As filed with the Securities and Exchange Commission on November 13, 1998
Registration Statement No. 333-9532
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
REGISTRATION STATEMENT
ON FORM S-3
UNDER
THE SECURITIES ACT OF 1933
------------------
BEAR STEARNS ASSET BACKED SECURITIES, INC.
(Depositor)
(Exact name of registrant as specified in its charter)
Delaware 13-3836437
(State of incorporation) (I.R.S. Employer
Identification No.)
245 Park Avenue
New York, New York 10167
(212) 272-4095
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
-------------
Jonathan Lieberman
245 Park Avenue
New York, New York 10167
(212) 272-4094
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
---------------
With a copy to:
Stephen B. Esko, Esq.
Brown & Wood llp
One World Trade Center
New York, New York 10048
Approximate date of commencement of proposed sale to the public: From
time to time after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [ ]
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, please check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<PAGE>
<TABLE>
===========================================================================================================================
Proposed Proposed
Amount Maximum Maximum Amount of
Title of to be Aggregate Price Aggregate Registration
Securities to Be Registered Registered Per Unit* Offering Price* Fee
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Backed Securities........................... $1,501,059,000 100% $1,501,059,000 $221,250**
===========================================================================================================================
* Estimated for the purpose of calculating the registration fee.
** This amount relates to the additional $750,000,000 of Asset Backed Securities registered hereby, and has been previously
paid. The remaining $751,059,000 of Asset Backed Securities relates to Registration Statement No. 333-49015, and the registration
fee with respect thereto has been previously paid.
Pursuant to Rule 429 under the Securities Act of 1933, as amended, the Prospectus included in this Registration
Statement is a combined prospectus and also relates to registration statement No. 333-49015 as previously filed by the Registrant
on Form S-3. Such registration statement No. 333-49015 was declared effective in May 1998. This Registration Statement, which is a
new registration statement, also constitutes Post-Effective Amendment No. 2 to registration statement No. 333-49015 and such
Post-Effective Amendment No. 2 shall hereafter become effective concurrently with the effectiveness of this Registration Statement
and in accordance with Section 8(c) of the Securities Act of 1933, as amended.
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its
effective date until the Registrant shall file a further amendment that specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration
Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
</TABLE>
=============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.*
The following table sets forth the estimated expenses to be incurred in
connection with the offering of the Securities, other than underwriting
discounts and commissions:
SEC Registration Fee................. ................... $ 221,250**
Trustee's Fees and Expenses.............................. 60,000
Printing and Engraving................................... 150,000
Legal Fees and Expenses.................................. 450,000
Blue Sky Fees............................................ 73,000
Accounting Fees and Expenses............................. 150,000
Rating Agency Fees....................................... 365,000
Miscellaneous............................................ 73,000
----------
Total.................................................... $1,542,250
==========
- -----------------
* All amounts, except the SEC Registration Fee, are estimates of
aggregate expenses incurred or to be incurred in connection with the
issuance and distribution of Securities in an aggregate principal amount
assumed for these purposes to be equal to $1,501,059,000 of Securities
registered hereby.
** This amount relates to the additional $750,000,000 of Asset Backed
Securities registered hereby, and has been previously paid. The remaining
$751,059,000 of Asset Backed Securities relates to Registration Statement No.
333-49015, and the registration fee with respect thereto has been previously
paid.
Item 15. Indemnification of Directors and Officers.
Article TWELFTH of the Certificate of Incorporation of the Depositor
provides for the indemnification of any person who is or was an officer or
director of the Depositor with respect to actions taken or omitted by such
person in any capacity in which such person serves or served the Depositor, to
the full extent authorized or permitted by Section 145 of the Delaware General
Corporation Law.
Under the proposed form of Underwriting Agreement, the Underwriters are
obligated under certain circumstances to indemnify certain controlling persons
of the Depositor against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Act").
Section 145 of the Delaware General Corporation Law provides, in
substance, that Delaware corporations shall have the power, under specified
circumstances, to indemnify their directors, officers, employees and agents in
connection with actions, suits or proceedings brought against them by a third
party or in the right of the corporation, by reason of the fact that they are
or were such directors, officers, employees or agents, against expenses
incurred in any such action, suit or proceeding.
Under the proposed form of Pooling and Servicing Agreement, no director,
officer, employee or agent of the Depositor is liable to the Trust Fund or the
Certificateholders, except for such person's own willful misfeasance, bad
faith, gross negligence in the performance of duties or reckless disregard of
obligations and duties.
Under the proposed form of Purchase Agreement, under certain
circumstances, the directors, officers and controlling persons of the
Depositor are entitled to be indemnified by the seller thereunder against any
loss, claim, damage or liability or action in respect thereof to which any of
them may become subject, under the Securities Act of 1933, as amended, or
otherwise.
Under the proposed form of Sale and Servicing Agreement, the Depositor is
entitled to be indemnified by the servicer thereunder against any costs,
expenses, losses, claims, damages and liabilities to the extent arising from
the negligence, willful misfeasance or bad faith of the servicer or reckless
disregard of its obligations.
Item 16. Exhibits.
(a)......Financial Statements:
None.
(b)......Exhibits:
1.1 -- Form of Underwriting Agreement.*
4.1 -- Form of Indenture.*
4.2 -- Form of Pooling and Servicing Agreement.*
4.3 -- Form of Purchase Agreement.*
4.4 -- Form of Trust Agreement.*
5.1 -- Opinion of Brown & Wood llp with respect to the
securities being registered.
8.1 -- Opinion of Brown & Wood llp with respect to tax
matters.
<PAGE>
10.1 -- Form of Sale and Servicing Agreement.*
23.1 -- Consent of Brown & Wood llp (included as part of
Exhibit 5.1).
23.2 -- Consent of Brown & Wood llp (included as part of
Exhibit 8.1).
24.1 -- Powers of Attorney of Directors and Officers of Issuer
(included on signature page).
25.1 -- Statement of Eligibility and Qualification of Trustee.**
- ------------------
* Incorporated by reference to Registration Statement No. 33-93574.
** To be filed on Form 8-K.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered that remain unsold at the termination
of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended (and, where
applicable, each filing of an employee benefit plan's annual report pursuant
to Section 15(d) of the Securities Exchange Act of 1934, as amended), that is
incorporated by reference in the registration statement shall be deemed a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933, as amended, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act of 1933, as
amended, and will be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York, on the
13th day of November, 1998.
BEAR STEARNS ASSET BACKED
SECURITIES, INC.
By: /s/ Patricia A. Jehle
--------------------------
Patricia A. Jehle
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Patricia Jehle and William J.
Montgoris, or any of them, his or her true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him or her and
his or her name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or their substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Patricia A. Jehle President, Chief Executive Officer November 13, 1998
- ------------------------ and Director (Principal
Patricia A Jehle
/s/ William J. Montgoris Executive Vice President November 13, 1998
- ------------------------ and Treasurer (Principal
William J. Montgoris Financial and Accounting
Officer)
/s/ Warren J. Spector Director November 13, 1998
- ------------------------
Wirren J. Spector
/s/ Juliana C. Johnson Director November 13, 1998
- ----------------------
Juliana C. Johnson
Information contained herein is subject to completion or amendment. A
registration statement relating to these Securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these Securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED ________, 199_)
$-------------
BEAR STEARNS HOME EQUITY LOAN TRUST 199__-__
---------------------
SERVICER
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
The Home Equity Loan Asset-Backed Certificates, Series 199_-_
(collectively, the "Certificates"), will consist of the Classes identified in
the chart below (the "Offered Certificates") as well as certain additional
Classes of Certificates which are not being offered for sale hereunder. The
Certificates will evidence in the aggregate the entire beneficial interest in a
trust (the "Trust") to be formed pursuant to a Pooling and Servicing Agreement
(the "Agreement") among Bear Stearns Asset Backed Securities, Inc., as depositor
(the "Depositor"), ________________, as Servicer (the "Servicer"), and
__________, as Trustee and Back-Up Servicer (the "Trustee" and the "Back-Up
Servicer," respectively). The property of the Trust will include assets composed
of Primary Assets, which may include one or more pools of (i) closed-end and/or
revolving home equity loans (the "Home Equity Loans"), secured generally by
subordinate liens 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 generally by subordinate liens on one- to four-family residential or
mixed-use properties, or by purchase money security interests in the home
improvements financed thereby, and (iii) securities backed or secured by Home
Equity Loans and/or Home Improvement Contracts. The Home Equity Loans and the
Home Improvement Contracts are referred to herein as "Loan Group One" and "Loan
Group Two", respectively. The Home Equity Loans and the Home Improvement
Contracts are collectively referred to herein as the "Loans". The Trust also
will include $__________ on deposit in the Pre-Funding Account which will be
used to purchase additional Home Equity Loans and Home Improvement Contracts
prior to ________, 199_ as described herein and funds on deposit in the
Capitalized Interest Account.
(cover continued on next page)
SEE "RISK FACTORS" HEREIN ON PAGE S-15 AND IN THE PROSPECTUS ON
PAGE 17 FOR CERTAIN FACTORS TO BE CONSIDERED IN
PURCHASING THE OFFERED CERTIFICATES.
THE CERTIFICATES DO NOT REPRESENT AN OBLIGATION OF OR INTEREST IN THE
DEPOSITOR, THE SELLER, THE SERVICER, THE TRUSTEE OR ANY OF THEIR
RESPECTIVE AFFILIATES. NEITHER THE CERTIFICATES NOR THE
UNDERLYING HOME EQUITY LOANS ARE INSURED OR GUARANTEED
BY ANY GOVERNMENTAL ENTITY, THE SELLER, THE SERVICER
OR ANY OF THEIR AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================= ------------------ --------------- ------------- --------------- ----------------
Initial
Certificate Pass-Through Price to Underwriting Proceeds to
Principal Balance Rate Public(1) Discount Depositor(1)(2)
- --------------------------------- ------------------ --------------- ------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Per Class A-1 Certificate.... $ % % % %
- --------------------------------- ------------------ --------------- ------------- --------------- ----------------
Per Class A-2 Certificate.... $ % % % %
- --------------------------------- ------------------ --------------- ------------- --------------- ----------------
Per Class A-3 Certificate.... $ (3) % % %
================================= ================== =============== ============= =============== ================
Total........................ $ % % %
================================= ================== =============== ============= =============== ================
</TABLE>
- ------------------
(1) Plus accrued interest, if any, from ____________.
(2) Before deducting expenses, estimated to be $_________.
(3) The Class A-3 Certificates will bear interest at a variable rate which, for
any Distribution Date, will equal the lesser of (i) __% per annum and (ii)
the weighted average of the Remittance Rates (as defined herein) of the
Loans in Loan Group ___. The Certificate Rate for the first Distribution
Date is excepted to be approximately ___% per annum. See "Description of the
Certificates" herein.
The Offered Certificates are offered by Bear, Stearns & Co. Inc. (the
"Underwriter") when, as and if issued, delivered to and accepted by the
Underwriter and subject to certain other conditions. It is expected that
delivery of the Offered Certificates will be made in book entry form only,
through the Same Day Funds Settlement System of The Depository Trust Company, on
or about _________, 199_.
BEAR, STEARNS & CO. INC.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS ________, 199_.
(cover page continued)
Distributions of principal and interest on the Offered Certificates
will be made on the 25th day of each month or, if such day is not a Business
Day, then on the succeeding Business Day (each, a "Distribution Date"),
beginning in ___________, 199__ On each Distribution Date, holders of the
Offered Certificates will be entitled to receive, from and to the extent of
funds available in the related Distribution Account (as defined herein),
distributions with respect to interest and principal calculated as set forth
herein. The Offered Certificates will have the benefit of an irrevocable and
unconditional surety bond (the "Policy") issued by _____________ (the
"Certificate Insurer") pursuant to which the Certificate Insurer will guarantee
payments to the holders of the Offered Certificates as described herein. See
"Description of the Certificates" herein.
There is currently no secondary market for the Offered Certificates.
The Underwriter intends to establish a market in the Offered Certificates but is
not obligated to do so. There can be no assurance that a secondary market for
any of the Offered Certificates will develop, or if one does develop, that it
will continue or offer sufficient liquidity of investment.
The yield to investors in each Class of Offered Certificates will be
sensitive in varying degrees to the rate and timing of principal payments
(including prepayments) on the Loans in the related Loan Group, which generally
may be prepaid in full or in part at any time without penalty. The yield to
maturity of a Class of Offered Certificates purchased at a discount or premium
will be more sensitive to the rate and timing of payments thereon. Holders of
the Offered Certificates should consider, in the case of any such certificates
purchased at a discount, the risk that a slower than anticipated rate of
principal payments could result in an actual yield that is lower than the
anticipated yield and, in the case of any Offered Certificates purchased at a
premium, the risk that a faster than anticipated rate of principal payments
could result in an actual yield that is lower than the anticipated yield. No
representation is made as to the anticipated rate of prepayments on the Loans or
as to the resulting yield to maturity of any Class of Offered Certificates.
An election will be made to treat certain assets of the Trust as a real
estate mortgage investment conduit ("REMIC") for federal income tax purposes. As
described more fully herein and in the Prospectus, the Offered Certificates will
be designated as "regular interests" in a REMIC. See "Certain Federal Income Tax
Considerations" in the Prospectus.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON
ORENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE OFFERED
CERTIFICATES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
-----------------------------
The Certificates offered by this Prospectus Supplement constitute a
separate series of Securities being offered by the Depositor pursuant to its
Prospectus dated ________, of which this Prospectus Supplement is a part and
which accompanies this Prospectus Supplement. The Prospectus contains important
information regarding this offering which is not contained herein and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
SUMMARY OF TERMS
The following summary of certain pertinent information is qualified in
its entirety by reference to the detailed information appearing elsewhere in
this Prospectus Supplement and in the accompanying Prospectus. Capitalized terms
used but not defined herein or in the accompanying Prospectus are defined in the
"Glossary of Terms" in the Prospectus.
Trust.......................................Bear Stearns Home Equity Loan Trust
199_-_ (the "Trust") will be formed
pursuant to a Pooling and Servicing
Agreement (the "Agreement"), to be
dated as of ___________ (the
"Cut-Off Date"), among Bear Stearns
Asset Backed Securities, Inc. as
depositor (the "Depositor"),
___________________, as servicer
(together with any successor in such
capacity, the "Servicer"), and
_________________, as trustee (the
"Trustee") and back-up servicer (the
"Back-Up Servicer"). The property of
the Trust will include: one or more
pools of closed-end and/or revolving
home equity loans (the "Home Equity
Loans"), secured generally by
subordinate liens on one- to
four-family residential or mixed-use
properties; home improvement
installment sales contracts and
installment loan agreements (the
"Home Improvement Contracts") which
are either unsecured or secured
generally by subordinate liens on
one- to four-family residential or
mixed-use properties, or by purchase
money security interests in the home
improvements financed thereby;
securities backed or secured by Home
Equity Loans and/or Home Improvement
Contracts. The Home Equity Loans and
the Home Improvement Contracts are
individually referred to herein as
"Loan Group One" and "Loan Group
Two," respectively, and collectively
as the "Loans"; securities backed or
secured by the Loans; payments in
respect of the Loans received on and
after the Cut-Off Date; property
that secured a Mortgage Loan which
has been acquired by foreclosure or
deed in lieu of foreclosure; rights
under certain hazard insurance
policies covering the Mortgaged
Properties; funds on deposit in the
Pre-Funding Account, the Capitalized
Interest Account and the Spread
Account (each as defined below); the
Depositor's rights under the
Purchase Agreement (as defined
herein); and certain other property,
as described more fully herein. In
addition, the Depositor has caused
the Certificate Insurer (as defined
below) to issue an irrevocable and
unconditional surety bond (the
"Policy") for the benefit of the
Holders of the Offered Certificates
pursuant to which it will guarantee
payments to such Holders as
described herein.
Securities Offered The Home Equity Loan and
Home Improvement Contract
Asset-Backed Certificates, Series
199_-_ (the "Certificates") will
consist of the Class A-1, Class A-2
and Class A-3 Certificates
(collectively, the "Offered
Certificates"), the Class I
Certificates and the Class R
Certificates. Only the Offered
Certificates are offered hereby. Any
information contained herein
regarding the Class I or Class R
Certificates is included solely to
permit a better understanding of the
Offered Certificates.
The Class A-1 and Class A-2
Certificates (collectively, the
"Fixed Rate Certificates") and the
Class I Certificates are related to
Loan Group One (Home Equity Loans)
and the Class A-3 Certificates are
related to Loan Group Two (Home
Improvement Contracts). Each Class
of Offered Certificates represents
the right to receive payments of
interest at the per annum rate (the
"Certificate Rate") described below
and payable monthly, and payments of
principal to the extent provided
below. The Offered Certificates will
be offered for purchase in minimum
dollar denominations of $25,000 and
integral multiples of $1,000 in
excess thereof, provided, however,
that one Certificate of each Class
of Offered Certificates may be
issued in an amount representing the
remainder, if any, of such Class.
The "Percentage Interest" evidenced
by an Offered Certificate will be
equal to the percentage derived by
dividing the denomination of such
Certificate by the aggregate
denomination of all Certificates of
the same Class as such Certificate.
Registration of the
Offered Certificates....................... The Offered Certificates initially
will be represented by one or more
certificates registered in the name
of Cede & Co., the nominee of The
Depository Trust Company ("DTC"),
and will be available only in the
form of book-entries on the records
of DTC, participating members
thereof ("Participants") and other
entities, such as banks, brokers,
dealers and trust companies that
clear through or maintain custodial
relationships with a Participant,
either directly or indirectly
("Indirect Participants").
References herein to "holders"
reflect the rights of owners of the
Offered Certificates only as they
may indirectly exercise such rights
through DTC and Participants, except
as otherwise specified herein. See
"Risk Factors--Book-Entry
Registration May Affect Liquidity"
and "Description of the
Certificates--Book-Entry
Registration" herein.
Distribution and
Record Dates................................Distributions will be made on the
25th day of each month or, if such
25th day is not a Business Day, on
the succeeding Business Day (each, a
"Distribution Date"), beginning in
__________, 199__. Distributions on
a Distribution Date will be made to
Holders of record as of the last
Business Day of the month preceding
the month in which such Distribution
Date occurs (each, a "Record Date").
Depositor ..................................Bear Stearns Asset Backed
Securities, Inc. (the "Depositor"),
a wholly-owned, special purpose
subsidiary of The Bear Stearns
Companies Inc. None of The Bear
Stearns Companies Inc. nor any other
affiliate of the Depositor, the
Servicer, the Trustee or the Seller
has guaranteed or is otherwise
obligated with respect to the
Certificates. See "The Depositor" in
the Prospectus.
Seller .....................................____________________________. All of
the Loans originally delivered to
the Trust (the "Initial Loans")
were, and any Subsequent Loans (as
defined below) will be, originated
by the Seller or by an affiliate and
acquired by the Seller in the
ordinary course of its business. The
Loans will be acquired by the
Depositor in a privately negotiated
transaction concurrently with the
delivery of such Loans to the Trust.
The Seller's corporate headquarters
are located at ______________, and
its telephone number is
_____________. See "The Seller and
the Servicer" herein.
Servicer ...................................________________. See "The Seller
and the Servicer" herein.
Trustee and
Back-Up Servicer............................____________, a ______________
organized under the laws of
__________, will act as trustee and
back-up servicer (the "Trustee" and
the "Back-Up Servicer,"
respectively).
Cut-Off Date ...............................____________, 199_.
Closing Date ...............................On or about ___________, 199_.
The Loans ..................................The Loans consist of promissory
notes or other evidences of
indebtedness (the "Mortgage Notes")
secured generally by mortgages,
deeds of trust or other instruments
(the "Mortgages") creating
subordinate liens primarily on one-
to four-family residential or mixed
use properties (the "Mortgaged
Properties"), and in the case of the
Home Improvement Contracts, by
purchase money security interests in
the home improvements financed
thereby. Certain of the Home
Improvement Contracts will be
unsecured. The Loans bear fixed or
adjustable rates (each, a "Loan
Rate"). Interest on each fixed rate
Mortgage Loan is calculated on the
"simple interest" method ("Simple
Interest Loans"), and interest on
each adjustable rate Mortgage Loan
is calculated on the "actuarial"
method ("Actuarial Loans"). Monthly
payments are due on the date of the
month specified in the related
Mortgage Note (each, a "Due Date").
The Due Dates for the Loans occur
throughout the month. Except for the
Balloon Loans (defined herein) in
Loan Group _____, the Loans are
fully amortizing.
The Loans will be divided into two
Loan Groups. Loan Group One will
consist of fixed rate and/or
adjustable rate Home Equity Loans
("ARMs"), and Loan Group Two will
consist of fixed rate and/or
adjustable rate (ARM) Home
Improvement Contracts. The Loan Rate
borne by each ARM is subject to
adjustment annually on the date set
forth in the related Mortgage Note
(each, a "Change Date") to equal the
sum of (i) the weekly average yield
on U.S. Treasury securities adjusted
to a constant maturity of one year,
as made available by the Federal
Reserve Board as of the date __ days
before the applicable Change Date
(the "Index") and (ii) the number of
basis points set forth in such
Mortgage Note (the "Gross Margin"),
subject to rounding and to the
effects of the Periodic Cap, the
applicable Lifetime Cap and the
applicable Lifetime Floor. The
"Periodic Cap" limits changes in the
Loan Rate for each ARM on each
Change Date to ___ basis points. The
"Lifetime Cap" is the maximum Loan
Rate that may be borne by an ARM
over its life and is equal to the
sum of (i) the initial Loan Rate for
such ARM and (ii) ___ basis points.
The "Lifetime Floor" is the minimum
Loan Rate that may be borne by an
ARM over its life and is equal to
the initial Loan Rate for such ARM.
The ARMs do not provide for negative
amortization. None of the ARMs has
reached its initial Change Date.
The "Principal Balance" of a
Mortgage Loan (other than a
Liquidated Mortgage Loan (as defined
herein)) on any day is equal to its
principal balance as of the Cut-Off
Date (or, with respect to a
Subsequent Mortgage Loan, its
principal balance as of the
applicable Subsequent Cut-Off Date),
minus all collections credited
against the Principal Balance of
such Mortgage Loan. The Principal
Balance of a Liquidated Mortgage
Loan after final recovery of related
Liquidation Proceeds (as defined
herein) will be zero. With respect
to any Distribution Date and Loan
Group, the "Loan Group Balance" will
be equal to the aggregate of the
Principal Balances of all Loans in
such Loan Group as of the first day
of the related Due Period. See
"Description of the Loans" herein
and Appendix A attached hereto.
Pre-Funding Account.........................On the Closing Date, an aggregate
cash amount (the "Pre-Funded
Amount") not to exceed approximately
$___________ will be deposited in
the Pre-Funding Account. Of such
amount, approximately $___________
will be used to purchase additional
home equity loans, home improvement
installment sales contracts and
installment loan agreements secured
by first or second liens on
Mortgaged Properties ("Subsequent
Loans") for deposit into the
applicable Loan Group and, if
required, to make accelerated
payments of principal on the Fixed
Rate Certificates and approximately
$_________ will be used to purchase
Subsequent Loans for deposit into
the applicable Loan Group and, if
required, to make accelerated
payments of principal on the Class
A-3 Certificates. During the period
(the "Pre-Funding Period") from the
Closing Date to the earliest to
occur of (i) the date on which the
aggregate amount on deposit in the
Pre-Funding Account is less than
$_______, (ii) an Event of Default
under the Agreement and (iii)
________, 199__, amounts on deposit
in the Pre-Funding Account may be
withdrawn from time to time to
acquire Subsequent Loans in
accordance with the Agreement. Any
net investment earnings on the
Pre-Funded Amount will be
transferred to the Capitalized
Interest Account on each
Distribution Date during the
Pre-Funding Period. Any Pre-Funded
Amount remaining in the Pre-Funding
Account at the end of the
Pre-Funding Period will be
distributed on the Distribution Date
occurring at or immediately
following the end of the Pre-Funding
Period as a prepayment of principal
of the Class A-1 and Class A-2
Certificates on a pro rata basis, or
on the Class A-3 Certificates, as
applicable, based on the remaining
Pre-Funded Amount allocated to the
related Loan Group. Only fixed rate
and/or adjustable Subsequent Home
Equity Loans may be added to Loan
Group One, and only fixed and/or
adjustable rate Subsequent Home
Improvement Contracts may be added
to Loan Group Two.
