respect to such period. See "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS -- Taxation of Debt Securities -- Interest and Acquisition
Discount" in the Prospectus.
The Class A Certificates will be treated as regular interests in a REMIC
under section 860G of the Code. Accordingly, the Class A Certificates will be
treated as (i) assets described in section 7701(a)(19)(C) of the Code, and (ii)
"real estate assets" within the meaning of section 856(c)(5) of the Code, in
each case to the extent
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<PAGE> 51
described in the Prospectus. Interest on the Class A Certificates 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 to the same extent that the
Class A Certificates are treated as real estate assets. See "CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS" in the Prospectus.
BACKUP WITHHOLDING
Certain Certificate Owners may be subject to backup withholding at the rate
of 31% with respect to interest paid on the Class A Certificates if the
Certificate Owners, upon issuance, fail to supply the Trustee or their broker
with their taxpayer identification number, furnish an incorrect taxpayer
identification number, fails to report interest, dividends, or other "reportable
payments" (as defined in the Code) properly, or, under certain circumstances,
fails to provide the Trustee or their broker with a certified statement, under
penalty of perjury, that they are not subject to backup withholding.
The Trustee will be required to report annually to the IRS, and to each
Class A Certificateholder of record, the amount of interest paid (and OID
accrued, if any) on the Class A Certificates (and the amount of interest
withheld for federal income taxes, if any) for each calendar year, except as to
exempt holders (generally, holders that are corporations, certain tax-exempt
organizations or nonresident aliens who provide certification as to their status
as nonresidents). As long as the only "Class A Certificateholder" of record is
Cede, as nominee for DTC, Certificate Owners and the IRS will receive tax and
other information including the amount of interest paid on such Certificates
owned from Participants and Indirect Participants rather than from the Trustee.
(The Trustee, however, will respond to requests for necessary information to
enable Participants, Indirect Participants and certain other persons to complete
their reports.) Each non-exempt Certificate Owner will be required to provide,
under penalty of perjury, a certificate on IRS Form W-9 containing his or her
name, address, correct federal taxpayer identification number and a statement
that he or she is not subject to backup withholding. Should a nonexempt
Certificate Owner fail to provide the required certification, the Participants
or Indirect Participants (or the Paying Agent) will be required to withhold 31%
of the interest (and principal) otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income tax
liability.
Such amounts will be deemed distributed to the affected Certificate Owner
for all purposes of the Certificates, the Agreement and the Policy.
NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the backup withholding
and information reporting rules described above. The New Regulations will
generally be effective for payments made after December 31, 1999, subject to
certain transition rules. Prospective investors are urged to consult their own
tax advisors regarding the New Regulations.
FEDERAL INCOME TAX CONSEQUENCES TO FOREIGN INVESTORS
The following information describes the United States federal income tax
treatment of holders that are not United States persons ("Foreign Investors").
The term "Foreign Investor" means any person other than (i) a citizen or
resident of the United States, (ii) a corporation, partnership (or other entity
treated as a corporation or partnership for federal tax purposes) organized in
or under the laws of the United States or any state thereof, or the District of
Columbia, (iii) an estate the income of which is includible in gross income for
United States federal income tax purposes, regardless of its source or (iv) a
trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
trustees have authority to control all substantial decisions of the trust.
The Code and Treasury regulations generally subject interest paid to a
Foreign Investor to a withholding tax at a rate of 30% (unless such rate were
changed by an applicable treaty). The withholding tax, however, is eliminated
with respect to certain "portfolio debt investments" issued to Foreign
Investors. Portfolio debt investments include debt instruments issued in
registered form for which the United States payor receives a statement that the
beneficial owner of the instrument is a Foreign Investor. The Class A
Certificates will be issued in registered form, therefore if the information
required by the Code is furnished (as described below) and no
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<PAGE> 52
other exceptions to the withholding tax exemption are applicable, no withholding
tax will apply to the Class A Certificates.
For the Class A Certificates to constitute portfolio debt investments
exempt from the United States withholding tax, the withholding agent must
receive from the Certificate Owner an executed IRS Form W-8 signed under penalty
of perjury by the Certificate Owner stating that the Certificate Owner is a
Foreign Investor and providing such Certificate Owner's name and address. The
statement must be received by the withholding agent in the calendar year in
which the interest payment is made, or in either of the two preceding calendar
years.
A Certificate Owner that is a nonresident alien or foreign corporation will
not be subject to United States federal income tax on gain realized on the sale,
exchange, or redemption of such Class A Certificate, provided that (i) such gain
is not effectively connected with a trade or business carried on by the
Certificate Owner in the United States, (ii) in the case of a Certificate Owner
that is an individual, such Certificate Owner is not present in the United
States for 183 days or more during the taxable year in which such sale, exchange
or redemption occurs and (iii) in the case of gain representing accrued
interest, the conditions described in the immediately preceding paragraph are
satisfied.
STATE TAXES
The Depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Class A Certificates under the tax
laws of any state. Investors considering an investment in the Class A
Certificates should consult their own tax advisors regarding such tax
consequences.
All investors should consult their own tax advisors regarding the Federal,
state, local or foreign income tax consequences of the purchase, ownership and
disposition of the Certificates.
ERISA CONSIDERATIONS
Any Plan fiduciary which proposes to cause a Plan to acquire any of the
Class A Certificates should consult with its counsel with respect to the
potential consequences under the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and the Code, of the Plan's acquisition and
ownership of such Certificates. See "ERISA CONSIDERATIONS" in the Prospectus.
The U.S. Department of Labor has granted to Bear Stearns & Co. Inc. ("Bear
Stearns") Prohibited Transaction Exemption 90-30 (the "Exemption") which exempts
from the application of the prohibited transaction rules transactions relating
to (1) the acquisition, sale and holding by Plans of certain certificates
representing an undivided interest in certain asset-backed pass-through trusts,
with respect to which Bear Stearns or any of its affiliates is the sole
underwriter or the manager or co-manager of the underwriting syndicate; and (2)
the servicing, operation and management of such asset-backed pass-through
trusts, provided that the general conditions and certain other conditions set
forth in the Exemption are satisfied. The Exemption will apply to the
acquisition, holding and resale of the Class A Certificates 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:
(1) The acquisition of the Class A Certificates by a Plan is on terms
(including the price for such Certificates) that are at least as favorable
to the investing Plan as they would be in an arm's-length transaction with
an unrelated party;
(2) The rights and interests evidenced by the Class A Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the Trust;
(3) The Class A Certificates 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 S&P, Moody's, Duff & Phelps Credit
Rating Co. or Fitch IBCA, Inc.;
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<PAGE> 53
(4) The sum of all payments made to and retained by the Underwriters
in connection with the distribution of the Class A Certificates represents
not more than reasonable compensation for underwriting such Certificates;
the sum of all payments made to and retained by the Seller pursuant to the
sale of the Mortgage Loans to the Trust represents not more than the fair
market value of such Mortgage Loans; the sum of all payments made to and
retained by the Servicer represent not more than reasonable compensation
for the Servicer's services under the Agreement and reimbursement of the
Servicer's reasonable expenses in connection therewith;
(5) The Trustee is not an affiliate of any Underwriter, the Seller,
the Servicer, the Certificate Insurer, any borrower whose obligations under
one or more Mortgage Loans constitute more than 5% of the aggregate
unamortized principal balance of the assets in the Trust, or any of their
respective affiliates (the "Restricted Group"); and
(6) The Plan investing in the Class A Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act of 1933, as amended.
The Underwriters believe that the Exemption will apply to the acquisition
and holding of the Class A Certificates by Plans and that all conditions of the
Exemption other than those within the control of the investors will be met. Any
Plan fiduciary considering whether to purchase any Class A Certificates on
behalf of a Plan should consult with its counsel regarding the applicability of
the fiduciary responsibility and prohibited transaction provisions of ERISA and
the Code to such investment. Among other things, before purchasing any Class A
Certificates, a fiduciary of a Plan subject to the fiduciary responsibility
provisions of ERISA or an employee benefit plan subject to the prohibited
transaction provisions of the Code should make its own determination as to the
availability of the exemptive relief provided in the Exemption, and also
consider the availability of any other prohibited transaction exemptions.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the Class A Certificates will
be rated in the highest rating category of the Rating Agencies, the Class A
Certificates will not constitute "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"), because not all
of the Mortgages securing the Mortgage Loans are first mortgages. Accordingly,
many institutions with legal authority to invest in comparably rated securities
based on first mortgage loans may not be legally authorized to invest in the
Class A Certificates, which because they evidence interests in a pool that
includes junior mortgage loans are not "mortgage related securities" under
SMMEA. See "LEGAL INVESTMENT" in the Prospectus.
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<PAGE> 54
PLAN OF DISTRIBUTION
The Depositor has been advised by Bear, Stearns & Co. Inc. that it
presently intends to make a market in the Class A Certificates and by McDonald
Investments (successor by merger to Key Capital Markets, Inc., as described
below) that it may make a market in the Class A Certificates; however, they 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 Class A
Certificates will develop.
The Depositor is an affiliate of Bear, Stearns & Co. Inc.
McDonald Investments is a member of the New York Stock Exchange, Inc., and
is an affiliate of the Seller and the Servicer.
After the initial distribution of the Class A Certificates by Bear, Stearns
& Co. Inc. and the former Key Capital Markets, Inc. (the "Underwriters"), the
Prospectus and this Prospectus Supplement may be used by McDonald Investments in
connection with market making transactions in the Class A Certificates. McDonald
Investments may act as principal or agent in such transactions. Such
transactions will be at prices related to prevailing market prices at the time
of sale.
Pursuant to an Agreement and Plan of Merger dated as of June 15, 1998
between KeyCorp and McDonald & Company Investments, Inc. ("McDonald"), a
full-service investment banking and securities brokerage company headquartered
in Cleveland, Ohio, on October 23, 1998, McDonald was merged with and into
KeyCorp. On November 9, 1998, the merger of Key Capital Markets, Inc., a
wholly-owned broker-dealer subsidiary of KeyCorp, into McDonald & Company
Securities, Inc. (a wholly-owned subsidiary of the former McDonald) was
completed and the surviving entity was renamed McDonald Investments Inc., A
KeyCorp Company. McDonald Investments may engage in market making transactions
as described above.
EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1997 and December 31, 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 into 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.
LEGAL MATTERS
Certain legal matters with respect to the Class A Certificates will be
passed upon for the Depositor by Brown & Wood LLP, New York, New York and for
the Underwriters by Brown & Wood LLP, New York, New York. Certain legal matters
will be passed upon for the Seller by Stroock & Stroock & Lavan LLP, New York,
New York.
RATINGS
It is a condition to the issuance of the Class A-1 Certificates that they
receive ratings of "AAA" by S&P and "Aaa" by Moody's. It is a condition to the
issuance of the Class A-2 Certificates that they receive ratings of "AAAr" by
S&P and "Aaa" by Moody's.
A securities rating addresses the likelihood of the receipt by Class A
Certificateholders of distributions on the Mortgage Loans. The rating takes into
consideration the characteristics of the Mortgage Loans and the structural,
legal and tax aspects associated with the Class A Certificates. The ratings on
the Class A Certificates do not, however, constitute statements regarding the
likelihood or frequency of prepayments on the Mortgage Loans or the possibility
that Class A Certificateholders might realize a lower than anticipated yield.
The ratings assigned to the Class A 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
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the ratings initially assigned to the Class A Certificates may result in a
reduction of one or more of the ratings assigned to the Class A Certificates.
The "r" of the "AAAr" rating of the Class A-2 Certificates by S&P is
attached to highlight the derivative, hybrid and certain other obligations that
S&P believes may experience high volatility or high variability in expected
returns due to non-credit risks. The absence of an "r" symbol should not be
taken as an indication that an obligation will exhibit no volatility or
variability in total return.
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.
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INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERMS PAGE
- ----- ----
<S> <C>
Adjusted Net Funds Cap...................................... S-7, S-39
Agreement................................................... S-4
ARMs........................................................ S-20
Available Funds............................................. S-38
Balloon Loans............................................... S-6, S-14, S-23
Balloon Payment............................................. S-6, S-23
Bear Stearns................................................ S-51, S-52
Beneficial Owner............................................ S-32
BIF......................................................... S-37
Book-Entry Certificates..................................... S-32
Business Day................................................ S-16
Cede........................................................ S-6
Cedel....................................................... S-6
Cedel Participants.......................................... S-33
Certificate Index........................................... S-7, S-39
Certificate Register........................................ S-38
Certificate Registrar....................................... S-38
Certificate Insurer......................................... S-2, S-11
Certificate Owners.......................................... S-6, S-32
Certificate Rate............................................ S-7, S-39, S-40
Certificateholder........................................... S-31, S-32
Certificates................................................ Cover, S-4
Champion.................................................... S-18
Chase....................................................... S-6
Citibank.................................................... S-6
Civil Relief Act............................................ S-12
Class....................................................... Cover
Class A Certificateholder................................... S-50
Class A Certificates........................................ Cover, S-4
Class Monthly Interest Distributable Amount................. S-40
Class A-1 Monthly Principal Distributable Amount............ S-8, S-40
Class A-1 Certificates...................................... S-31
Class A-1 Formula Rate...................................... S-7, S-39
Class A-1 Principal Balance................................. S-5, S-31
Class A-1 Principal Distribution............................ S-8, S-40
Class A-1 Principal Shortfall Amount........................ S-9, S-41
Class A-2 Certificates...................................... S-31
Class Interest Carryover Shortfall.......................... S-8, S-40
Class Interest Distribution................................. S-8, S-40
</TABLE>
S-56
<PAGE> 57
<TABLE>
<CAPTION>
TERMS PAGE
- ----- ----
<S> <C>
Class Monthly Interest Distributable Amount................. S-8, S-40
Class R Certificates........................................ Cover, S-5
CLTV........................................................ S-25
Closing Date................................................ Cover
CMAC........................................................ S-17
Code........................................................ S-49
Collection Account.......................................... S-4, S-36
Combined Loan-to-Value Ratio................................ S-5
Cooperative................................................. S-33
CPR......................................................... S-28, S-49
Cut-Off Date................................................ S-4
Cut-Off Date Pool Principal Balance......................... S-5, S-23
Cut-Off Date Principal Balance.............................. S-4
Debt Service Reduction...................................... S-12, S-44
Defective Mortgage Loans.................................... S-36
Definitive Certificate...................................... S-32
Depositor................................................... S-2, S-4, S-6
Determination Date.......................................... S-11
Distributable Excess Spread................................. S-9, S-40
Distribution Account........................................ S-4, S-37
Distribution Date........................................... S-2, S-8
DTC......................................................... S-6, S-32
Due Period.................................................. S-9, S-41
Eligible Account............................................ S-37
Eligible Substitute Mortgage Loan........................... S-36
ERISA....................................................... S-13, S-51
Euroclear................................................... S-6
Euroclear Operator.......................................... S-33
Euroclear Participants...................................... S-33
European Depositaries....................................... S-6, S-32
Events of Default........................................... S-46
Excess Spread............................................... S-9, S-41
Exemption................................................... S-51
Financial Intermediary...................................... S-32
First Liens................................................. S-15
Fixed Rate Certificates..................................... Cover, S-4
Foreign Investors........................................... S-50
Friendly Reminder Letter.................................... S-21
GAAP........................................................ S-17
Global Securities........................................... A-I-1
Guaranteed Principal Amount................................. S-10, S-41
</TABLE>
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<PAGE> 58
<TABLE>
<CAPTION>
TERMS PAGE
- ----- ----
<S> <C>
Holdings.................................................... S-14
Initial Subsidiary REMIC.................................... S-12
Insolvency Event............................................ S-46
Insurance Agreement......................................... S-41
Insurer Default............................................. S-41
Interest Period............................................. S-7, S-40
Key Bank USA................................................ S-18
KeyCorp..................................................... S-18
LIBOR Business Day.......................................... S-39
LIBOR Determination Date.................................... S-39
Liquidated Mortgage Loan.................................... S-9, S-41
Loan Rates.................................................. S-5, S-23
Master REMIC................................................ S-12
MBIA........................................................ S-16
Monthly Advance............................................. S-11, S-37
Moody's..................................................... S-13, S-18
Mortgage Loan Schedule...................................... S-35
Mortgage Loans.............................................. S-2, S-4
Mortgage Notes.............................................. S-23
Mortgage Pool............................................... S-2, S-4
Mortgaged Properties........................................ S-4
Net Simple Interest Shortfall............................... S-15
Net Funds Cap............................................... S-7, S-39
Net Losses.................................................. S-23
New Regulations............................................. S-50
Nonrecoverable Advance...................................... S-38
Notional Principal Balance.................................. Cover, S-5, S-31
OID......................................................... S-49
Percentage Interest......................................... S-31
Plan........................................................ S-13
Policy...................................................... S-2, S-4, S-31
Pool Principal Balance...................................... S-4
Pre-foreclosure Letter...................................... S-21
Prepayment Assumption....................................... S-28
Prepayment Interest Shortfall............................... S-12, S-45
Principal Balance........................................... S-4
Principal Remittance Amount................................. S-41
Purchase Agreement.......................................... S-48
Purchase Price.............................................. S-35
Record Date................................................. S-7
Reference Bank Rate......................................... S-39
</TABLE>
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<PAGE> 59
<TABLE>
<CAPTION>
TERMS PAGE
- ----- ----
<S> <C>
Regular Certificates........................................ S-12
Related Documents........................................... S-35
Relevant Depositary......................................... S-32
REMIC....................................................... S-2, S-12
Restricted Group............................................ S-52
Rules....................................................... S-32
SAP......................................................... S-17
S&P......................................................... S-13, S-18
SAIF........................................................ S-37
Seller...................................................... S-2, S-4, S-6, S-18, S-48
Servicer.................................................... S-2, S-4, S-6, S-18
Servicing Advance........................................... S-37
Servicing Fee............................................... S-11
Servicing Fee Rate.......................................... S-11, S-44
Simple Interest Loans....................................... S-15
SMMEA....................................................... S-13, S-52
Subsidiary REMICs........................................... S-12
Substitution Adjustment..................................... S-36
Support Agreement........................................... S-37
Tax Counsel................................................. S-49
Telerate Page 3750.......................................... S-39
Terms and Conditions........................................ S-34
Trigger Event............................................... S-46
Trust....................................................... S-2, S-4
Trustee..................................................... S-2, S-4
Underwriting Agreement...................................... S-52
Underwriters................................................ S-52
U.S. Person................................................. A-I-3
Variable Rate Certificates.................................. Cover, S-4
weighted average life....................................... S-28
</TABLE>
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<PAGE> 60
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Champion Home
Equity Loan Asset-Backed Certificates, Series 1998-1 (the "Global Securities")
will be available only in book-entry form. Investors in the Global Securities
may hold such Global Securities through any of DTC, Cedel or Euroclear. The
Global Securities will be tradeable as home market instruments in both the
European and U.S. domestic markets. Initial settlement and all secondary trades
will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior Home Equity Loan Asset-Backed
Certificates issues.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior Home Equity Loan Asset-Backed
Certificates issues. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior Home
Equity Loan Asset-Backed Certificates issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and Cedel or Euroclear purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a Cedel Participant or a Euroclear Participant, the purchaser will
send instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. Cedel or Euroclear
will instruct the respective Depositary, as the case may be, to receive the
Global Securities against payment. Payment will include interest accrued on the
Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of
A-I-1
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either the actual number of days in such accrual period and a year assumed to
consist of 360 days or a 360-day year of 12 30-day months as applicable to the
related class of Global Securities. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. Payment will then be made by the respective Depositary of
the DTC Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Cedel Participant's or Euroclear Participant's account.
The securities credit will appear the next day (European time) and the cash debt
will be back-valued to, and the interest on the Global Securities will accrue
from, the value date (which would be the preceding day when settlement occurred
in New York). If settlement is not completed on the intended value date (i.e.,
the trade fails), the Cedel or Euroclear cash debt will be valued instead as of
the actual settlement date.
Cedel Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each Cedel Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of Cedel Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to Cedel or Euroclear through a Cedel Participant or Euroclear Participant at
least one business day prior to settlement. In these cases Cedel or Euroclear
will instruct the respective Depositary, as appropriate, to deliver the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of either the
actual number of days in such accrual period and a year assumed to consist of
360 days or a 360-day year of 12 30-day months as applicable to the related
class of Global Securities. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. The payment will then be reflected in the account of the Cedel
Participant or Euroclear Participant the following day, and receipt of the cash
proceeds in the Cedel Participant's or Euroclear Participant's account would be
back-valued to the value date (which would be the preceding day, when settlement
occurred in New York). Should the Cedel Participant or Euroclear Participant
have a line of credit with its respective clearing system and elect to be in
debt in anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft incurred over that one-day period.
If settlement is not completed on the intended value date (i.e., the trade
fails), receipt of the cash proceeds in the Cedel Participant's or Euroclear
Participant's account would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades would automatically fail
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on the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedel or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the Cedel Participant
or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons that are Certificate Owners residing in a country
that has a tax treaty with the United States can obtain an exemption or reduced
tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Certificate Owners
or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof, (iii) an estate the income
of which is includible in gross income for United States tax purposes,
regardless of its source, or (iv) a trust if a court within the United States is
able to exercise primary supervision over the administration of the trust and
one or more United States trustees have authority to control all substantial
decisions of the trust. This summary does not deal with all aspects of U.S.
Federal income tax withholding that may be relevant to foreign holders of the
Global Securities or with the application of Treasury regulations relating to
tax documentation requirements that are generally effective with respect to
payments after December 31, 1999. Investors are advised to consult their own tax
advisors for specific tax advice concerning their holding and disposing of the
Global Securities.
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PROSPECTUS
BEAR STEARNS ASSET BACKED SECURITIES, INC.
(DEPOSITOR)
------------------------------
Bear Stearns Asset Backed Securities, Inc. (the "Depositor") may offer from
time to time under this Prospectus and related Prospectus Supplements the
Asset-Backed Notes (the "Notes") and the Asset-Backed Certificates (the
"Certificates" and, together with the Notes, the "Securities") which may be sold
from time to time in one or more series (each, a "Series").
As specified in the related Prospectus Supplement, the Certificates of a
Series will evidence undivided interests in certain assets deposited into a
trust (each, a "Trust Fund") by the Depositor pursuant to a Pooling and Service
Agreement or a Trust Agreement, as described herein. As specified in the related
Prospectus Supplement, the Notes of a Series will be issued and secured pursuant
to an Indenture and will represent indebtedness of the related Trust Fund. The
Trust Fund for a Series of Securities will include assets purchased from the
seller or sellers specified in the related Prospectus Supplement (the "Seller")
composed of (a) Primary Assets, which may include one or more pools of (i)
closed-end home equity loans (the "Mortgage Loans"), secured by mortgages on
one- to four-family residential or mixed-use properties, (ii) home improvement
installment sales contracts and installment loan agreements (the "Home
Improvement Contracts") which are either unsecured or secured by mortgages on
one- to four-family residential or mixed-use properties, or by purchase money
security interests in the home improvements financed thereby (the "Home
Improvements") and (iii) securities backed or secured by Mortgage Loans and/or
Home Improvement Contracts, (b) all monies due thereunder net, if and as
provided in the related Prospectus Supplement, of certain amounts payable to the
servicer of the Mortgage Loans and/or Home Improvement Contracts (collectively,
the "Loans"), which servicer may also be the Seller, specified in the related
Prospectus Supplement (the "Servicer"), (c) if specified in the related
Prospectus Supplement, funds on deposit in one or more pre-funding amounts
and/or capitalized interest accounts and (d) reserve funds, letters of credit,
surety bonds, insurance policies or other forms of credit support as described
herein and in the related Prospectus Supplement. The amount initially deposited
in a pre-funding account for a Series of Securities will not exceed fifty
percent of the aggregate principal amount of such series of Securities.
Each Series of Securities will be issued in one or more classes (each, a
"Class"). Interest on and principal of the Securities of a Series will be
payable on each Distribution Date specified in the related Prospectus
Supplement, at the times, at the rates, in the amounts and in the order of
priority set forth in the related Prospectus Supplement.