Capitalized Interest
Account.....................................On the Closing Date, funds will be
deposited in an account (the
"Capitalized Interest Account")
created and maintained with the
Trustee. The amount so deposited
will be used by the Trustee on the
Distribution Dates during the
Pre-Funding Period to fund the
excess, if any, of the Interest
Remittance Amounts for the Offered
Certificates (as defined below) and
the premium due on the Policy over
the funds available therefor on such
Distribution Dates. Any funds
remaining in the Capitalized
Interest Account at the end of the
Pre-Funding Period will be
distributed to the Holders of the
Class R Certificates.
Final Scheduled Distribution
Date........................................The Final Scheduled Distribution
Dates for each of the respective
classes of Offered Certificates are
as set forth below, although it is
anticipated that the actual final
Payment Date for each Class of
Offered Certificates will occur
significantly earlier than the
related Final Scheduled Distribution
Date. See "Prepayment and Yield
Considerations" herein.
Final Scheduled
Distribution Date
Class A-1 Certificates. . .____
Class A-2 Certificates. . .____
Class A-3 Certificates. . .____
Interest....................................The Certificate Rate for each Class
of Offered Certificates will be as
set forth or described on the cover
page hereof. The "Remittance Rate"
for each Mortgage Loan in Loan Group
Two will be calculated monthly, and
for any Distribution Date will equal
the Loan Rate for such Mortgage Loan
at the beginning of the related Due
Period (defined below) minus the sum
of (a) the Expense Fee Rate (defined
herein) and (b) the related Excess
Spread Rate. The "Excess Spread
Rate" for any Mortgage Loan in Loan
Group Two will equal the excess of
(x) the Gross Margin for such
Mortgage Loan less the Expense Fee
Rate over (y) _____%. Holders of the
Offered Certificates will be
entitled to receive on each
Distribution Date, to the extent
funds are available therefor,
interest at the applicable
Certificate Rate accrued during the
related Interest Period on the
related Class Certificate Balance
(as described below under the
caption "Principal"). Holders of the
Class I Certificates will be
entitled to receive on each
Distribution Date, to the extent
funds are available therefor and
concurrently with distributions of
interest on the Fixed Rate
Certificates, interest at the rate
of _____% per annum accrued during
the related Interest Period on the
Notional Balance of the Class I
Certificates which, for any
Distribution Date, will equal the
Loan Group Balance of Loan Group One
as of the first day of the related
Due Period. The amount of interest
(as described above) payable with
respect to a Class of Offered
Certificates or the Class I
Certificates constitutes the
"Interest Remittance Amount" for
such Class.
The "Interest Period" for each
Distribution Date will be the
calendar month preceding the month
in which such Distribution Date
occurs. Interest on the Certificates
will be calculated on the basis of a
360-day year consisting of twelve
30-day months. See "Description of
the Certificates" herein.
Principal...................................As to any Loan Group and
Distribution Date, the "Basic
Principal Amount" will equal the sum
of (i) each payment of principal on
a Mortgage Loan received by the
Servicer (exclusive of amounts
described in clauses (ii) and (iii)
below) during the calendar month
preceding the calendar month in
which such Distribution Date occurs
(with respect to any Distribution
Date, the "Due Period"); (ii)
curtailments (i.e., partial
prepayments) and prepayments in full
received during the related Due
Period; (iii) all Insurance Proceeds
and Net Liquidation Proceeds
allocable to recoveries of principal
of Home Equity Loans and Home
Improvement Contracts received
during the related Due Period; (iv)
an amount equal to the excess, if
any, of the Principal Balance
(immediately prior to liquidation)
of each Mortgage Loan liquidated
during the related Due Period over
the principal portion of Net
Liquidation Proceeds received during
such Due Period (the "Unrecovered
Class A Portion"); and (v) (a) the
outstanding Principal Balance of any
Mortgage Loan purchased by the
Seller or the Servicer as required
or permitted by the Agreement as of
the related Determination Date and
(b) with respect to any Defective
Mortgage Loan for which the Seller
substitutes an Eligible Substitute
Mortgage Loan as of the related
Determination Date, any excess of
the Principal Balance of such
Defective Mortgage Loan over the
Principal Balance of such Eligible
Substitute Mortgage Loan, plus the
amount of any unreimbursed Servicing
Advances (defined herein) made by
the Servicer with respect to the
Mortgage Loan to the extent
received.
Distributions of principal of a
Class of Offered Certificates will
be measured by the Basic Principal
Amount for the related Loan Group.
As to any Distribution Date and
Class of Offered Certificates, the
"Principal Remittance Amount" will
equal the sum of (i) the lesser of
(x) the Basic Principal Amount for
the related Loan Group and (y) the
portion of such Basic Principal
Amount required to be distributed to
increase the Overcollateralization
Amount (defined below) for the
related Loan Group to the Required
Overcollateralization Amount
(defined below) for such Loan Group,
(ii) the related Carry-Forward
Amount (defined below), and (iii) on
the Distribution Date at or
immediately following the end of the
Pre-Funding Period, the amount, if
any, allocable to the related Loan
Group remaining in the Pre-Funding
Account (exclusive of any investment
earnings included therein).
Distributions of principal will be
allocated among the Classes of
Offered Certificates as described
herein under "Description of the
Certificates--Priority of
Distributions." As described below,
Holders of a Class of Offered
Certificates also may receive
distributions of Additional
Principal (defined below) on a
Distribution Date.
The Interest Remittance Amount, the
Principal Remittance Amount and the
Additional Principal, if any, for a
Class of Offered Certificates
together constitute the "Class
Remittance Amount" for such Class
and each Distribution Date.
An amount to cover any loss on a
liquidated Mortgage Loan (i.e., the
Unrecovered Class A Portion) may or
may not be distributed to the
Holders of the related Class of
Offered Certificates on the
Distribution Date which immediately
follows the event of loss. However,
the Holders of such Certificates are
entitled to receive ultimate
recovery of 100% of the original
Class Certificate Balance of the
applicable Class of Certificates.
The "Class Certificate Balance" of a
Class of Offered Certificates on any
date is equal to the Class
Certificate Balance of such Class on
the Closing Date (the "Original
Class Certificate Balance") minus
the aggregate of amounts actually
distributed as principal to the
Holders of such Class of Offered
Certificates.
The "Carry-Forward Amount" of a
Class of Offered Certificates on any
Distribution Date will equal the sum
of (a) the excess of the aggregate
of the Class Remittance Amounts as
of each preceding Distribution Date
over the amount of the actual
distributions to the Holders of such
Class of Offered Certificates made
on any such Distribution Date and
not subsequently distributed, and
(b) interest on the amount, if any,
of the interest component of the
amount described in clause (a) at
one-twelfth of the applicable
Certificate Rate. See "Description
of the Certificates" herein.
Overcollateralization
and Crosscollateralization..................On any Distribution Date on which
the Overcollateralization Amount for
a Loan Group is less than the
Required Overcollateralization
Amount for such Loan Group, the
Remaining Net Excess Spread for such
Loan Group plus the Available
Transfer Cashflow and the Net Excess
Principal, if any, will be used to
make additional distributions of
principal of the related Class or
Classes of Offered Certificates
("Additional Principal") until such
Overcollateralization Amount equals
the related Required
Overcollateralization Amount.
As to any Loan Group and
Distribution Date, the
"Overcollateralization Amount" will
equal the sum of (a) the excess, if
any, of (i) the sum of the Loan
Group Balance and the amount on
deposit in the Pre-Funding Account
allocated to such Loan Group
(exclusive of any investment
earnings included therein) as of the
close of business on the last day of
the related Due Period, over (ii)
the Class Certificate Balance of the
related Class or Classes of Offered
Certificates, after giving effect to
the distributions of the related
Principal Remittance Amount on such
Distribution Date, and (b) the
amount, if any, on deposit in the
Spread Account allocated to the
related Class or Classes of Offered
Certificates.
The Agreement provides that, subject
to certain floors, caps and
triggers, the required level of
overcollateralization (the "Required
Overcollateralization Amount") may
(i) increase or decrease over time
based on the delinquency and default
experience on the Loans in the
Trust, (ii) be increased by the
Certificate Insurer at the end of
the Pre-Funding Period, (iii) step
down based on the passage of time
and the amortization of the Loans in
the Trust or (iv) be reduced or
eliminated by the Certificate
Insurer so long as a Certificate
Insurer Default (as defined herein)
has not occurred.
As to any Distribution Date and Loan
Group: (a) the "Excess Spread" will
equal interest collected or advanced
on the Loans in such Loan Group
(including amounts allocated to the
related Class or Classes of Offered
Certificates in the Capitalized
Interest Account) minus the sum of
(i) the Interest Remittance Amount
for the related Class or Classes of
Offered Certificates and, in the
case of Loan Group One, the Interest
Remittance Amount for the Class I
Certificates, (ii) the Servicing
Fee, (iii) the Back-Up Servicing
Fee, (iv) the Trustee Fee and (v)
the Premium Fee (the sum of clauses
(ii) through (v), the "Expense
Fees"); (b) the "Net Excess Spread"
will equal the Excess Spread
remaining after the application
thereof to cover an Available Funds
Shortfall with respect to the
related Loan Group; (c) "Remaining
Net Excess Spread" will equal the
Net Excess Spread remaining after
the application thereof to cover an
Available Funds Shortfall with
respect to the other Loan Group and
will be used to make payments of
Additional Principal to the Class or
Classes of Offered Certificates
related to such original Loan Group;
(d) the "Available Transfer
Cashflow" will equal the Remaining
Net Excess Spread for the other Loan
Group after the application thereof
to the payment of Additional
Principal to the Class or Classes of
Offered Certificates related to such
other Loan Group; (e) the "Excess
Principal" will equal the lesser of
(i) the portion of the Basic
Principal Amount for such Loan Group
which is not required to be included
in the Principal Remittance Amount
for the related Class or Classes of
Offered Certificates on such
Distribution Date and (ii) the
amount of such portion remaining
after the application of the related
Available Remittance Amount to the
Required Payments for such Loan
Group; (f) the "Net Excess
Principal" will equal the Excess
Principal remaining after the
application thereof to cover an
Available Funds Shortfall in the
other Loan Group; (g) an "Available
Funds Shortfall" is the amount by
which the Available Remittance
Amount for a Loan Group is less than
the related Required Payments, and
(h) the "Required Payments" equal
the sum of the related Expense Fees
(other than the Servicing Fee), the
Interest Remittance Amount(s), the
Principal Remittance Amount and
reimbursement of amounts due the
Certificate Insurer with respect to
such Loan Group.
Spread Account..............................On the Closing Date the Trustee will
establish and thereafter maintain an
account (the "Spread Account"). If
required by the Certificate Insurer,
the holder of the Class R
Certificates will deliver to the
Trustee for deposit in the Spread
Account the amount required by the
Certificate Insurer. Funds on
deposit in the Spread Account, if
any, will be available for
withdrawal to fund any shortfalls
between the available funds for
distribution to Holders of the
Offered Certificates and the related
Interest Remittance Amounts or
Principal Remittance Amounts.
The Certificate Insurer
_____________ (the "Certificate
Insurer") is a ______________
engaged only in the business of
writing financial guaranty and
surety insurance. The Certificate
Insurer insures structured
asset-backed, corporate, municipal
and other financial obligations in
the domestic and foreign capital
markets. The Certificate Insurer's
claims-paying ability is rated AAA
by Standard & Poor's, a division of
The McGraw-Hill Companies, Inc., and
Aaa by Moody's Investors Service,
Inc. ("Moody's"). See "The Policy
and the Certificate Insurer" herein.
Pursuant to the Insurance and
Reimbursement Agreement, dated as of
the Cut-Off Date (the "Insurance
Agreement"), among the Certificate
Insurer, the Depositor, the Seller
and the Servicer, the Certificate
Insurer will issue a financial
guaranty insurance policy (the
"Policy") pursuant to which it will
irrevocably and unconditionally
guaranty, among other things,
payment on each Distribution Date to
the Trustee for the benefit of the
Holders of each Class of Offered
Certificates of the Guaranteed
Interest Payment Amount and the
Guaranteed Principal Payment Amount.
The terms of the Offered
Certificates and the Agreement may
not be amended unless the
Certificate Insurer has given its
prior written consent.
So long as there does not exist a
failure by the Certificate Insurer
to make a required payment under the
Policy (such event, a "Certificate
Insurer Default"), the Certificate
Insurer will have the right to
exercise all rights of the Holders
of the Offered Certificates under
the Agreement without any consent of
such Holders, and such Holders may
exercise such rights only with the
prior written consent of the
Certificate Insurer except as
provided in the Agreement.
Servicing...................................The Servicer will be responsible for
servicing, managing and making
collections on the Loans. The
Servicer will deposit all
collections in respect of the Home
Equity Loans and/or Home Improvement
Contracts in a Loan Group into the
related Collection Account as
described herein. Not later than the
18th day of the month (or if such
18th day is not a Business Day, the
preceding Business Day) of each
Distribution Date (the
"Determination Date"), the Trustee
will calculate the amounts to be
paid, as described herein, to the
Certificateholders on such
Distribution Date. See "Description
of the Certificates--Priority of
Distributions" herein. With respect
to each Due Period, the Servicer
will receive from payments in
respect of interest on the Loans
actually received, a portion of such
payments as a monthly servicing fee
(the "Servicing Fee") in the amount
of ___% 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" herein. In
certain limited circumstances, the
Servicer may resign or be removed,
in which event either the Back-Up
Servicer or a third-party servicer
will be appointed as a successor
Servicer. See "Description of the
Certificates--Certain Matters
Regarding the Servicer" herein.
Monthly Advances ...........................The Servicer is required to remit to
the Trustee no later than the close
of business on the second Business
Day preceding a Distribution Date
for deposit in the applicable
Collection Account an amount equal
to the sum of (a) interest accrued
on each Mortgage Loan through the
date on which the related monthly
payment was due (the "Due Date") but
not received by the Servicer as of
the close of business on the related
Determination Date, net of the
Servicing Fee and (b) with respect
to each REO Property which was
acquired during or prior to the
related Due Period and as to which a
final disposition thereof did not
occur during the related Due Period,
an amount equal to the excess, if
any, of interest for the most
recently ended Due Period on the
Principal Balance of the Mortgage
Loan related to such REO Property at
the related Loan Rate, net of the
Servicing Fee, over the net income
from the REO Property transferred to
such Collection Account for such
Distribution Date pursuant to the
Agreement (the "Monthly Advance").
The Servicer is not required to make
any Monthly Advances which it
determines would be nonrecoverable.
Such Monthly Advances by the
Servicer are reimbursable to the
Servicer subject to certain
conditions and restrictions. See
"Description of the
Certificates--Advances" herein.
Prepayment Interest
Shortfalls..................................Not later than the second Business
Day prior to the related
Distribution Date, the Servicer is
required to remit to the Trustee, up
to the amount otherwise payable to
the Servicer as its aggregate
Servicing Fee for the related Due
Period, 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 from the
Mortgagor during the related Due
Period, 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
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 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
Home Equity Loans and Home
Improvement Contracts, the
"Prepayment Interest Shortfall").
Optional Termination by
the Servicer................................On any Distribution Date on which
the aggregate of the Loan Group
Balances (the "Pool Balance") is
less than ___ of the sum of (i) the
Pool Balance as of the Cut-Off Date
and (ii) the Principal Balance of
the Subsequent Loans as of their
respective Subsequent Cut-Off Dates,
the Servicer will have the option to
purchase, in whole, the Home Equity
Loans, the Home Improvement
Contracts and the related REO
Property, if any, remaining in the
Trust. See "Description of the
Certificates--Termination;
Retirement of the Certificates"
herein.
Optional Purchase of
Defaulted Loans.............................The Servicer has the option, but is
not obligated, to purchase from the
Trust any Loan ___ days or more
delinquent at a purchase price equal
to the outstanding Principal Balance
as of the date of purchase, plus the
greater of (i) all accrued and
unpaid interest on such Principal
Balance and (ii) 30 days' interest
on such Principal Balance, computed
at the Loan Rate, plus all
unreimbursed amounts owing to the
Certificate Insurer with interest
thereon at the rate referred to in
the Insurance Agreement. See
"Description of the
Certificates--Optional Purchase of
Defaulted Loans" herein.
Certain Federal
Income Tax Considerations...................For federal income tax purposes, an
election will be made to treat
certain assets of the Trust as a
"real estate mortgage investment
conduit" (the "REMIC"). The Offered
Certificates will constitute
"regular interests" in a REMIC and
will be treated as debt instruments
of the REMIC and as interests of the
Trust for federal income tax
purposes with payment terms
equivalent to the terms of such
Certificates.
The Holders of the Offered
Certificates will be required to
include in income interest on such
Certificates in accordance with the
accrual method of accounting, and
the Offered Certificates may,
depending 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 Offered Certificates, see
"Certain Federal Income Tax
Considerations" in the Prospectus.
ERISA Considerations........................Fiduciaries of employee benefit
plans subject to Title I of the
Employee Retirement Income Security
Act of 1974, as amended ("ERISA"),
should consider the ERISA fiduciary
investment standards before
authorizing an investment by a plan
in the Offered Certificates. In
addition, fiduciaries of: (i)
employee benefit plans subject to
Title I of ERISA, (ii) employee
benefit plans or other retirement
arrangements (including individual
retirement accounts and certain
Keogh plans) which are not subject
to ERISA, but which are subject to
Section 4975 of the Internal Revenue
Code of 1986, as amended (the
"Code"), or (iii) any entity whose
underlying assets are deemed to
include plan assets by reason of a
plan or account investing in such
entity (collectively, "Plan(s)"),
should consult with their legal
counsel to determine whether an
investment in the Offered
Certificates will cause the assets
of the Trust ("Trust Assets") to be
considered plan assets pursuant to
the plan asset regulations set forth
in 29 C.F.R. ss. 2510.3-101, thereby
subjecting the Plan to the
prohibited transaction rules with
respect to the Trust Assets and the
Trustee and Servicer to the
fiduciary investment standards of
ERISA, or cause the excise tax
provisions of Section 4975 of the
Code to apply to the Trust Assets,
unless some exemption granted by the
Department of Labor applies to the
purchase, sale, transfer or holding
of the Offered Certificates. One
such exemption is Prohibited
Transaction Exemption 90-30, subject
to the satisfaction of the
requirements thereof. See "Erisa
Considerations" in the Prospectus.
Legal Investment
Considerations..............................The Offered Certificates will not
constitute "mortgage related
securities" for purposes of the
Secondary Mortgage Market
Enhancement Act of 1984, as amended
("SMMEA"). Accordingly, many
institutions with legal authority to
invest in comparably rated
securities may not be legally
authorized to invest in the Offered
Certificates. See "Legal Investment"
in the Prospectus.
Certificate Rating .........................It is a condition to the issuance of
each Class of Offered Certificates
that they be rated not lower than
_____ by Standard & Poor's, a
division of The McGraw-Hill
Companies, Inc. ("S&P"), and _______
by Moody's Investors Service, Inc.
(each, a "Rating Agency"). A
security rating is not a
recommendation to buy, sell or hold
securities and may be subject to
revision or withdrawal at any time
by the assigning rating agency. In
addition, a security rating does not
address or assess the frequency or
likelihood of prepayments on the
Loans or the degree to which such
prepayments might differ from those
originally anticipated. A rating
also does not address the
possibility that holders of the
Offered Certificates might suffer a
lower than anticipated yield. See
"Ratings" and "Risk
Factors--Certificate Rating Is Not a
Recommendation" herein.
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Offered Certificates.
Trust Is Only Source of Payment. The Offered Certificates do not
represent an interest in, or the obligation of, the Depositor, the Seller, the
Servicer, the Trustee or any of their respective affiliates. The Offered
Certificates will be payable solely from the Trust. There will be no recourse to
the Depositor, the Seller, the Servicer, the Trustee or any other person for any
failure to receive distributions on the Offered Certificates. Consequently,
Holders of the Offered Certificates must rely solely upon payments with respect
to the Loans and the other assets constituting the Trust, including any amounts
available pursuant to the Policy, for the payment of principal of and interest
on such Certificates. Neither the Offered Certificates nor the Loans are insured
or guaranteed by any government agency or instrumentality.
Second Mortgages Include Additional Risks. Approximately __% of the
Home Equity Loans and approximately __% of the Home Improvement Contracts by
aggregate principal balance are secured by second mortgages, which are
subordinate to the rights of the mortgagee under the senior mortgage or
mortgages encumbering the related Mortgaged Property ("First Liens"), the
proceeds from any foreclosure, liquidation, insurance or condemnation
proceedings will be available to satisfy the outstanding balance of such junior
mortgage only to the extent that the claims of the mortgagees under such First
Liens have been satisfied in full, including any related foreclosure costs. In
addition, a junior mortgagee may not foreclose on the Mortgaged Property
securing a junior mortgage unless it forecloses subject to the First Liens, in
which case it must either pay the entire amount due on the First Liens to the
mortgagees thereof at or prior to the foreclosure sale or undertake the
obligation to make payments on the First Liens in the event the mortgagor is in
default thereunder. The Trust will not have any source of funds to satisfy the
First Liens or make payments due to the mortgagees thereof. In addition,
approximately __% of the Home Improvement Contracts are secured by purchase
money security interests and approximately __% of the Home Improvement Contracts
are unsecured.
Liquidation expenses with respect to defaulted mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted home equity loan or home improvement contract having a small
remaining principal balance as it would in the case of a defaulted mortgage loan
having a larger principal balance, the amount realized after expenses of
liquidation would be smaller as a percentage of the outstanding principal
balance of the smaller mortgage loan than would be the case with a larger loan.
Because the average outstanding principal balances of the Loans are small
relative to the size of the loans in a typical pool of conventional first
mortgages, realizations net of liquidation expenses on defaulted Loans may also
be smaller as a percentage of the principal amount of the Loans than would be
the case with respect to a typical pool of conventional first mortgage loans.
There are several factors that could adversely affect the value of
Mortgaged Properties such that the outstanding balance of the related Mortgage
Loan, together with any senior financing on the Mortgaged Properties, would
equal or exceed the value of the Mortgaged Properties. Among the factors that
could adversely affect the value of the Mortgaged Properties are an overall
decline in the residential real estate market in the areas in which the
Mortgaged Properties are located or a decline in the general condition of the
Mortgaged Properties as a result of failure of borrowers to maintain adequately
the Mortgaged Properties or of natural disasters that are not necessarily
covered by insurance, such as earthquakes and floods. Any such decline could
extinguish the value of a junior interest in Mortgaged Property before having
any effect on the related senior interest therein. If such a decline occurs, the
actual rates of delinquencies, foreclosure and losses on the junior Loans could
be higher than those currently experienced in the mortgage lending industry in
general.
Prepayments May Fluctuate. All of the Loans may be prepaid in whole or
in part at any time without penalty. Home equity loans and home improvement
contracts, such as the Home Equity Loans and the Home Improvement Contracts have
been originated in significant volume only during the past few years and the
Depositor is not aware of any publicly available studies or statistics on the
rate of prepayment of such loans. Generally, home equity loans and home
improvement contracts are not viewed by borrowers as permanent financing.
Accordingly, the Home Equity Loans and the Home Improvement Contracts may
experience a higher rate of prepayment than traditional loans. The prepayment
experience of the Trust may be affected by a wide variety of factors, including
general economic conditions, interest rates, the availability of alternative
financing and homeowner mobility. In addition, all of the Loans contain
due-on-sale provisions and the Servicer is obligated to enforce such provisions
unless such enforcement is not permitted by applicable law.
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, such loans are likely to prepay at rates higher than if prevailing
interest rates remain at or above the interest rates borne by such loans.
Payments on the Loans May Vary. 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. In addition, all of the fixed
rate Loans are 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 to receipt of the Mortgagor's most
current payment, and the portions of each monthly payment that are allocated to
interest and principal are adjusted based on the actual amount of interest
charged on such basis. Consequently, if less than a full month has elapsed
between the interest paid to date and the next payment on a Simple Interest
Loan, the amount of interest actually paid by the Mortgagor will be less than a
full month's interest on the principal balance of such Mortgage Loan.
Conversely, if more than a full month has elapsed between payments on a Simple
Interest Loan, the amount of interest actually paid by the Mortgagor will be
greater than a full month's interest on the principal balance of such Mortgage
Loan.
Each ARM will be serviced as an Actuarial Loan. Actuarial Loans provide
that interest is charged to each related Mortgagor, and payments are due
therefrom, as of a scheduled day in each month that is fixed at the time of
origination. Scheduled monthly payments by a Mortgagor on an Actuarial Loan
either earlier or later than the scheduled due date therefor will not affect the
amortization schedule or the relative application of such payment to principal
and interest.
Balloon Loans May Adversely Affect Distributions. Approximately _____%
by aggregate Principal Balance as of the Cutoff Date of the Initial Home Equity
Loans in Loan Group One and approximately __% of the Initial Home Improvement
Contracts in Loan Group Two have original terms to stated maturity of up to ___
years and amortization schedules of up to ___ years ("Balloon Loans"), leaving a
substantial payment due at the stated maturity (each, a "Balloon Payment"). The
ability of a Mortgagor/Borrower to repay a Balloon Loan at maturity frequently
will depend on such Mortgagor's/Borrower's ability to refinance the Mortgage
Loan. The ability of a Mortgagor/Borrower to refinance such a Mortgage Loan will
be affected by a number of factors, including the level of available mortgage
rates at the time, the value of the related Mortgaged Property, the
Mortgagor's/Borrower's equity in the related Mortgaged Property, the financial
condition of the Mortgagor/Borrower, the tax laws and general economic
conditions at the time.
Although a low interest rate environment may facilitate the refinancing
of a Balloon Payment, the receipt and reinvestment by Certificateholders of the
proceeds in such an environment may produce a lower return than that previously
received in respect of the related Mortgage Loan. Conversely, a high interest
rate environment may make it more difficult for the Mortgagor/Borrower to
accomplish a refinancing and may result in delinquencies or defaults. None of
the Depositor, the Seller, the Servicer or the Trustee will be obligated to
provide funds to refinance any Mortgage Loan.
The Pre-Funding May Adversely Affect Investment. If the principal
amount of eligible Loans available during the Pre-Funding Period is less than
_____% of the original Pre-Funded Amount, the Depositor will have insufficient
Loans to sell to the Trust on the Subsequent Transfer Dates, thereby resulting
in prepayments of principal to Holders of one or more Classes of Offered
Certificates as described herein.
Each Subsequent Mortgage Loan must satisfy the eligibility criteria set
forth in the Agreement. However, Subsequent Loans may be originated or purchased
by the Seller using credit criteria different from those which were applied to
the Initial Loans and may be of a different credit quality. Therefore, following
the transfer of Subsequent Loans to a Loan Group, the aggregate characteristics
of the Loans then held by the Trust as part of such Loan Group may vary from
those of the Initial Loans in such Loan Group.
The ability of the Trust to invest in Subsequent Loans is largely
dependent upon whether the Seller is able to originate or purchase home equity
loans, home improvement installment sales contracts or installment loan
agreements which meet the requirements for transfer to the Trust under the
Agreement. The ability of the Seller to originate or purchase such mortgage
loans is affected by a variety of social and economic factors. Economic factors
include interest rates, unemployment levels, the rate of inflation and consumer
perception of economic conditions generally.
Underwriting Standards May Affect Performance. As described herein,
_____________'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 __________
from making a loan; however, it will reduce the size (and consequently the
Combined Loan-to-Value Ratio) of the loan that ___________ is willing to make.
As a result of this approach to underwriting, the Loans in the Trust may
experience higher rates of delinquencies, defaults and foreclosures than
mortgage loans underwritten in a more traditional manner.
Geographic Concentration May Adversely Affect Performance.
Approximately _____% and _____% (by Principal Balance as of the Cutoff Date) of
the Initial Home Equity Loans in Loan Group One and the Initial Home Improvement
Contracts in Loan Group Two, respectively, are secured by Mortgaged Properties
located in _________. To the extent that the ________ 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 Loans may be expected to exacerbate the foregoing risks.
The Depositor can neither quantify the impact of any recent property value
declines on the Loans nor predict whether, to what extent or for how long such
declines may continue.
Book-Entry Registration May Affect Liquidity. Issuance of the Offered
Certificates in book-entry form may reduce the liquidity of such Certificates in
the secondary trading market since investors may be unwilling to purchase
Offered Certificates for which they cannot obtain physical certificates.
Since transactions in the Offered Certificates will, in most cases, be
able to be effected only through Participants, Indirect Participants and certain
banks, the ability of a Certificate Owner to pledge an Offered Certificate to
persons or entities that do not participate in the DTC system, or otherwise to
take actions in respect of such certificate, may be limited due to lack of a
physical certificate representing the Certificates.
Certificate Owners may experience some delay in their receipt of
distributions of interest on and principal of the Offered Certificates since
distributions may be required to be forwarded by the Trustee to DTC and, in such
a case, DTC will be required to credit such distributions to the accounts of its
Participants which thereafter will be required to credit them to the accounts of
the applicable Class of owners either directly or indirectly through Indirect
Participants. See "Description of the Certificates--Book-Entry Registration"
herein.
Certificate Rating Is Not A Recommendation. The rating of the Offered
Certificates will depend primarily on an assessment by the Rating Agencies of
the Home Equity Loans and Home Improvement Contracts and upon the claims-paying
ability of the Certificate Insurer. Any reduction in a rating assigned to the
claims-paying ability of the Certificate Insurer below the rating initially
given to the Offered Certificates may result in a reduction in the rating of
such Certificates. The rating by the Rating Agencies of the Offered Certificates
is not a recommendation to purchase, hold or sell the Offered Certificates,
inasmuch as such rating does not comment as to the market price or suitability
for a particular investor. There is no assurance that the ratings will remain in
place for any given period of time or that the ratings will not be lowered or
withdrawn by the Rating Agencies.
DESCRIPTION OF THE LOANS
GENERAL
The Initial Loans were, and any Subsequent Loans will be, originated by
the Seller or an affiliate in accordance with the policies set forth under "Home
Equity and Home Improvement Loan Program." All of the Initial Loans are, and all
Subsequent Loans will be, home equity loans bearing fixed or adjustable interest
rates (the "Loan Rates") and evidenced by promissory notes (the "Mortgage
Notes") secured by deeds of trust, security deeds or mortgages on Mortgaged
Properties.
The Loans are secured by either first or second mortgages or deeds of
trust on Mortgaged Properties located in _____ states. The Mortgaged Properties
securing the Loans consist primarily of one- to four-family residential or
mixed-use properties including townhouses and individual units in condominiums
and planned unit developments. The Mortgaged Properties may be owner-occupied
(which includes second and vacation homes) and non-owner occupied investment
properties. Certain of the Home Improvement Contracts are unsecured or secured
by purchase money security interests in the home improvements financed thereby.
Certain Mortgage Loans (including Subsequent Loans, if any) will be a
Simple Interest Loan bearing interest at a fixed rate. Certain of the Loans will
have original terms to stated maturity of up to __ years and amortization
schedules of up to __ years ("Balloon Loans"), leaving a substantial payment due
at the stated maturity (each, a "Balloon Payment").
Certain other Mortgage Loans (including Subsequent Loans, if any) will
bear interest at an adjustable rate and will be serviced as an Actuarial Loan.
The Loan Rate borne by each ARM is subject to adjustment on the date set forth
in the related Mortgage Note (each, a "Change Date") to equal the sum of (i) the
weekly average yield on U.S. Treasury securities adjusted to a constant maturity
of one year, as made available by the Federal Reserve Board as of the date __
days before the applicable Change Date (the "Index") and (ii) the number of
basis points set forth in such Mortgage Note (the "Gross Margin"), subject to
rounding and to the effects of the Periodic Cap, the applicable Lifetime Cap and
the applicable Lifetime Floor. The "Periodic Cap" limits changes in the Loan
Rate for each ARM on each Change Date to ___ basis points. The "Lifetime Cap" is
the maximum Loan Rate that may be borne by an ARM over its life and is equal to
the sum of (i) the initial Loan Rate for such ARM and (ii) ___ basis points. The
"Lifetime Floor" is the minimum Loan Rate that may be borne by an ARM over its
life and is equal to the initial Loan Rate for such ARM. The ARMs do not provide
for negative amortization.
STATISTICAL INFORMATION
Set forth below is certain summary statistical information regarding
the Initial Loans expected to be included in their respective Loan Groups as of
the Closing Date. All such information is approximate and is given as of the
Cutoff Date. More detailed statistical information is set forth in Appendix A.
Prior to the Closing Date, Loans may be removed from their respective Loan
Groups and other Loans may be substituted therefor. In addition, regularly
scheduled payments on the Loans will affect the balances and percentages set
forth below and in Appendix A, and Loans may be prepaid at any time. As a
result, certain characteristics of the Loans in one or both Loan Groups may vary
from the characteristics set forth below and in Appendix A as of the Cutoff
Date.
Home Equity Loans -- Loan Group One. With respect to the Initial Group
One Home Equity Loans as of the Cutoff Date: the Principal Balances ranged from
$________ to $____________; the average Principal Balance was $__________; the
Loan Rates ranged from ____% to ____%; the weighted average Loan Rate was
______%; the original Combined Loan-to-Value Ratios ranged from ___% to ___%;
the weighted average original Combined Loan-to-Value Ratio was ______%; the
remaining terms to stated maturity of the Balloon Loans ranged from ___ months
to ____ months; the weighted average remaining term to stated maturity of the
Balloon Loans was _______ months; the remaining terms to stated maturity of the
non-Balloon Loans ranged from ___ months to ___ months; the weighted average
remaining term to stated maturity of the non-Balloon Loans was ____ months;
approximately _____% of the Group One Home Equity Loans are Balloon Loans; the
number of months since funding ranged from __ months to ___ months; the weighted
average number of months since funding was ____ months; and no more than ____%
of the Initial Group One Home Equity Loans will be secured by Mortgaged
Properties located in any one postal zip code area.
Home Improvement Contracts -- Loan Group TwO. With respect to the
Initial Group Two Home Improvement Contracts as of the Cutoff Date: the
Principal Balances ranged from $_________ to $________; the average Principal
Balance was $________; the current Loan Rates ranged from ______% to _______%;
the weighted average current Loan Rate was ______%; the original Combined
Loan-to-Value Ratios ranged from ____% to ____%; the weighted average original
Combined Loan-to-Value Ratio was ___%; the remaining terms to stated maturity
ranged from ___ months to ___ months; the weighted average remaining term to
stated maturity was _____ months; the number of months since funding ranged from
__ months to __ months; the weighted average number of months since funding was
___ months; the Gross Margins ranged from ____% to ______%; the weighted average
Gross Margin was ______%; the Lifetime Floors ranged from ____% to ______%; the
weighted average Lifetime Floor was ______%; the Lifetime Caps ranged from
______% to ________%; the weighted average Lifetime Cap was _____%; the weighted
average number of months to the next Change Date was ______ months; and no more
than ____% of the Initial Group Two Home Improvement Contracts are secured by
Mortgaged Properties located in any one postal zip code area.
SUBSEQUEnT LOANS
The Depositor expects to sell Subsequent Loans to the Trust during the
Pre-Funding Period for inclusion in the applicable Loan Group. The purchase
price for each Subsequent Mortgage Loan will equal the outstanding principal
balance thereof as of the opening of business on the first day of the month in
which such Subsequent Mortgage Loan is transferred to the Trust (each, a
"Subsequent Cut-Off Date") and will be paid by withdrawal of funds on deposit in
the Pre-Funding Account allocated to the applicable Loan Group. The Subsequent
Loans will have been originated more recently than, and may have other
characteristics which differ from, the Loans initially included in the
respective Loan Groups. As a result, following any sale of Subsequent Loans to
the Trust, the description of the Loan Groups set forth above and in Appendix A
may not accurately reflect the characteristics of all of the Loans and
Subsequent Loans in such Loan Groups. However, the Subsequent Loans must conform
to the representations and warranties set forth in the Agreement. Following the
end of the Pre-Funding Period, the Depositor expects that the Loans (including
Subsequent Loans) in Loan Group One and Loan Group Two will have the following
approximate characteristics.
<TABLE>
<CAPTION>
LOAN GROUP ONE
<S> <C>
Average Unpaid Principal Balance.......................................... at least $______
Weighted Average Loan Rate ............................................... _____% - _____%
Weighted Average Remaining Term to Stated Maturity ...................... __ months - __ months
Weighted Average Original Combined Loan-to-Value Ratio ................... not more than __%
Weighted Average Loan Age ................................................ 0 month - __ month
Loans Secured by Primary Residences ...................................... at least __%
Single Family Detached ................................................... at least __%
State Distribution
________ ............................................................... not more than __%
________ ............................................................... not more than __%
________ ............................................................... not more than __%
Any other individual state ............................................. not more than __%
</TABLE>
<TABLE>
<CAPTION>
LOAN GROUP TWO
<S> <C>
Average Unpaid Principal Balance.......................................... at least $______
Weighted Average Initial Loan Rate ....................................... _____% - _____%
Weighted Average Remaining Term to Stated Maturity ...................... __ months - __ months
Weighted Average Original Combined Loan-to-Value Ratio ................... not more than __%
Weighted Average Loan Age ................................................ 0 month - __ months
Weighted Average Gross Martin ............................................ at least __%
Loans Secured by Primary Residences ...................................... at least __%
Single Family Detached ................................................... at least __%
State Distribution
________ ............................................................... not more than __%
________ ............................................................... not more than __%
Any other individual state ............................................. not more than __%
</TABLE>
THE SELLER AND THE SERVICER
_____________ (the "Seller") is a ____________ which originates home
equity loans, home improvement installment sales contracts and installment loan
agreements secured by subordinate liens primarily on one- to four-family
residential and mixed use properties, including townhouses and individual units
in condominiums and planned unit developments. The Seller conducts its business
directly and through ____ affiliated companies.
For the three fiscal years ended ______________, the Seller funded
$____ million, $___ million and $____ million, respectively, of mortgage loans.
For the three months ended ___________, the Seller funded approximately $____
million of mortgage loans.
As of _________, the Seller had approximately ___ employees. The
principal offices of the Seller are located at __________________________. Its
telephone number is ____________.
HOME EQUITY AND HOME IMPROVEMENT LOAN PROGRAM
GENERAL
One of the Seller's products is a closed end, fixed rate, fully
amortizing mortgage loan with an original term to maturity of ___ years. The
Seller also offers fixed-rate fully-amortizing mortgage loans with original
terms to maturity of ___________ and __ years and fixed rate mortgage loans with
original terms to maturity of __ or __ years and an amortization schedule of up
to __ years or an original term to maturity of up to __ years and an
amortization schedule of up to __ years. The Seller also offers closed end,
adjustable rate, fully-amortizing mortgage loans with original terms to maturity
of either __ or __ years. Each adjustable rate mortgage loan provides for annual
adjustments based on changes in the level of the Index, subject to rounding, the
Periodic Cap and the applicable Lifetime Cap and the applicable Lifetime Floor.
In most instances, the Seller's mortgage loans are non-purchase money
mortgages secured by first or second liens on owner-occupied one- to four-family
residential and mixed-use properties, including townhouses and individual units
in condominiums and planned unit developments. In the fiscal year ended
____________ and the three months ended _____________, approximately ____% and
_____%, respectively, of the mortgage loans originated by the Seller were
secured by owner occupied residences. The Seller also makes mortgage loans
secured by first or second liens on residential rental properties or vacation
properties.
[All of the Seller's fixed rate mortgage loans are Simple Interest
Loans.] A Simple Interest Loan provides for a series of substantially equal
monthly payments which, if paid when due, will fully amortize the amount
financed by the scheduled maturity date. Each monthly payment includes an
installment of interest which is calculated on the basis of the outstanding
principal balance of the mortgage loan multiplied by the stated Loan Rate and
further multiplied by a fraction, the numerator of which is the number of days
in the period elapsed since the preceding payment of interest was made and the
denominator of which is the number of days in the annual period for which
interest accrues on such loan. As payments are received under a Simple Interest
Loan, the amount received is applied first to interest accrued to the date of
payment and the balance is applied to reduce the unpaid principal balance.
Accordingly, if a borrower pays a fixed monthly installment on a Simple Interest
Loan before its scheduled due date, the portion of the payment allocable to
interest for the period since the preceding payment was made will be less than
it would have been had the payment been made as scheduled, and the portion of
the payment applied to reduce the unpaid principal balance will be
correspondingly greater. Conversely, if a borrower pays the fixed monthly
installment after the scheduled due date, the portion of the payment allocable
to interest will be greater, and the amortization of the unpaid principal
balance will be correspondingly less.
All of the Seller'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 the Seller'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 the Seller with respect to fixed rate and adjustable
rate mortgage loans, home improvement installment sales contracts and
installment loan agreements secured by first or second liens on one- to four-
family residential properties, including townhouses and individual units in
condominiums and planned unit developments. The Seller'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. The Seller
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 or home improvement loan. As of
___________, the Seller employed ____ loan officers and ___ underwriters.
Underwriters are primarily promoted from within the Seller on a selective basis
in order to maintain the quality and integrity of the Seller's business
philosophy. All underwriters receive fixed annual salaries which are not based
on underwriting volume.
The application process generally is conducted by telephone. Each
applicant for a mortgage or home improvement loan is required to supply the
information necessary to complete an application which lists the applicant's
liabilities, income, credit and employment history and other demographic and
personal information. If the information in the loan application demonstrates
that the applicant has sufficient income and that there is sufficient equity in
the real property to justify making a mortgage loan, the loan officer will
conduct a further credit investigation of the applicant. This investigation
includes obtaining and reviewing an independent credit bureau report on the
credit history of the applicant in order to evaluate the applicant's ability to
repay. The credit report typically contains information relating to such matters
as credit history with local merchants and lenders, installment debt payments
and any record of defaults, bankruptcy, collateral repossessions, suits or
judgments. Any adverse information contained in the credit report must be
acceptable (and if requested, explained) to the loan officer.
Based on the information obtained from the applicant, the loan officer
advises the applicant of the loan program for which the applicant qualifies.
Upon gaining the agreement of the applicant, the loan officer submits the
application to the underwriting department for further review. An underwriter
will then evaluate the submission in accordance with certain established
guidelines. The underwriter will either approve, reject, or amend the loan
request based on the information submitted in the application. If the applicant
accepts the amendment, the underwriter will approve the amended loan
application.
The application is then further processed to verify the accuracy of the
information therein. Verification may take the form of written or verbal
communication with the applicant's employer or recent pay stubs and current W-2
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, the Seller 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 ____% (by Principal Balance as of the Statistical
Calculation Date) of the Initial Home Equity Loans in Loan Group One and
approximately __% (by Principal Balance as of the Statistical Calculation Date)
of the Initial Home Improvement Contracts in Loan Group Two 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 or home improvement loan, the loan officer also evaluates the
type and outstanding balance of the senior mortgage loan and its payment
history. The Seller 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 the Seller is
appraised and title insurance acquired before the loan is closed. The Seller
requires appraisals on all properties that will secure its mortgage and home
improvement loans. Such appraisals are conducted by approved, independent
third-party appraisers who are paid a fee by the applicant, regardless of
whether the application for a loan is approved. All appraisals are required to
be on forms approved by FNMA or FHLMC. The Seller 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 or home improvement loan originated by the
Seller. 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, the Seller 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 and/or home improvement loan in addition to any senior mortgage
loan payments (including any escrows for property taxes and hazard insurance
premiums) and other monthly credit obligations. The Seller 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 __%. For ARMs, such ratios generally are calculated using the "fully
indexed" rate (i.e., the sum of the applicable Index and the related Gross
Margin). In addition, the maximum Combined Loan-to-Value Ratio of any mortgage
loan may not exceed __% and may be reduced depending on a number of factors,
including the applicant's credit history and employment status.
Any exceptions to the underwriting policies may be approved by the
manager of the underwriting department. 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 and/or home improvement
loan is completed by signing the applicable loan documents, including a
promissory note and mortgage. All loans are closed by approved attorneys.
Following the three business day rescission period required by the federal
Truth-in-Lending Act, a 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 or home improvement loan is underwritten,
approved and funded, the loan package is reviewed by an employee.
REFINANCInG POLICY
Where the Seller believes that borrowers having existing loans with the
Seller are likely to refinance such loans due to interest rate changes or other
reasons, the Seller actively attempts to retain such borrowers through
solicitations of such borrowers to refinance with the Seller. Such refinancings
generate fee and servicing income for the Seller. Since the solicited borrowers
may refinance their existing loans in any case, the Seller believes that this
practice will be unlikely to affect the prepayment experience of the mortgage
loans in a material respect. The Seller 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 AND HOME IMPROVEMENT LOANS
The Servicer has established standard policies for the servicing and
collection of the mortgage and home improvement 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 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 _____ day after the due
date, a "Pre-foreclosure Letter" is sent, and a qualified outside agency is used
to inspect the property. On the _____ day after a first payment default a Notice
of Default is sent to the borrower. This letter indicates an intent to
accelerate the 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 _____ 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 _____ 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 __ days past due without a specific arrangement for
repayment will be sent a Notice of Intent to Foreclosure which gives the
customer _____ days in which to respond. On the _____ 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 __ days to
reinstate the mortgage. When foreclosure proceedings are initiated, a third
party appraiser completes a drive-by evaluation of the property and obtains
comparable sales prices and listings in the area. In addition, homeowner's
insurance is verified and the status of senior mortgages and property taxes is
checked. Subject to applicable state law, all legal expenses are assessed to the
account and become the responsibility of the borrower.
Regulations and practices regarding the liquidation of properties
(e.g., foreclosure) and the rights of the borrower in default vary greatly from
state to state. The Servicer will decide that liquidation is the appropriate
course of action only if a delinquency cannot otherwise be cured. If the
Servicer determines that purchasing a property securing a mortgage or home
improvement 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 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 or home improvement 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 or
home improvement 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
The following tables set forth the delinquency and loss experience for
each of the periods shown for the Servicer's portfolio of home equity and home
improvement lines of credit. The Servicer believes that there have been no
material trends or anomalies in the historical delinquency and loss experience
as represented in the following tables. The information in the tables below has
not been adjusted to eliminate the effect of the growth in the size of the
Servicer's portfolio during the periods shown. Accordingly, loss and delinquency
as percentages of aggregate principal balance of such loans for each period may
be higher than those shown if a group of such loans were artificially isolated
at a point in time and the information showed the activity only in that isolated
group. The data presented in the following tables are for illustrative purposes
only, and there is no assurance that the delinquency and loss experience of the
Loans will be similar to that set forth below.
DELINQUENCY EXPERIENCE (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
As of As of December 31,
___________,_____(1)
-----------------------------------------------------------------------
--------------------- --------------------- -------------------- ------------------------
Number Amount Number Amount Number Amount Number Amount
of Loans of Loans of Loans of
Loans
--------- --------- --------- --------- --------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio Principal $ $ $ $
Outstanding at
Period End.......
Delinquency(1) $ $ $ $
30-59 Days.......
60-89 Days.......
90 or More _____ _____ _____ _____ _____ _____ _____ _____
Days(2)............
Total Delinquencies $ $ $ $
Total Delinquencies % % % % % % % %
as a Percentage
of the Portfolio
at Period End....
</TABLE>
- --------------------
(1) The period of delinquency is based on the number of days payments are
contractually past due for all loans other than mortgage loans
previously charged off.
(2) Includes mortgage loans in foreclosure and not charged off.
LOSS EXPERIENCE (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
As of Year Ended December 31,
___________,_____ (1)
---------------------------------------------------------------
---------------------------- ------------------- -------------------- -------------------
Number of Amount Number Amount Number Amount Number Amount
Loans of Loans of Loans of Loans
--------------- --------- -------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Portfolio Principal $ $ $ $
Outstanding at
Period End.......
Gross Losses....... $ $ $ $
Recoveries......... $ $ $ $
Net Losses......... $ $ $ $
Net Losses as a $ $ $ $
Percentage of
Portfolio at
Period End.......
</TABLE>
- --------------------
(1) Net Losses equal total principal charged off less recoveries. The
customary policy is to charge off mortgage and home improvement loans
in full that are 120 days past due unless foreclosure proceedings are
planned or there are indications that the account will be brought
current. An account that is not charged off because there are
indications that payment is imminent generally will be charged off
after an additional 60 to 90 days if such payment is not forthcoming.
(2) This percentage represents the ___-month period ended ___________,
1995 annualized and is not necessarily indicative of the results
which may occur for the full year.