(cover continued on next page)
------------------------------
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF, AND CERTIFICATES OF A
SERIES EVIDENCE BENEFICIAL INTERESTS IN, THE RELATED TRUST FUND ONLY AND ARE NOT
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR BY THE DEPOSITOR, THE SELLER, THE
TRUSTEE, THE SERVICER OR BY ANY OF THEIR RESPECTIVE AFFILIATES OR, UNLESS
OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT, BY ANY OTHER PERSON OR
ENTITY. THE DEPOSITOR'S ONLY OBLIGATIONS WITH RESPECT TO ANY SERIES OF
SECURITIES WILL BE PURSUANT TO CERTAIN REPRESENTATIONS AND WARRANTIES SET FORTH
IN THE RELATED AGREEMENT AS DESCRIBED HEREIN OR IN THE RELATED PROSPECTUS
SUPPLEMENT.
SEE "RISK FACTORS" ON PAGE 15 FOR CERTAIN FACTORS TO BE CONSIDERED IN
PURCHASING THE SECURITIES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE
PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------------
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.
SEPTEMBER 24, 1998
<PAGE> 64
(Continued from previous page)
If a Series includes multiple Classes, such Classes may vary with respect
to the amount, percentage and timing of distributions of principal, interest or
both and one or more Classes may be subordinated to other Classes with respect
to distributions of principal, interest or both as described herein and in the
related Prospectus Supplement. If so specified in the related Prospectus
Supplement, the Primary Assets and other assets comprising the Trust Fund may be
divided into one or more Asset Groups and each Class of the related Series will
evidence beneficial ownership of the corresponding Asset Group, as applicable.
The rate of reduction of the aggregate principal balance of each Class of a
Series may depend principally upon the rate of payment (including prepayments)
with respect to the Loans or Underlying Loans relating to the Private
Securities, as applicable. A rate of prepayment lower or higher than anticipated
will affect the yield on the Securities of a Series in the manner described
herein and in the related Prospectus Supplement. Under certain limited
circumstances described herein and in the related Prospectus Supplement, a
Series of Securities may be subject to termination or redemption under the
circumstances described herein and in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, an election may be made
to treat certain assets comprising the Trust Fund for a Series as a "real estate
mortgage investment conduit" (a "REMIC") for federal income tax purposes. See
"CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" herein.
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<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 securities other than the Securities offered
hereby and thereby nor an offer of the Securities to any person in any state or
other jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus at any time does not imply that information herein is correct as of
any time subsequent to its date.
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<PAGE> 66
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 the related Prospectus Supplement and 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 the related Prospectus
Supplement and 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 "Notional Amount" set forth in the
related Prospectus Supplement which is used
solely for convenience in expressing the
calculation of interest and for certain other
purposes and does not represent the right to
receive any distributions allocable to
principal. Principal Only Securities may not be
entitled to receive any interest payments or
may be entitled to receive only nominal
interest payments. Interest payable on the
Securities of a Series on a Distribution Date
will include all interest accrued during the
period specified in
5
<PAGE> 68
the related Prospectus Supplement. See
"DESCRIPTION OF THE SECURITIES -- Payments of
Interest."
Principal Payments............ All payments of principal of a Series of
Securities will be made in an aggregate amount
determined as set forth in the related
Prospectus Supplement and will be paid at the
times and will be allocated among the Classes
of such Series in the order and amounts, and
will be applied either on a pro rata or a
random lot basis among all Securities of any
such Class, all as specified in the related
Prospectus Supplement.
Final Scheduled Distribution
Date of the Securities........ The Final Scheduled Distribution Date with
respect to each Class of Notes is the date no
later than which principal thereof will be
fully paid and with respect to each Class of
Certificates is the date after which no
Certificates of such Class are expected to
remain outstanding, in each case calculated on
the basis of the assumptions applicable to such
Series described in the related Prospectus
Supplement. The Final Scheduled Distribution
Date of a Class may equal the maturity date of
the Primary Asset in the related Trust Fund
which has the latest stated maturity or will be
determined as described herein and in the
related Prospectus Supplement.
The actual final Distribution Date of the
Securities of a Series will depend primarily
upon the rate of payment (including
prepayments, liquidations due to default, the
receipt of proceeds from casualty insurance
policies and repurchases) of the Loans or
Underlying Loans relating to the Private
Securities, as applicable, in the related Trust
Fund. Unless otherwise specified in the related
Prospectus Supplement, the actual final
Distribution Date of any Security is likely to
occur earlier and may occur substantially
earlier or may occur later than its Final
Scheduled Distribution Date as a result of the
application of prepayments to the reduction of
the principal balances of the Securities and as
a result of defaults on the Primary Assets. The
rate of payments on the Loans or Underlying
Loans relating to the Private Securities, as
applicable, in the Trust Fund for a Series will
depend on a variety of factors, including
certain characteristics of such Loans or
Underlying Loans, as applicable, and the
prevailing level of interest rates from time to
time, as well as on a variety of economic,
demographic, tax, legal, social and other
factors. No assurance can be given as to the
actual prepayment experience with respect to a
Series. See "RISK FACTORS -- Yield May Vary"
and "DESCRIPTION OF THE SECURITIES -- Weighted
Average Life of the Securities" herein.
Optional Termination.......... One or more Classes of Securities of any Series
may be redeemed or repurchased in whole or in
part, at the Depositor's or the Servicer's
option, at such time and under the
circumstances specified in the related
Prospectus Supplement, at the price set forth
therein. If so specified in the related
Prospectus Supplement for a Series of
Securities, the Depositor, the Servicer, or
such other entity that is specified in the
related Prospectus Supplement, may, at its
option, cause an early termination of the
related Trust Fund by repurchasing all of the
Primary Assets remaining in the Trust Fund on
or after a specified date, or on or after such
time as the aggregate principal
6
<PAGE> 69
balance of the Securities of the Series or the
Primary Assets relating to such Series, as
specified in the related Prospectus Supplement,
is less than the amount or percentage specified
in the related Prospectus Supplement. See
"DESCRIPTION OF THE SECURITIES -- Optional
Redemption, Purchase or Termination."
In addition, the Prospectus Supplement may
provide other circumstances under which Holders
of Securities of a Series could be fully paid
significantly earlier than would otherwise be
the case if payments or distributions were
solely based on the activity of the related
Primary Assets.
The Trust Fund................ The Trust Fund for a Series of Securities will
consist of one or more of the assets described
below, as described in the related Prospectus
Supplement.
A. Primary Assets.......... The Primary Assets for a Series may consist of
any combination of the following assets, to the
extent and as specified in the related
Prospectus Supplement. The Primary Assets will
be purchased from the Seller or may be
purchased by the Depositor in the open market
or in privately negotiated transactions,
including transactions with entities affiliated
with the Depositor.
(1) Loans................ Primary Assets for a Series will consist, in
whole or in part, of Loans. Some Loans may be
delinquent or non-performing as specified in
the related Prospectus Supplement. Loans may be
originated by or acquired from an affiliate of
the Depositor and an affiliate of the Depositor
may be an obligor with respect to any such
Loan. The Loans will be conventional contracts
or contracts insured by the Federal Housing
Administration ("FHA") or partially guaranteed
by the Veterans Administration ("VA"). See "The
Trust Funds -- The Loans" for a discussion of
such guarantees. To the extent provided in the
related Prospectus Supplement, additional Loans
may be periodically added to the Trust Fund, or
may be removed from time to time if certain
asset value tests are met, as described in the
related Prospectus Supplement.
The "Loans" for a Series will consist of (i)
closed-end home equity loans (the "Mortgage
Loans") and (ii) home improvement installment
sales contracts and installment loan agreements
(the "Home Improvement Contracts"). The
Mortgage Loans and the Home Improvement
Contracts are collectively referred to herein
as the "Loans." Loans may, as specified in the
related Prospectus Supplement, have various
payment characteristics, including balloon or
other irregular 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
7
<PAGE> 70
collectively referred to herein as the
"Properties." The related Prospectus Supplement
will describe certain characteristics of the
Loans for a Series, including, without
limitation, and to the extent relevant: (a) the
aggregate unpaid principal balance of the Loans
(or the aggregate unpaid principal balance
included in the Trust Fund for the related
Series); (b) the range and weighted average
Loan Rate on the Loans and in the case of
adjustable rate Loans, the range and weighted
average of the Current Loan Rates and the
Lifetime Rate Caps, if any; (c) the range and
the average outstanding principal balance of
the Loans; (d) the weighted average original
and remaining term-to-stated maturity of the
Loans and the range of original and remaining
terms-to-stated maturity, if applicable; (e)
the range and Combined Loan-to-Value Ratios or
Loan-to-Value Ratios, as applicable, of the
Loans, computed in the manner described in the
related Prospectus Supplement; (f) the
percentage (by principal balance as of the
Cut-off Date) of Loans that accrue interest at
adjustable or fixed interest rates; (g) any
enhancement relating to the Loans; (h) the
percentage (by principal balance as of the
Cut-off Date) of Loans that are secured by
Mortgaged Properties, Home Improvements or are
unsecured; (i) the geographic distribution of
any Mortgaged Properties securing the Loans;
(j) the use and type of each Mortgaged Property
securing a Loan; (k) the lien priority of the
Loans; and (l) the delinquency status and year
of origination of the Loans.
(2) Private Securities... Primary Assets for a Series may consist, in
whole or in part, of Private Securities which
include (a) pass-through certificates
representing beneficial interests in loans of
the type that would otherwise be eligible to be
Loans (the "Underlying Loans") or (b)
collateralized obligations secured by
Underlying Loans. Such pass-through
certificates or collateralized obligations will
have previously been (a) offered and
distributed to the public pursuant to an
effective registration statement or (b)
purchased in a transaction not involving any
public offering from a person who is not an
affiliate of the issuer of such securities at
the time of sale (nor an affiliate thereof at
any time during the three preceding months);
provided a period of three years has elapsed
since the later of the date the securities were
acquired from the issuer or an affiliate
thereof. Although individual 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
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payment features of such Underlying Loans
(i.e., whether they are fixed rate or
adjustable rate and whether they provide for
fixed level payments, negative amortization or
other payment features), (B) the approximate
aggregate principal amount of such Underlying
Loans which are insured or guaranteed by a
governmental entity, (C) the servicing fee or
range of servicing fees with respect to such
Underlying Loans, (D) the minimum and maximum
stated maturities of such Underlying Loans at
origination, (E) the lien priority of such
Underlying Loans, and (F) the delinquency
status and year of origination of such
Underlying Loans; (iii) the maximum original
term-to-stated maturity of the Private
Securities; (iv) the weighted average
term-to-stated maturity of the Private
Securities; (v) the pass-through or certificate
rate or ranges thereof for the Private
Securities; (vi) the sponsor or depositor of
the Private Securities (the "PS Sponsor"), the
servicer of the Private Securities (the "PS
Servicer") and the trustee of the Private
Securities (the "PS Trustee"); (vii) certain
characteristics of enhancement, if any, such as
reserve funds, insurance policies, letters of
credit or guarantees, relating to the Loans
underlying the Private Securities, or to such
Private Securities themselves; (viii) the terms
on which the Underlying Loans may, or are
required to, be repurchased prior to stated
maturity; and (ix) the terms on which
substitute Underlying Loans may be delivered to
replace those initially deposited with the PS
Trustee. See "THE TRUST FUNDS -- Additional
Information" herein.
B. Collection and
Distribution Accounts... Unless otherwise provided in the related
Prospectus Supplement, all payments on or with
respect to the Primary Assets for a Series will
be remitted directly to an account (the
"Collection Account") to be established for
such Series with the Trustee or the Servicer,
in the name of the Trustee. Unless otherwise
provided in the related Prospectus Supplement,
the Trustee shall be required to apply a
portion of the amount in the Collection
Account, together with reinvestment earnings
from eligible investments specified in the
related Prospectus Supplement, to the payment
of certain amounts payable to the Servicer
under the related Agreement and any other
person specified in the Prospectus Supplement,
and to deposit a portion of the amount in the
Collection Account into a separate account (the
"Distribution Account") to be established for
such Series, each in the manner and at the
times established in the related Prospectus
Supplement. All amounts deposited in such
Distribution Account will be available, unless
otherwise specified in the related Prospectus
Supplement, for (i) application to the payment
of principal of and interest on such Series of
Securities on the next Distribution Date, (ii)
the making of adequate provision for future
payments on certain Classes of Securities and
(iii) any other purpose specified in the
related Prospectus Supplement. After applying
the funds in the Collection Account as
described above, any funds remaining in the
Collection Account may be paid over to the
Servicer, the Depositor, any provider of
Enhancement with respect to such Series (an
"Enhancer") or any other person entitled
thereto in the manner and at the times
established in the related Prospectus
Supplement.
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C. Pre-Funding and
Capitalized Interest
Accounts................ If specified in the related Prospectus
Supplement, a Trust Fund will include one or
more segregated trust accounts (each, a
"Pre-Funding Account") established and
maintained with the Trustee for the related
Series. If so specified, on the closing date
for such Series, a portion of the proceeds of
the sale of the Securities of such Series (such
amount, the "Pre-Funded Amount") will be
deposited in the Pre-Funding Account and may be
used to purchase additional Primary Assets
during the period of time, not to exceed six
months, specified in the related Prospectus
Supplement (the "Pre-Funding Period"). The
Primary Assets to be so purchased will be
required to have certain characteristics
specified in the related Prospectus Supplement.
If any Pre-Funded Amount remains on deposit in
the Pre-Funding Account at the end of the
Pre-Funding Period, such amount will be applied
in the manner specified in the related
Prospectus Supplement to prepay the Notes
and/or the Certificates of the applicable
Series. The amount initially deposited in a
pre-funding account for a Series of Securities
will not exceed fifty percent of the aggregate
principal amount of such Series of Securities.
If a Pre-Funding Account is established, one or
more segregated trust accounts (each, a
"Capitalized Interest Account") may be
established and maintained with the Trustee for
the related Series. On the closing date for
such Series, a portion of the proceeds of the
sale of the Securities of such Series will be
deposited in the Capitalized Interest Account
and used to fund the excess, if any, of (x) the
sum of (i) the amount of interest accrued on
the Securities of such Series and (ii) if
specified in the related Prospectus Supplement,
certain fees or expenses during the Pre-Funding
Period such as trustee fees and credit
enhancement fees, over (y) the amount of
interest available therefor from the Primary
Assets in the Trust Fund. Any amounts on
deposit in the Capitalized Interest Account at
the end of the Pre-Funding Period that are not
necessary for such purposes will be distributed
to the person specified in the related
Prospectus Supplement.
Enhancement................... If stated in the Prospectus Supplement relating
to a Series, the Depositor will obtain an
irrevocable letter of credit, surety bond,
certificate insurance policy, insurance policy
or other form of credit support (collectively,
"Enhancement") in favor of the Trustee on
behalf of the Holders of such Series and any
other person specified in such Prospectus
Supplement from an institution acceptable to
the rating agency or agencies identified in the
related Prospectus Supplement as rating such
Series of Securities (collectively, the "Rating
Agency") for the purposes specified in such
Prospectus Supplement. The Enhancement will
support the payments on the Securities and may
be used for other purposes, to the extent and
under the conditions specified in such
Prospectus Supplement. See "ENHANCEMENT."
Enhancement for a Series may include one or
more of the following types of Enhancement, or
such other type of Enhancement specified in the
related Prospectus Supplement.
A. Subordinate
Securities.............. If stated in the related Prospectus Supplement,
Enhancement for a Series may consist of one or
more Classes of Subordinate Securities.
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The rights of Holders of such Subordinate
Securities to receive distributions on any
Distribution Date will be subordinate in right
and priority to the rights of holders of Senior
Securities of the Series, but only to the
extent described in the related Prospectus
Supplement.
B. Insurance............... If stated in the related Prospectus Supplement,
Enhancement for a Series may consist of special
hazard insurance policies, bankruptcy bonds and
other types of insurance supporting payments on
the Securities.
C. Reserve Funds........... If stated in the Prospectus Supplement, the
Depositor may deposit cash, a letter or letters
of credit, short-term investments, or other
instruments acceptable to the Rating Agency in
one or more reserve funds to be established in
the name of the Trustee (each a "Reserve
Fund"), which will be used, as specified in
such Prospectus Supplement, by the Trustee to
make required payments of principal of or
interest on the Securities of such Series, to
make adequate provision for future payments on
such Securities or for any other purpose
specified in the Agreement, with respect to
such Series, to the extent that funds are not
otherwise available. In the alternative or in
addition to such deposit, a Reserve Fund for a
Series may be funded through application of all
or a portion of the excess cash flow from the
Primary Assets for such Series, to the extent
described in the related Prospectus Supplement.
D. Minimum Principal
Payment Agreement....... If stated in the Prospectus Supplement relating
to a Series of Securities, the Depositor will
enter into a minimum principal payment
agreement (the "Minimum Principal Payment
Agreement") with an entity meeting the criteria
of the Rating Agency, pursuant to which such
entity will provide funds in the event that
aggregate principal payments on the Primary
Assets for such Series are not sufficient to
make certain payments, as provided in the
related Prospectus Supplement. See
"ENHANCEMENT -- Minimum Principal Payment
Agreement."
E. Deposit Agreement....... If stated in the Prospectus Supplement, the
Depositor and the Trustee will enter into a
guaranteed investment contract or an investment
agreement (the "Deposit Agreement") pursuant to
which all or a portion of amounts held in the
Collection Account, the Distribution Account or
in any Reserve Fund will be invested with the
entity specified in such Prospectus Supplement.
The Trustee will be entitled to withdraw
amounts so invested, plus interest at a rate
equal to the Assumed Reinvestment Rate, in the
manner specified in the Prospectus Supplement.
See "ENHANCEMENT -- Deposit Agreement."
Servicing..................... The Servicer will be responsible for servicing,
managing and making collections on the Loans
for a Series. In addition, the Servicer, if so
specified in the related Prospectus Supplement,
will act as custodian and will be responsible
for maintaining custody of the Loans and
related documentation on behalf of the Trustee.
Advances with respect to delinquent payments of
principal or 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
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<PAGE> 74
liquidity only and, unless otherwise specified
in the related Prospectus Supplement,
reimbursable to the Servicer from scheduled
payments of principal and interest, late
collections, or from the proceeds of
liquidation of the related Loans or from other
recoveries relating to such Loans (including
any insurance proceeds or payments from other
credit support). In performing these functions,
the Servicer will exercise the same degree of
skill and care that it customarily exercises
with respect to similar receivables or Loans
owned or serviced by it. Under certain limited
circumstances, the Servicer may resign or be
removed, in which event either the Trustee or a
third-party servicer will be appointed as
successor servicer. The Servicer will receive a
periodic fee as servicing compensation (the
"Servicing Fee") and may, as specified herein
and in the related Prospectus Supplement,
receive certain additional compensation. See
"SERVICING OF LOANS -- Servicing Compensation
and Payment of Expenses" herein.
Federal Income Tax
Considerations
A. Debt Securities and
REMIC Residual
Securities.............. If (i) an election is made to treat all or a
portion of a Trust Fund for a Series as a "real
estate mortgage investment conduit" (a "REMIC")
or (ii) so provided in the related Prospectus
Supplement, a Series of Securities will include
one or more Classes of taxable debt obligations
under the Internal Revenue Code of 1986, as
amended (the "Code"). Stated interest with
respect to such Classes of Securities will be
reported by a Holder in accordance with the
Holder's method of accounting except that, in
the case of Securities constituting "regular
interests" in a REMIC ("Regular Interests"),
such interest will be required to be reported
on the accrual method regardless of a Holder's
usual method of accounting. Securities that are
Compound Interest Securities, Zero Coupon
Securities or Interest Only Securities will,
and certain other Classes of Securities may, be
issued with original issue discount that is not
de minimis. In such cases, the Holder will be
required to include original issue discount in
gross income as it accrues, which may be prior
to the receipt of cash attributable to such
income. If a Security is issued at a premium,
the Holder may be entitled to make an election
to amortize such premium on a constant yield
method.
In the case of a REMIC election, a Class of
Securities may be treated as REMIC "residual
interests" ("Residual Interest"). A Holder of a
Residual Interest will be required to include
in its income its pro rata share of the taxable
income of the REMIC. In certain circumstances,
the Holder of a Residual Interest may have
REMIC taxable income or tax liability
attributable to REMIC taxable income for a
particular period in excess of cash
distributions for such period or have an
after-tax return that is less than the
after-tax return on comparable debt
instruments. In addition, a portion (or, in
some cases, all) of the income from a Residual
Interest (i) may not be subject to offset by
losses from other activities or investments,
(ii) for a Holder that is subject to tax under
the Code on unrelated business taxable income,
may be treated as unrelated business taxable
income and (iii) for a foreign holder, may not
qualify for exemption from or reduction of
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<PAGE> 75
withholding. In addition, (i) Residual
Interests are subject to transfer restrictions
and (ii) certain transfers of Residual
Interests will not be recognized for federal
income tax purposes. Further, individual
holders are subject to limitations on the
deductibility of expenses of the REMIC. See
"CERTAIN FEDERAL INCOME TAX CONSIDERATIONS."
B. Non-REMIC Pass-Through
Securities.............. If so specified in the related Prospectus
Supplement, the Trust Fund for a Series will be
treated as a grantor trust and will not be
classified as an association taxable as a
corporation for federal income tax purposes and
Holders of Securities of such Series
("Pass-Through Securities") will be treated as
owning directly rights to receive certain
payments of interest or principal, or both on
the Primary Assets held in the Trust Fund for
such Series. All income with respect to a
Stripped Security (as defined herein) will be
accounted for as original issue discount and,
unless otherwise specified in the related
Prospectus Supplement, will be reported by the
Trustee on an accrual basis, which may be prior
to the receipt of cash associated with such
income.
C. Owner Trust
Securities.............. If so specified in the Prospectus Supplement,
the Trust Fund will be treated as a partnership
for purposes of federal and state income tax.
Each Noteholder, by the acceptance of a Note of
a given Series, will agree to treat such Note
as indebtedness, and each Certificateholder, by
the acceptance of a Certificate of a given
Series, will agree to treat the related Trust
as a partnership in which such
Certificateholder is a partner for federal
income and state tax purposes. Alternative
characterizations of such Trust and such
Certificates are possible, but would not result
in materially adverse tax consequences to
Certificateholders. See "CERTAIN FEDERAL INCOME
TAX CONSIDERATIONS."
ERISA Considerations.......... A fiduciary of any employee benefit plan or
other retirement arrangement subject to the
Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or Section 4975 of
the Code should carefully review with its own
legal advisors whether the purchase or holding
of Securities will constitute a prohibited
transaction or cause the assets of the Trust
Fund to be considered "plan assets," thereby
subjecting operation of the Trust Fund to the
prohibited transaction rules and fiduciary
investment standards of ERISA, unless some
exception or exemption is applicable.
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
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<PAGE> 76
obtain funds to acquire such Primary Assets,
(iii) to establish any Reserve Funds described
in the related Prospectus Supplement and (iv)
to pay costs of structuring and issuing such
Securities, including the costs of obtaining
Enhancement, if any. If so specified in the
related Prospectus Supplement, the purchase of
the Primary Assets for a Series will be
effected by an exchange of Securities with the
Seller of such Primary Assets. See "USE OF
PROCEEDS."
Ratings....................... It will be a requirement for issuance of any
Series that the Securities offered by this
Prospectus and the related Prospectus
Supplement be rated by at least one Rating
Agency in one of its four highest applicable
rating categories. The rating or ratings
applicable to Securities of each Series offered
hereby and by the related Prospectus Supplement
will be as set forth in the related Prospectus
Supplement. A securities rating should be
evaluated independently of similar ratings on
different types of securities. A securities
rating is not a recommendation to buy, hold or
sell securities and does not address the effect
that the rate of prepayments on Loans or
Underlying Loans relating to Private
Securities, as applicable, for a Series may
have on the yield to investors in the
Securities of such Series. See "RISK
FACTORS -- Ratings Are Not Recommendations."
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
NO SECONDARY MARKET
There will be no market for the Securities of any Series prior to the
issuance thereof, and there can be no assurance that a secondary market will
develop or, if it does develop, that it will provide Holders with liquidity of
investment or will continue for the life of the Securities of such Series. The
Underwriter(s) specified in the related Prospectus Supplement expects to make a
secondary market in the Securities, but has no obligation to do so.