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The rate of principal payments on a Class of Offered Certificates, the
aggregate amount of distributions on such Certificates and the yield to maturity
of such Certificates will be related to the rate and timing of payments of
principal on the Loans and in the related Loan Group. The rate of principal
payments on the Loans will in turn be affected by the amortization schedules of
the Loans (including, in the case of ARMs, changes thereto to accommodate
changes in the Loan Rate) and by the rate of principal prepayments (including
for this purpose prepayments resulting from refinancing, liquidations of the
Loans due to defaults, casualties, condemnations and repurchases by the Seller
or purchases by the Servicer). The Loans may be prepaid by the Mortgagors at any
time without a prepayment penalty.
Prepayments, liquidations and purchases of the Loans (including any
optional purchase by the Servicer of a defaulted Mortgage Loan and any optional
purchase of the remaining Loans in connection with the termination of the Trust,
in each case as described herein) will result in distributions on the related
Class or Classes of Offered Certificates of principal amounts which would
otherwise be distributed over the remaining terms of the Loans. In addition, any
Pre-Funded Amount allocated to a Loan Group remaining at the end of the
Pre-Funding Period will be distributed as a prepayment of the related Class or
Classes of Offered Certificates. Since the rate of payment of principal of the
Loans will depend on future events and a variety of factors, no assurance can be
given as to such rate or the rate of principal prepayments. The extent to which
the yield to maturity of an Offered Certificate may vary from the anticipated
yield will depend upon the degree to which such Certificate is purchased at a
discount or premium.
The prepayment experience on non-conventional home equity loans and
home improvement loans may differ from that on conventional first mortgage
loans, primarily due to the credit quality of the typical borrower. Because the
credit histories of many home equity and home improvement borrowers may preclude
them from other traditional sources of financing, such borrowers may be less
likely to refinance due to a decline in market interest rates. Non-conventional
home equity loans and home improvement loans may experience more prepayments in
a rising interest rate environment as the borrowers' finances are stressed to
the point of default.
The rate of prepayment on the Loans cannot be predicted. Home equity
loans and home improvement loans such as the Home Equity Loans and the Home
Improvement Contracts, respectively, have been originated in significant volume
only during the past few years and the Seller is not aware of any publicly
available studies or statistics on the rate of prepayment of such Loans.
Generally, home equity loans and home improvement loans are not viewed by
borrowers as permanent financing. Accordingly, the Loans may experience a higher
rate of prepayment than traditional first mortgage loans. The prepayment
experience of the Trust with respect to the 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 and/or home improvement contracts. All of the Home
Equity Loans [and Home Improvement Contracts] 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
Loans" in the Prospectus. No assurance can be given as to the level of
prepayments that will be experienced by the Trust and it can be expected that a
portion of borrowers will not prepay their Loans to any significant degree.
OVERCOLLATERALIZATION
The overcollateralization and cross collateralization features
described herein will affect the rate and timing of principal distributions on
the Offered Certificates, and consequently the average life and yield to
maturity. On any Distribution Date on which the Overcollateralization Amount for
a Loan Group is less than the related Required Overcollateralization Amount, the
Remaining Net Excess Spread for such Loan Group, the Available Transfer Cashflow
and the Net Excess Principal will be used to reduce the Class Certificate
Balance of the related Class or Classes of Offered Certificates through the
distribution of Additional Principal. Until such time, if any, that the
Overcollateralization Amount for a Loan Group equals the related Required
Overcollateralization Amount, there will be no Available Transfer Cashflow or
Net Excess Principal to accelerate the amortization of the other Class or
Classes of Offered Certificates. Loans with higher Loan Rates contribute more
interest to the Excess Spread than do Loans with relatively lower Loan Rates. If
Loans with higher Loan Rates were to prepay, the amount of Net Excess Spread
could be reduced thereby slowing the amortization of the Class Certificate
Balance of the related Class or Classes of Offered Certificates from the
distribution of Additional Principal.
Because the Excess Spread for a Loan Group is available to cover an
Available Funds Shortfall with respect to both the related Loan Group and the
other Loan Group, there may be no Remaining Net Excess Spread with which to make
payments of Additional Principal. Similarly, any Excess Principal for a Loan
Group will be applied to cover an Available Funds Shortfall in the other Loan
Group prior to being applied to the payment of Additional Principal for the
Class or Classes of Offered Certificates related to such other Loan Group. Thus,
the amount and timing of any distributions in respect of Additional Principal on
a Class of Offered Certificates will depend, in part, on the prepayment and loss
experience of the Loans in the Loan Group related to the other Class or Classes
of Offered Certificates.
The application of Remaining Net Excess Spread, Available Transfer
Cashflow and Net Excess Principal to payments of Additional Principal is
intended to create overcollateralization to provide a source of additional
cashflow to cover losses on the Loans in each Loan Group. If the amount of
losses in a particular Due Period exceeds the amount of Excess Spread for the
related Loan Group and the Net Excess Spread and Excess Principal for the other
Loan Group for the related Distribution Date, the amount in respect of principal
distributed to the related Class or Classes of Offered Certificates will be
reduced. A draw on the Policy in respect of principal will not be made until the
Loan Group Balance is less than the aggregate Class Certificate Balance of the
related Class or Classes of Offered Certificates, i.e., the related Class or
Classes of Offered Certificates are undercollateralized.
If a Required Overcollateralization Amount is allowed to step down, the
amount of Remaining Net Excess Spread and Net Excess Principal available to the
other Loan Group may be increased, and the amount of principal distributed to
the Class or Classes of Offered Certificates for which the step down occurred
will be decreased.
As a result of the interaction of the foregoing features, there may be
Distribution Dates on which Holders of the Offered Certificates receive little
or no distributions in respect of principal. Either Overcollateralization Amount
may or may not equal the related Required Overcollateralization Amount on any
Distribution Date. There can be no assurance as to whether or when either
Overcollateralization Amount may equal the related Required
Overcollateralization Amount.
ARMS
As is the case with fixed rate Home Equity Loans and Home Improvement
Contracts, the ARMs may be subject to a greater rate of principal prepayments in
a low interest rate environment. For example, if prevailing interest rates were
to fall, Mortgagors with ARMs may be inclined to refinance their ARMs with a
fixed rate loan to "lock in" a lower interest rate. The existence of the
Periodic Cap, Lifetime Cap and Lifetime Floor also may affect the likelihood of
prepayments resulting from refinancings. In addition, the delinquency and loss
experience on the ARMs may differ from that on the fixed rate Loans because the
amount of the monthly payments on the ARMs is subject to adjustment on each
Change Date. If such different experience were to occur, the prepayment
experience on the Class A-3 Certificates may differ from that on the Fixed Rate
Certificates.
Certain of the ARMs were originated with initial Loan Rates that were
based on competitive conditions and did not equal the sum of the applicable
Index and the related Gross Margin. In addition, none of the ARMs has reached
its initial Change Date. As a result, the Loan Rates on such ARMs are more
likely to adjust on their first, and possibly subsequent Change Dates, subject
to the effects of the applicable Periodic Cap and Lifetime Cap. Because the
Certificate Rate for the Class A-3 Certificates is a function of the weighted
average Remittance Rate of the ARMs, limits on changes in the Loan Rates of the
ARMs may limit changes in the Certificate Rate for the Class A-3 Certificates.
Disproportionate principal payments on ARMs having Loan Rates higher
than the current Certificate Rate will also affect the yield on the Class A-3
Certificates. The yield to maturity of the Class A-3 Certificates will be lower
than otherwise would be the case if disproportionate principal payments
(including prepayments) are made on ARMs having Loan Rates that exceed the
related Certificate Rate.
FINAL SCHEDULED DISTRIBUTION DATE
The Final Scheduled Distribution Date for each Class of Offered
Certificates is set forth in "Summary of Terms--Final Scheduled Distribution
Date herein". The Final Scheduled Distribution Date for the Class A-1
Certificates was determined based on the Structuring Assumptions (defined below)
and the assumption that there are no prepayments. The Final Scheduled
Distribution Dates for the Class A-2 and Class A-3 Certificates were set to
equal the Distribution Date in the 25th month following the month of the latest
possible scheduled maturity date for any of the Loans in the related Loan Group.
Since the rate of distributions in reduction of the Class Certificate Balance of
each Class of Offered Certificates will depend on the rate of payment (including
prepayments) of the Loans, the Class Certificate Balance of any such Class could
be reduced to zero significantly earlier or later than the applicable Final
Scheduled Distribution Date. The rate of payments on the Loans will depend on
their particular characteristics, as well as on prevailing interest rates from
time to time and other economic factors, and no assurance can be given as to the
actual payment experience of the Loans.
STRUCTURING ASSUMPTIONS
The information in the decrement tables has been prepared on the basis
of the following assumed characteristics of the Home Equity Loans and Home
Improvement Contracts and the following additional assumptions (collectively,
the "Structuring Assumptions"): (i) the Loans prepay at the specified
percentages of the Prepayment Ramp or CPR (each as defined below), (ii) no
defaults or delinquencies in the payment by Mortgagors of principal of and
interest on the Loans are experienced, (iii) the initial Class Certificate
Balance of each Class of Offered Certificates is as set forth on the cover page
hereof, (iv) interest accrues on each Class of Offered Certificates in each
period at the applicable Certificate Rate or initial Certificate Rate described
herein, (v) distributions in respect of the Offered Certificates are received in
cash on the 25th day of each month commencing in ___________, (vi) the Servicer
does not exercise its option to purchase the Loans described herein under
"Description of the Certificates--Termination; Retirement of Certificates" and
"--Optional Purchase of Defaulted Loans" herein, (vii) the Offered Certificates
are purchased on ________, (viii) scheduled payments on the Loans are received
on the first day of each month commencing in the calendar month following the
Closing Date and are computed prior to giving effect to prepayments received on
the last day of the prior month, (ix) prepayments represent prepayments in full
of individual Loans and are received on the last day of each month and include
30 days' interest thereon, commencing in the calendar month of the Closing Date,
(x) the scheduled monthly payment for each [Mortgage Loan] has been calculated
based on the assumed [Mortgage Loan] characteristics set forth in the following
table such that each Mortgage Loan will amortize in amounts sufficient to repay
the balance of such Mortgage Loan by its indicated remaining term to maturity,
(xi) all of the indicated Subsequent Loans purchased with funds from the
Pre-Funding Account are purchased during ______, (xii) the Trust consists of __
Loans with the characteristics set forth in the following table, (xiii) the
level of the Index remains constant at ______% and (xiv) [the Mortgage Rate for
each Mortgage Loan in Loan Group Two] is adjusted on its next Change Date (and
on subsequent Change Dates, if necessary) to equal the sum of (a) the assumed
level of the Index and (b) the Gross Margin (such sum being subject to the
Periodic Rate Cap). While it is assumed that each of the Loans prepays at the
specified percentages of the Prepayment Ramp or CPR, as applicable, this is not
likely to be the case. Moreover, discrepancies will exist between the
characteristics of the actual Loans which will be delivered to the Trustee
(including Subsequent Loans) and characteristics of the Loans assumed in
preparing the tables herein.
Prepayments of home equity loans, home improvement installment sales
contracts and installment loan agreements are commonly measured relative to a
prepayment standard or model. The model used with respect to the Fixed Rate
Certificates (the "Prepayment Ramp") assumes that the Home Equity Loans in Loan
Group One prepay at a rate of ___% CPR in the first month after origination, and
an additional ___% each month thereafter until the __ month. Beginning in the __
month and each month thereafter, the Prepayment Ramp assumes a prepayment rate
of __% CPR. For the Class A-3 Certificates, it was assumed that the Home
Improvement Contracts in Loan Group Two prepay at a rate of ___% CPR. The
Constant Prepayment Rate ("CPR") represents an assumed constant rate of
prepayment each month, expressed as an annual rate, relative to the then
outstanding principal balance of a pool of home improvement contracts for the
life of such loans. Neither model purports to be either an historical
description of the prepayment experience of any pool of loans or a prediction of
the anticipated rate of prepayment of any home equity loans or home improvement
agreements, including the Home Equity Loans and the Home Improvement Contracts
to be included in the Loan Groups.
<TABLE>
<CAPTION>
Original Remaining
Principal Current Loan Term to Term to Gross Months to
Balance($) Rate (%) Maturity Maturity Margin(%) Next Change
(months)(6) (months)(7) Date(8)
<S> <C> <C> <C> <C> <C> <C>
Loan Group One..........
</TABLE>
DECREMENT TABLES
The following tables indicate, based on the Structuring Assumptions,
the percentages of the initial Class Certificate Balances of the Classes of
Offered Certificates that would be outstanding after each of the dates shown at
various percentages of the Prepayment Ramp or CPR and the corresponding weighted
average lives of such Classes. It is not likely that (i) all of the Loans will
have the characteristics assumed, (ii) the Loans will prepay at the specified
percentages of the Prepayment Ramp or CPR or at any other constant percentage or
(iii) the level of the Index will remain constant at the level assumed or at any
other level. Moreover, the diverse remaining terms to maturity of the Loans
could produce slower or faster principal distributions than indicated in the
tables at the specified percentages of the Prepayment Ramp or CPR, even if the
weighted average remaining term to maturity of the Loans is consistent with the
remaining terms to maturity of the Loans specified in the Structuring
Assumptions.
<TABLE>
<CAPTION>
PERCENT OF INITIAL CLASS CERTIFICATE
BALANCES OUTSTANDING*
DISTRIBUTION DATE CLASS A-1 PERCENTAGE OF CPR CLASS A-2 PERCENTAGE OF CPR
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Initial Percent.............
February 1998...............
February 1999...............
February 2000...............
February 2001...............
February 2002...............
February 2003...............
February 2004...............
February 2005...............
February 2006...............
February 2007...............
February 2008...............
February 2009...............
February 2010...............
February 2011...............
February 2012...............
February 2013...............
February 2014...............
February 2015...............
February 2016...............
February 2017...............
February 2018...............
February 2019...............
February 2020...............
February 2021...............
February 2022...............
February 2023...............
February 2024...............
February 2025...............
February 2026...............
Weighted Average
Life (years)**............
</TABLE>
- ---------------------------
* Rounded to the nearest whole percentage.
** The weighted average life of an Offered Certificate is determined by (a)
multiplying the amount of the reduction, if any, of the Class Certificate
Balance of such Certificate on each Distribution Date by the number of
years from the date of issuance to such Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate amount of the reductions
in Class Certificate Balance of such Certificate referred to in clause (a).
PERCENT OF INITIAL CLASS CERTIFICATE
BALANCES OUTSTANDING*
DISTRIBUTION DATE CLASS A-3 PERCENTAGE OF CPR
- --------------------------------------------------------------------------
Initial Percent.............
February 1998...............
February 1999...............
February 2000...............
February 2001...............
February 2002...............
February 2003...............
February 2004...............
February 2005...............
February 2006...............
February 2007...............
February 2008...............
February 2009...............
February 2010...............
February 2011...............
February 2012...............
February 2013...............
February 2014...............
February 2015...............
February 2016...............
February 2017...............
February 2018...............
February 2019...............
February 2020...............
February 2021...............
February 2022...............
February 2023...............
February 2024...............
February 2025...............
February 2026...............
Weighted Average Life
(years)**.................
- ---------------------------
* Rounded to the nearest whole percentage.
** The weighted average life of an Offered Certificate is determined by (a)
multiplying the amount of the reduction, if any, of the Class Certificate
Balance of such Certificate on each Distribution Date by the number of
years from the date of issuance to such Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate amount of the reductions
in Class Certificate Balance of such Certificate referred to in clause (a).
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement. The
following summaries describe certain provisions of the Agreement. The summaries
do not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all of the provisions of the Agreement. Wherever
particular sections or defined terms of the Agreement are referred to, such
sections or defined terms are hereby incorporated herein by reference.
GENERAL
Each Class of Offered Certificates will evidence specified undivided
interests in the Trust. The property of the Trust will consist of, to the extent
provided in the Agreement: (i) the Home Equity Loans in Loan Group One; (ii)
payments on the Home Equity Loans received on and after the Cut-Off Date; (iii)
the Home Improvement Contracts in Loan Group Two; (iv) payments on the Home
Improvement Contracts received on or after the Cut-Off Date; (v) Mortgaged
Properties relating to the Home Equity Loans and Home Improvement Contracts that
are acquired by foreclosure or deed in lieu of foreclosure; (vi) each Collection
Account and Distribution Account; (vii) the Capitalized Interest Account; (viii)
the Pre-Funding Account; (ix) the Policy; (x) certain hazard insurance policies
maintained by the borrowers of the Loans, or the Servicer in respect thereof;
and (xi) the Depositor's rights under the Purchase Agreement (defined below).
BOOK-ENTRY REGISTRATION
The Offered Certificates initially will be registered in the name of
Cede & Co. ("Cede"), the nominee of the Depository Trust Company ("DTC"). DTC
has advised the Depositor as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code ("UCC") and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participating organizations ("Participants") and facilitate
the clearance and settlement of securities transactions between Participants
through electronic book-entry changes in their accounts, thereby eliminating the
need for physical movement of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include certain other organizations. Indirect access to the DTC system also is
available to others such as brokers, dealers, banks and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participant").
Under a book-entry format, beneficial owners of the Offered
Certificates ("Certificates Owners") that are not Participants or Indirect
Participants but desire to purchase, sell or otherwise transfer ownership of
Offered Certificates registered in the name of Cede, as nominee of DTC, may do
so only through Participants and Indirect Participants. In addition, such
Certificate Owners will receive all distributions of principal of and interest
on the Offered Certificates from the Trustee through DTC and its Participants.
Under a book-entry format, Certificate Owners will receive payments after the
related Distribution Date because, while payments are required to be forwarded
to Cede, as nominee for DTC, on each such date, DTC will forward such payments
to its Participants which thereafter will be required to forward them to
Indirect Participants or Certificate Owners. Under a book entry format, it is
anticipated that the only Certificateholder will be Cede, as nominee of DTC, and
that the Certificate Owners will not be recognized by the Trustee as
Certificateholders under the Agreement. The Certificate Owners will only be
permitted to exercise the rights of Certificateholders under the Agreement
indirectly through DTC and its Participants who in turn will exercise their
rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Offered Certificates
and is required to receive and transmit payments of principal of and interest on
the Offered Certificates. Participants and Indirect Participants with which
Certificate Owners have accounts with respect to the Offered Certificates
similarly are required to make book-entry transfers and receive and transmit
such payments on behalf of their respective Certificate Owners. Accordingly,
although Certificate Owners will not possess certificates, the rules provide a
mechanism by which Certificate Owners will receive distributions and will be
able to transfer their interests.
Certificate Owners who are not Participants may transfer ownership of
the Offered Certificates only through Participants by instructing such
Participants to transfer the Offered Certificates, by book-entry transfer,
through DTC for the account of the purchasers of such Certificates, which
account is maintained with their respective Participants. Under the rules and in
accordance with DTC's normal procedures, transfers of ownership of Offered
Certificates will be executed through DTC and the accounts of the respective
Participants at DTC will be debited and credited. Similarly, the respective
Participants will make debits or credits, as the case may be, on their records
on behalf of the selling and purchasing Certificate Owners.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of Certificate
Owners to pledge the Offered Certificates to persons or entities that do not
participant in the DTC system, or otherwise take actions in respect of such
Certificates may be limited due to the lack of a physical certificate for such
Certificates.
DTC in general advises that it will take any action permitted to be
taken by a Certificate Owner under the Agreement only at the direction of one or
more Participants to whose account with DTC the Offered Certificates are
credited. Additionally, DTC in general advises that it will take such actions
with respect to specified percentages of the Certificate Owners only at the
direction of and on behalf of Participants whose holdings include current
principal amounts of outstanding Offered Certificates that satisfy such
specified percentages. DTC may take conflicting actions with respect to other
current principal amounts of outstanding Offered Certificates to the extent that
such actions are taken on behalf of Participants whose holdings include such
current principal amounts of outstanding Offered Certificates.
Any Offered Certificates initially registered in the name of Cede, as
nominee of DTC, will be issued in fully registered, certificated form to
Certificate Owners or their nominees ("Definitive Certificates"), rather than to
DTC or its nominee only under the following circumstances: (i) the Depositor
advises the Trustee in writing that DTC is no longer willing or able to properly
discharge its responsibilities as Depository with respect to the Offered
Certificates, and the Trustee or the Depositor is unable to locate a qualified
successor, (ii) the Depositor, at its option, elects to terminate the book-entry
system through DTC, or (iii) after the occurrence of an Event of Default
(defined herein), Certificate Owners representing not less than 50% of the
aggregate Certificate Principal Balance of the Offered Certificates advise the
Trustee and DTC through Participants in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interest of the Certificate Owners. Upon the occurrence of any of such events,
DTC will be required to notify all Participants of the availability through DTC
of Definitive Certificates. Upon surrender by DTC of the certificates
representing the Offered Certificates and instruction for re-registration, the
Trustee will issue the Offered Certificates in the form of Definitive
Certificates, and thereafter the Trustee will recognize the holders of such
Definitive Certificates as Certificateholders. Thereafter, payments of principal
of and interest on the Offered Certificates will be made by the Trustee directly
to Certificateholders in accordance with the procedures set forth in the
Agreement. The final distribution of any Offered Certificate (whether Definitive
Certificates or Offered Certificates registered in the name of Cede), however,
will be made only upon presentation and surrender of such Certificates on the
final Distribution Date at such office or agency as is specified in the notice
of final payment to Certificateholders.
Although DTC has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Offered Certificates among
Participants, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. None of the
Depositor, the Seller, the Servicer or the Trustee will have any responsibility
for the performance by DTC or its Participants or Indirect Participants of their
respective obligations under the rules and procedures governing their
operations.
ASSIGNMENT OF LOANS
The Loans will be acquired by the Depositor from the Seller pursuant to
the Mortgage Loan Purchase Agreement, dated the Closing Date (the "Purchase
Agreement"), between the Seller and the Depositor. At the time of issuance of
the Certificates, the Depositor will transfer to the Trust all of its right,
title and interest in and to each Mortgage Loan, the related mortgage note,
mortgage and other related documents (collectively, the "Related Documents"),
including all payments received on or with respect to each such Mortgage Loan on
or after the Cut-Off Date (exclusive of payments in respect of accrued interest
on the Loans through the related Due Date in the month preceding the month of
the Cut-Off Date). The Depositor also will assign to the Trustee all of the
Depositor's rights under the Purchase Agreement. The Trustee, concurrently with
such transfer, will deliver the Certificates to the Seller. 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 as to the Principal Balance of each Mortgage Loan as of
the Cut-Off Date, as well as information with respect to the current Loan Rate.
The Agreement will require that, within the time period specified
therein, the Depositor will deliver or cause to be delivered to the Trustee (or
a custodian, as the Trustee's agent for such purpose) the Home Equity Loans and
Home Improvement Contracts endorsed to the Trustee and the Related Documents. In
lieu of delivery of original mortgages, the Depositor may deliver or cause to be
delivered true and correct copies thereof which have been certified as to
authenticity by the appropriate county recording office where such mortgage is
recorded.
Under the terms of the Purchase Agreement, the Seller will have 30 days
after the Closing Date to prepare and submit for recording assignments of the
mortgages related to each Mortgage Loan in favor of the Trustee (unless opinions
of counsel satisfactory to the Rating Agencies and the Certificate Insurer are
delivered to the Trustee and the Certificate Insurer to the effect that
recordation of such assignments is not required in the relevant jurisdictions to
protect the interests of the Trustee in the Loans). If the recording information
with respect to any assignment of Mortgage is unavailable within 30 days of the
Closing Date, such assignment will be prepared and recorded promptly after
receipt of such information, but in no event later than one year after the
Closing Date.
Within 90 days of the Closing Date, the Trustee will review the 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
and the Depositor 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 the Trust as a REMIC for federal income tax
purposes 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 the greater of (i) all accrued and unpaid interest thereon and (ii) 30
days' interest thereon, computed at the Loan Rate, net of the Servicing Fee with
respect to such Mortgage Loan if the Seller or an affiliate is the Servicer,
plus the amount of any unreimbursed Servicing Advances made by the Servicer with
respect to such Mortgage Loan. The Purchase Price will be deposited in the
applicable Collection Account on or prior to the next succeeding Determination
Date after such obligation arises. The obligation of the Seller to repurchase or
substitute for a Defective Mortgage Loan is the sole remedy regarding any
defects in the 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 applicable Collection
Account on or prior to the next succeeding Determination Date after such
obligation arises an amount (the "Substitution Adjustment") equal to the sum of
(i) the excess of the Principal Balance of the related Defective Mortgage Loan
over the Principal Balance of such Eligible Substitute Mortgage Loan, (ii) 30
days' interest on such excess computed at the Loan Rate, net of the Servicing
Fee if the Seller or an affiliate is the Servicer, and (iii) the amount of any
unreimbursed Servicing Advances and Monthly Advances made by the Servicer with
respect to such Defective Mortgage Loan if the Servicer is not an affiliate of
the Seller. The Servicer will be deemed to have been reimbursed for any
Servicing Advances and Monthly Advances that are not paid pursuant to clause
(iii).
An "Eligible Substitute 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 lien 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 Loans set forth in the Purchase Agreement (deemed to be made as of the date
of substitution); (vi) have a Combined Loan-to-Value Ratio not greater than that
of the Defective Mortgage Loan.; (vii) bear a fixed or adjustable Loan Rate if
the Deleted Mortgage Loan was in Loan Group One or Loan Group Two, respectively;
and (viii) if the Mortgage Loan is an ARM, have a Gross Margin and Lifetime Cap
no less than, the same interval between the Change Dates as, and a Loan Rate
based on the same Index as, that of the Defective Mortgage Loan.
In the Purchase Agreement, the Seller will make certain representations
and warranties with respect to the Home Equity Loans and Home Improvement
Contracts including, among others: (i) The information with respect to each
Mortgage Loan set forth in the Mortgage Loan Schedule is true and correct in all
material respects as of the Cut-Off Date; (ii) Each Mortgage is a valid and
subsisting first or second lien of record on the Mortgaged Property subject, in
the case of any second Mortgage Loan, only to a First Lien on such Mortgaged
Property and subject in all cases to the exceptions to title set forth in the
title insurance policy with respect to the related Mortgage Loan, which
exceptions are generally acceptable to mortgage lending companies, and such
other exceptions to which similar properties are commonly subject and which do
not individually, or in the aggregate, materially and adversely affect the
benefits of the security intended to be provided by such Mortgage; (iii) Except
with respect to liens released immediately prior to the transfer contemplated in
the Purchase Agreement, each Mortgage Note and the related Mortgage have not
been assigned or pledged and immediately prior to the transfer and assignment
herein contemplated, the Seller held good, marketable and indefeasible title to,
and was the sole owner and holder of, each Mortgage Loan subject to no liens,
charges, mortgages, claims, participation interests, equities, pledges or
security interests of any nature, encumbrances or rights of others
(collectively, a "Lien"); and immediately upon the completion of the transfers
and assignments contemplated in the Agreement, the Trustee will hold good,
marketable and indefeasible title, to, and be the sole owner of, each Mortgage
Loan subject to no Liens; (iv) No Mortgage Loan was 30 or more days delinquent
as of the Cut-Off Date, as measured at the end of the month; and (v) Each
Mortgage Loan at the time it was made complied in all material respects with
applicable state and federal laws and regulations, including, without
limitation, usury, equal credit opportunity, consumer credit, truth-in-lending,
real estate settlement procedures and disclosure laws.
Upon discovery of a breach of any such representation and warranty
which materially and adversely affects the interests of the Certificateholders
or the Certificate Insurer in the related Mortgage Loan, the Seller will have a
period of 60 days after discovery or notice of the breach to effect a cure. If
the breach cannot be cured within the 60-day period, the Seller will be
obligated to (i) substitute for such Defective 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 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
that materially and adversely affects the interests of the Certificateholders or
the Certificate Insurer. The obligation of the Seller to repurchase or
substitute for a Defective Mortgage Loan is the sole remedy regarding any breach
of a representation or warranty with respect thereto available to the Trustee or
the Certificateholders.
The Depositor will make no representations or warranties with respect
to the Loans and will have no obligation (other than to assign to the Trustee
the Depositor's rights under the Purchase Agreement) or liability with respect
to breaches of the Seller's representations or warranties or its obligations to
cure, purchase or substitute for any Defective Loan.
PAYMENTS ON LOANS; DEPOSITS TO COLLECTION ACCOUNTS AND DISTRIBUTION ACCOUNT
The Trustee will establish and maintain a separate account (each, a
"Collection Account") for each Loan Group. Each Collection Account will be an
Eligible Account (as defined herein). Subject to the investment provision
described in the following paragraphs, upon receipt by the Servicer of amounts
in respect of the Loans (excluding amounts representing the Servicing Fee,
reimbursement for previous related Monthly Advances or Servicing Advances,
administrative charges, taxes, assessments, credit insurance charges, insurance
proceeds to be applied to the restoration or repair of a Mortgaged Property or
similar items), the Servicer will deposit such amounts in the Collection Account
for the applicable Loan Group. Amounts so deposited may be invested in Eligible
Investments (as described in the Agreement) maturing no later than one Business
Day prior to the date on which the amount on deposit therein is required to be
deposited in the Distribution Account or on such Distribution Date if approved
by the Rating Agencies and the Certificate Insurer.
The Trustee will establish a separate account (each, a "Distribution
Account") for each Loan Group into which will be deposited amounts withdrawn
from the related Collection Account for distribution to Certificateholders on a
Distribution Date. Each Distribution Account will be an Eligible Account.
Amounts on deposit therein may be invested in Eligible Investments maturing on
or before the Business Day prior to the related Distribution Date.
An "Eligible Account" is an account that is (i) maintained with a
depository institution the deposits in which are insured by the FDIC to the
limits established by the FDIC and the short-term debt obligations of which (or
in the case of a depository institution that is the principal subsidiary of a
holding company, the short-term debt obligations of which) are rated in the
highest short-term rating category by each Rating Agency and the long-term debt
obligations of which are rated at least Aa3 by Moody's, (ii) a trust account or
accounts maintained with the trust department of a federal or a state chartered
depository institution or trust company the long-term debt obligations of which
are rated at least Baa3 by Moody's, acting in a fiduciary capacity or (iii) an
account or accounts otherwise acceptable to each Rating Agency and the
Certificate Insurer.
Eligible Investments are specified in the Agreement and are limited to
investments which meet the criteria of the Rating Agencies from time to time as
being consistent with their then current ratings of the Certificates.
PRE-FUNDING ACCOUNT
On the Closing Date, an aggregate cash amount (the "Pre-Funded Amount")
not to exceed approximately $_________ will be deposited in the Pre-Funding
Account. Of such amount, approximately $__________ will be used to purchase
Subsequent Home Equity Loans for deposit into Loan Group One and, if required,
to make accelerated payments of principal on the Fixed Rate Certificates and
approximately $__________ will be used to purchase Subsequent Home Improvement
Contracts for deposit into Loan Group Two and, if required, to make accelerated
payments of principal on the Class A-3 Certificates. During the period (the
"Pre-Funding Period") from the Closing Date to the earliest to occur of (a) the
date on which the amount on deposit in the Pre-Funding Account is less than
$_____, (b) an Event of Default under the Agreement and (c) __________, amounts
on deposit in the Pre-Funding Account may be withdrawn from time to time to
acquire Subsequent Loans in accordance with the Agreement. Any net investment
earnings on the Pre-Funded Amount will be transferred to the Capitalized
Interest Account on each Distribution Date during the Pre-Funding Period. Any
Pre-Funded Amount remaining in the Pre-Funding Account at the end of the
Pre-Funding Period will be distributed on the Distribution Date occurring at or
immediately following the end of the Pre-Funding Period as a prepayment of
principal of the Class A-1 and Class A-2 Certificates, on a pro rata basis, or
the Class A-3 Certificates, as applicable, based on the remaining Pre-Funded
Amount allocated to the related Loan Group. [Only fixed-rate Subsequent Home
Equity Loans may be added to Loan Group One, and only adjustable-rate Subsequent
Home Improvement Contracts may be added to Loan Group Two.]
CAPITALIZED INtEREST ACCOUNT
On the Closing Date, funds will be deposited in an account (the
"Capitalized Interest Account") created and maintained with the Trustee. The
amount so deposited will be used by the Trustee on the Distribution Dates in the
Pre-Funding Period to fund the excess, if any, of the Interest Remittance
Amounts for the Offered Certificates and the premium due for the Policy over the
funds available therefor on such Distribution Dates. Any funds remaining in the
Capitalized Interest Account at the end of the Pre-Funding Period will be
distributed to the Holders of the Class R Certificates.
ADVAnCES
Not later than the close of business on the second Business Day prior
to the related Distribution Date, the Servicer will be required to remit to the
Trustee for deposit in the applicable Collection Account an amount, to be
distributed on the related Distribution Date, equal to the sum of the interest
accrued on each Mortgage Loan through the related Due Date but not received by
the Servicer as of the close of business on the related Determination Date (net
of the Servicing Fee with respect to such Mortgage Loan), plus, with respect to
each REO Property which was acquired during or prior to the related Due Period
and as to which a final disposition thereof did not occur in the related Due
Period, an amount equal to the excess, if any, of interest for the most recently
ended Due Period on the Principal Balance of the Mortgage Loan relating to such
REO Property at the related Loan Rate (net of the Servicing Fee with respect to
such Mortgage Loan) over the net income from the REO Property transferred to the
related Collection Account for such Distribution Date pursuant to the Agreement
(the "Monthly Advance"). The Servicer may fund all or a portion of any Monthly
Advance from funds on deposit in the applicable Collection Account that are not
required to be distributed on the related Distribution Date. Any funds so used
must be replaced on or before the Distribution Date on which such funds will be
required to be distributed.
In the course of performing its servicing obligations, the Servicer
will pay all reasonable and customary "out-of-pocket" costs and expenses
incurred in the performance of its servicing obligations, including, but not
limited to, the cost of (i) the preservation, restoration and protection of the
Mortgaged Properties; (ii) any enforcement or judicial proceedings, including
foreclosures, and (iii) the management and liquidation of Mortgaged Properties
acquired in satisfaction of the related Mortgage. Each such expenditure will
constitute a "Servicing Advance."
The Servicer's right to reimbursement for unreimbursed Servicing
Advances is limited to late collections on the related 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 such reimbursement is
prior to the rights of Certificateholders. The Servicer's right to reimbursement
for unreimbursed Monthly Advances is limited to late collections of interest on
any Mortgage Loan and to Liquidation Proceeds and Insurance Proceeds on the
related Mortgage Loan (as to which it will have priority over
Certificateholders) unless such amounts are insufficient. In such event (a
"Nonrecoverable Advance"), the Servicer will be reimbursed for such
Nonrecoverable Advance from funds on deposit in the applicable Distribution
Account.
The Servicer is not required to make any Monthly Advance or Servicing
Advance which it determines would be nonrecoverable from amounts received in
respect of the related Mortgage Loan.
COMPENSATING INTEREST
The Agreement provides that not later than the close of business on the
second Business Day prior to the related Distribution Date, the Servicer will
remit to the Trustee for deposit to the applicable Collection Account an amount
equal to the lesser of (i) the aggregate of the Prepayment Interest Shortfalls
for the related Distribution Date resulting from principal prepayments by
Mortgagors during the related Due Period and (ii) the amount otherwise payable
to the Servicer as its aggregate Servicing Fee for such Due Period. The Servicer
will not have the right to reimbursement for any such amounts deposited to
either Collection Account.
SPREAD ACCOUNT
The Trustee will establish on the Closing Date the Spread Account into
which it will deposit upon receipt from the holder of the Class R Certificate an
amount specified by the Certificate Insurer (the "Initial Spread Account
Deposit"). Amounts on deposit in the Spread Account will be available for
withdrawal to fund any shortfall between the available funds for distribution to
Holders of a Class of Offered Certificates and the related Interest Remittance
Amount and Principal Remittance Amount. If the Initial Spread Account Deposit is
available to fund any such shortfall on each Distribution Date, funds on deposit
in the Spread Account equal to the amount of such shortfall will be withdrawn by
the Trustee and deposited into the applicable Distribution Account for
distribution to Holders of the affected Class or Classes of Offered
Certificates.
PRIORITY OF DISTRIBUTIONS
On or before each Distribution Date, the Trustee will determine the
Overcollateralization Amount for each Loan Group after giving effect to the
distribution of the Principal Remittance Amount to the related Class or Classes
of Offered Certificates on such Distribution Date and the amount of the related
Net Excess Spread. The "Amount Available" for a Loan Group on a Distribution
Date will equal the sum of (i) the Available Remittance Amount for such Loan
Group, (ii) if an Available Funds Shortfall exists in such Loan Group, (a)
first, the Net Excess Spread from the other Loan Group, to the extent of such
Available Funds Shortfall, (b) second, the Excess Principal from the other Loan
Group, to the extent of any remaining Available Funds Shortfall, and (c) third,
any amounts in respect of any remaining Available Funds Shortfall withdrawn from
the Spread Account and deposited in the applicable Distribution Account, (iii)
(a) first, the Available Transfer Cashflow, to the extent necessary to reach the
Required Overcollateralization Amount for such Loan Group and (b) second, the
Net Excess Principal, to the extent necessary to reach the Required
Overcollateralization Amount for such Loan Group, and (iv) any Insured Payments
with respect to the related Class or Classes of Certificates. On each
Distribution Date the Trustee will withdraw from each Distribution Account the
Amount Available, and make distributions thereof in the following order of
priority and to the extent of such Amount Available:
(A) From the Distribution Account for Loan Group One:
(i) to the Certificate Insurer the monthly premium then due
with respect to Loan Group One;
(ii) to the Trustee, the Trustee Fee then due with respect to
Loan Group One;
(iii) to the Back-Up Servicer, the Back-Up Servicing Fee then
due with respect to Loan Group One;
(iv) concurrently, to the Class A-1, Class A-2 and Class I
Certificates, an amount allocable to interest equal to the applicable
Interest Remittance Amount;
(v) sequentially, to the Class A-1 and Class A-2 Certificates,
in that order, an amount allocable to principal equal to the related
Principal Remittance Amount, until their respective Class Certificate
Balances have been reduced to zero;
(vi) to the Certificate Insurer an amount equal to previously
unreimbursed Insured Payments with respect to the Class A-1, Class A-2
or Class I Certificates, together with interest thereon at the rate
referred to in the Insurance Agreement;
(vii) sequentially, to the Class A-1 and Class A-2
Certificates, in that order, an amount allocable to principal equal to
the Additional Principal, until their respective Class Certificate
Balances have been reduced to zero;
(viii) to the Certificate Insurer, all other amounts owing to
the Certificate Insurer under the Insurance Agreement;
(ix) to the Servicer certain reimbursable expenses pursuant to
the Agreement;
(x) to the Servicer, Nonrecoverable Advances not previously
reimbursed with respect to Loan Group One; and
(xi) to the Class R Certificates, the balance, if any.
(B) From the Distribution Account for Loan Group Two:
(i) to the Certificate Insurer the monthly premium then due
with respect to Loan Group Two;
(ii) to the Trustee, the Trustee Fee then due with respect to
Loan Group Two;
(iii) to the Back-Up Servicer, the Back-Up Servicing Fee then
due with respect to Loan Group Two;
(iv) to the Class A-3 Certificates, an amount allocable to
interest equal to the related Interest Remittance Amount;
(v) to the Class A-3 Certificates, an amount allocable to
principal equal to the related Principal Remittance Amount;
(vi) to the Certificate Insurer an amount equal to previously
unreimbursed Insured Payments with respect to the Class A-3
Certificates, together with interest thereon at the rate referred to in
the Insurance Agreement;
(vii) to the Class A-3 Certificates, an amount allocable to
principal equal to the Additional Principal;
(viii) to the Certificate Insurer, all other amounts owing to
the Certificate Insurer under the Insurance Agreement;
(ix) to the Servicer certain reimbursable expenses pursuant to
the Agreement;
(x) to the Servicer, Nonrecoverable Advances not previously
reimbursed with respect to Loan Group Two; and
(xi) to the Class R Certificates, the balance, if any.
Distributions allocable to principal of a Class of Offered Certificates
will not exceed the Class Certificate Balance of such Class immediately prior to
the applicable Distribution Date.
The "Additional Principal" for any Class or Classes of Offered
Certificates and any Distribution Date will equal the lesser of (i) the amount
required to be distributed as principal so that the Overcollateralization Amount
for the related Loan Group equals the related Required Overcollateralization
Amount and (ii) the sum of (x) the Remaining Net Excess Spread for such Loan
Group, (y) the Available Transfer Cashflow and (z) the Net Excess Principal.
The "Adjusted Net Loan Rate" for any Mortgage Loan and any Distribution
Date will equal the related Loan Rate minus the Expense Fee Rate.
An "Available Funds Shortfall" means with respect to any Loan Group and
Distribution Date, the amount by which the Available Remittance Amount for such
Loan Group is less than the Required Payments for such Loan Group.
The "Available Remittance Amount" with respect to any Loan Group and
Distribution Date is equal to the sum of all amounts received or required to be
paid by the Servicer or the Seller during the related Due Period with respect to
the Loans in such Loan Group (exclusive of the Servicing Fee with respect to
each Mortgage Loan, other servicing compensation payable to the Servicer as
permitted by the Agreement and certain amounts available for reimbursement of
Monthly Advances and Servicing Advances, as described above under "--Advances")
and deposited into the applicable Collection Account pursuant to the Agreement
as of the related Determination Date, including any Monthly Advances,
Compensating Interest and, through the end of the Pre-Funding Period, amounts
withdrawn from the Capitalized Interest Account with respect to the related
Class or Classes of Offered Certificates and any remaining amount on deposit in
the Pre-Funding Account at the end of the Pre-Funding Period and allocable to
the related Loan Group, in each case with respect to such Distribution Date.
The "Available Transfer Cashflow" for any Loan Group and Distribution
Date will equal the Remaining Net Excess Spread for the other Loan Group
remaining after the payment, if any, of Additional Principal on the Class or
Classes of Offered Certificates related to such other Loan Group.
The "Basic Principal Amount" with respect to any Loan Group and
Distribution Date will equal the sum of (i) each payment of principal on a
Mortgage Loan received by the Servicer (exclusive of amounts described in
clauses (ii) and (iii) below during the calendar month preceding the calendar
month in which such Distribution Date occurs (with respect to any Distribution
Date, the "Due Period"); (ii) curtailments (i.e., partial prepayments) and
prepayments in full received during the related Due Period; (iii) all Insurance
Proceeds and Net Liquidation Proceeds allocable to recoveries of principal of
Loans received during the related Due Period; (iv) an amount equal to the
excess, if any, of the Principal Balance (immediately prior to liquidation) of
each Mortgage Loan liquidated during the related Due Period over the principal
portion of Net Liquidation Proceeds received during such Due Period (the
"Unrecovered Class A Portion"); and (v) (a) the outstanding Principal Balance of
any Mortgage Loan purchased by the Seller or the Servicer as required or
permitted by the Agreement as of the related Determination Date and (b) with
respect to any Defective Mortgage Loan for which the Seller substitutes an
Eligible Substitute Mortgage Loan as of the related Determination Date, any
excess of the Principal Balance of such Defective Mortgage Loan over the
Principal Balance of such Eligible Substitute Mortgage Loan, plus the amount of
any unreimbursed Servicing Advances (defined herein) made by the Servicer with
respect to the Mortgage Loan to the extent received.
The "Carry-Forward Amount" for any Class of Offered Certificates on any
Distribution Date will equal the sum of (a) the excess of the aggregate Class
Remittance Amounts as of each preceding Distribution Date over the amount of the
actual distributions to the Holders of such Class of Offered Certificates made
on any such Distribution Date and not subsequently distributed, and (b) interest
on the amount, if any, of the interest component of the amount described in
clause (a) at one-twelfth of the applicable Certificate Rate.
The "Excess Principal" for any Loan Group and Distribution Date will
equal the lesser of (i) the portion, if any, of the Basic Principal Amount for
such Loan Group that is not required to be included in the Principal Remittance
Amount for the related Class or Classes of Offered Certificates for such
Distribution Date and (ii) the amount of such portion remaining after the
application of the related Available Remittance Amount to the Required Payments
for such Loan Group.
The "Excess Spread" for any Loan Group and Distribution Date will equal
interest collected or advanced on the Loans in such Loan Group (including
amounts allocated to the related Class of Offered Certificates in the
Capitalized Interest Account) minus the sum of (i) the Interest Remittance
Amount for the related Class or Classes of Offered Certificates and, [in the
case of Loan Group One, the Interest Remittance Amount for the Class I
Certificates] and (ii) the Expense Fees for such Loan Group.
The "Expense Fee Rate" will equal the sum of the per annum rates at
which the Servicing Fee, the Back-up Servicing Fee, the Trustee Fee and the
Premium are calculated which, will be ____%.
The "Interest Remittance Amount" for any Distribution Date will equal
interest accrued during the related Interest Period (a) in the case of a Class
of Offered Certificates, at the applicable Certificate Rate on the Class
Certificate Balance of such Class of Offered Certificates immediately prior to
the related Distribution Date, and (b) in the case of the Class I Certificates,
at the rate of _____% per annum on the Notional Balance thereof which, [for any
Distribution Date, will equal the Loan Group Balance of Loan Group One as of the
first day of the related Due Period.]
The "Principal Remittance Amount" for any Class of Offered Certificates
and any Distribution Date will be equal to the sum of:
(i) the lesser of (x) the Basic Principal Amount for the
related Loan Group and (y) the portion of such Basic Principal Amount
required to be distributed to increase the Overcollateralization Amount
for the related Loan Group to the Required Overcollateralization Amount
for such Loan Group on such Distribution Date;
(ii) the Carry-Forward Amount; and
(iii) on the Distribution Date at the end of the Pre-Funding
Period, amounts deposited in the related Distribution Account from the
Pre-Funding Account pursuant to the Agreement and allocable to the
related Loan Group.
A "Liquidated Mortgage Loan" means, as to any Distribution Date, any
Mortgage Loan in respect of which the Servicer has determined, based on the
servicing procedures specified in the Agreement, as of the end of the preceding
Due Period that all Liquidation Proceeds which it expects to recover with
respect to the disposition of the related Mortgaged Property have been
recovered.
The "Net Excess Principal" for any Loan Group and Distribution Date
will equal the Excess Principal for such Loan Group remaining after the
application thereof to cover an Available Funds Shortfall with respect to the
other Loan Group.
The "Net Excess Spread" for any Loan Group and Distribution Date will
equal the Excess Spread for such Loan Group remaining after the application
thereof to cover an Available Funds Shortfall with respect to such Loan Group.
"Net Liquidation Proceeds" with respect to a Mortgage Loan are equal to
the Liquidation Proceeds, reduced by related expenses, up to the unpaid
Principal Balance of the Mortgage Loan plus accrued and unpaid interest thereon.
"Liquidation Proceeds" are the proceeds received in connection with the
liquidation of any Mortgage Loan, whether through trustee's sale, foreclosure
sale or otherwise.
The "Overcollateralization Amount" for any Loan Group and Distribution
Date will equal the sum of (a) the excess, if any, of (i) the sum of the Loan
Group Balance and the amount on deposit in the Pre-Funding Account allocated to
such Loan Group (exclusive of any investment earnings included therein) as of
the close of business on the last day of the related Due Period, over (ii) the
Class Certificate Balance of the related Class or Classes of Offered
Certificates, after giving effect to the distributions of the related Principal
Remittance Amount on such Distribution Date, and (b) the amount, if any on
deposit in the Spread Account allocated to the related Class or Classes of
Offered Certificates.
The "Remaining Net Excess Spread" for any Loan Group and Distribution
Date will equal the Net Excess Spread for such Loan Group remaining after the
application thereof to cover an Available Funds Shortfall with respect to the
other Loan Group.
The "Required Payments" for any Loan Group and Distribution Date will
equal the amount required to pay the Expense Fees, other than the Servicing Fee,
the related Interest Remittance Amount(s) and the related Principal Remittance
Amount and to reimburse the Certificate Insurer for previously unreimbursed
Insured Payments with respect to the related Class or Classes of Certificates,
together with interest thereon at the rate referred to in the Insurance
Agreement.
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to the Certificateholders, the
Trustee will forward to each Certificateholder a statement setting forth, among
other items, the following information with respect to each Class of Offered
Certificates:
(i) the Available Remittance Amount for the related
Distribution Date;
(ii) the related Interest Remittance Amount and Certificate
Rate;
(iii) the related Principal Remittance Amount, stating
separately the components thereof;
(iv) the amount of the Monthly Advances and Compensating
Interest Payments;
(v) the Servicing Fee for such Distribution Date;
(vi) the Additional Principal;
(vii) the Class Certificate Balance, after giving effect to
such distribution;
(viii) the related Loan Group Balance;
(ix) the number and aggregate Principal Balances of the Loans
in the related Loan Group as to which the minimum monthly payment is
delinquent for 30-59 days, 60-89 days and 90 or more days,
respectively, as of the end of the preceding Due Period;
(x) the book value of any real estate which is acquired by the
Trust through foreclosure or grant of deed in lieu of foreclosure; and
(xi) the amount of any Insured Payments for such Distribution
Date; and
(xii) the amount of the Unrecovered Class A Portions for each
Loan Group realized during the related Due Period; the cumulative
amount of losses realized since the Cut-Off Date for each Loan Group
with separate items indicating gross losses, principal losses,
recoveries, net losses and a breakout for recovery expenses.