PRIMARY ASSETS ARE ONLY SOURCE OF REPAYMENT
The Depositor does not have, nor is it expected to have, any significant
assets. The Securities of a Series will be payable solely from the assets of the
Trust Fund for such Securities. There will be no recourse to the Depositor or
any other person for any default on the Notes or any failure to receive
distributions on the Certificates. Further, unless otherwise stated in the
related Prospectus Supplement, at the times set forth in the related Prospectus
Supplement, certain Primary Assets and/or any balance remaining in the
Collection Account or Distribution Account immediately after making all payments
due on the Securities of such Series and other payments specified in the related
Prospectus Supplement, may be promptly released or remitted to the Depositor,
the Servicer, the Enhancer or any other person entitled thereto and will no
longer be available for making payments to Holders. Consequently, Holders of
Securities of each Series must rely solely upon payments with respect to the
Primary Assets and the other assets constituting the Trust Fund for a Series of
Securities, including, if applicable, any amounts available pursuant to any
Enhancement for such Series, for the payment of principal of and interest on the
Securities of such Series.
Holders of Notes will be required under the Indenture to proceed only
against the Primary Assets and other assets constituting the related Trust Fund
in the case of a default with respect to such Notes and may not proceed against
any assets of the Depositor. There is no assurance that the market value of the
Primary Assets or any other assets for a Series will at any time be equal to or
greater than the aggregate principal amount of the Securities of such Series
then outstanding, plus accrued interest thereon. Moreover, upon an event of
default under the Indenture for a Series of Notes and a sale of the assets in
the Trust Fund or upon a sale of the assets of a Trust Fund for a Series of
Certificates, the Trustee, the Servicer, if any, the Enhancer and any other
service provider specified in the related Prospectus Supplement generally will
be entitled to receive the proceeds of any such sale to the extent of unpaid
fees and other amounts owing to such persons under the related Agreement prior
to distributions to Holders of Securities. Upon any such sale, the proceeds
thereof may be insufficient to pay in full the principal of and interest on the
Securities of such Series.
The only obligations, if any, of the Depositor with respect to the
Securities of any Series will be pursuant to certain representations and
warranties. See "THE AGREEMENTS -- Assignment of Primary Assets" herein. The
Depositor does not have, and is not expected in the future to have, any
significant assets with which to meet any obligation to repurchase Primary
Assets with respect to which there has been a breach of any representation or
warranty. If, for example, the Depositor were required to repurchase a Primary
Asset, its only sources of funds to make such repurchase would be from funds
obtained from the enforcement of a corresponding obligation, if any, on the part
of the originator of the Primary Assets, the Servicer or the Seller, as the case
may be, or from a Reserve Fund established to provide funds for such
repurchases.
LIMITED PROTECTION AGAINST LOSSES
Although any Enhancement is intended to reduce the risk of delinquent
payments or losses to holders of Securities entitled to the benefit thereof, the
amount of such Enhancement will be limited, as set forth in the related
Prospectus Supplement, and will decline and could be depleted under certain
circumstances prior to the payment in full of the related Series of Securities,
and as a result Holders may suffer losses. See "ENHANCEMENT."
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<PAGE> 78
YIELD MAY VARY
The yield to maturity experienced by a Holder of Securities may be affected
by the rate of payment of principal of the Loans or Underlying Loans relating to
the Private Securities, as applicable. The timing of principal payments of the
Securities of a Series will be affected by a number of factors, including the
following: (i) the extent of prepayments of the Loans or Underlying Loans
relating to the Private Securities, as applicable, which prepayments may be
influenced by a variety of factors; (ii) the manner of allocating principal
payments among the Classes of Securities of a Series as specified in the related
Prospectus Supplement; and (iii) the exercise by the party entitled thereto of
any right of optional termination. See "DESCRIPTION OF THE
SECURITIES -- Weighted Average Life of Securities." Prepayments may also result
from repurchases of Loans or Underlying Loans, as applicable, due to material
breaches of the Seller's or the Depositor's warranties.
Interest payable on the Securities of a Series on a Distribution Date will
include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues during the calendar month
prior to a Distribution Date, the effective yield to Holders will be reduced
from the yield that would otherwise be obtainable if interest payable on the
Security were to accrue through the day immediately preceding each Distribution
Date, and the effective yield (at par) to Holders will be less than the
indicated coupon rate. See "DESCRIPTION OF THE SECURITIES -- Payments of
Interest."
PROPERTY VALUES MAY BE INSUFFICIENT
If the Mortgages in a Trust Fund are primarily junior liens subordinate to
the rights of the mortgagee under the related senior mortgage or mortgages, the
proceeds from any liquidation, insurance or condemnation proceedings will be
available to satisfy the outstanding balance of such junior mortgage only to the
extent that the claims of such senior mortgagees have been satisfied in full,
including any related foreclosure costs. In addition, a junior mortgagee may not
foreclose on the Property securing a junior mortgage unless it forecloses
subject to the senior mortgages, in which case it must either pay the entire
amount due on the senior mortgages to the senior mortgagees at or prior to the
foreclosure sale or undertake the obligation to make payments on the senior
mortgages in the event the mortgagor is in default thereunder. The Trust Fund
will not have any source of funds to satisfy the senior mortgages or make
payments due to the senior mortgagees.
There are several factors that could adversely affect the value of
Properties such that the outstanding balance of the related Loan, together with
any senior financing on the Properties, would equal or exceed the value of the
Properties. Among the factors that could adversely affect the value of the
Properties are an overall decline in the residential real estate market in the
areas in which the Properties are located or a decline in the general condition
of the Properties as a result of failure of borrowers to maintain adequately the
Properties or of natural disasters that are not necessarily covered by
insurance, such as earthquakes and floods. Any such decline could extinguish the
value of a junior interest in a Property before having any effect on the related
senior interest therein. If such a decline occurs, the actual rates of
delinquencies, foreclosure and losses on the junior Loans could be higher than
those currently experienced in the mortgage lending industry in general.
PRE-FUNDING MAY ADVERSELY AFFECT INVESTMENT
If a Trust Fund includes a Pre-Funding Account and the principal balance of
additional Loans delivered to the Trust Fund during the Pre-Funding Period is
less than the original Pre-Funded Amount, the Holders of the Securities of the
related Series will receive a prepayment of principal as and to the extent
described in the related Prospectus Supplement. Any such principal prepayment
may adversely affect the yield to maturity of the applicable Securities. Since
prevailing interest rates are subject to fluctuation, there can be no issuance
that investors will be able to reinvest such a prepayment at yields equaling or
exceeding the yields on the related Securities. It is possible that the yield on
any such reinvestment will be lower, and may be significantly lower, than the
yield on the related Securities.
The ability of a Trust Fund to invest in subsequent Loans during the
related Pre-Funding Period will be dependant on the ability of the Seller to
originate or acquire Loans that satisfy the requirements for transfer to the
Trust Fund. The ability of the Seller to originate or acquire such Loans will be
affected by a variety of social and
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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.
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."
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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.
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.
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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 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.
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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
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
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specified in the related Prospectus Supplement is less than the amount or
percentage specified in the related Prospectus Supplement. Notice of such
redemption, purchase or termination must be given by the Depositor or the
Trustee prior to the related date. The redemption, purchase or repurchase price
will be set forth in the related Prospectus Supplement. If specified in the
related Prospectus Supplement, in the event that a REMIC election has been made,
the Trustee shall receive a satisfactory opinion of counsel that the optional
redemption, purchase or termination will be conducted so as to constitute a
"qualified liquidation" under Section 860F of the Code.
In addition, the Prospectus Supplement may provide other circumstances
under which Holders of Securities of a Series could be fully paid significantly
earlier than would otherwise be the case if payments or distributions were
solely based on the activity of the related Primary Assets.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of such
security will be repaid to the investor. Unless otherwise specified in the
related Prospectus Supplement, the weighted average life of the Securities of a
Class will be influenced by the rate at which the amount financed under the
Loans or Underlying Loans relating to the Private Securities, as applicable,
included in the Trust Fund for a Series is paid, which may be in the form of
scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to a
prepayment standard or model. The Prospectus Supplement for a Series of
Securities will describe the prepayment standard or model, if any, used and may
contain tables setting forth the projected weighted average life of each Class
of Securities of such Series and the percentage of the original principal amount
of each Class of Securities of such Series that would be outstanding on
specified Distribution Dates for such Series based on the assumptions stated in
such Prospectus Supplement, including assumptions that prepayments on the Loans
or Underlying Loans relating to the Private Securities, as applicable, included
in the related Trust Fund are made at rates corresponding to various percentages
of the prepayment standard or model specified in such Prospectus Supplement.
There is, however, no assurance that prepayment of the Loans or Underlying
Loans relating to the Private Securities, as applicable, included in the related
Trust Fund will conform to any level of any prepayment standard or model
specified in the related Prospectus Supplement. The rate of principal
prepayments on pools of loans may be influenced by a variety of factors,
including job related factors such as transfers, layoffs or promotions and
personal factors such as divorce, disability or prolonged illness. Economic
conditions, either generally or within a particular geographic area or industry,
also may affect the rate of principal prepayments. Demographic and social
factors may influence the rate of principal prepayments in that some borrowers
have greater financial flexibility to move or refinance than do other borrowers.
The deductibility of mortgage interest payments, servicing decisions and other
factors also affect the rate of principal prepayments. As a result, there can be
no assurance as to the rate or timing of principal prepayments of the Loans or
Underlying Loans either from time to time or over the lives of such Loans or
Underlying Loans.
The rate of prepayments of conventional housing loans and other receivables
has fluctuated significantly in recent years. In general, however, if prevailing
interest rates fall significantly below the interest rates on the Loans or
Underlying Loans relating to the Private Securities, as applicable, for a
Series, such loans are likely to prepay at rates higher than if prevailing
interest rates remain at or above the interest rates borne by such loans. In
this regard, it should be noted that the Loans or Underlying Loans, as
applicable, for a Series may have different interest rates. In addition, the
weighted average life of the Securities may be affected by the varying
maturities of the Loans or Underlying Loans relating to the Private Securities,
as applicable. If any Loans or Underlying Loans relating to the Private
Securities, as applicable, for a Series have actual terms-to-stated maturity of
less than those assumed in calculating the Final Scheduled Distribution Date of
the related Securities, one or more Classes of the Series may be fully paid
prior to their respective Final Scheduled Distribution Date, even in the absence
of prepayments and a reinvestment return higher than the Assumed Reinvestment
Rate.
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THE TRUST FUNDS
GENERAL
The Notes of each Series will be secured by the pledge of the assets of the
related Trust Fund, and the Certificates of each Series will represent interests
in the assets of the related Trust Fund. The Trust Fund of each Series will
include assets purchased from the Seller composed of (i) the Primary Assets,
(ii) amounts available from the reinvestment of payments on such Primary Assets
at the Assumed Reinvestment Rate, if any, specified in the related Prospectus
Supplement, (iii) any Enhancement, (iv) any Property that secured a Loan but
which is acquired by foreclosure or deed in lieu of foreclosure or repossession
and (v) the amount, if any, initially deposited in the Collection Account or
Distribution Account for a Series as specified in the related Prospectus
Supplement.
The Securities will be non-recourse obligations of the related Trust Fund.
The assets of the Trust Fund specified in the related Prospectus Supplement for
a Series of Securities, unless otherwise specified in the related Prospectus
Supplement, will serve as collateral only for that Series of Securities. Holders
of a Series of Notes may only proceed against such collateral securing such
Series of Notes in the case of a default with respect to such Series of Notes
and may not proceed against any assets of the Depositor or the related Trust
Fund not pledged to secure such Notes.
The Primary Assets for a Series will be sold by the Seller to the Depositor
or purchased by the Depositor in the open market or in privately negotiated
transactions, which may include transactions with affiliates and will be
transferred by the Depositor to the Trust Fund. Loans relating to a Series will
be serviced by the Servicer, which may be the Seller, specified in the related
Prospectus Supplement, pursuant to a Pooling and Servicing Agreement, with
respect to a Series of Certificates or a servicing agreement (each, a "Servicing
Agreement") between the Trust Fund and Servicer, with respect to a Series of
Notes.
As used herein, "Agreement" means, with respect to a Series of
Certificates, the Pooling and Servicing Agreement or Trust Agreement, and with
respect to a Series of Notes, the Indenture and the Servicing Agreement, as the
context requires.
If so specified in the related Prospectus Supplement, a Trust Fund relating
to a Series of Securities may be a business trust formed under the laws of the
state specified in the related Prospectus Supplement pursuant to a trust
agreement (each, a "Trust Agreement") between the Depositor and the trustee of
such Trust Fund specified in the related Prospectus Supplement.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or liabilities.
No Trust Fund is expected to engage in any activities other than acquiring,
managing and holding the related Primary Assets and other assets contemplated
herein and in the related Prospectus Supplement and the proceeds thereof,
issuing Securities and making payments and distributions thereon and certain
related activities. No Trust Fund is expected to have any source of capital
other than its assets and any related Enhancement.
Primary Assets included in the Trust Fund for a Series may consist of any
combination of Loans and Private Securities, to the extent and as specified in
the related Prospectus Supplement.
THE LOANS
Mortgage Loans. The Primary Assets for a Series may consist, in whole or
in part, of closed-end home equity loans (the "Mortgage Loans") secured by
mortgages primarily on Single Family Properties which may be subordinated to
other mortgages on the same Mortgaged Property. The Mortgage Loans may have
fixed interest rates or adjustable interest rates and may provide for other
payment characteristics as described below and in the related Prospectus
Supplement.
Unless otherwise described in the related Prospectus Supplement, the full
principal amount of a Mortgage Loan is advanced at origination of the loan and
generally is repayable in equal (or substantially equal) installments of an
amount sufficient to fully amortize such loan at its stated maturity. As more
fully described in
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the related Prospectus Supplement, interest on each Mortgage Loan is calculated
on the basis of the outstanding principal balance of such loan multiplied by the
Loan Rate thereon and further multiplied by a fraction, the numerator of which
is the number of days in the period elapsed since the preceding payment of
interest was made and the denominator is the number of days in the annual period
for which interest accrues on such loan. Unless otherwise described in the
related Prospectus Supplement the original terms to stated maturity of Mortgage
Loans will not exceed 360 months.
The Mortgaged Properties will include Single Family Property (i.e., one- to
four-family residential housing, including Condominium Units and Cooperative
Dwellings) and mixed-use property. Mixed-use properties will consist of
structures of no more than three stories, which include one to four residential
dwelling units and space used for retail, professional or other commercial uses.
Such uses, which will not involve more than 50% of the space in the structure,
may include doctor, dentist or law offices, real estate agencies, boutiques,
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 Mortgage Loans secured by Mortgaged
Properties that are owner-occupied will be disclosed in the related Prospectus
Supplement. Unless otherwise specified in the Prospectus Supplement, the sole
basis for a representation that a given percentage of the Mortgage Loans are
secured by Single Family Property that is owner-occupied will be either (i) the
making of a representation by the Mortgagor at origination of the Mortgage Loan
either that the underlying Mortgaged Property will be used by the Mortgagor for
a period of at least six months every year or that the Mortgagor intends to use
the Mortgaged Property as a primary residence, or (ii) a finding that the
address of the underlying Mortgaged Property is the Mortgagor's mailing address
as reflected in the Servicer's records. To the extent specified in the related
Prospectus Supplement, the Mortgaged Properties may include non-owner occupied
investment properties and vacation and second homes.
Unless otherwise specified in the related Prospectus Supplement, the
initial Combined Loan-to-Value Ratio of a Loan is computed in the manner
described in the related Prospectus Supplement, taking into account the amounts
of any related senior mortgage loans.
Home Improvement Contracts. The Primary Assets for a Series may consist,
in whole or part, of home improvement installment sales contracts and
installment loan agreements (the "Home Improvement Contracts") originated by a
home improvement contractor in the ordinary course of business. As specified in
the related Prospectus Supplement, the Home Improvement Contracts will either be
unsecured or secured by the Mortgages primarily on Single Family Properties
which are generally subordinate to other mortgages on the same Mortgaged
Property or by purchase money security interests in the Home Improvements
financed thereby. Unless otherwise specified in the applicable Prospectus
Supplement, the Home Improvement Contracts will be fully amortizing and may have
fixed interest rates or adjustable interest rates and may provide for other
payment characteristics as described below and in the related Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement, the home
improvements (the "Home Improvements") securing the Home Improvement Contracts
include, but are not limited to, replacement windows, house siding, new roofs,
swimming pools, satellite dishes, kitchen and bathroom remodeling goods and
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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 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.
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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 regulations. Payments
under the guaranty will be equal to the unpaid principal amount of the loan,
interest accrued on the unpaid balance of the loan to the appropriate date of
computation and limited expenses of the mortgagee, but in each case only to the
extent that such amounts have not been recovered through liquidation of the
Mortgaged Property. The amount payable under the guaranty may in no event exceed
the amount of the original guaranty.
The related Prospectus Supplement for each Series will provide information
with respect to the Loans that are Primary Assets as of the Cut-off Date,
including, among other things, and to the extent relevant: (a) the aggregate
unpaid principal balance of the Loans; (b) the range and weighted average Loan
Rate on the Loans, and, in the case of adjustable rate Loans, the range and
weighted average of the current Loan Rates and the Lifetime Rate Caps, if any;
(c) the range and average outstanding principal balance of the Loans; (d) the
weighted average original and remaining term-to-stated maturity of the Loans and
the range of original and remaining terms-to-stated maturity, if applicable; (e)
the range and weighted average of Combined Loan-to-Value Ratios or Loan-to-Value
Ratios for the Loans, as applicable; (f) the percentage (by outstanding
principal balance as of the Cut-off Date) of Loans that accrue interest at
adjustable or fixed interest rates; (g) any special hazard insurance policy or
bankruptcy bond or other enhancement relating to the Loans; (h) the percentage
(by principal balance as of the Cut-off Date) of Loans that are secured by
Mortgaged Properties, Home Improvements or are unsecured; (i) the geographic
distribution of any Mortgaged Properties securing the Loans; (j) the percentage
of Loans (by principal balance as of the Cut-off Date) that are secured by
Single Family Properties, shares relating to Cooperative Dwellings, Condominium
Units, investment property and vacation or second homes; (k) the lien priority
of the Loans; and (l) the delinquency status and year of origination of the
Loans. The related Prospectus Supplement will also specify any other limitations
on the types or characteristics of Loans for a Series.
If information of the nature described above respecting the Loans is not
known to the Depositor at the time the Securities are initially offered,
approximate or more general information of the nature described above will be
provided in the Prospectus Supplement and additional information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related Series and to be filed with the Commission within 15
days after the initial issuance of such Securities.
PRIVATE SECURITIES
General. Primary Assets for a Series may consist, in whole or in part, of
Private Securities which include pass-through certificates representing
beneficial interests in loans of the type that would otherwise be eligible to be
Loans (the "Underlying Loans") or (b) collateralized obligations secured by
Underlying Loans. Such pass-through certificates or collateralized obligations
will have previously been (a) offered and distributed to the public pursuant to
an effective registration statement or (b) purchased in a transaction not
involving any public offering from a person who is not an affiliate of the
issuer of such securities at the time of sale (nor an affiliate thereof at
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any time during the three preceding months); provided a period of three years
elapsed since the later of the date the securities were acquired from the issuer
or an affiliate thereof. Although individual Underlying Loans may be insured or
guaranteed by the United States or an agency or instrumentality thereof, they
need not be, and Private Securities themselves will not be so insured or
guaranteed.
Private Securities will have been issued pursuant to a pooling and
servicing agreement, a trust agreement or similar agreement (a "PS Agreement").
The seller/servicer of the Underlying Loans will have entered into the PS
Agreement with the trustee under such PS Agreement (the "PS Trustee"). The PS
Trustee or its agent, or a custodian, will possess the Underlying Loans.
Underlying Loans will be serviced by a servicer (the "PS Servicer") directly or
by one or more sub-servicers who may be subject to the supervision of the PS
Servicer.
The sponsor of the Private Securities (the "PS Sponsor") will be a
financial institution or other entity engaged generally in the business of
lending; a public agency or instrumentality of a state, local or federal
government; or a limited purpose corporation organized for the purpose of, among
other things, establishing trusts and acquiring and selling loans to such
trusts, and selling beneficial interests in such trusts. If so specified in the
Prospectus Supplement, the PS Sponsor may be an affiliate of the Depositor. The
obligations of the PS Sponsor will generally be limited to certain
representations and warranties with respect to the assets conveyed by it to the
related trust. Unless otherwise specified in the related Prospectus Supplement,
the PS Sponsor will not have guaranteed any of the assets conveyed to the
related trust or any of the Private Securities issued under the PS Agreement.
Additionally, although the Underlying Loans may be guaranteed by an agency or
instrumentality of the United States, the Private Securities themselves will not
be so guaranteed.
Distributions of principal and interest will be made on the Private
Securities on the dates specified in the related Prospectus Supplement. The
Private Securities may be entitled to receive nominal or no principal
distributions or nominal or no interest distributions. Principal and interest
distributions will be made on the Private Securities by the PS Trustee or the PS
Servicer. The PS Sponsor or the PS Servicer may have the right to repurchase the
Underlying Loans after a certain date or under other circumstances specified in
the related Prospectus Supplement.
The Underlying Loans may be fixed rate, level payment, fully amortizing
loans or adjustable rate loans or loans having balloon or other irregular
payment features. Such Underlying Loans will be secured by mortgages on
Mortgaged Properties.
Credit Support Relating to Private Securities. Credit support in the form
of Reserve Funds, subordination of other private securities issued under the PS
Agreement, guarantees, letters of credit, cash collateral accounts, insurance
policies or other types of credit support may be provided with respect to the
Underlying Loans or with respect to the Private Securities themselves. The type,
characteristics and amount of credit support will be a function of certain
characteristics of the Underlying Loans and other factors and will have been
established for the Private Securities on the basis of requirements of the
nationally recognized statistical rating organization that rated the Private
Securities.
Additional Information. The Prospectus Supplement for a Series for which
the Primary Assets include Private Securities will specify (such disclosure may
be on an approximate basis and will be as of the date specified in the related
Prospectus Supplement), to the extent relevant and to the extent such
information is reasonably available to the Depositor and the Depositor
reasonably believes such information to be reliable: (i) the aggregate
approximate principal amount and type of the Private Securities to be included
in the Trust Fund for such Series; (ii) certain characteristics of the
Underlying Loans including (A) the payment features of such Underlying Loans
(i.e., whether they are fixed rate or adjustable rate and whether they provide
for fixed level payments or other payment features), (B) the approximate
aggregate principal balance, if known, of such Underlying Loans insured or
guaranteed by a governmental entity, (C) the servicing fee or range of servicing
fees with respect to the Underlying Loans, (D) the minimum and maximum stated
maturities of such Underlying Loans at origination, (E) the lien priority of
such Underlying Loans, and (F) the delinquency status and year of origination of
such Underlying Loans; (iii) the maximum original term-to-stated maturity of the
Private Securities; (iv) the weighted average term-to-stated maturity of the
Private Securities; (v) the pass-through or certificate rate or ranges thereof
for the Private Securities; (vi) the PS Sponsor, the PS Servicer (if other than
the PS Sponsor) and the PS Trustee for such Private Securities; (vii) certain
characteristics of credit support if any,
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such as Reserve Funds, insurance policies, letters of credit or guarantees
relating to such Loans underlying the Private Securities or to such Private
Securities themselves; (viii) the terms on which Underlying Loans may, or are
required to, be purchased prior to their stated maturity or the stated maturity
of the Private Securities; and (ix) the terms on which Underlying Loans may be
substituted for those originally underlying the Private Securities.
If information of the nature described above representing the Private
Securities is not known to the Depositor at the time the Securities are
initially offered, approximate or more general information of the nature
described above will be provided in the Prospectus Supplement and the additional
information, if available, will be set forth in a Current Report on Form 8-K to
be available to investors on the date of issuance of the related Series and to
be filed with the Commission within 15 days of the initial issuance of such
Securities.