In the case of information furnished pursuant to clauses (ii) and (iii)
above, the amounts shall be expressed as a dollar amount per Certificate with a
$1,000 denomination.
Within 60 days after the end of each calendar year, the Trustee will
forward to each Person who was a Certificateholder during the prior calendar
year a statement containing the information set forth in clauses (ii) and (iii)
above aggregated for such calendar year.
COLLECTION AND OTHER SERViCING PROCEDURES ON LOANS
The Servicer will make reasonable efforts to collect all payments
called for under the 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 and home improvement loans in its servicing portfolio comparable to
the Home Equity Loans and Home Improvement Contracts. 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 Loans.
With respect to the 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 and home improvement loans it owns or services.
With respect to 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 least of (i) the outstanding
Principal Balance on the Mortgage Loan and any related First Lien, (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 Federal Emergency Management Agency as Flood Zone "A",
such flood insurance has been made available and the Servicer determines that
such insurance is necessary in accordance with accepted mortgage servicing
practices of prudent lending institutions servicing similar mortgage loans, the
Servicer will cause to be purchased a flood insurance policy with a generally
acceptable insurance carrier, in an amount representing coverage not less than
the least of (a) the outstanding Principal Balance of the Mortgage Loan and any
related First Lien, (b) the full insurable value of the Mortgaged Property, or
(c) the maximum amount of insurance available under the National Flood Insurance
Act of 1968, as amended. The Servicer will also maintain on REO Property, to the
extent such insurance is available, fire and hazard insurance in the applicable
amounts described above, liability insurance and, to the extent required and
available under the National Flood Insurance Act of 1968, as amended, and the
Servicer determines that such insurance is necessary in accordance with accepted
mortgage servicing practices of prudent lending institutions servicing similar
mortgage loans, flood insurance in an amount equal to that required above. Any
amounts collected by the Servicer under any such policies (other than amounts to
be applied to the restoration or repair of the Mortgaged Property, or to be
released to the Mortgagor in accordance with the Servicer's normal mortgage
servicing procedures) will be deposited in the applicable Collection Account,
subject to retention by the Servicer to the extent such amounts constitute
servicing compensation or to withdrawal pursuant to the Agreement.
In the event that the Servicer obtains and maintains a blanket policy
as provided in the Agreement insuring against fire and hazards of extended
coverage on all of the 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 Loans without coinsurance and otherwise complies with
the requirements of the preceding paragraph, the Servicer will be deemed
conclusively to have satisfied its obligations with respect to fire and hazard
insurance coverage.
REALIZATION UPON DEFAULTED LOANS
The Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Loans as come into default
when, in accordance with applicable servicing procedures under the Agreement, no
satisfactory arrangements can be made for the collection of delinquent payments.
In connection with such foreclosure or other conversion, the Servicer will
follow such practices as it deems necessary or advisable and as are in keeping
with its general mortgage servicing activities, provided the Servicer will not
be required to expend its own funds in connection with foreclosure or other
conversion, correction of default on a related First Lien or restoration of any
property unless, in its sole judgment, such foreclosure, correction or
restoration will increase Net Liquidation Proceeds. The Servicer will be
reimbursed out of Liquidation Proceeds for advances of its own funds as
liquidation expenses before any Net Liquidation Proceeds are distributed to
Certificateholders.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
When any Mortgaged Property is about to be conveyed by the obligor, the
Servicer will, to the extent it has knowledge of such prospective conveyance and
prior to the time of the consummation of such conveyance, exercise its rights to
accelerate the maturity of the related Mortgage Loan under the applicable
"due-on-sale" clause, if any, unless it reasonably believes that such clause is
not enforceable under applicable law. In such event, the Servicer is 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 Mortgage 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 Mortgage Loan. Any fee collected in connection with
an assumption will be retained by the Servicer as additional servicing
compensation. The terms of a Mortgage Loan may not be changed in connection with
an assumption.
SERVICING COMPENSATION aND PAYMENT OF EXPENSES
With respect to each Due Period, the Servicer will receive from
interest payments actually received in respect of the Loans a portion of such
interest payments as a monthly Servicing Fee in the amount equal to ____% 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
will pay certain ongoing expenses associated with the Trust and incurred by it
in connection with its responsibilities under the Agreement.
EVIDENCE AS TO COMPLIANCE
The Agreement provides for delivery on or before January 31 in each
year, beginning in January ____, to the Depositor, the Trustee, the Certificate
Insurer and the Rating Agencies of an annual statement signed by an officer of
the Servicer to the effect that the Servicer has fulfilled its material
obligations under the Agreement throughout the preceding fiscal year, except as
specified in such statement.
On or before January 31 in each year, beginning in January ____, the
Servicer will furnish a report prepared by a firm of nationally recognized
independent public accountants (who may also render other services to the
Servicer or the Seller) to the Depositor, the Trustee, the Certificate Insurer
and the Rating Agencies to the effect that such firm has examined certain
documents and the records relating to servicing of the Loans under the Uniform
Single Audit Program for Mortgage Bankers and such firm's conclusion with
respect thereto.
CERTAIN MATTERS REGARDING THE SERVICER
The Agreement provides that the Servicer may not resign from its
obligations and duties thereunder, except in connection with a permitted
transfer of servicing, unless (i) such duties and obligations are no longer
permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it or (ii) upon the satisfaction of the following conditions: (a) the
Servicer has proposed a successor servicer to the Trustee in writing and such
proposed successor servicer is reasonably acceptable to the Trustee; (b) the
Rating Agencies have confirmed to the Trustee that the appointment of such
proposed successor servicer as the Servicer will not result in the reduction or
withdrawal of the then current rating of the Offered Certificates; and (c) such
proposed successor servicer is reasonably acceptable to the Certificate Insurer.
No such resignation will become effective until the Trustee or a successor
servicer has assumed the Servicer's obligations and duties under the Agreement.
The Servicer may perform any of its duties and obligations under the
Agreement through one or more subservicers or delegates, which may be affiliates
of the Servicer. Notwithstanding any such arrangement, the Servicer will remain
liable and obligated to the Trustee and the Certificateholders for the
Servicer's duties and obligations under the Agreement, without any diminution of
such duties and obligations and as if the Servicer itself were performing such
duties and obligations.
The Agreement provides that none of the Depositor, the Seller or the
Servicer or any of their respective directors, officers, employees or agents
will be under any other liability to the Trust, the Trustee, the
Certificateholders or any other person for any action taken or for refraining
from taking any action pursuant to the Agreement. However, the Servicer will not
be protected against any liability which would otherwise be imposed by reason of
its willful misconduct, bad faith or negligence in the performance of its duties
under the Agreement or by reason of reckless disregard of its obligations
thereunder. In addition, the Agreement provides that the Servicer will not be
under any obligation to appear in, prosecute or defend any legal action which is
not incidental to the Servicer's servicing responsibilities under the Agreement.
The Servicer may, in its sole discretion, undertake any such legal action which
it may deem necessary or desirable with respect to the Agreement and the rights
and duties of the parties thereto and the interest of the Certificateholders
thereunder.
Any corporation into which the Servicer may be merged or consolidated,
or any corporation resulting from any merger, conversion or consolidation to
which the Servicer shall be a party, or any corporation succeeding to the
business of the Servicer shall be the successor of the Servicer, without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, anything in the Agreement to the contrary notwithstanding.
THE BACK-Up SERVICER
____________ will be appointed as the Back-Up Servicer under the
Agreement. Prior to the occurrence of an Event of Servicer Termination, the
Agreement requires the Back-Up Servicer to maintain current records of each
Mortgagor's account and the activity therein. The Servicer will be required to
furnish electronically such records to the Back-Up Servicer on a monthly basis,
and the Back-Up Servicer will be required to recalculate the Servicer's
application of all funds received from or on behalf of the Mortgagors. Upon the
occurrence of an Event of Servicer Termination, the Back-Up Servicer will be
obligated to assume the obligations of the Servicer as described below. In
performing its obligations under the Agreement, the Back-Up Servicer will be
entitled to the same protections afforded to the Servicer under the Agreement.
EVENTS OF SERVICER TERMINATION
The Servicer's rights under the Agreement may be terminated upon the
occurrence of an Event of Default or a Trigger Event. "Events of Default" will
consist of: (i) any failure of the Servicer to deposit in either Collection
Account any deposit required to be made under the Agreement, which failure
continues unremedied for three Business Days after the giving of written notice
of such failure to the Servicer by the Trustee, or to the Servicer and the
Trustee by the Certificate Insurer or Certificateholders of any Class evidencing
Percentage Interests aggregating not less than 25% of such Class; (ii) any
failure by the Servicer duly to observe or perform in any material respect any
other of its covenants or agreements in the Agreement which continues unremedied
for 30 days after the giving of written notice of such failure to the Servicer
by the Trustee, or to the Servicer and the Trustee by the Certificate Insurer or
Certificateholders of any Class evidencing Percentage Interests aggregating not
less than 25% of such Class; (iii) any failure by the Servicer to make any
required Servicing Advance, which failure continues unremedied for a period of
30 days after the giving of written notice of such failure to the Servicer by
the Trustee, or to the Servicer and the Trustee by the Certificate Insurer or
Certificateholders of any Class evidencing Percentage Interests aggregating not
less than 25% of such Class; (iv) certain events of insolvency, readjustment of
debt, marshalling of assets and liabilities or similar proceedings relating to
the Servicer and certain actions by the Servicer indicating insolvency,
reorganization or inability to pay its obligations (an "Insolvency Event"); (v)
so long as the Seller is an affiliate of the Servicer, any failure of the Seller
to repurchase or substitute Eligible Substitute Loans for Defective Loans as
required by the Purchase Agreement; (vi) any failure to pay any Monthly Advance
or any Compensating Interest Payments which continues unremedied for a period of
one Business Day; or (vii) any insufficiency in either Amount Available
excluding Insured Payments occurs on a Distribution Date resulting in the need
for an Insured Payment.
A "Trigger Event" will consist of: (i) the failure by the Seller or the
Servicer to pay any amount due the Certificate Insurer pursuant to the Insurance
Agreement among the Depositor, the Seller, the Servicer and the Certificate
Insurer, which continues unremedied for three Business Days after written notice
of such failure by the Certificate Insurer; (ii) the Certificate Insurer
determines that the performance of the Servicer is not satisfactory; or (iii)
the Servicer is a party to a merger, consolidation or other corporate
transaction in which the Servicer is not the surviving entity, the debt of such
surviving entity is not investment grade or the Certificate Insurer determines
that the servicing capabilities of the surviving entity could materially and
adversely affect the servicing of the Loans.
RIGHTS UPON AN EVENT Of SERVICER TERMINATION
So long as an Event of Default remains unremedied, either the Trustee,
or Certificateholders of any Class evidencing Percentage Interests of at least
51% of such Class, with the consent of the Certificate Insurer, or the
Certificate Insurer, may terminate all of the rights and obligations of the
Servicer under the Agreement and in and to the Loans, whereupon the Back-Up
Servicer will succeed to all the responsibilities, duties and liabilities of the
Servicer under the Agreement (the "Successor Servicer") and will be entitled to
similar compensation arrangements. Upon the occurrence and continuation beyond
the applicable grace period of the event described in clause (vi) in the second
preceding paragraph, the Back-Up Servicer will immediately assume the duties of
the Servicer. The Back-Up Servicer, as Successor Servicer, will be obligated to
make Monthly Advances and Servicing Advances and certain other advances unless
it determines reasonably and in good faith that such advances would not be
recoverable. In the event that the Back-Up Servicer would be obligated to
succeed the Servicer but is unwilling or 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 $_________ and acceptable to the
Certificate Insurer to act as Successor Servicer under the Agreement. Pending
such appointment, the Back-Up Servicer will be obligated to act in such capacity
unless prohibited by law. Such successor will be entitled to receive the same
compensation that the Servicer would otherwise have received (or such lesser
compensation as the Trustee and such successor may agree). A trustee in
bankruptcy for the Servicer may be empowered to prevent the termination and
replacement of the Servicer if the only Event of Default has occurred is an
Insolvency Event.
Upon the occurrence of a Trigger Event, the Certificate Insurer, in its
sole discretion, may direct the Trustee to remove the Servicer and to appoint a
Successor Servicer.
AMENDMENT
The Agreement may be amended from time to time by the Depositor, the
Servicer and the Trustee, with the consent of the Certificate Insurer, but
without the consent of the Certificateholders, to cure any ambiguity, to correct
or supplement any provisions therein which may be defective or inconsistent with
any other provisions of the Agreement, to add to the duties of the Depositor or
the Servicer, to comply with any requirements imposed by the Code or any
regulation thereunder, or to add or amend any provisions of the Agreement as
required by the Rating Agencies in order to maintain or improve any rating of
the Offered Certificates (it being understood that, after obtaining the ratings
in effect on the Closing Date, none of the Depositor, the Seller, the Servicer
or the Trustee is obligated to obtain, maintain, or improve any such rating) or
to add any other provisions with respect to matters or questions arising under
the Agreement which shall not be inconsistent with the provisions of the
Agreement, provided that such action will not, as evidenced by an opinion of
counsel, materially and adversely affect the interests of any Certificateholder
or the Certificate Insurer; provided, that any such amendment will not be deemed
to materially and adversely affect the Certificateholders and no such opinion
will be required to be delivered if the person requesting such amendment obtains
a letter from the Rating Agencies stating that such amendment would not result
in a downgrading of the then current rating of the Offered Certificates. The
Agreement may also be amended from time to time by the Depositor, the Servicer
and the Trustee, with the consent of Holders of Certificates evidencing
Percentage Interests aggregating not less than 51% of each Class affected
thereby and the Certificate Insurer for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of the Agreement
or of modifying in any manner the rights of the Certificateholders, provided
that no such amendment will (i) reduce in any manner the amount of, or delay the
timing of, collections of payments on the Certificates or distributions or
payments under the Policy which are required to be made on any Certificate
without the consent of the Certificateholder or (ii) reduce the aforesaid
percentage required to consent to any such amendment, without the consent of the
holders of all Certificates then outstanding. Notwithstanding the foregoing, the
provisions of the Agreement relating to overcollateralization may be reduced or
eliminated by the Certificate Insurer without the consent of any
Certificateholder so long as a Certificate Insurer Default has not occurred.
TERMINATION; RETIREMENT OF THE CERTIFICATES
The Trust will terminate on the Distribution Date following the later
of (A) termination of the Policy and payment in full of all amounts owing to the
Certificate Insurer and (B) the earliest of (i) the Distribution Date on which
the Class Certificate Balance of each Class of Offered Certificates has been
reduced to zero, (ii) the final payment or other liquidation of the last
Mortgage Loan in the Trust, and (iii) the optional transfer to the Servicer of
the Loans, as described below.
The Servicer will have the right to purchase all remaining Loans, and
related REO Properties in the Trust and thereby effect early retirement of the
Certificates, subject to the Pool Balance of such Loans and REO Properties at
the time of purchase being less than or equal to __% of the sum of the Pool
Balance as of the Cut-Off Date and the Principal Balance of each Subsequent
Mortgage Loan as of the applicable Subsequent Cut-Off Date. In the event the
Servicer exercises such option, the purchase price will be at least equal to (x)
100% of its then outstanding principal balance plus (y) the greater of (i) the
aggregate amount of accrued and unpaid interest on the Loans through the related
Due Period and (ii) 30 days' accrued interest thereon at the Loan Rate, in each
case net of the Servicing Fee plus (z) any amounts due to the Certificate
Insurer.
The termination of the Trust will be effected in a manner consistent
with applicable federal income tax regulations and the status of the Trust as a
REMIC.
OPTIONAL PURCHASE oF DEFAULTED LOANS
The Servicer has the option to purchase from the Trust any Loan __ days
or more delinquent at a purchase price equal to the outstanding Principal
Balance of such Loan as of the date of purchase, plus the greater of (i) all
accrued and unpaid interest on such principal balance and (ii) 30 days' interest
on such principal balance, computed at the Loan Rate, plus all unreimbursed
amounts owing to the Certificate Insurer with interest thereon at the rate
referred to in the Insurance Agreement.
THE TRUSTEE
________________, a ____________ organized under the laws of the
___________, has been named Trustee pursuant to the Agreement.
The Trustee may have normal banking relationships with the Depositor,
the Seller and the Servicer.
The Trustee may resign at any time, in which event the Depositor will
be obligated to appoint a successor Trustee, as approved by the Certificate
Insurer and the Servicer. The Depositor may also remove the Trustee if the
Trustee ceases to be eligible to continue as such under the Agreement or if the
Trustee becomes insolvent. Upon becoming aware of such circumstances, the
Depositor will be obligated to appoint a successor Trustee, as approved by the
Certificate Insurer and the Servicer. Any resignation or removal of the Trustee
and appointment of a successor Trustee will not become effective until
acceptance of the appointment by the successor Trustee.
No holder of a Certificate will have any right under the Agreement to
institute any proceeding with respect to the Agreement unless such holder
previously has given to the Trustee written notice of default and unless
Certificateholders evidencing Percentage Interests of at least 51% of the
applicable Class have made written requests upon the Trustee to institute such
proceeding in its own name as Trustee thereunder and have offered to the Trustee
reasonable indemnity and the Trustee for 60 days has neglected or refused to
institute any such proceeding. The Trustee will be under no obligation to
exercise any of the trusts or powers vested in it by the Agreement or to make
any investigation of matters arising thereunder or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order or
direction of any of the Certificateholders, unless such Certificateholders have
offered to the Trustee reasonable security or indemnity against the cost,
expenses and liabilities which may be incurred therein or thereby.
THE POLICY AND THE CERTIFICATE INSURER
THE PoLICY
Simultaneously with the issuance of the Certificates, the Certificate
Insurer will issue the Policy pursuant to which it will irrevocably and
unconditionally guaranty payment on each Distribution Date to the Trustee for
the benefit of the Holders of each Class of Offered Certificates of a maximum
amount equal to the applicable Guaranteed Interest Payment Amount and the
applicable Guaranteed Principal Payment Amount for such Distribution Date. The
Offered Certificates and the Agreement may not be amended unless the Certificate
Insurer has given its prior written consent. The amount of the actual payment
(the "Insured Payment"), if any, made by the Certificate Insurer under the
Policy on each Distribution Date allocated to such Class of Offered Certificates
or the Class I Certificates, as the case may be, is equal to the sum of (A) the
excess, if any, of (1) the Interest Remittance Amount with respect to such Class
and Distribution Date over (2) the Amount Available (net of Insured Payments)
for the related Loan Group and (B) the amount by which the Class Certificate
Balance of such Class of Offered Certificates (or in the case of the Fixed Rate
Certificates, the aggregate Class Certificate Balance of such Certificates)
after giving effect to all allocations and distributions to principal on such
Class or Classes of Offered Certificates on such Distribution Date exceeds the
related Loan Group Balance as of such Distribution Date. The Certificate
Insurer's obligations under the Policy to make Insured Payments will be
discharged to the extent funds are transferred to the Trustee as provided in the
Policy, whether or not such funds are properly applied by the Trustee.
Payment of claims under the Policy will be made by the Certificate
Insurer following Receipt by the Certificate Insurer of the appropriate notice
for payment on the later to occur of (a) 11:00 a.m., New York City time, on the
second Business Day following Receipt of such notice for payment, and (b) 11:00
a.m., New York City time, on the Business Day immediately preceding the relevant
Distribution Date.
The terms "Receipt" and "Received," with respect to the Policy, means
actual delivery to the Certificate Insurer, prior to 2:00 pm., New York City
time, on a Business Day; delivery either on a day that is not a Business Day or
after 2:00 pm., New York City time, shall be deemed to be Receipt on the next
succeeding Business Day.
If the payment of the Guaranteed Interest Payment Amount or the
Guaranteed Principal Payment Amount is voided pursuant to a final and
non-appealable order (a "Preference Event") under any applicable bankruptcy,
insolvency, receivership or similar law in an Insolvency Proceeding, and, as a
result of such a Preference Event, the Trustee is required to return such voided
payment, or any portion of such voided payment, made in respect of the
Certificates (an "Avoided Payment"), the Certificate Insurer will pay an amount
equal to such Avoided Payment, upon receipt by the Certificate Insurer from the
Trustee of (x) a certified copy of a final order of a court exercising
jurisdiction in such Insolvency Proceeding to the effect that the Trustee is
required to return any such payment or portion thereof during the term of the
Policy because such payment was voided under applicable law, with respect to
which order the appeal period has expired without an appeal having been filed
(the "Final Order"), (y) an assignment, in form reasonably satisfactory to the
Certificate Insurer, irrevocably assigning to the Certificate Insurer all rights
and claims of the Trustee relating to or arising under such Avoided Payment and
(z) a notice for payment appropriately completed and executed by the Trustee.
Such payment shall be disbursed to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Final Order and not
to the Trustee directly.
Notwithstanding the foregoing, in no event shall the Certificate
Insurer be obligated to make any payment in respect of any Avoided Payment,
which payment represents a payment of the principal amount of a Class of Offered
Certificates, prior to the time the Certificate Insurer would have been required
to make a payment in respect of such principal in the absence of such Preference
Event.
The Certificate Insurer shall make payments due in respect of Avoided
Payments prior to 1:00 p.m., New York City time, on the second Business Day
following the Certificate Insurer's receipt of the documents required under
clauses (x) through (z) of the second preceding paragraph. Any such documents
received by the Certificate Insurer after 3:00 p.m., New York City time, on any
Business Day or on any day that is not a Business Day shall be deemed to have
been received by the Certificate Insurer prior to 3:00 p.m. on the next
succeeding Business Day.
Under the Policy, "Business Day" means any day other than (i) a
Saturday or Sunday or (ii) a day on which banking institutions in the City of
New York, New York are authorized or obligated by law or executive order to be
closed.
"Insolvency Proceeding" means the commencement, after the Closing Date,
of any bankruptcy, insolvency, readjustment of debt, reorganization, marshalling
of assets and liabilities or similar proceedings by or against any Person, or
the commencement, after the Closing Date, of any proceedings by or against any
Person for the winding up or liquidation of its affairs, or the consent after
the date hereof to the appointment of a trustee, conservator, receiver or
liquidator in any bankruptcy, insolvency, readjustment of debt, reorganization,
marshalling of assets and liabilities or similar proceedings of or relating to
any Person.
The terms of the Policy cannot be modified, altered or affected by any
other agreement or instrument, or by the merger, consolidation or dissolution of
the Depositor, the Seller or Servicer. The Policy by its terms may not be
canceled or revoked. The Policy is governed by the laws of the State of New
York.
Pursuant to the terms of the Agreement, unless a Certificate Insurer
Default exists, the Certificate Insurer will be entitled to exercise all rights
of the Holders of the Offered Certificates, without the consent of such
Certificateholders, and the Holders of the Offered Certificates may exercise
such rights only with the prior written consent of the Certificate Insurer. In
addition, the Certificate Insurer will, as a third party beneficiary to the
Agreement, have, among others, the following rights: (i) the right to give
notices of breach or to terminate the rights and obligations of the Servicer
under the Agreement in the event of an Event of Default by the Servicer and to
institute proceedings against the Servicer; (ii) the right to consent to or
direct any waivers of defaults by the Servicer; (iii) the right to remove the
Trustee pursuant to the Agreement; (iv) the right to direct the actions of the
Trustee during the continuation of a Servicer default; (v) the right to require
the Seller to repurchase Loans for breach of representation and warranty or
defect in documentation; (vi) the right to direct foreclosures upon the failure
of the Servicer to do so in accordance with the Agreement; and (vii) the right
to direct the Trustee to investigate certain matters. The Certificate Insurer's
consent will be required prior to, among other things, (i) the removal of the
Trustee, (ii) the appointment of any successor Trustee or Servicer or (iii) any
amendment to the Agreement (which consent will not be withheld if an opinion of
counsel is delivered and addressed to the Certificate Insurer and the Trustee to
the effect that failure to amend the Agreement would adversely affect the
interests of the Certificateholders).