COLLECTION AND DISTRIBUTION ACCOUNTS
A separate Collection Account will be established by the Trustee or the
Servicer, in the name of the Trustee, for each Series of Securities for receipt
of the amount of cash, if any, specified in the related Prospectus Supplement to
be initially deposited therein by the Depositor, all amounts received on or with
respect to the Primary Assets and, unless otherwise specified in the related
Prospectus Supplement, income earned thereon. Certain amounts on deposit in such
Collection Account and certain amounts available pursuant to any Enhancement, as
provided in the related Prospectus Supplement, will be deposited in a related
Distribution Account, which will also be established by the Trustee for each
such Series of Securities, for distribution to the related Holders. Unless
otherwise specified in the related Prospectus Supplement, the Trustee will
invest the funds in the Collection and Distribution Accounts in Eligible
Investments maturing, with certain exceptions, not later, in the case of funds
in the Collection Account, than the day preceding the date such funds are due to
be deposited in the Distribution Account or otherwise distributed and, in the
case of funds in the Distribution Account, than the day preceding the next
Distribution Date for the related Series of Securities. Eligible Investments
include, among other investments, obligations of the United States and certain
agencies thereof, federal funds, certificates of deposit, commercial paper,
demand and time deposits and banker's acceptances, certain repurchase agreements
of United States government securities and certain guaranteed investment
contracts, in each case, acceptable to the Rating Agency.
Notwithstanding any of the foregoing, amounts may be deposited and
withdrawn pursuant to any Deposit Agreement or Minimum Principal Payment
Agreement as specified in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, a Trust Fund will
include one or more segregated trust accounts (each, a "Pre-Funding Account")
established and maintained with the Trustee for the related Series. If so
specified, on the closing date for such Series, a portion of the proceeds of the
sale of the Securities of such Series (such amount, the "Pre-Funded Amount")
will be deposited in the Pre-Funding Account and may be used to purchase
additional Primary Assets during the period of time specified in the related
Prospectus Supplement (the "Pre-Funding Period"). The Primary Assets to be so
purchased will be required to have certain characteristics specified in the
related Prospectus Supplement. If any Pre-Funded Amount remains on deposit in
the Pre-Funding Account at the end of the Pre-Funding Period, such amount will
be applied in the manner specified in the related Prospectus Supplement to
prepay the Notes and/or the Certificates of the applicable Series.
If a Pre-Funding Account is established, one or more segregated trust
accounts (each, a "Capitalized Interest Account") may be established and
maintained with the Trustee for the related Series. On the closing date for such
Series, a portion of the proceeds of the sale of the Securities of such Series
will be deposited in the Capitalized Interest Account and used to fund the
excess, if any, of the sum of (i) the amount of interest accrued on the
Securities of such Series and (ii) if specified in the related Prospectus
Supplement, certain fees or expenses during the Pre-Funding Period, over the
amount of interest available therefor from the Primary Assets in the Trust Fund.
Any amounts on deposit in the Capitalized Interest Account at the end of the
Pre-Funding Period that are not necessary for such purposes will be distributed
to the person specified in the related Prospectus Supplement.
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ENHANCEMENT
If stated in the Prospectus Supplement relating to a Series of Securities,
simultaneously with the Depositor's assignment of the Primary Assets to the
Trustee, the Depositor will obtain an irrevocable letter of credit, surety bond
or insurance policy, issue Subordinate Securities or obtain any other form of
enhancement or combination thereof (collectively, "Enhancement") in favor of the
Trustee on behalf of the Holders of the related Series or designated Classes of
such Series from an institution or by other means acceptable to the Rating
Agency. The Enhancement will support the payment of principal and interest on
the Securities, and may be applied for certain other purposes to the extent and
under the conditions set forth in such Prospectus Supplement. Enhancement for a
Series may include one or more of the following forms, or such other form as may
be specified in the related Prospectus Supplement. If so specified in the
related Prospectus Supplement, any of such Enhancement may be structured so as
to protect against losses relating to more than one Trust Fund, in the manner
described therein.
SUBORDINATE SECURITIES
If specified in the related Prospectus Supplement, Enhancement for a Series
may consist of one or more Classes of Subordinate Securities. The rights of
holders of such Subordinate Securities to receive distributions on any
Distribution Date will be subordinate in right and priority to the rights of
Holders of Senior Securities of the Series, but only to the extent described in
the related Prospectus Supplement.
INSURANCE
If stated in the related Prospectus Supplement, Enhancement for a Series
may consist of special hazard insurance policies, bankruptcy bonds and other
types of insurance relating to the Primary Assets, as described below and in the
related Prospectus Supplement.
Pool Insurance Policy. If so specified in the Prospectus Supplement
relating to a Series of Securities, the Depositor will obtain a pool insurance
policy for the Loans in the related Trust Fund. The pool insurance policy will
cover any loss (subject to the limitations described in a related Prospectus
Supplement) by reason of default, but will not cover the portion of the
principal balance of any Loan that is required to be covered by any primary
mortgage insurance policy. The amount and terms of any such coverage will be set
forth in the related Prospectus Supplement.
Special Hazard Insurance Policy. Although the terms of such policies vary
to some degree, a special hazard insurance policy typically provides that, where
there has been damage to Property securing a defaulted or foreclosed Loan (title
to which has been acquired by the insured) and to the extent such damage is not
covered by the standard hazard insurance policy or any flood insurance policy,
if applicable, required to be maintained with respect to such Property, or in
connection with partial loss resulting from the application of the coinsurance
clause in a standard hazard insurance policy, the special hazard insurer will
pay the lesser of (i) the cost of repair or replacement of such Property or (ii)
upon transfer of such Property to the special hazard insurer, the unpaid
principal balance of such Loan at the time of acquisition of such Property by
foreclosure or deed in lieu of foreclosure, plus accrued interest to the date of
claim settlement and certain expenses incurred by the Servicer with respect to
such Property. If the unpaid principal balance plus accrued interest and certain
expenses is paid by the special hazard insurer, the amount of further coverage
under the special hazard insurance policy will be reduced by such amount less
any net proceeds from the sale of such Property. Any amount paid as the cost of
repair of such Property will reduce coverage by such amount. Special hazard
insurance policies typically do not cover losses occasioned by war, civil
insurrection, certain governmental actions, errors in design, faulty workmanship
or materials (except under certain circumstances), nuclear reaction, flood (if
the mortgaged property is in a federally designated flood area), chemical
contamination and certain other risks.
Restoration of the Property with the proceeds described under (i) above is
expected to satisfy the condition under any pool insurance policy that such
Property be restored before a claim under such pool insurance policy may be
validly presented with respect to the defaulted Loan secured by such Property.
The payment described under (ii) above will render unnecessary presentation of a
claim in respect of such Loan under any pool insurance policy. Therefore, so
long as such pool insurance policy remains in effect, the payment by the special
hazard insurer of the cost of repair or of the unpaid principal balance of the
related Loan plus accrued interest and certain
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expenses will not affect the total insurance proceeds paid to Holders of the
Securities, but will affect the relative amounts of coverage remaining under the
special hazard insurance policy and pool insurance policy.
Bankruptcy Bond. In the event of a bankruptcy of a borrower, the
bankruptcy court may establish the value of the Property securing the related
Loan at an amount less than the then-outstanding principal balance of such Loan.
The amount of the secured debt could be reduced to such value, and the holder of
such Loan thus would become an unsecured creditor to the extent the outstanding
principal balance of such Loan exceeds the value so assigned to the Property by
the bankruptcy court. In addition, certain other modifications of the terms of a
Loan can result from a bankruptcy proceeding. See "CERTAIN LEGAL ASPECTS OF
LOANS." If so provided in the related Prospectus Supplement, the Depositor or
other entity specified in the related Prospectus Supplement will obtain a
bankruptcy bond or similar insurance contract (the "bankruptcy bond") covering
losses resulting from proceedings with respect to borrowers under the Bankruptcy
Code. The bankruptcy bond will cover certain losses resulting from a reduction
by a bankruptcy court of scheduled payments of principal of and interest on a
Loan or a reduction by such court of the principal amount of a Loan and will
cover certain unpaid interest on the amount of such a principal reduction from
the date of the filing of a bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount specified
in the related Prospectus Supplement for all Loans in the Trust Fund for such
Series. Such amount will be reduced by payments made under such bankruptcy bond
in respect of such Loans, unless otherwise specified in the related Prospectus
Supplement, and will not be restored.
RESERVE FUNDS
If so specified in the Prospectus Supplement relating to a Series of
Securities, the Depositor will deposit into one or more funds to be established
with the Trustee as part of the Trust Fund for such Series or for the benefit of
any Enhancer with respect to such Series (the "Reserve Funds") cash, a letter or
letters of credit, cash collateral accounts, Eligible Investments, or other
instruments meeting the criteria of the Rating Agency rating any Series of the
Securities in the amount specified in such Prospectus Supplement. In the
alternative or in addition to such deposit, a Reserve Fund for a Series may be
funded over time through application of all or a portion of the excess cash flow
from the Primary Assets for such Series, to the extent described in the related
Prospectus Supplement. If applicable, the initial amount of the Reserve Fund and
the Reserve Fund maintenance requirements for a Series of Securities will be
described in the related Prospectus Supplement.
Amounts withdrawn from any Reserve Fund will be applied by the Trustee to
make payments on the Securities of a Series, to pay expenses, to reimburse any
Enhancer or for any other purpose, in the manner and to the extent specified in
the related Prospectus Supplement.
Amounts deposited in a Reserve Fund will be invested by the Trustee, in
Eligible Investments maturing no later than the day specified in the related
Prospectus Supplement.
MINIMUM PRINCIPAL PAYMENT AGREEMENT
If stated in the Prospectus Supplement relating to a Series of Securities,
the Depositor will enter into a Minimum Principal Payment Agreement with an
entity meeting the criteria of the Rating Agency pursuant to which such entity
will provide certain payments on the Securities of such Series in the event that
aggregate scheduled principal payments and/or prepayments on the Primary Assets
for such Series are not sufficient to make certain payments on the Securities of
such Series, as provided in the Prospectus Supplement.
DEPOSIT AGREEMENT
If specified in a Prospectus Supplement, the Depositor and the Trustee for
such Series of Securities will enter into a Deposit Agreement with the entity
specified in such Prospectus Supplement on or before the sale of such Series of
Securities. The purpose of a Deposit Agreement would be to accumulate available
cash for investment so that such cash, together with income thereon, can be
applied to future distributions on one or more Classes of Securities. The
Prospectus Supplement for a Series of Securities pursuant to which a Deposit
Agreement is used will contain a description of the terms of such Deposit
Agreement.
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SERVICING OF LOANS
GENERAL
Customary servicing functions with respect to Loans comprising the Primary
Assets in the Trust Fund will be provided by the Servicer directly pursuant to
the related Servicing Agreement or Pooling and Servicing Agreement, as the case
may be, with respect to a Series of Securities.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The Servicer will make reasonable efforts to collect all payments required
to be made under the Loans and will, consistent with the terms of the related
Agreement for a Series and any applicable Enhancement, follow such collection
procedures as it follows with respect to comparable loans held in its own
portfolio. Consistent with the above, the Servicer may, in its discretion, (i)
waive any assumption fee, late payment charge, or other charge in connection
with a Loan and (ii) to the extent provided in the related Agreement arrange
with an obligor a schedule for the liquidation of delinquencies by extending the
Due Dates for Scheduled Payments on such Loan.
If specified in the related Prospectus Supplement, the Servicer, to the
extent permitted by law, will establish and maintain escrow or impound accounts
("Escrow Accounts") with respect to Loans in which payments by obligors to pay
taxes, assessments, mortgage and hazard insurance premiums, and other comparable
items will be deposited. Loans may not require such payments under the loan
related documents, in which case the Servicer would not be required to establish
any Escrow Account with respect to such Loans. Withdrawals from the Escrow
Accounts are to be made to effect timely payment of taxes, assessments and
mortgage and hazard insurance, to refund to obligors amounts determined to be
overages, to pay interest to obligors on balances in the Escrow Account to the
extent required by law, to repair or otherwise protect the property securing the
related Loan and to clear and terminate such Escrow Account. The Servicer will
be responsible for the administration of the Escrow Accounts and generally will
make advances to such accounts when a deficiency exists therein.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT
Unless otherwise specified in the related Prospectus Supplement, the
Trustee or the Servicer will establish a separate account (the "Collection
Account") in the name of the Trustee. Unless otherwise indicated in the related
Prospectus Supplement, the Collection Account will be an account maintained (i)
at a depository institution, the long-term unsecured debt obligations of which
at the time of any deposit therein are rated by each Rating Agency rating the
Securities of such Series at levels satisfactory to each Rating Agency or (ii)
in an account or accounts the deposits in which are insured to the maximum
extent available by the FDIC or which are secured in a manner meeting
requirements established by each Rating Agency.
Unless otherwise specified in the related Prospectus Supplement, the funds
held in the Collection Account may be invested, pending remittance to the
Trustee, in Eligible Investments. If so specified in the related Prospectus
Supplement, the Servicer will be entitled to receive as additional compensation
any interest or other income earned on funds in the Collection Account.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer, the Depositor, the Trustee or the Seller, as appropriate, will deposit
into the Collection Account for each Series on the Business Day following the
Closing Date any amounts representing Scheduled Payments due after the related
Cut-off Date but received by the Servicer on or before the Closing Date, and
thereafter, within two business days after the date of receipt thereof, the
following payments and collections received or made by it (other than, unless
otherwise provided in the related Prospectus Supplement, in respect of principal
of and interest on the related Primary Assets due on or before such Cut-off
Date):
(i) All payments on account of principal, including prepayments, on
such Primary Assets;
(ii) All payments on account of interest on such Primary Assets after
deducting therefrom, at the discretion of the Servicer but only to the
extent of the amount permitted to be withdrawn or withheld from
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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;
(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;
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(vii) to make payments to the Trustee of such Series for deposit into
the Distribution Account, if any, or for remittance to the Holders of such
Series in the amounts and in the manner provided for in the related
Agreement; and
(viii) to clear and terminate the Collection Account pursuant to the
related Agreement.
In addition, if the Servicer deposits in the Collection Account for a
Series any amount not required to be deposited therein, it may, at any time,
withdraw such amount from such Collection Account.
ADVANCES AND LIMITATIONS THEREON
The related Prospectus Supplement will describe the circumstances, if any,
under which the Servicer will make Advances with respect to delinquent payments
on Loans. If specified in the related Prospectus Supplement, the Servicer will
be obligated to make Advances, and such obligation may be limited in amount, or
may not be activated until a certain portion of a specified Reserve Fund is
depleted. Advances are intended to provide liquidity and, except to the extent
specified in the related Prospectus Supplement, not to guarantee or insure
against losses. Accordingly, any funds advanced are recoverable by the Servicer
out of amounts received on particular Loans which represent late recoveries of
principal or interest, proceeds of insurance policies or Liquidation Proceeds
respecting which any such Advance was made. If an Advance is made and
subsequently determined to be nonrecoverable from late collections, proceeds of
insurance policies, or Liquidation Proceeds from the related Loan, the Servicer
may be entitled to reimbursement from other funds in the Collection Account or
Distribution Account, as the case may be, or from a specified Reserve Fund as
applicable, to the extent specified in the related Prospectus Supplement.
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
Standard Hazard Insurance; Flood Insurance. Except as otherwise specified
in the related Prospectus Supplement, the Servicer will be required to maintain
or to cause the obligor on each Loan to maintain a standard hazard insurance
policy providing coverage of the standard form of fire insurance with extended
coverage for certain other hazards as is customary in the state in which the
related Property is located. The standard hazard insurance policies will provide
for coverage at least equal to the applicable state standard form of fire
insurance policy with extended coverage for property of the type securing the
related Loans. In general, the standard form of fire and extended coverage
policy will cover physical damage to or destruction of, the related Property
caused by fire, lightning, explosion, smoke, windstorm, hail, riot, strike and
civil commotion, subject to the conditions and exclusions particularized in each
policy. Because the standard hazard insurance policies relating to the Loans
will be underwritten by different hazard insurers and will cover Properties
located in various states, such policies will not contain identical terms and
conditions. The basic terms, however, generally will be determined by state law
and generally will be similar. Most such policies typically will not cover any
physical damage resulting from war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides
and mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all inclusive. Uninsured risks not covered by a special hazard insurance policy
or other form of Enhancement will adversely affect distributions to Holders.
When a Property securing a Loan is located in a flood area identified by HUD
pursuant to the Flood Disaster Protection Act of 1973, as amended, the Servicer
will be required to cause flood insurance to be maintained with respect to such
Property, to the extent available.
The standard hazard insurance policies covering Properties securing Loans
typically will contain a "coinsurance" clause which, in effect, will require the
insured at all times to carry hazard insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the Property, including
the improvements on any Property, in order to recover the full amount of any
partial loss. If the insured's coverage falls below this specified percentage,
such clause will provide that the hazard insurer's liability in the event of
partial loss will not exceed the greater of (i) the actual cash value (the
replacement cost less physical depreciation) of the Property, including the
improvements, if any, damaged or destroyed or (ii) such proportion of the loss,
without deduction for depreciation, as the amount of insurance carried bears to
the specified percentage of the full replacement cost
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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.
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
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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.
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.
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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.
Except to the extent otherwise provided therein, each Agreement will
provide that neither the Servicer, nor any director, officer, employee or agent
of the Servicer, will be under any liability to the related Trust Fund, the
Depositor or the Holders for any action taken or for failing to take any action
in good faith pursuant to the related Agreement, or for errors in judgment;
provided, however, that neither the Servicer nor any such person will be
protected against any breach of warranty or representations made under such
Agreement or the failure to perform its obligations in compliance with any
standard of care set forth in such Agreement, or liability which would otherwise
be imposed by reason of willful misfeasance, bad faith or negligence in the
performance of their duties or by reason of reckless disregard of their
obligations and duties thereunder. Each Agreement will further provide that the
Servicer and any director, officer, employee or agent of the Servicer is
entitled to indemnification from the related Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the Securities, other than any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
negligence in the performance of duties thereunder or by reason of reckless
disregard of obligations and duties thereunder. In addition, the related
Agreement will provide that the Servicer is not under any obligation to appear
in, prosecute or defend any legal action which is not incidental to its
servicing responsibilities under such Agreement which, in its opinion, may
involve it in any expense or liability. The Servicer may, in its discretion,
undertake any such action which it may deem necessary or desirable with respect
to the related Agreement and the rights and duties of the parties thereto and
the interests of the Holders thereunder. In such event the legal expenses and
costs of such action and any liability resulting therefrom may be expenses,
costs, and liabilities of the Trust Fund and the Servicer may be entitled to be
reimbursed therefor out of the Collection Account.
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THE AGREEMENTS
The following summaries describe certain provisions of the Agreements. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Agreements. Where
particular provisions or terms used in the Agreements are referred to, such
provisions or terms are as specified in the related Agreements.
ASSIGNMENT OF PRIMARY ASSETS
General. At the time of issuance of the Securities of a Series, the
Depositor will transfer, convey and assign to the Trust Fund all right, title
and interest of the Depositor in the Primary Assets and other property to be
transferred to the Trust Fund for a Series. Such assignment will include all
principal and interest due on or with respect to the Primary Assets after the
Cut-off Date specified in the related Prospectus Supplement (except for any
Retained Interests). The Trustee will, concurrently with such assignment,
execute and deliver the Securities.
Assignment of Loans. Unless otherwise specified in the related Prospectus
Supplement, the Depositor will, as to each Loan, deliver or cause to be
delivered to the Trustee, or, as specified in the related Prospectus Supplement
a custodian on behalf of the Trustee (the "Custodian"), the Mortgage Note
endorsed without recourse to the order of the Trustee or in blank, the original
Mortgage with evidence of recording indicated thereon (except for any Mortgage
not returned from the public recording office, in which case a copy of such
Mortgage will be delivered, together with a certificate that the original of
such Mortgage was delivered to such recording office) and an assignment of the
Mortgage in recordable form. The Trustee, or, if so specified in the related
Prospectus Supplement, the Custodian, will hold such documents in trust for the
benefit of the Holders.
Unless otherwise specified in the related Prospectus Supplement, the
Depositor will as to each Home Improvement Contract deliver or cause to be
delivered to the Trustee (or the Custodian) the original Home Improvement
Contract and copies of documents and instruments related to each Home
Improvement Contract and, other than in the case of unsecured Home Improvement
Contracts, the security interest in the property securing such Home Improvement
Contract. In order to give notice of the right, title and interest of
Securityholders to the Home Improvement Contracts, the Depositor will cause a
UCC-1 financing statement to be executed by the Depositor or the Seller
identifying the Trustee as the secured party and identifying all Home
Improvement Contracts as collateral. Unless otherwise specified in the related
Prospectus Supplement, the Home Improvement Contracts will not be stamped or
otherwise marked to reflect their assignment to the Trust. Therefore, if,
through negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the Home Improvement Contracts without notice of such
assignment, the interest of Securityholders in the Home Improvement Contracts
could be defeated. See "CERTAIN LEGAL ASPECTS OF THE LOANS -- The Home
Improvement Contracts."
With respect to Loans secured by Mortgages, if so specified in the related
Prospectus Supplement, the Depositor will, at the time of issuance of the
Securities, cause assignments to the Trustee of the Mortgages relating to the
Loans for a Series to be recorded in the appropriate public office for real
property records, except in states where, in the opinion of counsel acceptable
to the Trustee, such recording is not required to protect the Trustee's interest
in the related Loans. If specified in the related Prospectus Supplement, the
Depositor will cause such assignments to be so recorded within the time after
issuance of the Securities as is specified in the related Prospectus Supplement,
in which event, the Agreement may, as specified in the related Prospectus
Supplement, require the Depositor to repurchase from the Trustee any Loan the
related Mortgage of which is not recorded within such time, at the price
described below with respect to repurchases by reason of defective
documentation. Unless otherwise provided in the related Prospectus Supplement,
the enforcement of the repurchase obligation would constitute the sole remedy
available to the Holders or the Trustee for the failure of a Mortgage to be
recorded.
Each Loan will be identified in a schedule appearing as an exhibit to the
related Agreement (the "Loan Schedule"). Such Loan Schedule will specify with
respect to each Loan: the original principal amount and unpaid principal balance
as of the Cut-off Date; the current interest rate; the current Scheduled Payment
of principal and interest; the maturity date, if any, of the related Mortgage
Note; if the Loan is an adjustable rate Loan, the Lifetime Rate Cap, if any, and
the current index.
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Assignment of Private Securities. The Depositor will cause Private
Securities to be registered in the name of the Trustee (or its nominee or
correspondent). The Trustee (or its nominee or correspondent) will have
possession of any certificated Private Securities. Unless otherwise specified in
the related Prospectus Supplement, the Trustee will not be in possession of or
be assignee of record of any underlying assets for a Private Security. See "THE
TRUST FUNDS -- Private Securities" herein. Each Private Security will be
identified in a schedule appearing as an exhibit to the related Agreement (the
"Certificate Schedule"), which will specify the original principal amount,
outstanding principal balance as of the Cut-off Date, annual pass-through rate
or interest rate and maturity date for each Private Security conveyed to the
Trust Fund. In the Agreement, the Depositor will represent and warrant to the
Trustee regarding the Private Securities: (i) that the information contained in
the Certificate Schedule is true and correct in all material respects; (ii)
that, immediately prior to the conveyance of the Private Securities, the
Depositor had good title thereto, and was the sole owner thereof (subject to any
Retained Interest); (iii) that there has been no other sale by it of such
Private Securities; and (iv) that there is no existing lien, charge, security
interest or other encumbrance (other than any Retained Interest) on such Private
Securities.
Repurchase and Substitution of Non-Conforming Primary Assets. Unless
otherwise provided in the related Prospectus Supplement, if any document in the
file relating to the Primary Assets delivered by the Depositor to the Trustee
(or Custodian) is found by the Trustee within 90 days of the execution of the
related Agreement (or promptly after the Trustee's receipt of any document
permitted to be delivered after the Closing Date) to be defective in any
material respect and the Depositor or Seller does not cure such defect within 90
days, or within such other period specified in the related Prospectus
Supplement, the Depositor or Seller will, not later than 90 days or within such
other period specified in the related Prospectus Supplement, after the Trustee's
notice to the Depositor or the Seller, as the case may be, of the defect,
repurchase the related Primary Asset or any property acquired in respect thereof
from the Trustee at a price equal to, unless otherwise specified in the related
Prospectus Supplement, (a) the lesser of (i) the outstanding principal balance
of such Primary Asset and (ii) the Trust Fund's federal income tax basis in the
Primary Asset and (b) accrued and unpaid interest to the date of the next
scheduled payment on such Primary Asset at the rate set forth in the related
Agreement, provided, however, the purchase price shall not be limited in (i)
above to the Trust Fund's federal income tax basis if the repurchase at a price
equal to the outstanding principal balance of such Primary Asset will not result
in any prohibited transaction tax under Section 860F(a) of the Code.
If provided in the related Prospectus Supplement, the Depositor or Seller,
as the case may be, may, rather than repurchase the Primary Asset as described
above, remove such Primary Asset from the Trust Fund (the "Deleted Primary
Asset") and substitute in its place one or more other Primary Assets (each, a
"Qualifying Substitute Primary Asset") provided, however, that (i) with respect
to a Trust Fund for which no REMIC election is made, such substitution must be
effected within 120 days of the date of initial issuance of the Securities and
(ii) with respect to a Trust Fund for which a REMIC election is made, after a
specified time period, the Trustee must have received a satisfactory opinion of
counsel that such substitution will not cause the Trust Fund to lose its status
as a REMIC or otherwise subject the Trust Fund to a prohibited transaction tax.
Unless otherwise specified in the related Prospectus Supplement, any
Qualifying Substitute Primary Asset will have, on the date of substitution, (i)
an outstanding principal balance, after deduction of all Scheduled Payments due
in the month of substitution, not in excess of the outstanding principal balance
of the Deleted Primary Asset (the amount of any shortfall to be deposited to the
Collection Account in the month of substitution for distribution to Holders),
(ii) an interest rate not less than (and not more than 2% greater than) the
interest rate of the Deleted Primary Asset, (iii) a remaining term-to-stated
maturity not greater than (and not more than two years less than) that of the
Deleted Primary Asset, and will comply with all of the representations and
warranties set forth in the applicable Agreement as of the date of substitution.
Unless otherwise provided in the related Prospectus Supplement, the
above-described cure, repurchase or substitution obligations constitute the sole
remedies available to the Holders or the Trustee for a material defect in a
document for a Primary Asset.
The Depositor or another entity will make representations and warranties
with respect to Primary Assets for a Series. If the Depositor or such entity
cannot cure a breach of any such representations and warranties in all
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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."
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
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.
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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 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,
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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 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.
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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.
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.
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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 property acquired in respect of a Primary Asset and remaining in the Trust
Fund. The exercise of such right will effect early retirement of the Securities
of such Series, but such entity's right to so purchase is subject to the
aggregate Principal Balance of the Primary Assets at the time of repurchase
being less than a fixed percentage, to be set forth in the related Prospectus
Supplement, of the aggregate Principal Balance of the Primary Assets as of the
Cut-off Date. In no event, however, will the trust created by the Agreement
continue beyond the expiration of 21 years from the death of the last survivor
of certain persons identified therein. For each Series, the Servicer or the
Trustee, as applicable, will give written notice of termination of the Agreement
to each Holder, and the final distribution will be made only upon surrender and
cancellation of the Securities at an office or agency specified in the notice of
termination. If so provided in the related Prospectus Supplement for a Series,
the Depositor or another entity may effect an optional termination of the Trust
Fund under the circumstances described in such Prospectus Supplement. See
"DESCRIPTION OF THE SECURITIES -- Optional Redemption, Purchase or Termination"
herein.
Indenture. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes of
such Series or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which, through the
payment of interest and principal in respect thereof in accordance with their
terms, will provide money in an amount sufficient to pay the principal of and
each installment of interest on the Notes of such Series on the Final Scheduled
Distribution Date for such Notes and any installment of interest on such Notes
in accordance with the terms of the Indenture and the Notes of such Series. In
the event of any such defeasance and discharge of Notes of such Series, holders
of Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
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CERTAIN LEGAL ASPECTS OF LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans, home improvement installment sales contracts and home
improvement installment loan agreements which are general in nature. Because
certain of such legal aspects are governed by applicable state law (which laws
may differ substantially), the summaries do not purport to be complete nor
reflect the laws of any particular state, nor encompass the laws of all states
in which the properties securing the Loans are situated.
MORTGAGES
The Loans for a Series will, and certain Home Improvement Contracts for a
Series may, be secured by either mortgages or deeds of trust or deeds to secure
debt (such Mortgage Loans and Home Improvement Contracts are hereinafter
referred to in this section as "mortgage loans"), depending upon the prevailing
practice in the state in which the property subject to a mortgage loan is
located. The filing of a mortgage, deed of trust or deed to secure debt creates
a lien or title interest upon the real property covered by such instrument and
represents the security for the repayment of an obligation that is customarily
evidenced by a promissory note. It is not prior to the lien for real estate
taxes and assessments or other charges imposed under governmental police powers
and may also be subject to other liens pursuant to the laws of the jurisdiction
in which the Mortgaged Property is located. Priority with respect to such
instruments depends on their terms, the knowledge of the parties to the mortgage
and generally on the order of recording with the applicable state, county or
municipal office. There are two parties to a mortgage, the mortgagor, who is the
borrower/property owner or the land trustee (as described below), and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the borrower/property owner is the
beneficiary; at origination of a mortgage loan, the borrower executes a separate
undertaking to make payments on the mortgage note. A deed of trust transaction
normally has three parties: the trustor, who is the borrower/property owner; the
beneficiary, who is the lender; and the trustee, a third-party grantee. Under a
deed of trust, the trustor grants the property, irrevocably until the debt is
paid, in trust, generally with a power of sale, to the trustee to secure payment
of the obligation. The mortgagee's authority under a mortgage and the trustee's
authority under a deed of trust are governed by the law of the state in which
the real property is located, the express provisions of the mortgage or deed of
trust, and, in some cases, in deed of trust transactions, the directions of the
beneficiary.
FORECLOSURE ON MORTGAGES
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming and expensive. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a receiver
or other officer to conduct the sale of the property. In some states, mortgages
may also be foreclosed by advertisement, pursuant to a power of sale provided in
the mortgage. Foreclosure of a mortgage by advertisement is essentially similar
to foreclosure of a deed of trust by nonjudicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a nonjudicial
trustee's sale under a specific provision in the deed of trust which authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In certain states, such foreclosure also may
be accomplished by judicial action in the manner provided for foreclosure of
mortgages. In some states, the trustee must record a notice of default and send
a copy to the borrower-trustor and to any person who has recorded a request for
a copy of a notice of default and notice of sale. In addition, the trustee in
some states must provide notice to any other individual having an interest in
the real property, including any junior lienholders. If the deed of trust is not
reinstated within any applicable cure period, a notice of sale must be posted in
a public place and, in most states, published for a specified period of time in
one or more newspapers. In addition, some state laws require that a copy of the
notice of sale be posted on the property and sent to all parties having an
interest of record in the property. The trustor, borrower, or any person having
a junior encumbrance on the real estate, may, during a
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reinstatement period, cure the default by paying the entire amount in arrears
plus the costs and expenses incurred in enforcing the obligation. Generally,
state law controls the amount of foreclosure expenses and costs, including
attorney's fees, which may be recovered by a lender. If the deed of trust is not
reinstated, a notice of sale must be posted in a public place and, in most
states, published for a specified period of time in one or more newspapers. In
addition, some state laws require that a copy of the notice of sale be posted on
the property, recorded and sent to all parties having an interest in the real
property.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful nor
in bad 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
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redemption is to force the lender to retain the property and pay the expenses of
ownership until the redemption period has run. In some states, there is no right
to redeem property after a trustee's sale under a deed of trust.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGES
The mortgage loans comprising or underlying the Primary Assets included in
the Trust Fund for a Series will be secured by mortgages or deeds of trust which
may be second or more junior mortgages to other mortgages held by other lenders
or institutional investors. The rights of the Trust Fund (and therefore the
Holders), as mortgagee under a junior mortgage, are subordinate to those of the
mortgagee under the senior mortgage, including the prior rights of the senior
mortgagee to receive hazard insurance and condemnation proceeds and to cause the
property securing the mortgage loan to be sold upon default of the mortgagor,
thereby extinguishing the junior mortgagee's lien unless the junior mortgagee
asserts its subordinate interest in the property in foreclosure litigation and,
possibly, satisfies the defaulted senior mortgage. A junior mortgagee may
satisfy a defaulted senior loan in full and, in some states, may cure such
default and bring the senior loan current, in either event adding the amounts
expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the mortgagor. All sums so expended by
the mortgagee become part of the indebtedness secured by the mortgage.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower. In
certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower following a foreclosure sale to
the excess of the outstanding debt over the fair market value of the property at
the time of the public sale. The purpose of these statutes is generally to
prevent a beneficiary or a mortgagee from obtaining a large deficiency judgment
against the former borrower as a result of low or no bids at the foreclosure
sale.
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In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws, the Federal
Soldiers' and Sailors' Relief Act and state laws affording relief to debtors,
may interfere with or affect the ability of the secured lender to realize upon
collateral and/or enforce a deficiency judgment. For example, with respect to
federal bankruptcy law, the filing of a petition acts as a stay against the
enforcement of remedies for collection of a debt. Moreover, a court with federal
bankruptcy jurisdiction may permit a debtor through a Chapter 13 Bankruptcy Code
rehabilitative plan to cure a monetary default with respect to a loan on a
debtor's residence by paying arrearages within a reasonable time period and
reinstating the original loan payment schedule even though the lender
accelerated the loan and the lender has taken all steps to realize upon his
security (provided no sale of the property has yet occurred) prior to the filing
of the debtor's Chapter 13 petition. Some courts with federal bankruptcy
jurisdiction have approved plans, based on the particular facts of the
reorganization case, that effected the curing of a loan default by permitting
the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan may be modified if the borrower has filed a petition
under Chapter 13. These courts have suggested that such modifications may
include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Federal bankruptcy law and limited case law
indicate that the foregoing modifications could not be applied to the terms of a
loan secured by property that is the principal residence of the debtor. In all
cases, the secured creditor is entitled to the value of its security plus
post-petition interest, attorney's fees and costs to the extent the value of the
security exceeds the debt.
In a Chapter 11 case under the Bankruptcy Code, the lender is precluded
from foreclosing without authorization from the bankruptcy court. The lender's
lien may be transferred to other collateral and/or be limited in amount to the
value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate
due-on-sale clauses through confirmed Chapter 11 plans of reorganization.
The Bankruptcy Code provides priority to certain tax liens over the
lender's security. This may delay or interfere with the enforcement of rights in
respect of a defaulted Loan. In addition, substantive requirements are imposed
upon lenders in connection with the origination and the servicing of mortgage
loans by numerous federal and some state consumer protection laws. The laws
include the federal Truth-in-Lending Act, Real Estate Settlement Procedures Act,
Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act
and related statutes and regulations. These federal laws impose specific
statutory liabilities upon lenders who originate loans and who fail to comply
with the provisions of the law. In some cases, this liability may affect
assignees of the loans.
DUE-ON-SALE CLAUSES IN MORTGAGE LOANS
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases, typically involving
single family residential mortgage transactions, their enforceability has been
limited or denied. In any event, the Garn-St. Germain Depository Institutions
Act of 1982 (the "Garn-St. Germain Act") preempts state constitutional,
statutory and case law that prohibits the enforcement of due-on-sale clauses and
permits lenders to enforce these clauses in accordance with their terms, subject
to certain exceptions. As a result, due-on-sale clauses have become generally
enforceable except in those states whose legislatures exercised their authority
to regulate the enforceability of such clauses with respect to mortgage loans
that were (i) originated or assumed during the "window period" under the
Garn-St. Germain Act which ended in all cases not later than October 15, 1982,
and (ii) originated by lenders other than national banks, federal savings
institutions and federal credit unions. FHLMC has taken the position in its
published mortgage servicing standards that, out of a total of eleven "window
period states," five states (Arizona, Michigan, Minnesota, New Mexico and Utah)
have enacted statutes extending, on various terms and for varying periods, the
prohibition on
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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.
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
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a law prior to the April 1, 1983 deadline. In addition, even where Title V is
not so rejected, any state is authorized by the law to adopt a provision
limiting discount points or other charges on mortgage loans covered by Title V.
THE HOME IMPROVEMENT CONTRACTS
General. The Home Improvement Contracts, other than those Home Improvement
Contracts that are unsecured or secured by mortgages on real estate (such Home
Improvement Contracts are hereinafter referred to in this section as
"contracts") generally are "chattel paper" or constitute "purchase money
security interests" each as defined in the Uniform Commercial Code (the "UCC").
Pursuant to the UCC, the sale of chattel paper is treated in a manner similar to
perfection of a security interest in chattel paper. Under the related Agreement,
the Depositor will transfer physical possession of the contracts to the Trustee
or a designated custodian or may retain possession of the contracts as custodian
for the Trustee. In addition, the Depositor will make an appropriate filing of a
UCC-1 financing statement in the appropriate states to give notice of the
Trustee's ownership of the contracts. Unless otherwise specified in the related
Prospectus Supplement, the contracts will not be stamped or otherwise marked to
reflect their assignment from the Depositor to the Trustee. Therefore, if
through negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the contracts without notice of such assignment, the
Trustee's interest in the contracts could be defeated.
Security Interests in Home Improvements. The contracts that are secured by
the Home Improvements financed thereby grant to the originator of such contracts
a purchase money security interest in such Home Improvements to secure all or
part of the purchase price of such Home Improvements and related services. A
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.
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
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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 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.
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SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service, (i) are entitled to have interest rates reduced and capped at
6% per annum, on obligations (including Loans) incurred prior to the
commencement of military service for the duration of military service, (ii) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on such obligations entered into prior to
military service for the duration of military service and (iii) may have the
maturity of such obligations incurred prior to military service extended, the
payments lowered and the payment schedule readjusted for a period of time after
the completion of military service. However, the benefits of (i), (ii), or (iii)
above are subject to challenge by creditors and if, in the opinion of the court,
the ability of a person to comply with such obligations is not materially
impaired by military service, the court may apply equitable principles
accordingly. If a borrower's obligation to repay amounts otherwise due on a Loan
included in a Trust Fund for a Series is relieved pursuant to the Soldiers' and
Sailors' Civil Relief Act of 1940, none of the Trust Fund, the Servicer, the
Depositor nor the Trustee will be required to advance such amounts, and any loss
in respect thereof may reduce the amounts available to be paid to the Holders of
the Securities of such Series. Unless otherwise specified in the related
Prospectus Supplement, any shortfalls in interest collections on Loans or
Underlying Loans relating to the Private Securities, as applicable, included in
a Trust Fund for a Series resulting from application of the Soldiers' and
Sailors' Civil Relief Act of 1940 will be allocated to each Class of Securities
of such Series that is entitled to receive interest in respect of such Loans or
Underlying Loans in proportion to the interest that each such Class of
Securities would have otherwise been entitled to receive in respect of such
Loans or Underlying Loans had such interest shortfall not occurred.
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THE DEPOSITOR
GENERAL
The Depositor was incorporated in the State of Delaware in June 1995, and
is a wholly-owned subsidiary of The Bear Stearns Companies Inc. The Depositor's
principal executive offices are located at 245 Park Avenue, New York, New York
10167. Its telephone number is (212) 272-4095.
The Depositor will not engage in any activities other than to authorize,
issue, sell, deliver, purchase and invest in (and enter into agreements in
connection with), and/or to engage in the establishment of one or more trusts
which will issue and sell, bonds, notes, debt or equity securities, obligations
and other securities and instruments ("Depositor Securities") collateralized or
otherwise secured or backed by, or otherwise representing an interest in, among
other things, receivables or pass-through certificates, or participations or
certificates of participation or beneficial ownership in one or more pools of
receivables, and the proceeds of the foregoing, that arise in connection with
loans secured by certain first or junior mortgages on real estate or
manufactured housing and any and all other commercial transactions and
commercial, sovereign, student or consumer loans or indebtedness and, in
connection therewith or otherwise, purchasing, acquiring, owning, holding,
transferring, conveying, servicing, selling, pledging, assigning, financing and
otherwise dealing with such receivables, pass-through certificates, or
participations or certificates of participation or beneficial ownership. Article
Third of the Depositor's Certificate of Incorporation limits the Depositor's
activities to the above activities and certain related activities, such as
credit enhancement with respect to such Depositor Securities, and to any
activities incidental to and necessary or convenient for the accomplishment of
such purposes.
USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds from
the sale of each Series of Securities for one or more of the following purposes:
(i) to purchase the related Primary Assets, (ii) to repay indebtedness which has
been incurred to obtain funds to acquire such Primary Assets, (iii) to establish
any Reserve Funds described in the related Prospectus Supplement and (iv) to pay
costs of structuring and issuing such Securities, including the costs of
obtaining Enhancement, if any. If so specified in the related Prospectus
Supplement, the purchase of the Primary Assets for a Series may be effected by
an exchange of Securities with the Seller of such Primary Assets.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following summary is based on the opinion of Stroock & Stroock & Lavan
LLP, special counsel to the Depositor ("Federal Tax Counsel") as to the
anticipated material federal income tax consequences of the purchase, ownership
and disposition of Securities. The summary does not purport to deal with all
aspects of federal income taxation that may affect particular investors in light
of their individual circumstances, nor with certain types of investors subject
to special treatment under the federal income tax laws. This summary focuses
primarily upon investors who will hold Securities as "capital assets"
(generally, property held for investment) within the meaning of Section 1221 of
the Code, but much of the discussion is applicable to other investors as well.
Prospective investors are advised to consult their own tax advisers concerning
the federal, state, local and any other tax consequences to them of the
purchase, ownership and disposition of the Securities.
The summary is based upon the provisions of the Code, the regulations
promulgated thereunder, including, where applicable, proposed regulations, and
the judicial and administrative rulings and decisions now in effect, all of
which are subject to change or possible differing interpretations. The statutory
provisions, regulations, and interpretations on which this interpretation is
based are subject to change, and such a change could apply retroactively.
The federal income tax consequences to Holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness; (ii) an
election is made to treat the Trust Fund relating to a particular Series
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of Securities as a real estate mortgage investment conduit ("REMIC") under the
Internal Revenue Code of 1986, as amended (the "Code"); (iii) the Securities
represent an ownership interest in some or all of the assets included in the
Trust Fund for a Series; or (iv) an election is made to treat the Trust Fund
relating to a particular Series of Certificates as a partnership or a division
of a single holder of all of the equity Securities of a Series.
The Prospectus Supplement for each Series of Securities will specify how
the Securities will be treated for federal income tax purposes and will discuss
whether a REMIC election, if any, will be made with respect to such Series.
TAXATION OF DEBT SECURITIES
Status of Regular Interest Securities as Real Property Loans. The regular
interests in a REMIC ("Regular Interest Securities") will be "real estate
assets" for purposes of Section 856(c)(4)(A) of the Code and assets described in
Section 7701(a)(19)(C) of the Code (assets qualifying under one or both of those
sections, applying each section separately, "qualifying assets") to the extent
that the REMIC's assets are qualifying assets. For purposes of this rule, if at
least 95 percent of the REMIC's assets are qualifying assets, then 100 percent
of the Regular Interest Securities will be qualifying assets. Similarly, income
on the Regular Interest Securities will be treated as "interest on obligations
secured by mortgages on real property" within the meaning of Section
856(c)(3)(B) of the Code, subject to the limitations of the preceding two
sentences. In addition to Loans, the REMIC's assets will include payments on
Loans held pending distribution to holders of Regular Interest Securities,
amounts in reserve accounts (if any), other credit enhancements (if any) and
possibly buydown funds ("Buydown Funds"). The Loans generally will be qualifying
assets under both of the foregoing sections of the Code. However, Loans that are
not secured by residential real property or real property used primarily for
church purposes may not constitute qualifying assets under Section
7701(a)(19)(c)(v) of the Code. In addition, to the extent that the principal
amount of a Loan exceeds the value of the property securing the Loan, it is
unclear and Federal Tax Counsel is unable to opine whether the Loans will be
qualifying assets. The regulations under Sections 860A through 860G of the Code
(the "REMIC Regulations") treat credit enhancements as part of the mortgage or
pool of mortgages to which they relate, and therefore credit enhancements
generally should be qualifying assets. Regulations issued in conjunction with
the REMIC Regulations provide that amounts paid on Loans and held pending
distribution to holders of Regular Interest Securities ("cash flow investments")
will be treated as qualifying assets. It is unclear whether reserve funds or
Buydown Funds would also constitute qualifying assets under any of those
provisions.
Interest and Acquisition Discount. Securities representing Regular
Interest Securities are generally taxable to Holders in the same manner as
evidences of indebtedness issued by the REMIC. Stated interest on the Regular
Interest Securities will be taxable as ordinary income and taken into account
using the accrual method of accounting, regardless of the Holder's normal
accounting method. Interest (other than original issue discount) on Securities
(other than Regular Interest Securities) that are characterized as indebtedness
for federal income tax purposes will be includible in income by Holders thereof
in accordance with their usual methods of accounting. Securities characterized
as debt for federal income tax purposes and Regular Interest Securities will be
referred to hereinafter collectively as "Debt Securities."
Debt Securities that are Compound Interest Securities will, and certain of
the other Debt Securities may, be issued with "original issue discount" ("OID").
The following discussion is based in part on the rules governing OID which are
set forth in Sections 1271-1275 of the Code and the Treasury regulations issued
thereunder on February 2, 1994, as amended June 11, 1996 (the "OID
Regulations"). A Holder should be aware, however, that the OID Regulations do
not adequately address certain issues relevant to prepayable securities, such as
the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. A Holder of
a Debt Security must include such OID in gross income as ordinary interest
income as it accrues under a method taking into account an economic accrual of
the discount. In general, OID must be included in income in advance of the
receipt of the cash representing that income. The amount of OID on a Debt
Security will be considered to be zero if it is less than a de minimis amount
determined under the Code.
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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 reasonable
legal remedies exist to compel timely payment, or the debt instrument otherwise
provides terms and conditions that make the likelihood of late payment (other
than a late payment that occurs within a reasonable grace period) or nonpayment
of interest a remote contingency, as defined in the OID Regulations. It is
unclear whether the terms and conditions of the Loans underlying the Debt
Securities or the terms and conditions of the Debt Securities are considered
when determining whether the likelihood of late payment or nonpayment of
interest is a remote contingency. Any terms or conditions that do not reflect
arm's length dealing or that the holder does not intend to enforce are not
considered.
Certain Debt Securities will provide for distributions of interest based on
a period that is the same length as the interval between Distribution Dates but
ends prior to each Distribution Date. Any interest that accrues prior to the
Closing Date may be treated under the OID Regulations either (i) as part of the
issue price and the stated redemption price at maturity of the Debt Securities
or (ii) as not included in the issue price or stated redemption price. The OID
Regulations provide a special application of the de minimis rule for debt
instruments with long first accrual periods where the interest payable for the
first period is at a rate which is effectively less than that which applies in
all other periods. In such cases, for the sole purpose of determining whether
original issue discount is de minimis, the OID Regulations provide that the
stated redemption price is equal to the instrument's issue price plus the
greater of the amount of foregone interest or the excess (if any) of the
instrument's stated principal amount over its issue price.
Under the de minimis rule, OID on a Debt Security will be considered to be
zero if such OID is less than 0.25% of the stated redemption price at maturity
of the Debt Security multiplied by the weighted average maturity of the Debt
Security. For this purpose, the weighted average maturity of the Debt Security
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the Debt Security and the
denominator of which is the stated redemption price at maturity of the Debt
Security. Holders generally must report de minimis OID pro rata as principal
payments are received, and such income will be capital gain if the Debt Security
is held as a capital asset. However, accrual method Holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
The Holder of a Debt Security issued with OID must include in gross income,
for all days during its taxable year on which it holds such Debt Security, the
sum of the "daily portions" of such original issue discount. The amount of OID
includible in income by a Holder will be computed by allocating to each day
during a taxable year a pro rata portion of the original issue discount that
accrued during the relevant accrual period. In the case of a Debt Security that
is not a Regular Interest Security and the principal payments on which are not
subject to acceleration resulting from prepayments on the Loans, the amount of
OID includible in income of a Holder for an accrual period (generally the period
over which interest accrues on the debt instrument) will equal the product of
the yield to maturity of the Debt Security and the adjusted issue price of the
Debt Security, reduced by any payments of qualified stated interest. The
adjusted issue price is the sum of its issue price plus prior accruals of OID,
reduced by the total payments made with respect to such Debt Security in all
prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a Holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
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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.