THE CERTIFICATE INSURER
The information set forth in this section and in Appendix B and
Appendix C hereto has been supplied by ____________. Accordingly, none of the
Depositor, the Seller, the Servicer, the Trustee or the Underwriter makes any
representation as to the accuracy and completeness of such information.
________ is a ___________ which engages only in the business of
financial guarantee and surety insurance. _______ is licensed in ___ states in
addition to _________. ________ insures structured asset-backed, corporate,
municipal and other financial obligations in the U.S. and international capital
markets. ____________ also provides financial guarantee reinsurance for
structured asset-backed, corporate, municipal and other financial obligations
written by other major insurance companies.
_________'s claims-paying ability is rated "Aaa" by Moody's Investors
Service, Inc. ("Moody's"), "AAA" by Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. ("Standard & Poor's"), "AAA" by Duff & Phelps Credit
Rating Co. ("Duff & Phelps") and "AAA" by Fitch IBCA, Inc. Such ratings reflect
only the views of the respective rating agencies, are not recommendations to
buy, sell or hold securities and are subject to revision or withdrawal at any
time by such rating agencies.
________ is regulated by ___________. In addition, _________ is subject
to regulation by the insurance laws and regulations of the other jurisdictions
in which it is licensed. Such insurance laws regulate, among other things, the
amount of net exposure per risk that ________ may retain, capital transfers,
dividends, investment of assets, changes in control, transactions with
affiliates and consolidations and acquisitions. __________ is subject to
periodic regulatory examinations by the same regulatory authorities.
________'s obligations under the Policy may be reinsured. Such
reinsurance does not relieve _________ of any of its obligations under the
Policy.
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY
FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
As at December 31, and , _____________ had qualified statutory capital
(which consists of policyholders' surplus and contingency reserve) of
approximately $____ million and $____ million, respectively, and had not
incurred any debt obligations. ______________ requires ________ to establish and
maintain the contingency reserve, which is available to cover claims under
surety bonds issued by ____________.
The audited financial statements of ______________ prepared in
accordance with generally accepted accounting principles for the period ended
December 31, are attached as Appendix B to this Prospectus Supplement, and the
unaudited financial statements of _________ for the period ended ______________,
are attached as Appendix C to this Prospectus Supplement. Copies of _________'s
financial statements prepared in accordance with statutory accounting standards,
which differ from generally accepted accounting principles, and filed with
_____________________ are available upon request.
__________ is located at ____________________ and its telephone number
is _______________.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Offered
Certificates will be used by the Depositor to purchase the Loans. The Loans will
have been acquired by the Depositor from _____________ in a privately negotiated
transaction.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement (the "Underwriting Agreement") between the Depositor and Bear, Stearns
& Co. Inc. (the "Underwriter"), the Depositor has agreed to sell to the
Underwriter and the Underwriter has agreed to purchase from the Depositor, each
Class of Offered Certificates.
In the Underwriting Agreement, the Underwriter has agreed, subject to
the terms and conditions set forth therein, to purchase all of the Certificates
offered hereby, if any are purchased. The Depositor has been advised by the
Underwriter that it proposes initially to offer the Certificates to the public
at the respective offering prices set forth on the cover page hereof and to
certain dealers at such price less a concession not in excess of the respective
amounts set forth in the table below (expressed as a percentage of the relative
Certificate Principal Balance). The Underwriter may allow and such dealers may
reallow a discount not in excess of the respective amounts set forth in the
table below to certain other dealers.
<TABLE>
<CAPTION>
Selling Reallowance
Class Concession Discount
- ----- ---------- --------
<S> <C> <C>
A-1.......................................
%
A-2....................................... %
%
A-3....................................... %
%
</TABLE>
The Depositor is an affiliate of the Underwriter.
In connection with the offering of the Certificates, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of any Class of Certificates. Specifically, the Underwriters may overallot
the offering, creating a syndicate short position. The Underwriters may bid for
and purchase the Certificates in the open market to cover syndicate short
positions. In addition, the Underwriters may bid for and purchase the
Certificates in the open market to stabilize the price of the Certificates. The
activities may stabilize or maintain the market price of the Certificates above
independent market levels. The Underwriters are not required to engage in these
activities, and may end these activities at any time.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
EXPERTS
The financial statements of __________________ included in this
Prospectus Supplement in Appendix B, as of December 31, and and for each of the
years in the two year period then ended, have been included in reliance upon the
report of ______________, independent certified public accountants, appearing in
Appendix B, upon the authority of such firm as expert in accounting and
auditing.
RATINGS
It is a condition to issuance that each Class of Offered Certificates
be rated not lower than ____________ by _________________ and _____________ by
- ------------------.
A securities rating addresses the likelihood of the receipt by Holders
of distributions on the Loans to which they are entitled. The rating takes into
consideration the characteristics of the Loans and the structural, legal and tax
aspects associated with the Offered Certificates. The ratings on the Offered
Certificates do not, however, constitute statements regarding the likelihood or
frequency of prepayments on the Loans or the possibility that Holders might
realize a lower than anticipated yield. The ratings assigned to the Offered
Certificates will depend primarily upon the creditworthiness of the Certificate
Insurer. Any reduction in a rating assigned to the claims-paying ability of the
Certificate Insurer below the ratings initially assigned to the Offered
Certificates may result in a reduction of one or more of the ratings assigned to
the Offered Certificates.
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
LEGAL MATTERS
Certain legal matters with respect to the Certificates will be passed
upon by Brown & Wood LLP, New York, New York.
APPENDIX A
CERTAIN STATISTICAL INFORMATION
REGARDING THE INITIAL LOANS IN THE LOAN GROUPS
AS OF THE CUT-OFF DATE
LOAN GROUP ONE
LOAN GROUP TWO
Information contained herein is subject to completion or amendment. A
registration statement relating to these Securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these Securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED ________, 199__)
$-------------
BEAR STEARNS HOME EQUITY LOAN TRUST 199__-__
$__________ ASSET-BACKED NOTES, SERIES 199__-__
$__________ ASSET-BACKED CERTIFICATES, SERIES 199__-__
The Home Equity Loan Trust 199__-__ (the "Trust") will be formed pursuant
to a trust agreement to be dated as of ______, 199__ (the "Trust Agreement") and
entered into by Bear Stearns Asset Backed Securities, Inc. (the "Depositor"),
__________, as servicer (the "Servicer"), and ________, as owner trustee (the
"Owner Trustee"). The Trust will issue $_________ aggregate principal amount of
Asset Backed Notes (the "Notes"). The Notes will be issued pursuant to an
indenture to be dated as of ______ 1, 199__ (the "Indenture"), between the Trust
and _________, as indenture trustee (the "Indenture Trustee"). The Trust will
also issue $________ aggregate principal amount of Asset Backed Certificates,
Series 199__-__ (the "Certificates" and, together with the Notes, the
"Securities"). The Trust will consist of certain [adjustable rate] [fixed rate]
home equity revolving credit line loans made or to be made in the future (the
"Revolving Credit Line Loans") secured [primarily] by [second] deeds of trust or
Mortgages on residential properties that are primarily one- to four-family
properties, the Collections in respect of such
(cover continued on next page)
SEE "RISK FACTORS" HEREIN ON PAGE S-10 AND IN THE PROSPECTUS ON PAGE 15 FOR
CERTAIN FACTORS TO BE CONSIDERED IN PURCHASING THE SECURITIES.
THE SECURITIES DO NOT REPRESENT AN OBLIGATION OF OR INTEREST IN
THE DEPOSITOR, THE SELLER, THE SERVICER, THE TRUSTEES OR ANY
OF THEIR RESPECTIVE AFFILIATES. NEITHER THE SECURITIES
NOR THE UNDERLYING HOME EQUITY LOANS ARE INSURED
OR GUARANTEED BY ANY GOVERNMENTAL AGENCY, THE
SELLER, THE SERVICER OR ANY OF THEIR
AFFILIATES.
-----------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE 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.
-----------------------------
<TABLE>
<CAPTION>
=================================------------------------------------------------------------------------------------------
Initial Security Pass-Through/ Price to Underwriting Proceeds to
Balance Interest Rate Public(1) Discount Depositor(1)(2)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Note $ [(3)]% % % %
- --------------------------------------------------------------------------------------------------------------------------
Per Certificate................. $ [(3)]% % % %
===========================================================================================================================
Total........................... $ % % %
===========================================================================================================================
</TABLE>
- ---------------
(1) Plus accrued interest, if any, from _________.
(2) Before deducting expenses, estimated to be $________.
(3) [The [Notes] [Certificates] will bear interest at a variable rate that, for
any Distribution Date, will equal the lesser of
(i) ____% per annum and (ii) the weighted average of the Loan Rates (as
defined herein) of the Loans. The Pass-Through Rate for the first
Distribution Date is expected to be approximately ____% per annum.] See
"Description of the Securities" herein.
The Securities are offered by Bear, Stearns & Co. Inc. [and _________]
(the "Underwriters") when, as and if issued, delivered to and accepted by the
Underwriters and subject to certain other conditions. It is expected that
delivery of the Securities will be made in book-entry form only, through the
Same Day Funds Settlement System of The Depository Trust Company, on or about
_________, 199__.
-----------------------------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERs AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
-----------------------------
Each Series of Securities offered hereby constitutes part of a separate
Series of Asset Backed Securities being offered by Bear, Stearns & Co. Inc. from
time to time pursuant to the Prospectus dated _________, 199__. This Prospectus
Supplement does not contain complete information about the offering of the
Securities. 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 Securities may not be consummated unless the purchaser has received
both this Prospectus Supplement and the Prospectus.
-----------------------------
BEAR, STEARNS & CO. INC.
The date of this Prospectus Supplement is _______, 199__
(cover page continued)
Revolving Credit Line Loans, and certain other property relating to such
Revolving Credit Line Loans. [In addition, the Securities will have the benefit
of an irrevocable and unconditional limited financial guaranty insurance policy
(the "Policy") issued by __________ (the "Insurer") covering [describe].]
Distributions of principal of and interest on the Notes will be made on the
_____ day of each month or, if such date is not a Business Day, then on the
succeeding Business Day (each, a "Distribution Date"), commencing on ________,
199__, to the extent described herein. Interest will accrue on the Notes at a
rate (the "Note Rate") equal to ____% per annum from the Closing Date to the
first Distribution Date and at [a floating rate equal to LIBOR plus ____% per
annum] [____% per annum] thereafter. The Certificates will represent fractional
undivided interests in the Trust. Distributions of principal of and interest on
the Securities will be made on each Distribution Date to the extent described
herein. Interest will accrue on the Certificates at a rate (the "Pass-Through
Rate") equal to ____% per annum from the Closing Date to the first Distribution
Date and at [a floating rate equal to LIBOR plus ____% per annum] [____% per
annum] thereafter. Payments of interest on and principal of the Notes will have
equal priority (and will be made pro rata) with payments of principal of and
interest on the Certificates.
There is currently no secondary market for the Securities. The
Underwriters intend to establish a market in the Securities but are not
obligated to do so. There can be no assurance that a secondary market for any of
the Securities will develop, or if one does develop, that it will continue or
offer sufficient liquidity of investment.
The yield to investors on each Class of Securities will be sensitive in
varying degrees to the rate and timing of principal payments (including
prepayments) on the Loans, which generally may be prepaid in full or in part at
any time without penalty. The yield to maturity of a Class of Securities
purchased at a discount or premium will be more sensitive to the rate and timing
of payments thereon. Holders of the Securities should consider, in the case of
any such Securities purchased at a discount, the risk that a slower than
anticipated rate of principal payments could result in an actual yield that is
lower than the anticipated yield and, in the case of any Securities purchased at
a premium, the risk that a faster than anticipated rate of principal payments
could result in an actual yield that is lower than the anticipated yield. No
representation is made as to the anticipated rate of prepayments on the Loans or
as to the resulting yield to maturity of any Class of Securities.
An election will be made to treat certain assets of the Trust as a real
estate mortgage investment conduit ("REMIC") for federal income tax purposes. As
described more fully herein and in the Prospectus, the Certificates will be
designated as "regular interests" in a REMIC. See "Certain Federal Income Tax
Considerations" herein and in the Prospectus.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF ANY CLASS
OF SECURITIES. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH
THE OFFERING AND MAY BID FOR AND PURCHASE THE SECURITIES IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
-----------------------------
SUMMARY
The following summary of certain pertinent information is qualified in
its entirety by reference to the detailed information appearing elsewhere in
this Prospectus Supplement and in the accompanying Prospectus. Certain
capitalized terms used herein are defined elsewhere in the Prospectus Supplement
or in the Prospectus.
Trust......................Bear Stearns Home Equity Loan Trust 199__-__ (the
"Trust" or the "Issuer"), a Delaware business trust
established pursuant to the Trust Agreement, dated as
of _______, 199__. The property of the Trust will
include: a pool of [adjustable] [fixed] rate home
equity loan revolving credit line loans made or to be
made in the future (the "Revolving Credit Line
Loans") under certain home equity revolving credit
line loan agreements (the "Revolving Credit Line Loan
Agreements") and secured [primarily] by [second]
[deeds of trust] [Mortgages] on residential
properties that are primarily one- to four-family
properties (the "Mortgaged Properties"); the
Collections in respect of the Revolving Credit Line
Loans received on or after the Cut-off Date; property
that secured the Revolving Credit Line Loans that has
been acquired by foreclosure or deed in lieu of
foreclosure; [a surety bond or letter of credit]; an
assignment of the Depositor's rights under the
Purchase Agreement; rights under certain hazard
insurance policies covering the Mortgaged Properties;
and certain other property, as described more fully
herein.
The Trust will include the Principal Balance of each
Revolving Credit Line Loan as of the Cut-off Date
(the "Cut-off Date Principal Balance") plus any
additions thereto as a result of new advances made
pursuant to the applicable Revolving Credit Line Loan
Agreement (the "Additional Balances") during the life
of the Trust. With respect to any date, the "Pool
Balance" will be equal to the aggregate of the
Principal Balances of all Revolving Credit Line Loans
as of such date. The "Principal Balance" of a Loan
(other than a Liquidated Loan) on any day is equal to
its Cut-off Date Principal Balance, plus (i) any
Additional Balances in respect of such Revolving
Credit Line Loan, minus (ii) all Collections credited
against the Principal Balance of such Revolving
Credit Line Loan in accordance with the related
Revolving Credit Line Loan Agreement prior to such
day. The Principal Balance of a Liquidated Loan after
the final recovery of related Liquidation Proceeds
shall be zero.
Securities Offered.........The Securities offered hereby are (i) Asset Backed
Notes (the "Notes") and (ii) Asset Backed
Certificates (the "Certificates" and, together with
the Notes, the "Securities"). Each Security
represents the right to receive payments of interest
at the rate described below, payable monthly, and
payments of principal at such time and to the extent
provided below.
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., the
Depositor, the Servicer, the Trustees, the Seller or
any affiliate of the foregoing has guaranteed or is
otherwise obligated with respect to the Securities of
any Series. See "The Depositor" in the Prospectus.
Servicer ..................__________ (the "Servicer"). The Servicer will
service the Revolving Credit Line Loans pursuant to a
Servicing Agreement dated _________, 199__, between
the Issuer and the Servicer.
Indenture .................The Notes will be issued pursuant to an indenture
dated as of _________, 199__ (the "Indenture")
between the Trust and _______________, in its
capacity as indenture trustee (the "Indenture
Trustee"). The Indenture Trustee will allocate
distributions of principal and interest to Holders of
the Notes (the "Noteholders") in accordance with the
Indenture.
Trust Agreement ...........Pursuant to a trust agreement dated as of ________,
199__ (the "Trust Agreement"), among the Depositor,
the Servicer and ___________, in its capacity as
owner trustee (the "Owner Trustee"), the Trust will
issue the Certificates in an initial aggregate amount
of $__________. The Certificates will represent
fractional undivided interests in the Trust.
The Revolving Credit Line..Loans The Revolving Credit Line Loans are [primarily]
secured by [second] deeds of trust or Mortgages on
Mortgaged Properties. The Revolving Credit Line Loans
were originated by ______ and on or prior to the
Closing Date, _______ will sell the Revolving Credit
Line Loans to the Depositor pursuant to a purchase
agreement (the "Purchase Agreement"). The aggregate
Cut-off Date Principal Balance of the Revolving
Credit Line Loans is $___________ (the "Cut-off Date
Pool Balance").
The combined loan-to-value ratio of each Revolving
Credit Line Loan, computed using the maximum amount
the borrower was permitted to draw down under the
related Revolving Credit Line Loan Agreement (the
"Credit Limit") and taking into account the amounts
of any related senior mortgage loans (the "Combined
Loan-to-Value Ratio"), did not exceed ___% as of the
Cut-off Date. The weighted average Combined
Loan-to-Value Ratio of the Revolving Credit Line
Loans was ____% as of the Cut-off Date. See "The Home
Equity Lending Program--Underwriting Procedures
Relating to the Revolving Credit Line Loans" herein.
Interest on each Revolving Credit Line Loan is
payable monthly and computed on the related average
daily Principal Balance for each billing cycle at a
variable rate per annum (the "Loan Rate") equal at
any time (subject to minimum and maximum rates, as
described herein under "The Home Equity Lending
Program--Revolving Credit Line Loan Terms," and
further subject to applicable usury limitations) to
the sum of (i) [the prime rate published in the
"Money Rates" section of The Wall Street Journal
generally on the Monday of the week in which such
Loan Rate adjusts (or, if no rate is published on
such day, then on the next succeeding calendar day on
which a prime rate is published), rounded to the
nearest 1/8 of 1 percent] and (ii) a margin generally
within the range of ___% to ___%. The Loan Rate is
subject to adjustment ________. With respect to each
Revolving Credit Line Loan, a "billing cycle" is the
calendar month preceding a Due Date. Interest accrued
at such rate will be due on the Due Date in the month
following the close of the billing cycle. [As to each
Revolving Credit Line Loan, the Due Date is the ____
day of the month.] The Cut-off Date Principal
Balances of the Revolving Credit Line Loans ranged
from $______ to $_______ and averaged $_______.
Credit Limits under the Revolving Credit Line Loans
as of the Cut-off Date ranged from approximately
$_____ to $______ and averaged $______. Each
Revolving Credit Line Loan was originated in the
period from _______ to ________, and, as of the
Cut-off Date, the weighted average Credit Limit
Utilization Rate (as defined herein) was
approximately ___%. See "The Home Equity Lending
Program" and "Description of the Revolving Credit
Line Loans" herein.
Collections ...............All Collections on the Revolving Credit Line Loans
will be allocated by the Servicer in accordance with
the Revolving Credit Line Loan Agreements between
amounts collected in respect of interest ("Interest
Collections") and amounts collected in respect of
principal ("Principal Collections" and, together with
Interest Collections, "Collections"). The Servicer
will generally deposit Collections distributable to
the Holders in an account established for such
purpose under the Servicing Agreement (the
"Collection Account"). See "Description of the
Servicing Agreement--Allocations and Collections"
herein and "The Agreements--Payments on Loans;
Deposits to Security Account" and "Servicing of
Loans--Collection Procedures" in the Prospectus.
Description of the Securities
A. Distributions......On each Distribution Date, Collections on the
Revolving Credit Line Loans will be applied in the
following order of priority:
(i) to the Servicer, the Servicing Fee;
(ii) as payment for the accrued interest due
and any overdue accrued interest (with interest
thereon to the extent lawful) on the respective
outstanding principal balances of the Notes (the
"Note Balance") and the Certificates (the
"Certificate Balance" and, together with the Note
Balance, the "Security Balance");
(iii) as principal of the Securities, the
excess of Principal Collections over Additional
Balances created during the preceding Collection
Period, such amount to be allocated between the Notes
and Certificates, pro rata, based on their respective
Security Balances;
(iv) as principal of the Securities, as
payment for any Liquidation Loss Amounts on the
Revolving Credit Line Loans;
(v) as payment for the premium on the
Policy;
(vi) to reimburse prior draws made on the
Policy; and
(vii) any remaining amounts, to the
Depositor.
As to any Distribution Date, the "Collection Period"
is the calendar month preceding the month in which
such Distribution Date occurs.
"Liquidation Loss Amount" means, with respect to any
liquidated Revolving Credit Line Loan, the
unrecovered Principal Balance thereof at the end of
the related Collection Period in which such Revolving
Credit Line Loan became a liquidated Revolving Credit
Line Loan, after giving effect to the Liquidation
Proceeds in connection therewith.
B. Note Rate.........Interest will accrue on the unpaid Note Balance of
the Notes (i) at a per annum rate (the "Note Rate")
equal to ___% from the Closing Date to the first
Distribution Date and (ii) thereafter, from and
including the preceding Distribution Date to but
excluding such current Distribution Date (each, an
"Accrual Period") at [a floating rate equal to LIBOR
plus ___%] [___%]. [Interest will be calculated on
the basis of the actual number of days in each
Accrual Period divided by 360.] A failure to pay
interest on any Notes on any Distribution Date that
continues for five days will constitute an Event of
Default under the Indenture.
C. Pass-Through Rate.Interest will accrue on the unpaid Certificate
Balance of the Certificates (i) at a per annum rate
(the "Pass-Through Rate") equal to ___% from the
Closing Date to the first Distribution Date and (ii)
thereafter, at [a floating rate equal to LIBOR plus
___%] [___%]. [Interest will be calculated on the
basis of the actual number of days in each Accrual
Period divided by 360.] A failure to pay interest on
any Certificates on any Distribution Date that
continues for five days will constitute an Event of
Default under the Trust Agreement.
D. Distribution Date.The ____ day of each month or, if such day is not a
Business Day, the next succeeding Business Day,
commencing with _______, 199__. A "Business Day" is
any day other than a Saturday, Sunday or other day on
which banking institutions in New York, New York [and
____________] are authorized or obligated by law,
regulation or executive order to be closed.
E. Record Date .....The last day preceding a Distribution Date or, if the
Securities are no longer Book-Entry Securities, the
last day of the month preceding the month in which a
Distribution Date occurs.
F. Final Schedule
Distribution Dates.To the extent not previously paid, (i) the
Certificate Balance of the Certificates will be due
on the ______ Distribution Date and (ii) the Note
Balance of the Notes will be due on the _____
Distribution Date. Failure to pay the full Note
Balance of Notes or the full Certificate Balance on
the Certificates on or before the related Final
Scheduled Distribution Date will constitute an Event
of Default under the Indenture or the Trust
Agreement, as the case may be.
G. Form and
Registration .....The Securities will initially be delivered in
Book-Entry form ("Book-Entry Securities"). Holders of
such Securities may elect to hold their 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 Securities are Book-Entry
Securities, such Securities will be evidenced by one
or more securities registered in the name of Cede &
Co. ("Cede"), as the nominee of DTC [or one of the
relevant 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 Morgan Guaranty
Trust Company of New York ("Morgan"), the relevant
depositaries of Cedel and Euroclear, respectively,
and each a participating member of DTC. The
Securities will initially be registered in the name
of Cede. The interests of such Holders will be
represented by book entries on the records of DTC and
participating members thereof. No Holder of a
Security will be entitled to receive a definitive
note representing such Person's interest, except in
the event that Securities in fully registered,
certificated form ("Definitive Securities") are
issued under the limited circumstances described in
"Description of the Securities--General" in the
Prospectus. All references in this Prospectus
Supplement to Securities reflect the rights of
Holders of such Notes only as such rights may be
exercised through DTC and its participating
organizations for so long as such Securities are held
by DTC. See "Description of the
Securities--Book-Entry Securities" herein.
H. Denominations ....The Notes will be issued in minimum denominations of
$_______ and integral multiples of $______ in excess
thereof. The Certificates will be issued in minimum
denominations of $_______ and integral multiples of
$______ in excess thereof.
[Letter of Credit]
[Surety Bond] Issuer.......________________ (the "[Letter of Credit] [Surety
Bond] Issuer"). See "The [Letter of Credit] [Surety
Bond] Issuer" herein.
[Letter of Credit]
[Surety Bond]..............On the Closing Date, the [Letter of Credit] [Surety
Bond] Issuer will issue a [letter of credit] [surety
bond] (the "[Letter of Credit] [Surety Bond]") in
favor of the Owner Trustee on behalf of the Trust. In
the event that on any Distribution Date, available
amounts on deposit in the Collection Account with
respect to the preceding Collection Period are
insufficient to provide for the payment of the amount
required to be distributed to the Holders and the
Servicer on such Distribution Date, the Owner Trustee
will draw on the [Letter of Credit] [Surety Bond] to
the extent of the [Letter of Credit] [Surety Bond]
Amount for such Distribution Date, in an amount equal
to such deficiency. See "Description of the
Securities--Distributions" herein and "Enhancement"
in the Prospectus.