Interest-Only Debt Securities. The Trust Fund intends to report income
from interest-only classes of Debt Securities to the Internal Revenue Service
and to holders of interest-only Debt Securities based on the assumption that the
stated redemption price at maturity is equal to the sum of all payments
determined under the applicable prepayment assumption. As a result, such
interest-only Debt Securities Certificates will be treated as having original
issue discount.
Variable Rate Debt Securities. Under the OID Regulations, Debt Securities
paying interest at a variable rate (a "Variable Rate Debt Security") are subject
to special rules. A Variable Rate Debt Security will qualify as a "variable rate
debt instrument" if (i) its issue price does not exceed the total noncontingent
principal payments due under the Variable Rate Debt Security by more than a
specified de minimis amount, (ii) it provides for stated interest, paid or
compounded at least annually, at (a) one or more qualified floating rates, (b) a
single fixed rate and one or more qualified floating rates, (c) a single
objective rate or (d) a single fixed rate and a single objective
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rate that is a qualified inverse floating rate and (iii) it does not provide for
any principal payments that are contingent, as defined in the OID Regulations,
except as provided in (i), above. Because the OID Regulations relating to
contingent payment debt instruments do not apply to REMIC regular interests,
principal payments on the REMIC Regular Certificates should not be considered
contingent for this purpose.
A "qualified floating rate" is any variable rate where variations in the
value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate Debt Security is denominated. A multiple of a qualified floating
rate will generally not itself constitute a qualified floating rate for purposes
of the OID Regulations. However, a variable rate equal to (i) the product of a
qualified floating rate and a fixed multiple that is greater than 0.65 but not
more than 1.35 or (ii) the product of a qualified floating rate and a fixed
multiple that is greater than 0.65 but not more than 1.35, increased or
decreased by a fixed rate will constitute a qualified floating rate for purposes
of the OID Regulations. In addition, under the OID Regulations, two or more
qualified floating rates that can reasonably be expected to have approximately
the same values throughout the term of the Variable Rate Debt Security will be
treated as a single qualified floating rate (a "Presumed Single Qualified
Floating Rate"). Two or more qualified floating rates with values within 25
basis points of each other as determined on the Variable Rate Debt Security's
issue date will be conclusively presumed to be a Presumed Single Qualified
Floating Rate. Notwithstanding the foregoing, a variable rate that would
otherwise constitute a qualified floating rate but which is subject to one or
more restrictions such as a cap or floor, will not be a qualified floating rate
for purposes of the OID Regulations unless the restriction is fixed throughout
the term of the Variable Rate Debt Security or the restriction will not
significantly affect the yield of the Variable Rate Debt Security.
An "objective rate" is a rate that is not itself a qualified floating rate
but which is determined using a single fixed formula and which is based upon
objective financial or economic information. The OID Regulations also provide
that other variable rates may be treated as objective rates if so designated by
the Internal Revenue Service in the future. An interest rate on a REMIC Regular
Certificate that is the weighted average of the interest rates on some or all of
the qualified mortgages held by the REMIC should constitute an objective rate.
Despite the foregoing, a variable rate of interest on a Variable Rate Debt
Security will not constitute an objective rate if it is reasonably expected that
the average value of such rate during the first half of the Variable Rate Debt
Security's term will be either significantly less than or significantly greater
than the average value of the rate during the final half of the Variable Rate
Debt Security's term. Further, an objective rate does not include a rate that is
based on information that is within the control of the issuer (or a party
related to the issuer) or that is unique to the circumstances of the issuer (or
a party related to the issuer). An objective rate will qualify as a "qualified
inverse floating rate" if such rate is equal to a fixed rate minus a qualified
floating rate and variations in the rate can reasonably be expected to inversely
reflect contemporaneous variations in the qualified floating rate. The OID
Regulations also provide that if a Variable Rate Debt Security provides for
stated interest at a fixed rate for an initial period of less than one year
followed by a variable rate that is either a qualified floating rate or an
objective rate and if the variable rate on the Variable Rate Debt Security's
issue date is intended to approximate the fixed rate, then the fixed rate and
the variable rate together will constitute either a single qualified floating
rate or objective rate, as the case may be (a "Presumed Single Variable Rate").
If the value of the variable rate and the initial fixed rate are within 25 basis
points of each other as determined on the Variable Rate Debt Security's issue
date, the variable rate will be conclusively presumed to approximate the fixed
rate.
For Variable Rate Debt Securities that qualify as a "variable rate debt
instrument" under the OID Regulations and provide for interest at either a
single qualified floating rate, a single objective rate, a Presumed Single
Qualified Floating Rate or a Presumed Single Variable Rate throughout the term
(a "Single Variable Rate Debt Security"), original issue discount is computed as
described above based on the following: (i) stated interest on the Single
Variable Rate Debt Security which is unconditionally payable in cash or property
(other than debt instruments of the issuer) at least annually will constitute
qualified stated interest, (ii) by assuming that the variable rate on the Single
Variable Debt Security is a fixed rate equal to: (a) in the case of a Single
Variable Rate Debt Security with a qualified floating rate or a qualified
inverse floating rate, the value of, as of the issue date, of the qualified
floating rate or the qualified inverse floating rate or (b) in the case of a
Single Variable Rate Debt Security with an objective rate (other than a
qualified inverse floating rate), a fixed rate which reflects the reasonably
expected yield for such Single Variable Debt Security and (iii) the qualified
stated interest allocable to
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an accrual period is increased (or decreased) if the interest actually paid
during an accrual period exceeds (or is less than) the interest assumed to be
paid under the assumed fixed rate described in (ii), above.
In general, any Variable Rate Debt Security other than a Single Variable
Rate Debt Security (a "Multiple Variable Rate Debt Security") that qualifies as
a "variable rate debt instrument" will be converted into an "equivalent" fixed
rate debt instrument for purposes of determining the amount and accrual of
original issue discount and qualified stated interest on the Multiple Variable
Rate Debt Security. The OID Regulations generally require that such a Multiple
Variable Rate Debt Security be converted into an "equivalent" fixed rate debt
instrument by substituting any qualified floating rate or qualified inverse
floating rate provided for under the terms of the Multiple Variable Rate Debt
Security with a fixed rate equal to the value of the qualified floating rate or
qualified inverse floating rate, as the case may be, as of the Multiple Variable
Rate Debt Security's issue date. Any objective rate (other than a qualified
inverse floating rate) provided for under the terms of the Multiple Variable
Rate Debt Security is converted into a fixed rate that reflects the yield that
is reasonably expected for the Multiple Variable Rate Debt Security. In the case
of a Multiple Variable Rate Debt Security that qualifies as a "variable rate
debt instrument" and provides for stated interest at a fixed rate in addition to
either one or more qualified floating rates or a qualified inverse floating
rate, the fixed rate is initially converted into a qualified floating rate (or a
qualified inverse floating rate, if the Multiple Variable Rate Debt Security
provides for a qualified inverse floating rate). Under such circumstances, the
qualified floating rate or qualified inverse floating rate that replaces the
fixed rate must be such that the fair market value of the Multiple Variable Rate
Debt Security as of the Multiple Variable Rate Debt Security's issue date is
approximately the same as the fair market value of an otherwise identical debt
instrument that provides for either the qualified floating rate or qualified
inverse floating rate rather than the fixed rate. Subsequent to converting the
fixed rate into either a qualified floating rate or a qualified inverse floating
rate, the Multiple Variable Rate Debt Security is then converted into an
"equivalent" fixed rate debt instrument in the manner described above.
Once the Multiple Variable Rate Debt Security is converted into an
"equivalent" fixed rate debt instrument pursuant to the foregoing rules, the
amount of original issue discount and qualified stated interest, if any, are
determined for the "equivalent" fixed rate debt instrument by applying the
original issue discount rules to the "equivalent" fixed rate debt instrument in
the manner described above. A Holder of the Multiple Variable Rate Debt Security
will account for such original issue discount and qualified stated interest as
if the Holder held the "equivalent" fixed rate debt instrument. Each accrual
period appropriate adjustments will be made to the amount of qualified stated
interest or original issue discount assumed to have been accrued or paid with
respect to the "equivalent" fixed rate debt instrument in the event that such
amounts differ from the accrual amount of interest accrued or paid on the
Multiple Variable Rate Debt Security during the accrual period.
If a Variable Rate Debt Security does not qualify as a "variable rate debt
instrument" under the OID Regulations, then the Variable Rate Debt Security
would be treated as a contingent payment debt obligation. It is not clear under
current law how a Variable Rate Debt Security would be taxed if such Debt
Security were treated as a contingent payment debt obligation since the OID
Regulations relating to contingent payment debt obligations do not apply to
REMIC regular interests.
Market Discount. A purchaser of a Security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A Holder that acquires a Debt
Security with more than a prescribed de minimis amount of "market discount"
(generally, the excess of the principal amount of the Debt Security over the
purchaser's purchase price) will be required to include accrued market discount
in income as ordinary income in each month, but limited to an amount not
exceeding the principal payments on the Debt Security received in that month
and, if the Securities are sold, the gain realized. Such market discount would
accrue in a manner to be provided in Treasury regulations but, until such
regulations are issued, such market discount would in general accrue either (i)
on the basis of a constant yield (in the case of a Pay-Through Security, taking
into account a prepayment assumption) or (ii) in the ratio of (a) in the case of
Securities (or in the case of a Pass-Through Security, as set forth below, the
Loans underlying such Security) not originally issued with original issue
discount, stated interest payable in the relevant period to total stated
interest remaining to be paid at the beginning of the period or (b) in the case
of Securities (or, in the case of a Pass-Through Security, as described below,
the Loans underlying such Security) originally issued at a discount, OID in the
relevant period to total OID remaining to be paid.
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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
be irrevocable without the consent of the Internal Revenue Service. Purchasers
who pay a premium for the Securities should consult their tax advisers regarding
the election to amortize premium and the method to be employed.
Election to Treat all Interest as Original Issue Discount. The OID
Regulations permit a Holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method for Debt Securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a Debt Security with market discount, the Holder of the Debt Security
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount that
such Holder of the Debt Security acquires during the year of the election or
thereafter. Similarly, a Holder of a Debt Security that makes this election for
a Debt Security that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Holder owns or acquires. The election to
accrue interest, discount and premium on a constant yield method with respect to
a Debt Security is irrevocable.
TAXATION OF THE REMIC AND ITS HOLDERS
General. In the opinion of Federal Tax Counsel, if a REMIC election is
made with respect to a Series of Securities, then the arrangement by which the
Securities of that Series are issued will be treated as a REMIC as long as all
of the provisions of the applicable Agreement are complied with and the
statutory and regulatory requirements are satisfied. Securities will be
designated as "Regular Interests" or "Residual Interests" in a REMIC, as
specified in the related Prospectus Supplement.
Except to the extent specified otherwise in a Prospectus Supplement, if a
REMIC election is made with respect to a Series of Securities, (i) Securities
held by a domestic building and loan association will constitute "a regular or a
residual interest in a REMIC" within the meaning of Code Section
7701(a)(19)(C)(xi) (assuming that at least 95% of the REMIC's assets consist of
cash, government saturates, "loans secured by an interest in real property," and
other types of assets described in Code Section 7701(a)(19)(C)); and (ii)
Securities held by a real estate investment trust will constitute "real estate
assets" within the meaning of Code Section 856(c)(6)(B), and income with respect
to the Securities will be considered "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of Code Section 856(c)(3)(B) (assuming, for both
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purposes, that at least 95% of the REMIC's assets are qualifying assets). If
less than 95% of the REMIC's assets consist of assets described in (i) or (ii)
above, then a Security will qualify for the tax treatment described in (i) or
(ii) in the proportion that such REMIC assets are qualifying assets.
REMIC EXPENSES; SINGLE CLASS REMICs
As a general rule, all of the expenses of a REMIC will be taken into
account by Holders of the Residual Interest Securities. In the case of a "single
class REMIC," however, the expenses will be allocated, under Treasury
regulations, among the Holders of the Regular Interest Securities and the
Holders of the Residual Interest Securities on a daily basis in proportion to
the relative amounts of income accruing to each Holder on that day. In the case
of a Holder of a Regular Interest Security who is an individual or a
"pass-through interest holder" (including certain pass-through entities but not
including real estate investment trusts), such expenses will be deductible only
to the extent that such expenses, plus other "miscellaneous itemized deductions"
of the Holder, exceed 2% of such Holder's adjusted gross income. In addition,
for taxable years beginning after December 31, 1990, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation for taxable years beginning after 1990) will be reduced
by the lesser of (i) 3% of the excess of adjusted gross income over the
applicable amount, or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. For taxable years beginning after December 31,
1997, in the case of a partnership that has 100 or more partners and elects to
be treated as an "electing large partnership," 70 percent of such partnership's
miscellaneous itemized deductions will be disallowed, although the remaining
deductions will generally be allowed at the partnership level and will not be
subject to the 2 percent floor that would otherwise be applicable to individual
partners. The reduction or disallowance of this deduction may have a significant
impact on the yield of the Regular Interest Security to such a Holder. In
general terms, a single class REMIC is one that either (i) would qualify, under
existing Treasury regulations, as a grantor trust if it were not a REMIC
(treating all interests as ownership interests, even if they would be classified
as debt for federal income tax purposes) or (ii) is similar to such a trust and
which is structured with the principal purpose of avoiding the single class
REMIC rules. Unless otherwise stated in the applicable Prospectus Supplement,
the expenses of the REMIC will be allocated to Holders of the related Residual
Interest Securities.
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
Tiered REMIC Structures. For certain Series of Securities, two or more
separate elections may be held to treat designated portions of the related Trust
Fund as REMICs ("Tiered REMICs") for federal income tax purposes. Upon the
issuance of any such Series of Securities, Federal Tax Counsel will deliver its
opinion generally to the effect that, assuming compliance with all provisions of
the related Pooling and Servicing Agreement, the Tiered REMICs will each qualify
as a REMIC and the REMIC Certificates issued by the Tiered REMICs, respectively,
will be considered to evidence ownership of Regular Certificates or Residual
Certificates in the related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of Section 856(c)(4)(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
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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 taxable years beginning after December 31, 1997, in the case
of a partnership that has 100 or more partners and elects to be treated as an
"electing large partnership," 70 percent of such partnership's miscellaneous
itemized deductions will be disallowed, although the remaining deductions will
generally be allowed at the partnership level and will not be subject to the 2
percent floor that would otherwise be applicable to individual partners.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the Startup
Day (generally, the day that the interests are issued). Such aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which Holders of Pay-Through Securities
accrue original issue discount (i.e., under the constant yield method taking
into account the Prepayment Assumption). The REMIC will deduct OID on the
Regular Interest Securities in the same manner that the Holders of the Regular
Interest 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.
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The Holder of a Residual Interest Security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to such income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in certain REMIC issues in which the loans held by the REMIC were issued or
acquired at a discount, since mortgage prepayments cause recognition of discount
income, while the corresponding portion of the prepayment could be used in whole
or in part to make principal payments on REMIC Regular Interests issued without
any discount or at an insubstantial discount. (If this occurs, it is likely that
cash distributions will exceed taxable income in later years.) Taxable income
may also be greater in earlier years of certain REMIC issues as a result of the
fact that interest expense deductions, as a percentage of outstanding principal
on REMIC Regular Interest Securities, will typically increase over time as lower
yielding Securities are paid, whereas interest income with respect to loans will
generally remain constant over time as a percentage of loan principal.
In any event, because the holder of a residual interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
Limitation on Losses. The amount of the REMIC's net loss that a Holder may
take into account currently is limited to the Holder's adjusted basis at the end
of the calendar quarter in which such loss arises. A Holder's basis in a
Residual Interest Security will initially equal such Holder's purchase price,
and will subsequently be increased by the amount of the REMIC's taxable income
allocated to the Holder, and decreased (but not below zero) by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
Holder. Any disallowed loss may be carried forward indefinitely, but may be used
only to offset income of the REMIC generated by the same REMIC. The ability of
Holders of Residual Interest Securities to deduct net losses may be subject to
additional limitations under the Code, as to which such Holders should consult
their tax advisers.
Distributions. Distributions on a Residual Interest Security (whether at
their scheduled times or as a result of prepayments) will generally not result
in any additional taxable income or loss to a Holder of a Residual Interest
Security. If the amount of such payment exceeds a holder's adjusted basis in the
Residual Interest Security, however, the Holder will recognize gain (treated as
gain from the sale of the Residual Interest Security) to the extent of such
excess.
Sale or Exchange. A Holder of a Residual Interest Security will recognize
gain or loss on the sale or exchange of a Residual Interest Security equal to
the difference, if any, between the amount realized and such Holder's adjusted
basis in the Residual Interest Security at the time of such sale or exchange.
Except to the extent provided in regulations, which have not yet been issued,
any loss upon disposition of a Residual Interest Security will be disallowed if
the selling Holder acquires any residual interest in a REMIC or similar mortgage
pool within six months before or after such disposition.
Excess Inclusions. The portion of the REMIC taxable income of a Holder of
a Residual Interest Security consisting of "excess inclusion" income may not be
offset by other deductions or losses, including net operating losses, on such
Holder's federal income tax return. Further, if the Holder of a Residual
Interest Security is an organization subject to the tax on unrelated business
income imposed by Code Section 511, such Holder's excess inclusion income will
be treated as unrelated business taxable income of such Holder. In addition,
under Treasury regulations yet to be issued, if a real estate investment trust,
a regulated investment company, a common trust fund, or certain cooperatives
were to own a Residual Interest Security, a portion of dividends (or other
distributions) paid by the real estate investment trust (or other entity) would
be treated as excess inclusion income. If a Residual Security is owned by a
foreign person, excess inclusion income is subject to tax at a rate of 30% which
may not be reduced by treaty, is not eligible for treatment as "portfolio
interest" and is subject to certain additional limitations. See "Tax Treatment
of Foreign Investors."
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Security, over the daily accruals for such quarterly period of
(i) 120% of the long term applicable federal rate on the Startup Date multiplied
by (ii) the adjusted issue price of such Residual Interest Security at the
beginning of such quarterly period. The adjusted
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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.
Provisions governing the relationship between excess inclusions and the
alternative minimum tax provide that (i) the alternative minimum taxable income
of a taxpayer is based on the taxpayer's regular taxable income computed without
regard to the rule that taxable income cannot be less than the amount of excess
inclusions, (ii) the alternative minimum taxable income of a taxpayer for a
taxable year cannot be less than the amount of excess inclusions for that year,
and (iii) the amount of any alternative minimum tax net operating loss is
computed without regard to any excess inclusions. While these provisions are
generally effective for tax years beginning after December 31, 1986, a taxpayer
may elect to have these provisions apply only with respect to tax years
beginning after August 20, 1996.
The Code provides that to the extent provided in regulations, as an
exception to the general rule described above, the entire amount of income
accruing on a Residual Interest Security will be treated as an excess inclusion
if the Residual Interest Securities in the aggregate are considered not to have
"significant value." The Treasury Department has not yet provided regulations in
this respect.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Interest Securities may be disregarded. See "-- Restrictions on
Ownership and Transfer of Residual Interest Securities" and "-- Tax Treatment of
Foreign Investors" below.
Restrictions on Ownership and Transfer of Residual Interest Securities. As
a condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a REMIC residual interest by any "Disqualified
Organization." Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in Section 1381(a)(2)(C) of the
Code, or any entity exempt from the tax imposed by Sections 1399 of the Code, if
such entity is not subject to tax on its unrelated business income. Accordingly,
the applicable Pooling and Servicing Agreement will prohibit Disqualified
Organizations from owning a Residual Interest Security. In addition, no transfer
of a Residual Interest Security will be permitted unless the proposed transferee
shall have furnished to the Trustee an affidavit representing and warranting
that it is neither a Disqualified Organization nor an agent or nominee acing on
behalf of a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
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.
For taxable years beginning after December 31, 1997, all partners of certain
electing partnerships having 100 or more partners ("electing large
partnerships") will be treated as disqualified organizations for purposes of the
tax imposed on pass-through entities if such electing large partnerships hold
residual interests in a REMIC. However, the electing large partnership would be
entitled to exclude the excess inclusion income from gross income for purposes
of determining the taxable income of the partners.
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
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occurs, and (ii) the transferor reasonably expects that the transferee will
receive distributions from the REMIC at or after the time at which the taxes
accrue on the anticipated excess inclusions in an amount sufficient to satisfy
the accrued taxes. If a transfer of a Residual Interest Security is disregarded,
the transferor would be liable for any federal income tax imposed upon taxable
income derived by the transferee from the REMIC. The REMIC Regulations provide
no guidance as to how to determine if a significant purpose of a transfer is to
impede the assessment or collection of tax. A similar type of limitation exists
with respect to certain transfers of residual interests by foreign persons to
United States persons. See "-- Tax Treatment of Foreign Investors."
Mark to Market Rules. Prospective purchasers of a Residual Interest
Security should be aware of Internal Revenue Service regulations (the "Mark to
Market Regulations") relating to the requirement that a securities dealer
mark-to-market securities held for sale to customers. This mark-to-market
requirement applies to all securities of a dealer, except to the extent that the
dealer has specifically identified a security as held for investment. The Mark
to Market Regulations provide that for purposes of this mark-to-market
requirement, a "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.
The 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. However, 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 TRUST
General. As specified in the related Prospectus Supplement if a REMIC or
partnership election is not made and the Trust Fund is not treated as a division
of a sole owner in the opinion of Federal Tax Counsel, the Trust Fund relating
to a Series of Securities will be classified for federal income tax purposes as
a grantor trust under Subpart E, Part 1 of Subchapter J of Chapter 1 of Subtitle
A of the Code and not as an association taxable as a corporation (the Securities
of such Series, "Pass-Through Securities"). In some Series there will be no
separation of the principal and interest payments on the Loans. In such
circumstances, a Holder will be considered to have purchased a pro rata
undivided interest in each of the Loans. In other cases ("Stripped Securities"),
sale of the Securities will produce a separation in the ownership of all or a
portion of the principal payments from all or a portion of the interest payments
on the Loans.
Each Holder must report on its federal income tax return its share of the
gross income derived from the Loans (not reduced by the amount payable as fees
to the Trustee and the Servicer and similar fees (collectively,
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the "Servicing Fees")), at the same time and in the same manner as such items
would have been reported under the Holder's tax accounting method had it held
its interest in the Loans directly, received directly its share of the amounts
received with respect to the Loans, and paid directly its share of the Servicing
Fees. In the case of Pass-Through Securities other than Stripped Securities,
such income will consist of a pro rata share of all of the income derived from
all of the Loans and, in the case of Stripped Securities, such income will
consist of a pro rata share of the income derived from each stripped bond or
stripped coupon in which the Holder owns an interest. The Holder of a Security
will generally be entitled to deduct such Servicing Fees under Section 162 or
Section 212 of the Code to the extent that such Servicing Fees represent
"reasonable" compensation for the services rendered by the Trustee and the
Servicer (or third parties that are compensated for the performance of
services). In the case of a noncorporate Holder, however, Servicing Fees (to the
extent not otherwise disallowed, e.g., because they exceed reasonable
compensation) will be deductible in computing such Holder's regular tax
liability only to the extent that such fees, when added to other miscellaneous
itemized deductions, exceed 2% of adjusted gross income and may not be deducible
to any extent in computing such Holder's alternative minimum tax liability. In
addition, for taxable years beginning after December 31, 1990, the amount of
itemized deductions otherwise allowable for the taxable year for an individual
whose adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation in taxable years beginning after 1990) will be reduced by
the lesser of (i) 3% of the excess of adjusted gross income over the applicable
amount or (ii) 80% of the amount of itemized deductions otherwise allowable for
such taxable year. For taxable years beginning after December 31, 1997, in the
case of a partnership that has 100 or more partners and elects to be treated as
an "electing large partnership," 70 percent of such partnership's miscellaneous
itemized deductions will be disallowed, although the remaining deductions will
generally be allowed at the partnership level and will not be subject to the 2
percent floor that would otherwise be applicable to individual partners.
Discount or Premium on Pass-Through Securities. The Holder's purchase
price of a Pass-Through Security is to be allocated among the Loans in
proportion to their fair market values, determined as of the time of purchase of
the Securities. In the typical case, the Trustee (to the extent necessary to
fulfill its reporting obligations) will treat each Loan as having a fair market
value proportional to the share of the aggregate principal balances of all of
the Loans that it represents, since the Securities, unless otherwise specified
in the applicable Prospectus Supplement, will have a relatively uniform interest
rate and other common characteristics. To the extent that the portion of the
purchase price of a Pass-Through Security allocated to a Loan (other than to a
right to receive any accrued interest thereon and any undistributed principal
payments) is less than or greater than the portion of the principal balance of
the Loan allocable to the Security, the interest in the Loan allocable to the
Pass-Through Security will be deemed to have been acquired at a discount or
premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Loan with OID in excess of a
prescribed de minimis amount or a Stripped Security, a Holder of a Security will
be required to report as interest income in each taxable year its share of the
amount of OID that accrues during that year in the manner described above. OID
with respect to a Loan could arise, for example, by virtue of the financing of
points by the originator of the Loan, or by virtue of the charging of points by
the originator of the Loan in an amount greater than a statutory de minimis
exception, in circumstances under which the points are not currently deductible
pursuant to applicable Code provisions. Any market discount or premium on a Loan
will be includible in income, generally in the manner described above, except
that in the case of Pass-Through Securities, market discount is calculated with
respect to the Loans underlying the Security, rather than with respect to the
Security. A Holder that acquires an interest in a Loan originated after July 18,
1984 with more than a de minimis amount of market discount (generally, the
excess of the principal amount of the Loan over the purchaser's allocable
purchase price) will be required to include accrued market discount in income in
the manner set forth above. See "-- Taxation of Debt Securities; Market
Discount" and "-- Premium" above.
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.
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Stripped Securities. A Stripped Security may represent a right to receive
only a portion of the interest payments on the Loans, a right to receive only
principal payments on the Loans, or a right to receive certain payments of both
interest and principal. Certain Stripped Securities ("Ratio Strip Securities")
may represent a right to receive differing percentages of both the interest and
principal on each Loan. Pursuant to Section 1286 of the Code, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from ownership of the right to receive some or all of the principal
payments results in the creation of "stripped bonds" with respect to principal
payments and "stripped coupons" with respect to interest payments. Section 1286
of the Code applies the OID rules to stripped bonds and stripped coupons. For
purposes of computing original issue discount, a stripped bond or a stripped
coupon is treated as a debt instrument issued on the date that such stripped
interest is purchased with an issue price equal to its purchase price or, if
more than one stripped interest is purchased, the ratable share of the purchase
price allocable to such stripped interest.
Servicing Fees in excess of reasonable servicing fees ("excess servicing")
will be treated under the stripped bond rules. If the excess servicing fee is
less than 100 basis points (i.e. 1% interest on the Loan principal balance) or
the Securities are initially sold with a de minimis discount (assuming no
prepayment assumption is required), any non-de minimis discount arising from a
subsequent transfer of the Securities should be treated as market discount. The
IRS appears to require that reasonable servicing fees be calculated on a Loan by
Loan basis, which could result in some Loans being treated as having more than
100 basis points of interest stripped off.
The Code, OID Regulations and judicial decisions provide no direct guidance
as to how the interest and original issue discount rules are to apply to
Stripped Securities and other Pass-Through Securities. Under the method
described above for Pay-Through Securities (the "Cash Flow Bond Method"), a
prepayment assumption is used and periodic recalculations are made which take
into account with respect to each accrual period the effect of prepayments
during such period. However, the 1986 Act does not, absent Treasury regulations,
appear specifically to cover instruments such as the Stripped Securities which
technically represent ownership interests in the underlying Loans, rather than
being debt instruments "secured by" those Loans. Nevertheless, it is believed
that the Cash Flow Bond Method is a reasonable method of reporting income for
such Securities, and it is expected that OID will be reported on that basis
unless otherwise specified in the related Prospectus Supplement. In applying the
calculation to Pass-Through Securities, the Trustee will treat all payments to
be received by a Holder with respect to the underlying Loans as payments on a
single installment obligation. The IRS could, however, assert that original
issue discount must be calculated separately for each Loan underlying a
Security.
Under certain circumstances, if the Loans prepay at a rate faster than the
Prepayment Assumption, the use of the Cash Flow Bond Method may accelerate a
Holder's recognition of income. If, however, the Loans prepay at a rate slower
than the Prepayment Assumption, in some circumstances the use of this method may
decelerate a Holder's recognition of income.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the Internal Revenue
Service could contend that (i) in certain Series, each Security is composed of
an unstripped undivided ownership interest in Loans and an installment
obligation consisting of stripped principal payments; (ii) the Securities are
subject to the contingent payment provisions of the Proposed Regulations; or
(iii) each Stripped Security the payments on which consist primarily or solely
of a specified portion of the interest payments on Loans is composed of an
unstripped undivided ownership interest in Loans and an installment obligation
consisting of stripped interest payments.
Given the variety of alternatives for treatment of the Stripped Securities
and the different federal income tax consequences that result from each
alternative, potential purchasers are urged to consult their own tax advisers
regarding the proper treatment of the Securities for federal income tax
purposes.
Character as Qualifying Loans. In the case of Stripped Securities there is
no specific legal authority existing regarding whether the character of the
Securities, for federal income tax purposes, will be the same as the Loans. The
IRS could take the position that the Loans' character is not carried over to the
Securities in such circumstances. To the extent the Trust Fund's assets are
qualifying assets, Pass-Through Securities will be, and, although the matter is
not free from doubt, Stripped Securities should be considered to represent "real
estate
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assets" within the meaning of Section 856(c)(6)(B) of the Code, and "loans
secured by an interest in real property" within the meaning of Section
7701(a)(19)(C)(v) of the Code; and interest income attributable to the
Securities should be considered to represent "interest on obligations secured by
mortgages on real property or on interests in real property" with the meaning of
Section 856(c)(3)(B) of the Code. Reserves or funds underlying the Securities
may cause a proportionate reduction in the above-described qualifying status
categories of Securities.
SALE OR EXCHANGE
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, a Holder's tax basis in its Security is the price
such Holder pays for a Security, plus amounts of original issue or market
discount included in income and reduced by any payments received (other than
qualified stated interest payments) and any amortized premium. Gain or loss
recognized on a sale, exchange, or redemption of a Security, measured by the
difference between the amount realized and the Security's basis as so adjusted,
will generally be capital gain or loss, assuming that the Security is held as a
capital asset. In the case of a Security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or loss realized
on the sale or exchange of a Regular Interest Security will be taxable as
ordinary income or loss. In addition, gain from the disposition of a Regular
Interest Security that might otherwise be capital gain will be treated as
ordinary income to the extent of the excess, if any, of (i) the amount that
would have been includible in the Holder's income if the yield on such Regular
Interest Security had equaled 110% of the applicable federal rate as of the
beginning of such Holder's holding period, over the amount of ordinary income
actually recognized by the Holder with respect to such Regular Interest
Security.
MISCELLANEOUS TAX ASPECTS
Backup Withholding. Subject to the discussion below with respect to Trust
Funds as to which a partnership election is made, a Holder, other than a Holder
of a Residual Interest Security, may, under certain circumstances, be subject to
"backup withholding" at a rate of 31% with respect to distributions or the
proceeds of a sale of certificates to or through brokers that represent interest
or original issue discount on the Securities. This withholding generally applies
if the Holder of a Security (i) fails to furnish the Trustee with its taxpayer
identification number ("TIN"); (ii) furnishes the Trustee an incorrect TIN;
(iii) fails to report properly interest, dividends or other "reportable
payments" as defined in the Code; or (iv) under certain circumstances, fails to
provide the Trustee or such Holder's securities broker with a certified
statement, signed under penalty of perjury, that the TIN provided is its correct
number and that the Holder is not subject to backup withholding. Backup
withholding will not apply, however, with respect to certain payments made to
Holders, including payments to certain exempt recipients (such as exempt
organizations) and to certain Nonresidents (as defined below). Holders should
consult their tax advisers as to their qualification for exemption from backup
withholding and the procedure for obtaining the exemption.
The Trustee will report to the Holders and to the Servicer for each
calendar year the amount of any "reportable payments" during such year and the
amount of tax withheld, if any, with respect to payments on the Securities.
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, under the Code, unless interest (including OID)
paid on a Security (other than a Residual Interest Security) is considered to be
"effectively connected" with a trade or business conducted in the United States
by a Holder who is not a United States person, as defined below,
("Nonresidents"), such interest will normally qualify as portfolio interest
(except where (i) the recipient is a holder, directly or by attribution, of 10%
or more of the capital or profits interest in the issuer, or (ii) the recipient
is a controlled foreign corporation to which the issuer is 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,
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interest and other fixed or determinable, annual or periodic income paid to
Nonresidents. Holders of Pass-Through Securities and Stripped Securities,
including Ratio Strip Securities, however, may be subject to withholding to the
extent that the Loans were originated on or before July 18, 1984. For these
purposes, the term "United States person" means (i) a citizen or resident of the
United States, (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or any political subdivision
thereof, (iii) an estate whose income is includable in gross income for United
States federal income taxation regardless of its source, and (iv) a trust for
which one or more United States fiduciaries have the authority to control all
substantial decisions and for which a court of the United States can exercise
primary supervision over the trust's administration. For years beginning before
January 1, 1997, the term "United States person" shall include a trust whose
income in includible in gross income for United States federal income taxation
regardless of source, in lieu of trusts described in (iv) above, unless the
trust elects to have its United States status determined under the criteria set
forth in (iv) above for tax year ending after August 20, 1996. Recently issued
Treasury regulations (the "Final Withholding Regulations"), which are generally
effective with respect to payments made after December 31, 1998, consolidate and
modify the current certification requirements and means by which a Holder may
claim exemption from United States federal income tax withholding and provide
certain presumptions regarding the status of Holders when payments to the
Holders cannot be reliably associated with appropriate documentation provided to
the payor. All Holders should consult their tax advisers regarding the
application of the Final Withholding Regulations.
Interest and OID of Holders who are Nonresidents are not subject to
withholding if they are effectively connected with a United States business
conducted by the Holder. They will, however, generally be subject to the regular
United States income tax.
Payments to Holders of Residual Interest Securities who are Nonresidents
will generally be treated as interest for purposes of the 30% (or lower treaty
rate) United States withholding tax. Nonresidents should assume that such income
does not qualify for exemption from United States withholding tax as "portfolio
interest." It is clear that, to the extent that a payment represents a portion
of REMIC taxable income that constitutes excess inclusion income, a Holder of a
Residual Interest Security will not be entitled to an exemption from or
reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed
(or when the Residual Interest Security is disposed of). The Treasury has
statutory authority, however, to promulgate regulations which would require such
amounts to be taken into account at an earlier time in order to prevent the
avoidance of tax. Such regulations could, for example, require withholding prior
to the distribution of cash in the case of Residual Interest Securities that do
not have significant value. Under the REMIC Regulations, if a Residual Interest
Security has tax avoidance potential, a transfer of a Residual Interest Security
to a Nonresident will be disregarded for all federal tax purposes. A Residual
Interest Security has tax avoidance potential unless, at the time of the
transfer the transferor reasonably expects that the REMIC will distribute to the
transferee residual interest holder amounts that will equal at least 30% of each
excess inclusion, and that such amounts will be distributed at or after the time
at which the excess inclusions accrue and not later than the calendar year
following the calendar year of accrual. If a Nonresident transfers a Residual
Interest Security to a United States person, and if the transfer has the effect
of allowing the transferor to avoid tax on accrued excess inclusions, then the
transfer is disregarded and the transferor continues to be treated as the owner
of the Residual Interest Security for purposes of the withholding tax provisions
of the Code. See "-- Excess Inclusions."
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
Federal Tax Counsel will deliver its opinion that a Trust Fund for which a
partnership election is made will not be an association (or publicly traded
partnership) taxable as a corporation for federal income tax purposes assuming
that no action will be taken that is inconsistent with the treatment of the
Trust as a partnership (such as an election to treat the Trust as a corporation
for federal income tax purposes ("Corporation Election")). If, however, the
Trust has a single owner for federal income tax purposes, it will be treated as
a division of its owner and as such will be disregarded as an entity separate
from its owner for federal income tax purposes, assuming that no Corporation
Election is made. 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
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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 contingent interest when it becomes fixed and unconditionally
payable. A purchaser who buys a Note for more or less than its principal amount
will generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one year
from the issue date of such Note (a "Short-Term Note") may be subject to special
rules. An accrual basis Holder of a Short-Term Note (and certain cash method
Holders, including regulated investment companies, as set forth in Section 1281
of the Code) generally would be required to report interest income as interest
accrues on a straight-line basis over the term of each interest period. Other
cash basis Holders of a Short-Term Note would, in general, be required to report
interest income as interest is paid (or, if earlier, upon the taxable
disposition of the Short-Term Note). However, a cash basis Holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
Sale or Other Disposition. If a Noteholder sells a Note, the Holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the Holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the Holder's
cost for the Note, increased by any market discount, acquisition discount, OID
and gain previously included by such Noteholder in income with respect to the
Note and decreased by the amount of bond premium (if any) previously amortized
and by the
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amount of principal payments previously received by such Noteholder with respect
to such Note. Any such gain or loss will be capital gain or loss if the Note was
held as a capital asset, except for gain representing accrued interest and
accrued market discount not previously included in income. Capital losses
generally may be used only to offset capital gains.
Foreign Holders. Interest payments made (or accrued) to a Noteholder who
is a Holder other than a United States Person, as defined below, (a "foreign
person") generally will be considered "portfolio interest", and generally will
not be subject to United States federal income tax and withholding tax, if the
interest is not effectively connected with the conduct of a trade or business
within the United States by the foreign person and the foreign person (i) is not
actually or constructively a "10 percent shareholder" of the Trust or the Seller
(including a Holder of 10% of the outstanding Certificates) or a "controlled
foreign corporation" with respect to which the Trust or the Seller is a "related
person" within the meaning of the Code and (ii) provides the Owner Trustee or
other person who is otherwise required to withhold U.S. tax with respect to the
Notes with an appropriate statement (on Form W-8 or a similar form), signed
under penalties of perjury, certifying that the beneficial owner of the Note is
a foreign person and providing the foreign person's name and address. If a Note
is held through a securities clearing organization or certain other financial
institutions, the organization or institution may provide the relevant signed
statement to the withholding agent; in that case, however, the signed statement
must be accompanied by a Form W-8 or substitute form provided by the foreign
person that owns the Note. If such interest is not portfolio interest, then it
will be subject to United States federal income and withholding tax at a rate of
30 percent, unless reduced or eliminated pursuant to an applicable tax treaty.
For these purposes, the term "United States person" means (i) a citizen or
resident of the United States, (ii) a corporation or partnership (including an
entity treated as a corporation or partnership for U.S. federal income tax
purposes) created or organized in or under the laws of the United States or any
State thereof or the District of Columbia (unless, in the case of a partnership,
Treasury regulations are adopted that provide otherwise), (iii) an estate whose
income is includable in gross income for United States federal income taxation
regardless of its source, and (iv) a trust for which one or more United States
persons have the authority to control all substantial decisions and for which a
court of the United States can exercise primary supervision over the trust's
administration. In addition, certain trusts that would otherwise not qualify as
U.S. Persons under the foregoing definition can elect to be treated as U.S.
Persons. Recently adopted Treasury regulations make certain modifications to the
withholding, backup withholding, and information reporting rules described in
the prospectus. These new regulations attempt to unify certification
requirements and modify reliance standards and are generally effective for
payments made after December 31, 1998. Prospective investors are urged to
consult their own tax advisors regarding the affect these regulations may have
on their particular circumstances.
The Final Withholding Regulations consolidate and modify the current
certification requirements and means by which a Non-Resident may claim exemption
from United States federal income tax withholding. All Non-Residents should
consult their tax advisors regarding the application of the Final Withholding
Regulations, which are generally effective with respect to payments made after
December 31, 1998.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each Holder of a Note (other than an exempt Holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the Holder's name,
address, correct federal taxpayer identification number and a statement that the
holder is not subject to backup withholding. Should a nonexempt Noteholder fail
to provide the required certification, the Trust Fund will be required to
withhold 31 percent of the amount otherwise payable to the Holder, and remit the
withheld amount to the IRS as a credit against the Holder's federal income tax
liability.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of Federal Tax Counsel, the IRS successfully asserted that one or more of the
Notes did not represent debt for federal income tax purposes, the
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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.
Partnership Taxation. As a partnership, the Trust Fund will not be subject
to federal income tax. Rather, each Certificateholder will be required to
separately take into account such Holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Loans (including
appropriate adjustments for market discount, OID and bond premium) and any gain
upon collection or disposition of Loans. The Trust Fund's deductions will
consist primarily of interest accruing with respect to the Notes, servicing and
other fees, and losses or deductions upon collection or disposition of Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). Except as disclosed in the related
Prospectus Supplement, the Trust Agreement will provide, in general, that the
Certificateholders will be allocated taxable income of the Trust Fund for each
month equal to the sum of (i) the interest that accrues on the Certificates in
accordance with their terms for such month, including interest accruing at the
Pass-Through Rate for such month and interest on amounts previously due on the
Certificates but not yet distributed; (ii) any Trust Fund income attributable to
discount on the Loans that corresponds to any excess of the principal amount of
the Certificates over their initial issue price; (iii) prepayment premium
payable to the Certificateholders for such month; and (iv) any other amounts of
income payable to the Certificateholders for such month. Such allocation will be
reduced by any amortization by the Trust Fund of premium on Loans that
corresponds to any excess of the issue price of Certificates over their
principal amount. All remaining taxable income of the Trust Fund will be
allocated to the Depositor. Based on the economic arrangement of the parties,
this approach for allocating Trust Fund income should be permissible under
applicable Treasury regulations, although no assurance can be given that the IRS
would not require a greater amount of income to be allocated to
Certificateholders. Moreover, even
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under the foregoing method of allocation, Certificateholders may be allocated
income equal to the entire Pass-Through Rate plus the other items described
above even though the Trust Fund might not have sufficient cash to make current
cash distributions of such amount. Thus, cash basis Holders will in effect be
required to report income from the Certificates on the accrual basis and
Certificateholders may become liable for taxes on Trust Fund income even if they
have not received cash from the Trust Fund to pay such taxes. In addition,
because tax allocations and tax reporting will be done on a uniform basis for
all Certificateholders but Certificateholders may be purchasing Certificates at
different times and at different prices, Certificateholders may be required to
report on their tax returns taxable income that is greater or less than the
amount reported to them by the Trust Fund.
A Certificateholder that is a pension, profit sharing or employee benefit
plan or other tax-exempt entity (including an individual retirement account)
will realize from a Certificate "unrelated business taxable income" as a result
of the "Debt Financed Income" rules under the Code.
An individual taxpayer's share of expenses of the Trust Fund (including
fees to the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or in
part and might result in such Holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such Holder over the life of
the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Loan, the Trust Fund
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Loans were not issued with
OID and, therefore, the Trust should not have OID income. However, the purchase
price paid by the Trust Fund for the Loans may be greater or less than the
remaining principal balance of the Loans at the time of purchase. If so, the
Loan will have been acquired at a premium or discount, as the case may be. (As
indicated above, the Trust Fund will make this calculation on an aggregate
basis, but might be required to recompute it on a Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium, the
Trust Fund will elect to include any such discount in income currently as it
accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust Fund
will be deemed to terminate for federal income tax purposes if 50% or more of
the capital and profits interests in the Trust Fund are sold or exchanged within
a 12-month period. If such a termination occurs, the Trust Fund will be
considered to contribute its assets to a new partnership in exchange for
partnership interests therein, and then dissolve and distribute the new
partnership interests to the partners. The Trust Fund will not comply with
certain technical requirements that might apply when such a constructive
termination occurs. As a result, the Trust Fund may be subject to certain tax
penalties and may incur additional expenses if it is required to comply with
those requirements. Furthermore, the Trust Fund might not be able to comply due
to lack of data.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
Holder's cost increased by the Holder's share of Trust Fund income (includible
in income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include the Holder's share of the
Notes and other liabilities of the Trust Fund. A Holder acquiring Certificates
at different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the Certificates
sold (rather than maintaining a separate tax basis in each Certificate for
purposes of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the Holder's share of
unrecognized accrued market discount on the Loans would generally be treated as
ordinary income to the Holder and would give rise to special tax reporting
requirements. The Trust Fund does not expect to have any other assets that would
give rise to such
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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.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust Fund were to file an election under
Section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the Trust Fund will not make such
election. As a result, Certificateholders might be allocated a greater or lesser
amount of Trust Fund income than would be appropriate based on their own
purchase price for Certificates.
Administrative Matters. The Owner Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust Fund will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust Fund and will report each Certificateholder's allocable share of items of
Trust Fund income and expense to Holders and the IRS on Schedule K-1. The Trust
Fund will provide the Schedule K-1 information to nominees that fail to provide
the Trust Fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
Certificates. Generally, Holders must file tax returns that are consistent with
the information return filed by the Trust Fund or be subject to penalties unless
the Holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund information
as to themselves and their ownership of Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Trust Fund. The information referred to above
for any calendar year must be furnished to the Trust Fund on or before the
following January 31. Nominees, brokers and financial institutions that fail to
provide the Trust Fund with the information described above may be subject to
penalties.
The Depositor will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally,
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the statute of limitations for partnership items does not expire before three
years after the date on which the partnership information return is filed. Any
adverse determination following an audit of the return of the Trust Fund by the
appropriate taxing authorities could result in an adjustment of the returns of
the Certificateholders, and, under certain circumstances, a Certificateholder
may be precluded from separately litigating a proposed adjustment to the items
of the Trust Fund. An adjustment could also result in an audit of a
Certificateholder's returns and adjustments of items not related to the income
and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to foreign
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a failure
to withhold. The Trust Fund expects to withhold on the portion of its taxable
income that is allocable to a Certificateholder which is a foreign person
pursuant to Section 1446 of the Code, as if such income were effectively
connected to a U.S. trade or business, at a rate of 35% for Holders which are
foreign persons that are taxable as corporations and 39.6% for all other Holders
which are foreign persons. Subsequent adoption of Treasury regulations or the
issuance of other administrative pronouncements may require the Trust Fund to
change its withholding procedures. In determining a Holder's withholding status,
the Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the Holder's
certification of nonforeign status signed under penalties of perjury.
Each Certificateholder which is a foreign person might be required to file
a U.S. individual or corporate income tax return (including, in the case of a
corporation, the branch profits tax) on its share of the Trust Fund's income.
Each Certificateholder which is a foreign person must obtain a taxpayer
identification number from the IRS and submit that number to the Trust Fund on
Form W-8 in order to assure appropriate crediting of the taxes withheld. A
Certificateholder which is a foreign person generally would be entitled to file
with the IRS a claim for refund with respect to taxes withheld by the Trust Fund
taking the position that no taxes were due because the Trust Fund was not
engaged in a U.S. trade or business. However, interest payments made (or
accrued) to a Certificateholder who is a foreign person generally will be
considered guaranteed payments to the extent such payments are determined
without regard to the income of the Trust Fund. As a result, Certificateholders
which are foreign persons will be subject to United States federal income tax
and withholding tax at a rate of 30%, unless reduced or eliminated pursuant to
an applicable treaty. In such case, a Certificateholder which is a foreign
person would only be entitled to claim a refund for that portion of the taxes in
excess of the taxes that should be withheld with respect to the guaranteed
payments.
The Final Withholding Regulations consolidate and modify the current
certification requirements and means by which a Non-Resident may claim exemption
from United States federal income tax withholding. All Non-Residents should
consult their tax advisors regarding the application of the Final Withholding
Regulations, which are generally effective with respect to payments made after
December 31, 1998.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the Holder is an exempt recipient under
applicable provisions of the Code.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Considerations," potential investors should consider the
state and local income tax consequences of the acquisition, ownership, and
disposition of the Securities. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in the
Securities.
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ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and the Code impose certain restrictions on employee benefit plans subject to
ERISA and plans and other arrangements subject to Section 4975 of the Code and
on persons who are parties in interest or disqualified persons ("parties in
interest") with respect to such plans or arrangements. Certain employee benefit
plans, such as governmental plans and church plans (if no election has been made
under Section 410(d) of the Code), are not subject to the restrictions of ERISA,
and assets of such plans may be invested in the Securities without regard to the
ERISA considerations described below, subject to other applicable federal and
state law. However, any such governmental or church plan which is qualified
under Section 401(a) of the Code and exempt from taxation under Section 501(a)
of the Code is subject to the prohibited transaction rules set forth in Section
503 of the Code.
A fiduciary of an employee benefit plan subject to Title I of ERISA should
consider the fiduciary standards under ERISA in the context of the plan's
particular circumstances before authorizing an investment of a portion of such
plan's assets in the Securities. Accordingly, among other factors, such
fiduciary should consider (i) whether the investment is for the exclusive
benefit of plan participants and their beneficiaries; (ii) whether the
investment satisfies the diversification requirements of Section 404 of ERISA;
(iii) whether the investment is in accordance with the documents and instruments
governing the plan and (iv) whether the investment is prudent, considering the
nature of the investment, the overall investment policy of the Plan and the
composition of the Plan's portfolio. Fiduciaries of such plans also should
consider ERISA's prohibition on improper delegation of control over, or
responsibility for, plan assets.
In addition, fiduciaries of employee benefit plans subject to Title I of
ERISA, as well as of certain plans or other retirement arrangements not subject
to ERISA but subject to Section 4975 of the Code (such as individual retirement
accounts and Keogh plans covering only a sole proprietor or partners) and any
entity, including an insurance company general account, whose underlying assets
include plan assets by reason of such a plan investing in such entity,
(collectively, "Plans(s)"), should consult with their legal counsel to determine
whether an investment in the Securities will cause the assets of the Trust Fund
to be considered plan assets pursuant to the plan asset regulations set forth at
29 CFR 2510.3-101 (the "Regulation"), thereby subjecting the Plan to the
prohibited transaction rules with respect to the Trust Fund and subjecting the
Trustee and any entities providing services with respect to the operation of the
Trust to the fiduciary standards of ERISA, or will 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 with
respect to Plans that invest in the Trust, and 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 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 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 a
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prohibited transaction if the Depositor or the Trustee or any of their
respective affiliates is, or becomes, a party in interest or disqualified person
with respect to such Plan.
Another such exception applies if the class of equity interests in question
is: (i) "widely held" (held by 100 or more investors who are independent of the
Depositor and each other); (ii) freely transferable; and (iii) sold as part of
an offering pursuant to (A) an effective registration statement under the
Securities Act of 1933, and then subsequently registered under the Securities
Exchange Act of 1934 or (B) an effective registration statement under Section
12(b) or 12(g) of the Securities Exchange Act of 1934 ("Publicly Offered
Securities"). In addition, the Regulation provides that if at all times more
than 75% of the value of all classes of equity interests in the Depositor or the
Trust Fund is 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 exemption may also be available for the purchase, holding and transfer
of the Securities. The Department of Labor 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). If the Trust Fund
consists solely of assets covered by the Exemption, 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 IBCA, Inc. ("Fitch") (each, a "Rating Agency");
(iv) The sum of all payments made to the underwriter in connection
with the distribution of the Securities represents not more than reasonable
compensation for underwriting the Securities. The sum of all payments made
to and retained by the seller pursuant to the sale of the obligations to
the trust represents not more than the fair market value of such
obligations. The sum of all payments made to and retained by the servicer
represents not more than reasonable compensation for the servicer's
services under the related servicing agreement and reimbursement of the
servicer's reasonable expenses in connection therewith;
(v) The Trustee must not be an affiliate of any other member of the
Restricted Group (as defined below); and
(vi) The Plan investing in the Securities is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933. The Depositor assumes that
only Plans which are accredited investors under the federal securities laws
will be permitted to purchase the Securities.
The trust also must meet the following requirements:
(i) the corpus of the trust must consist solely of assets of the type
which have been included in other investment pools;
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(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 any Plan for which the
person serves as fiduciary 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").
On July 21, 1997, the DOL published in the Federal Register an amendment to
the Exemption which extends exemptive relief to certain mortgage-backed
securities transactions using pre-funding accounts for trusts issuing
pass-through Securities. With respect to the Securities, the amendment generally
allows a portion of the mortgages ("Loans") supporting payments to
Securityholders and having a principal amount equal to no more than 25% of the
total principal amount of the Securities to be transferred to the Trust within a
90-day or three-month period following the Closing Date ("Pre-Funding Period"),
instead of requiring that all such Loans be either identified or transferred on
or before the Closing Date. The relief is available when the following
conditions are met:
(1) The ratio of the amount allocated to the Pre-Funding Account to
the total principal amount of the Securities being offered ("Pre-Funding
Limit") must not exceed twenty-five percent (25%).
(2) All Loans transferred after the Closing Date ("Additional Loans")
must meet the same terms and conditions for eligibility as the original
Loans used to create the Trust, which terms and conditions have been
approved by a Rating Agency.
(3) The transfer of such Additional Loans to the Trust during the
Pre-Funding Period must not result in the Securities receiving a lower
credit rating from a Rating Agency upon termination of the Pre-Funding
Period than the rating that was obtained at the time of the initial
issuance of the Securities by the Trust.
(4) Solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate (the "average interest rate") for all of
the Loans in the Trust at the end of the Pre-Funding Period must not be
more than 100 basis points lower than the average interest rate for the
Loans which were transferred to the Trust on the Closing Date.
(5) In order to insure that the characteristics of the Additional
Loans are substantially similar to the original Loans which were
transferred to the Trust: (i) the characteristics of the Additional Loans
must be monitored by an insurer or other credit support provider which is
independent of the Depositor; or (ii) an independent accountant retained by
the Depositor must provide the Depositor with a letter (with copies
provided to each Rating Agency rating the Securities, the Underwriter and
the Trustee) stating whether or not the characteristics of the Additional
Loans conform to the characteristics described in the Prospectus and
Prospectus Supplement ("Offering Documents") and/or Pooling and Servicing
Agreement or Sale and Servicing Agreement. In preparing such letter, the
independent accountant must use the same type of procedures as were
applicable to the Loans which were transferred as of the Closing Date.
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(6) The Pre-Funding Period must end no later than three months or 90
days after the Closing Date or earlier, in certain circumstances, if the
amount on deposit in the Pre-Funding Account is reduced below the minimum
level specified in the Agreement or an event of default occurs under the
Agreement.
(7) Amounts transferred to any Pre-Funding Account and/or Capitalized
Interest Account used in connection with the pre-funding may be invested
only in certain permitted investments ("Permitted Investments").
(8) The Offering Documents must describe: (i) any Pre-Funding Account
and/or Capitalized Interest Account used in connection with a Pre-Funding
Account; (ii) the duration of the Pre-Funding Period; (iii) the percentage
and/or dollar amount of the Pre-Funding Limit for the Trust; and (iv) that
the amounts remaining in the Pre-Funding Account at the end of the
Pre-Funding Period will be remitted to Securityholders as repayments of
principal.
(9) The Pooling and Servicing Agreement must describe the Permitted
Investments for the Pre-Funding Account and Capitalized Interest Account
and, if not disclosed in the Offering Documents, the terms and conditions
for eligibility of the Additional Loans.
In the event that the Exemption is not applicable, some other prohibited
transaction class exemption issued by the DOL, including PTCE 96-23 (relating to
investments by in-house asset managers), 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 in their specific circumstances, prior to making an investment in
the Securities. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment procedure and diversification an
investment in the Securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
LEGAL INVESTMENT
Unless otherwise specified in the related Prospectus Supplement, the
Securities will not constitute "mortgage-related securities" within the meaning
of SMMEA. Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and to
what extent the Securities constitute legal investments for them.
PLAN OF DISTRIBUTION
The Depositor may offer each Series of Securities through Bear, Stearns &
Co. Inc. ("Bear Stearns") or one or more other firms that may be designated at
the time of each offering of such Securities. The participation of Bear Stearns
in any offering will comply with Schedule E to the By-Laws of the National
Association of Securities Dealers, Inc. The Prospectus Supplement relating to
each Series of Securities will set forth the specific terms of the offering of
such Series of Securities and of each Class within such Series, the names of the
underwriters, the purchase price of the Securities, the proceeds to the
Depositor from such sale, any securities exchange on which the Securities may be
listed, and, if applicable, the initial public offering prices, the discounts
and commissions to the underwriters and any discounts and concessions allowed or
reallowed to certain dealers. The place and time of delivery of each Series of
Securities will also be set forth in the Prospectus Supplement relating to such
Series. Bear Stearns is an affiliate of the Depositor.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain
legal matters in connection with the Securities will be passed upon for the
Depositor by Stroock & Stroock & Lavan LLP, New York, New York.
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GLOSSARY OF TERMS
The following are abbreviated definitions of certain capitalized terms used
in this Prospectus. Unless otherwise provided in a "Supplemental Glossary" in
the Prospectus Supplement for a Series, such definitions shall apply to
capitalized terms used in such Prospectus Supplement. The definitions may vary
from those in the related Agreement for a Series and the related Agreement for a
Series generally provides a more complete definition of certain of the terms.
Reference should be made to the related Agreement for a Series for a more
compete definition of such terms.
"Accrual Termination Date" means, with respect to a Class of Compound
Interest Securities, the Distribution Date specified in the related Prospectus
Supplement.
"Advance" means cash advanced by the Servicer in respect of delinquent
payments of principal of and interest on a Loan, and for any other purposes
specified in the related Prospectus Supplement.
"Agreement" means, with respect to a Series of Certificates, the Pooling
and Servicing Agreement or Trust Agreement, and, with respect to a Series of
Notes, the Indenture and the Servicing Agreement, as the context requires.
"Appraised Value" means, with respect to property securing a Loan, the
lesser of the appraised value determined in an appraisal obtained at origination
of the Loan or sales price of such property at such time.
"Asset Group" means, with respect to the Primary Assets and other assets
comprising the Trust Fund of a Series, a group of such Primary Assets and other
assets having the characteristics described in the related Prospectus
Supplement.
"Assumed Reinvestment Rate" means, with respect to a Series, the per annum
rate or rates specified in the related Prospectus Supplement for a particular
period or periods as the "Assumed Reinvestment Rate" for funds held in any fund
or account for the Series.
"Available Distribution Amount" means the amount in the Distribution
Account (including amounts deposited therein from any reserve fund or other fund
or account) eligible for distribution to Holders on a Distribution Date.
"Bankruptcy Code" means the federal bankruptcy code, 11 United States Code
101 et seq., and related rules and regulations promulgated thereunder.
"Business Day" means a day that, in the City of New York or in the city or
cities in which the corporate trust office of the Trustee are located, is
neither a legal holiday nor a day on which banking institutions are authorized
or obligated by law, regulations or executive order to be closed.
"Certificate" means the Asset-Backed Certificates.
"Class" means a Class of Securities of a Series.
"Closing Date" means, with respect to a Series, the date specified in the
related Prospectus Supplement as the date on which Securities of such Series are
first issued.
"Code" means the Internal Revenue Code of 1986, as amended, and regulations
(including proposed regulations) or other pronouncements of the Internal Revenue
Service promulgated thereunder.
"Collection Account" means, with respect to a Series, the account
established in the name of the Servicer for the deposit by the Servicer of
payments received from the Primary Assets.
"Combined Loan-to-Value Ratio" means, with respect to a Loan, the ratio
determined as set forth in the related Prospectus Supplement taking into account
the amounts of any related senior mortgage loans on the related Mortgaged
Property.
"Commission" means the Securities and Exchange Commission.
"Compound Interest Security" means any Security of a Series on which all or
a portion of the interest accrued thereon is added to the principal balance of
such Security on each Distribution Date, through the Accrual
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<PAGE> 141
Termination Date, and with respect to which no interest shall be payable until
such Accrual Termination Date, after which interest payments will be made on the
Compound Value thereof.
"Compound Value" means, with respect to a Class of Compound Interest
Securities, the original principal balance of such Class, plus all accrued and
unpaid interest, if any, previously added to the principal balance thereof and
reduced by any payments of principal previously made on such Class of Compound
Interest Securities.
"Condominium" means a form of ownership of real property wherein each owner
is entitled to the exclusive ownership and possession of his or her individual
Condominium Unit and also owns a proportionate undivided interest in all parts
of the Condominium Building (other than the individual Condominium Units) and
all areas or facilities, if any, for the common use of the Condominium Units.
"Condominium Association" means the person(s) appointed or elected by the
Condominium Unit owners to govern the affairs of the Condominium.
"Condominium Building" means a multi-unit building or buildings, or a group
of buildings whether or not attached to each other, located on property subject
to Condominium ownership.
"Condominium Loan" means a Loan secured by a Mortgage on a Condominium Unit
(together with its appurtenant interest in the common elements).
"Condominium Unit" means an individual housing unit in a Condominium
Building.
"Cooperative" means a corporation owned by tenant-stockholders who, through
the ownership of stock, shares or membership securities in the corporation,
receive proprietary leases or occupancy agreements which confer exclusive rights
to occupy specific units and which is described in Section 216 of the Code.
"Cooperative Dwelling" means an individual housing unit in a building owned
by a Cooperative.
"Cooperative Loan" means a housing loan made with respect to a Cooperative
Dwelling and secured by an assignment by the borrower (tenant-stockholder) or
security interest in shares issued by the applicable Cooperative.
"Cut-off Date" means the date designated as such in the related Prospectus
Supplement for a Series.
"Debt Securities" means Securities characterized as indebtedness for
federal income tax purposes, and Regular Interest Securities.
"Deferred Interest" means the excess of the interest accrued on the
outstanding principal balance of a Loan during a specified period over the
amount of interest required to be paid by an obligor on such Loan on the related
Due Date.
"Deposit Agreement" means a guaranteed investment contract or reinvestment
agreement providing for the investment of funds held in a fund or account,
guaranteeing a minimum or a fixed rate of return on the investment of moneys
deposited therein.
"Depositor" means Bear Stearns Asset Backed Securities, Inc.
"Disqualified Organization" means the United States, any State or political
subdivision thereof, any possession of the United States, any foreign
government, any international organization, or any agency or instrumentality of
any of the foregoing, a rural electric or telephone cooperative described in
section 1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income.
"Distribution Account" means, with respect to a Series, the account
established in the name of the Trustee for the deposit of remittances received
from the Servicer with respect to the Primary Assets.
"Distribution Date" means, with respect to a Series or Class of Securities,
each date specified as a distribution date for such Series or Class in the
related Prospectus Supplement.
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<PAGE> 142
"Due Date" means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest is due
and payable by the obligor on any Primary Asset pursuant to the terms thereof.
"Eligible Investments" means any one or more of the obligations or
securities described as such in the related Agreement.
"Enhancement" means the enhancement for a Series, if any, specified in the
related Prospectus Supplement.
"Enhancer" means the provider of the Enhancement for a Series specified in
the related Prospectus Supplement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Account" means an account, established and maintained by the
Servicer for a Loan, into which payments by borrowers to pay taxes, assessments,
mortgage and hazard insurance premiums and other comparable items required to be
paid to the mortgagee are deposited.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"Final Scheduled Distribution Date" means, with respect to a Class of Notes
of a Series, the date no later than which principal thereof will be fully paid
and with respect to a Class of Certificates of a Series, the date after which no
Certificates of such Class will remain outstanding, in each case based on the
assumptions set forth in the related Prospectus Supplement.
"FNMA" means the Federal National Mortgage Association.
"Holder" means the person or entity in whose name a Security is registered.
"Home Improvements" means the home improvements financed by a Home
Improvement Contract.
"Home Improvement Contract" means any home improvement installment sales
contracts and installment loan agreement which may be unsecured or secured by
purchase money security interest in the Home Improvement financed thereby.
"HUD" means the United States Department of Housing and Urban Development.
"Indenture" means the indenture relating to a Series of Notes between the
Trust Fund and the Trustee.
"Insurance Policies" means certain mortgage insurance, hazard insurance and
other insurance policies required to be maintained with respect to Loans.
"Insurance Proceeds" means amount paid by the insurer under any of the
Insurance Policies covering any Loan or Mortgaged Property.
"Interest Only Securities" means a Class of Securities entitled solely or
primarily to distributions of interest and which is identified as such in the
related Prospectus Supplement.
"IRS" means the Internal Revenue Service.
"Lifetime Rate Cap" means the lifetime limit if any, on the Loan Rate
during the life of each adjustable rate Loan.
"Liquidation Proceeds" means amounts received by the Servicer in connection
with the liquidation of a Loan, net of liquidation expenses.
"Loan Rate" means, unless otherwise indicated herein or in the Prospectus
Supplement, the interest rate borne by a Loan.
"Loans" mean Mortgage Loans and/or Home Improvement Contracts,
collectively. A Loan refers to a specific Mortgage Loan or Home Improvement
Contract, as the context requires.
"Loan-to-Value Ratio" means, with respect to a Loan, the ratio determined
as set forth in the related Prospectus Supplement.
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<PAGE> 143
"Minimum Rate" means the lifetime minimum Loan Rate during the life of each
adjustable rate Loan.
"Minimum Principal Payment Agreement" means a minimum principal payment
agreement with an entity meeting the criteria of the Rating Agencies.
"Modification" means a change in any term of a Loan.
"Mortgage" means the mortgage, deed of trust or other similar security
instrument securing a Mortgage Note.
"Mortgage Loan" means a closed-end home equity loan secured by a Mortgaged
Property.
"Mortgage Note" means the note or other evidence of indebtedness of a
Mortgagor under the Loan.
"Mortgagor" means the obligor on a Mortgage Note.
"1986 Act" means the Tax Reform Act of 1986.
"Notes" means the Asset-Backed Notes.
"Notional Amount" means the amount set forth in the related Prospectus
Supplement for a Class of Interest Only Securities.
"PAC" ("Planned Amortization Class Securities") means a Class of Securities
of a Series on which payments of principal are made in accordance with a
schedule specified in the related Prospectus Supplement, based on certain
assumptions stated therein.
"Participating Securities" means Securities entitled to receive payments of
principal and interest and an additional return on investment as described in
the related Prospectus Supplement.
"Pass-Through Security" means a security representing an undivided
beneficial interest in a pool of assets, including the right to receive a
portion of all principal and interest payments relating to those assets.
"Pay Through Security" means Regular Interest Securities and certain Debt
Securities that are subject to acceleration due to prepayment on the underlying
Primary Assets.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust (including any beneficiary thereof),
unincorporated organization, or government or any agency or political
subdivision thereof.
"Pooling and Servicing Agreement" means the pooling and servicing agreement
relating to a Series of Certificates among the Depositor, the Servicer (if such
Series relates to Loans) and the Trustee.
"Primary Assets" means the Private Securities and/or Loans, as the case may
be, which are included in the Trust Fund for such Series. A Primary Asset refers
to a specific Private Security or Loan, as the case may be.
"Principal Balance" means, with respect to a Primary Asset and as of a Due
Date, the original principal amount of the Primary Asset, plus the amount of any
Deferred Interest added to such principal amount, reduced by all payments, both
scheduled or otherwise, received on such Primary Asset prior to such Due Date
and applied to principal in accordance with the terms of the Primary Asset.
"Principal Only Securities" means a Class of Securities entitled solely or
primarily to distributions of principal and identified as such in the Prospectus
Supplement.
"Private Security" means a participation or pass-through certificate
representing a fractional, undivided interest in Underlying Loans or
collateralized obligations secured by Underlying Loans.
"Property" means either a Home Improvement or a Mortgaged Property securing
a Loan, as the context requires.
"PS Agreement" means the pooling and servicing agreement, indenture, trust
agreement or similar agreement pursuant to which a Private Security is issued.
"PS Servicer" means the servicer of the Underlying Loans.
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<PAGE> 144
"PS Sponsor" means, with respect to Private Securities, the sponsor or
depositor under a PS Agreement.
"PS Trustee" means the trustee designated under a PS Agreement.
"Qualified Insurer" means a mortgage guarantee or insurance company duly
qualified as such under the laws of the states in which the Mortgaged Properties
are located duly authorized and licensed in such states to transact the
applicable insurance business and to write the insurance provided.
"Rating Agency" means the nationally recognized statistical rating
organization (or organizations) which was (or were) requested by the Depositor
to rate the Securities upon the original issuance thereof.
"Regular Interest" means a regular interest in a REMIC.
"REMIC" means a real estate mortgage investment conduit.
"REMIC Administrator" means the Person, if any, specified in the related
Prospectus Supplement for a Series for which a REMIC election is made, to serve
as administrator of the Series.
"REMIC Provisions" means the provisions of the federal income tax law
relating to real estate mortgage investment conduits, which appear at sections
860A through 860G of Subchapter M of Chapter 1 of the Code, and related
provisions, and regulations, including proposed regulations and rulings, and
administrative pronouncements promulgated thereunder, as the foregoing may be in
effect from time to time.
"REO Property" means real property which secured a defaulted Loan,
beneficial ownership of which has been acquired upon foreclosure, deed in lieu
of foreclosure, repossession or otherwise.
"Reserve Fund" means, with respect to a Series, any Reserve Fund
established pursuant to the related Agreement.
"Residual Interest" means a residual interest in a REMIC.
"Retained Interest" means, with respect to a Primary Asset, the amount or
percentaged specified in the related Prospectus Supplement which is not included
in the Trust Fund for the related Series.
"Scheduled Payments" means the scheduled payments of principal and interest
to be made by the borrower on a Primary Asset.
"Securities" means the Notes or the Certificates.
"Seller" means the seller of the Primary Assets to the Depositor identified
in the related Prospectus Supplement for a Series.
"Senior Securityholder" means a holder of a Senior Security.
"Senior Securities" means a Class of Securities as to which the holders'
rights to receive distributions of principal and interest are senior to the
rights of holders of Subordinate Securities, to the extent specified in the
related Prospectus Supplement.
"Series" means a separate series of Securities sold pursuant to this
Prospectus and the related Prospectus Supplement.
"Servicer" means, with respect to a Series relating to Loans, the Person if
any, designated in the related Prospectus Supplement to service Loans for that
Series, or the successors or assigns of such Person.
"Single Family Property" means property securing a Loan consisting of one
to four-family attached or detached residential housing, including Cooperative
Dwellings.
"Stripped Securities" means Pass-Through Securities representing interests
in Primary Assets with respect to which all or a portion of the principal
payments have been separated from all or a portion of the interest payments.
"Subordinate Securityholder" means a Holder of a Subordinate Security.
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"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 REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH THEY RELATE OR
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THEIR
RESPECTIVE DATES.
---------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Summary..................................... S-4
Risk Factors................................ S-14
The Certificate Insurer..................... S-16
The Seller and the Servicer................. S-18
Champion's Home Equity Loan Program......... S-20
Description of the Mortgage Loans........... S-24
Prepayment and Yield Considerations......... S-28
Description of the Certificates............. S-32
Description of the Purchase Agreement....... S-49
Use of Proceeds............................. S-49
Certain Federal Income Tax Considerations... S-50
State Taxes................................. S-52
ERISA Considerations........................ S-52
Legal Investment Considerations............. S-53
Plan of Distribution........................ S-54
Experts..................................... S-54
Legal Matters............................... S-54
Ratings..................................... S-54
Index of Defined Terms...................... S-56
Annex I..................................... A-I-1
PROSPECTUS
Prospectus Supplement....................... 3
Reports to Holders.......................... 3
Available Information....................... 3
Incorporation of Certain Documents by
Reference................................. 4
Summary of Terms............................ 5
Risk Factors................................ 15
Description of the Securities............... 18
The Trust Funds............................. 22
Enhancement................................. 28
Servicing of Loans.......................... 30
The Agreements.............................. 36
Certain Legal Aspects of Loans.............. 44
The Depositor............................... 52
Use of Proceeds............................. 52
Certain Federal Income Tax Considerations... 52
State Tax Considerations.................... 73
ERISA Considerations........................ 74
Legal Investment............................ 77
Plan of Distribution........................ 77
Legal Matters............................... 77
Glossary of Terms........................... 78
</TABLE>
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$300,000,000
CHAMPION HOME EQUITY
LOAN TRUST 1998-1
CLASS A-1 VARIABLE RATE CERTIFICATES
CLASS A-2 8.12% FIXED RATE CERTIFICATES
CHAMPION MORTGAGE CO., INC.
SELLER AND SERVICER
BEAR STEARNS ASSET
BACKED SECURITIES, INC.
DEPOSITOR
------------------------------------
PROSPECTUS SUPPLEMENT
------------------------------------
BEAR, STEARNS & CO. INC.
MCDONALD INVESTMENTS
A KeyCorp Company
November 10, 1998
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