[[Letter of Credit]
[Surety Bond]
Amount....................The amount available under the [Letter of Credit]
[Surety Bond] (the "[Letter of Credit] [Surety Bond]
Amount") for the initial Distribution Date will be $
. For each Distribution Date thereafter, the [Letter
of Credit] [Surety Bond] Amount will equal the lesser
of (i) % of the Pool Balance as of the first day of
the preceding Collection Period (after giving effect
to any amounts distributed in respect of principal of
the Revolving Credit Line Loans on the Distribution
Date occurring in such preceding Collection Period)
and (ii) the [Letter of Credit] [Surety Bond] Amount
as of the first day of the preceding Collection
Period, minus any amounts drawn under the [Letter of
Credit] [Surety Bond] during such preceding
Collection Period, plus any amounts paid to the
[Letter of Credit] [Surety Bond] Issuer on the
Distribution Date occurring in such preceding
Collection Period up to the amount of any previous
draws on the [Letter of Credit] [Surety Bond].]
Servicing..................The Servicer will be responsible for servicing,
managing and making Collections on the Revolving
Credit Line Loans. On the ________ business day, but
no later than the _______ calendar day, of each month
(each, a "Determination Date"), the Servicer will
calculate, and will instruct the related Trustee
regarding, the amounts to be paid, as described
herein, with respect to the related Collection
Period, to the related Holders. See "Description of
the Securities--Distributions" herein. The Servicer
will receive a monthly servicing fee in the amount of
____% per annum (the "Servicing Fee Rate") of the
related Pool Balance, and certain other amounts, as
servicing compensation from the Trust. See "Servicing
of the Revolving Credit Line Loans--Servicing
Compensation and Payment of Expenses" herein. In
certain limited circumstances, the Servicer may
resign or be removed, in which event either the Owner
Trustee or a third-party servicer will be appointed
as successor Servicer. See "Servicing of the
Loans--Certain Matters Regarding the Servicer" and
"The Agreements--Events of Default; Rights Upon
Events of Default" in the Prospectus.
[Final Payment of
Principal; Termination.....The Trust will terminate on the Distribution Date
following the earlier of (i) ______________ and (ii)
the final payment or other liquidation of the last
Revolving Credit Line Loan and Private Security in
the Trust. The Revolving Credit Line Loans will be
subject to optional repurchase by the Servicer on any
Distribution Date after the aggregate Principal
Balance thereof is reduced to an amount less than or
equal to $_____ ([5]% of the initial Principal
Balance). The Repurchase Price will be equal to the
sum of the aggregate Principal Balance of the
Revolving Credit Line Loans and accrued and unpaid
interest thereon at the weighted average of the Loan
Rates through the day preceding the Final Scheduled
Distribution Date. See "Description of the
Securities--Optional Termination" herein and "The
Agreements--Termination" in the Prospectus.]
Certain Federal Income Tax
Considerations.............In the opinion of Tax Counsel, for federal income tax
purposes, the Notes will be characterized as
indebtedness, and the Trust will not be characterized
as an association (or publicly traded partnership)
taxable as a corporation. Each Holder of a Note, by
its acceptance of a Note, will agree to treat such
Note as indebtedness for federal, state and local
income and franchise tax purposes. See "Certain
Federal Income Tax Considerations" and "State Tax
Considerations" herein and in the Prospectus
concerning the application of federal, state and
local tax laws.
Legal Investment...........The Securities will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984, as amended ("SMMEA"),
because not all of the Mortgages securing the
Revolving Credit Line Loans are 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 Securities. See "Legal Investment
Considerations" herein and "Legal Investment" in the
Prospectus.
ERISA .....................Generally, Plans that are subject to the requirements
of ERISA and the Code are permitted to purchase
instruments similar to the Notes that are debt under
applicable state law and have no "substantial equity
features" without reference to the prohibited
transaction requirements of ERISA and the Code. In
the opinion of ERISA Counsel (as defined herein), the
Notes will be classified as indebtedness without
substantial equity features for ERISA purposes.
However, if the Notes were to be deemed to be equity
interests and no statutory, regulatory or
administrative exemption were to apply, the Trust
will hold plan assets by reason of a Plan's
investment in the Notes. Accordingly, any Plan
fiduciary considering whether to purchase the Notes
on behalf of a Plan should consult with its counsel
regarding the applicability of the provisions of
ERISA and the Code and the availability of any
exemptions. Under current law, the purchase and
holding of the Certificates by or on behalf of any
employee benefit plan (each, a "Plan") subject to the
fiduciary responsibility provisions of the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"), may result in a "prohibited transaction"
within the meaning of ERISA and the Code or other
violation of the fiduciary responsibility provisions
of ERISA and Section 4975 of the Code. [Consequently,
the Certificates may not be transferred to a proposed
transferee that is a Plan subject to ERISA or that is
described in Section 4975(e)(1) of the Code, or a
Person acting on behalf of any such Plan or using the
assets of such Plan, unless the Owner Trustee and the
Depositor receive an opinion of counsel reasonably
satisfactory to the Owner Trustee and the Depositor
to the effect that the purchase and holding of such
Certificates will not result in the assets of the
Trust being deemed to be "plan assets" for ERISA
purposes and will not be a prohibited transaction
under ERISA or Section 4975 of the Code.] See "ERISA
Considerations" herein and in the Prospectus.
Rating ....................It is a condition to the issuance of the Securities
that they be rated _______ by at least ____
nationally recognized statistical rating
organizations (each, a "Rating Agency"). In general,
ratings address credit risk and do not address the
likelihood of prepayments. A security rating is not a
recommendation to buy, sell or hold securities.
RISK FACTORS
[CASH FLOW CONSIDERATIONS
During the first ____-year draw down period under the related Revolving
Credit Line Loan Agreements for the Revolving Credit Line Loans, Collections on
such Revolving Credit Line Loans may vary because, among other things, borrowers
are not required to make monthly payments of principal. With respect to some of
the Revolving Credit Line Loans, during the second ____-year draw down period,
no monthly payments of principal are required. Collections on the Revolving
Credit Line Loans may also vary due to seasonal purchasing and payment habits of
borrowers.
General credit risk may also be greater to Holders than to holders of
instruments representing interests in level payment first mortgage loans, since
no payment of principal generally is required until after either a five- or
ten-year interest-only period under the related Revolving Credit Line Loan
Agreements. Minimum monthly payments will at least equal and may exceed accrued
interest. Even assuming that the Mortgaged Properties provide adequate security
for the Revolving Credit Line Loans, substantial delay could be encountered in
connection with the liquidation of Revolving Credit Line Loans that are
delinquent and corresponding delays in the receipt of related proceeds by
Holders could occur if the [Letter of Credit] [Surety Bond] provider were unable
to perform on its obligations under the [Letter of Credit] [Surety Bond].
Further, liquidation expenses (such as legal fees, real estate taxes, and
maintenance and preservation expenses) will reduce the Liquidation Proceeds
payable to Holders and thereby reduce the security for the Revolving Credit Line
Loans. In the event any of the Mortgaged Properties fail to provide adequate
security for the related Revolving Credit Line Loans, Holders could experience a
loss if the [Letter of Credit] [Surety Bond] provider were unable to perform its
obligations under the [Letter of Credit] [Surety Bond].]
PREPAYMENT CONSIDERATIONS
All of the Revolving Credit Line Loans may be prepaid in whole or in
part at any time without penalty. Home equity loans, such as the Revolving
Credit Line Loans, have been originated in significant volume only during the
past few years and neither the Depositor nor the Servicer is aware of any
publicly available studies or statistics on the rate of prepayment of such
loans. The Trust's prepayment experience may be affected by a wide variety of
factors, including general economic conditions, interest rates, the availability
of alternative financing and homeowner mobility. In addition, substantially all
of the Revolving Credit Line Loans contain due-on-sale provisions and the
Servicer intends to enforce such provisions unless (i) such enforcement is not
permitted by applicable law or (ii) the Servicer, in a manner consistent with
reasonable commercial practice, permits the purchaser of the related Mortgaged
Property to assume the Revolving Credit Line Loan. To the extent permitted by
applicable law, such assumption will not release the original borrower from its
obligation under any such Revolving Credit Line Loan. See "Certain Legal Aspects
of the Loans--Due-on-Sale Clauses in Revolving Credit Line Loans" in the
Prospectus.
LEGAL CONSiDERATIONS
The Revolving Credit Line Loans are secured by deeds of trust or
Mortgages. With respect to Revolving Credit Line Loans that are secured by first
Mortgages, the Servicer has the power under certain circumstances to consent to
a new mortgage lien on the Mortgaged Property having priority over such
Revolving Credit Line Loan. Revolving Credit Line Loans secured by senior
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 [Letter of Credit]
[Surety Bond] provider is unable to perform its obligations under the [Letter of
Credit] [Surety Bond] or if the coverage under the [Letter of Credit] [Surety
Bond] is exhausted], the Trust, and accordingly, the Holders, bear (i) the risk
of delay in distributions while a deficiency judgment against the borrower is
obtained and (ii) the risk of loss if the deficiency judgment cannot be obtained
or is not realized upon. See "Certain Legal Aspects of the Loans" in the
Prospectus.
The sale of the Revolving Credit Line Loans from the Seller to the
Depositor pursuant to the Purchase Agreement will be treated as a sale of the
Revolving Credit Line Loans. The Seller will warrant that such transfer is
either a sale of its interest in the Revolving Credit Line Loans or a grant of a
first priority perfected security interest therein. In the event of an
insolvency of the Seller, the receiver of the Seller may attempt to
recharacterize the sale of the Revolving Credit Line Loans as a borrowing by the
Seller secured by a pledge of the Revolving Credit Line Loans. If the receiver
decided to challenge such transfer, delays in payments of the Securities and
possible reductions in the amount thereof could occur. The Depositor will
warrant in the Trust Agreement that the transfer of its interest in the
Revolving Credit Line Loans to the Trust is a valid transfer and assignment of
such interest.
If a conservator, receiver or trustee were appointed for the Seller, or
if certain other events relating to the bankruptcy or insolvency of the Seller
were to occur, Additional Balances would not be transferred by the Seller to the
Trust pursuant to the Purchase Agreement (as assigned by the Depositor to the
Trust). In such an event, an Event of Default under the Trust Agreement and
Indenture would occur and the Owner Trustee would attempt to sell the Revolving
Credit Line Loans (unless Holders of Securities evidencing undivided interests
aggregating at least 51% of each of the Note Balance and the Certificate Balance
instruct otherwise), thereby causing early payment of the respective Security
Balances of the Notes and the Certificates.
In the event of a bankruptcy or insolvency of the Servicer, the related
bankruptcy trustee or receiver may have the power to prevent the Owner Trustee
or the Holders from appointing a successor Servicer.
SERVICER'S ABILITY TO CHANGE THE TERMS OF THE REVOLVING CREDIT LINE LOANS
The Servicer may agree to changes in the terms of a Revolving Credit
Line Loan Agreement, provided that such changes (i) do not adversely affect the
interests of the Holders and (ii) are consistent with prudent business practice.
There can be no assurance that changes in applicable law or the marketplace for
home equity loans or prudent business practice will not result in changes in the
terms of the Revolving Credit Line Loans.
[DELINQUENT REVOLVING CREDIT LINE LOANS
The Trust will include Revolving Credit Line Loans that are 59 or fewer
days delinquent. The Cut-off Date Principal Balance of such delinquent Revolving
Credit Line Loans was $____________.]
THE TRUST
GENERAL
The Issuer, Bear Stearns Home Equity Loan Trust 199__-__, is a business
trust formed under the laws of the State of Delaware pursuant to the Trust
Agreement for the transactions described in this Prospectus Supplement. The
Trust Agreement constitutes the "governing instrument" under the laws of the
State of Delaware relating to business trusts. After its formation, the Issuer
will not engage in any activity other than (i) acquiring, holding and managing
the Revolving Credit Line Loans and the other assets of the Trust and proceeds
therefrom, (ii) issuing the Notes and the Certificates, (iii) making payments on
the Notes and the Certificates and (iv) engaging in other activities that are
necessary, suitable or convenient to accomplish the foregoing or are incidental
thereto or connected therewith.
The property of the Trust will consist of: (i) the Revolving Credit
Line Loans; (ii) Collections on the Revolving Credit Line Loans received on or
after the Cut-off Date; (iii) Mortgaged Properties relating to the Revolving
Credit Line Loans that are acquired by foreclosure or deed in lieu of
foreclosure; (iv) the Collection Account and the Distribution Accounts
(excluding, in each case, net earnings thereon); (v) the [Letter of Credit]
[Surety Bond]; and (vi) an assignment of the Depositor's rights under the
Purchase Agreement, including all rights of the Depositor to purchase Additional
Balances.
The Trust's principal offices are in __________, Delaware, in care of
_______________, as Owner Trustee, at ____________.
THE [LETTER OF CREDIT] [SURETY BOND] ISSUER
The following information with respect to _________ has been furnished
by __________.
[Description of Letter of Credit/Surety Bond Issuer]
THE HOME EQUITY LENDING PROGRAM
The information set forth below concerning ________ and its
underwriting policies has been provided by _________. The Depositor does not
make any representation as to the accuracy or completeness of such information.
GENERAL
The Revolving Credit Line Loans were originated by _____________ (in
such capacity, the "Seller") under its home equity lending program. The Seller
first offered [fixed] [adjustable] rate home equity revolving credit line loans
("home equity loans") in 19___. As of __________, _______ owned and serviced
approximately $__________ aggregate principal amount of outstanding home equity
loans secured by properties located in __________ under home equity credit
lines.
UNDERWRITING PROCEDURES RELATING TO THE REVOLVING CREDIT LINE LOANS
Each Revolving Credit Line Loan was originated after a review by the
Seller in accordance with its established underwriting procedures, which were
intended to assess the applicant's ability to assume and repay such Revolving
Credit Line Loan and the adequacy of the real property that was to serve as
collateral for such Revolving Credit Line Loan. The maximum Credit Limit for a
Revolving Credit Line Loan provided by the Seller was $__________.
Each applicant for a home equity loan was required to complete an
application that listed the applicant's assets, liabilities, income, credit and
employment history and other demographic and personal information. If
information in the loan application demonstrated that there was sufficient
income and equity to justify making a home equity loan and the Seller (i)
received a satisfactory independent credit bureau report on the credit history
of the borrower and (ii) obtained, in the case of all home equity loans
originated prior to ________, 19___, a drive-by appraisal of the related
Mortgaged Property or, for all home equity loans originated as of _______,
19___, a satisfactory appraisal completed on forms approved by FNMA, and if such
information met the Seller's underwriting standards, the Seller issued a
commitment subject to satisfaction of certain other conditions. These conditions
included: (i) obtaining and reviewing pay stubs, income tax returns or a
verification of employment from the applicant's employer; (ii) obtaining and
reviewing a verification of deposit; and (iii) when the home equity loan was to
be in a junior lien position, obtaining and reviewing a verification of the loan
or loans in a senior lien position.
Appraisals of the Mortgaged Properties were performed by a qualified
appraiser or an independent third-party, fee-based appraiser who had been
previously approved for such assignment by the Seller.
It is the Seller's policy to require a title policy insuring title
mortgage in accordance with the intended lien position.
Generally, a home equity loan needed a Combined Loan-to-Value Ratio of
___% for loans for which the Seller obtained full documentary support and ___%
for loans for which limited documentary support was obtained.
After obtaining all applicable employment, credit and property
information, the Seller determined whether sufficient unencumbered equity in the
property existed and whether the prospective borrower had sufficient monthly
income available to support the payments of interest at the current prime rate
plus the applicable margin based on the Credit Limit in addition to any senior
mortgage loan payments (including any escrows for property taxes and hazard
insurance premiums) and other monthly credit obligations based on the
prospective borrower's debt-to-gross income ratio. The "debt-to-gross income
ratio" is the ratio of (a) certain of the borrower's debt obligations, which
include: (i) the monthly first mortgage payment plus taxes; (ii) monthly
installment debt payments with a term of more than ten months; (iii) five
percent of the total revolving obligations; (iv) monthly alimony and child
support obligations; and (v) the payment on the home equity loan calculated at
the Credit Limit and current prime rate plus margin for such home equity loan to
(b) the borrower's gross verifiable monthly income. The debt-to-gross income
ratio generally did not exceed ______%.
When the commitment conditions had been satisfied, the Revolving Credit
Line Loan was completed by signing a Revolving Credit Line Loan Agreement,
rescission statement, and Mortgage that secured the repayment of principal of
and interest on the Revolving Credit Line Loan. The original Mortgage was then
recorded in the appropriate county government office.
REVOLVING CREDIT LINE LOAN TERMS
A borrower may access a home equity loan by writing a check. On all
home equity loans, there is [a ten-year] draw down period as long as the
borrower is not in default under the loan agreement. Home equity loans bear
interest at a variable rate, which may change biweekly. Home equity loans may be
subject to a maximum per annum interest rate (the "Maximum Rate") of ______% per
annum and in all cases are subject to applicable usury limitations. See "Certain
Legal Aspects of the Loans--Applicability of Usury Laws" in the Prospectus. The
daily periodic rate on the Revolving Credit Line Loans (the "Loan Rate") is the
sum of the Index Rate plus a spread (the "Margin"), which generally ranges
between ____% and ____%, divided by 365 days or 366 days, as applicable.
The "Index Rate" is based on [the prime rate published in the "Money
Rates" section of The Wall Street Journal generally on the Monday of the week in
which such Loan Rate adjusts (or, if no rate is published on such day, then on
the next succeeding calendar day on which a prime rate is published), rounded to
the nearest 1/8 of 1 percent.] The annual percentage rate for any biweekly
period will be based on the prime rate in effect on the Monday on which the rate
may change. [If a prime rate range is published in The Wall Street Journal, then
the midpoint (average) of such range will be used.] There are no limitations on
increases or decreases (except for those Revolving Credit Line Loans that have
Maximum Rates). Only the Revolving Credit Line Loans that have Maximum Rates of
____% also have annual adjustment caps of __% as to both increases and decreases
in their Loan Rates.
Billing statements are mailed monthly. The statement details all debits
and credits and specifies the minimum payment due and the available credit line.
Notice of changes in the applicable Loan Rate are provided by the Seller to the
borrower with such statements. All payments are due by the tenth day after the
date the billing statement is issued.
The Revolving Credit Line Loan Agreements further provide that if
publication of the Index Rate is discontinued, the Index Rate will be changed
upon notification in accordance with such Revolving Credit Line Loan Agreements.
The borrower's right to obtain additional credit may be suspended or
terminated, or the borrower may be required to pay the entire balance due plus
all other accrued but unpaid charges immediately, if (i) the borrower fails to
make any required payment by the due date, (ii) the total outstanding principal
balance including all charges payable exceeds the Credit Limit, (iii) the
borrower made any statement or signature on any document that is fraudulent or
contained a material misrepresentation, (iv) the borrower dies or becomes
incompetent, (v) the borrower becomes bankrupt or insolvent, (vi) the borrower
becomes subject to any judgment, lien or attachment or any execution is issued
against the Mortgaged Property, (vii) the borrower fails to obtain and maintain
required property insurance or (viii) the borrower sells or transfers the
Mortgaged Property or does not maintain the Mortgaged Property. In addition, the
right to obtain additional credit may be suspended or a borrower's Credit Limit
may be reduced, if (i) the value of the Mortgaged Property decreases for any
reason to less than 80% of the original appraised value, (ii) the borrower is in
default under the Revolving Credit Line Loan Agreement, (iii) government action
impairs the Seller's lien priority or (iv) a regulatory agency has notified the
Seller that continued advances would constitute an unsafe and unsound practice.
DELINQUENCY AND LOSS EXPERIENCE OF THE SERVICER'S PORTFOLIO
The following tables set forth the delinquency and loss experience for
each of the periods shown for the home equity loans indicated on the table. The
Servicer believes that there have been no material trends or anomalies in the
historical delinquency and loss experience as represented in the following
tables. The data presented in the following tables are for illustrative purposes
only, and there is no assurance that the delinquency and loss experience of the
Revolving Credit Line Loans will be similar to that set forth below.
DELINQUENCY EXPERIENCE
(DOLLARS IN THOUSANDS)
AS OF _________
<TABLE>
<CAPTION>
-----------------------------------------
NUMBER OF LOANS AMOUNT
LOANS
------------------- -----------------
<S> <C>
Amount Outstanding at
Period End..............................
Delinquency
30-59 Days.............................. $
60-89 Days..............................
90 or More Days.........................
Foreclosures and Bankruptcies........... _________
$---------
Total Delinquencies.......................
%
30-59 Days Percentage.....................
60-89 Days Percentage..................... %
90 or More Days Percentage................ %
Foreclosures and Bankruptcies.............
</TABLE>
LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
FOR THE YEAR
ENDING ________
---------------------
Average Amount
Outstanding................................ $
Gross Charge-Offs............................ $
Recoveries................................... $
Net Losses as a Percentage
of Average Amount Outstanding.............. %
SERVICING OF THE REVOLVING CREDIT LINE LOANS
The information set forth below concerning the Servicer and its
servicing policies has been provided by the Servicer. The Depositor does not
make any representation as to the accuracy or completeness of such information.
GENERAL
The Servicer will be responsible for servicing the Revolving Credit
Line Loans as agent for the Trust in accordance with the Servicer's policies and
procedures for servicing home equity loans and in accordance with the terms of
the Servicing Agreement.
With respect to real estate secured loans, the general policy of the
Servicer is to initiate foreclosure on the underlying property (i) after such
loan is 90 days or more delinquent; (ii) if a notice of default on a senior lien
is received by the Servicer; or (iii) if circumstances are discovered by the
Servicer that would indicate that a potential for loss exists. Foreclosure
proceedings may be terminated if the delinquency is cured. However, under
certain circumstances, the Servicer may elect not to commence foreclosure or
stay the foreclosure proceeding if the borrower's default is due to special
circumstances that are temporary and are not expected to last beyond a specified
period. The loans to borrowers in bankruptcy proceedings will be restructured in
accordance with law and with a view to maximizing recovery of such home equity
loans, including any deficiencies. Additionally, at any time during foreclosure,
a forbearance, short sale, deed in lieu of foreclosure or payment plan can be
authorized.
After foreclosure, if the home equity loan is secured by a first
mortgage lien, title to the related Mortgaged Property will pass to the
Servicer, or a wholly-owned subsidiary of the Servicer, which will liquidate the
Mortgaged Property and charge off the balance of the home equity loan that was
not recovered by the Liquidation Proceeds. If the Mortgaged Property was subject
to a senior lien position, the Servicer will either satisfy such lien at the
time of foreclosure or take other action as deemed necessary to protect the
Servicer's interest in the Mortgaged Property. If, in the judgment of the
Servicer, the cost of maintaining or purchasing the senior lien position exceeds
the economic benefit of such action, the Servicer will generally charge off the
entire home equity loan, will seek a money judgment against the borrower or will
not pursue any recovery.
Servicing and charge-off policies and collection practices may change
over time in accordance with the Servicer's business judgment, changes in the
Servicer's real estate secured revolving credit line loans and applicable laws
and regulations, and other considerations.
SERVICING COMPENSATION aND PAYMENT OF EXPENSES
With respect to each Collection Period other than the first Collection
Period, the servicing compensation to be paid to the Servicer in respect of its
servicing activities relating to the Revolving Credit Line Loans will be paid to
it from Interest Collections in respect of the Revolving Credit Line Loans and
will be equal to ____% per annum (the "Servicing Fee Rate") on the Pool Balance
as of the first day of each such Collection Period (the "Servicing Fee"). With
respect to the first Collection Period, the Servicer will receive from such
Collections ____% of the amount calculated in the preceding sentence. All
assumption fees, late payment charges and other fees and charges, to the extent
collected from borrowers, will be retained by the Servicer as additional
servicing compensation.
The Servicer will pay certain ongoing expenses associated with the
Trust and incurred by it in connection with its responsibilities under the
Servicing Agreement including, without limitation, payment of the fees and
disbursements of the Trustees, any custodian appointed by a Trustee, the
registrar and any paying agent. In addition, the Servicer will be entitled to
reimbursement for certain expenses incurred by it in connection with defaulted
Revolving Credit Line Loans and in connection with the restoration of Mortgaged
Properties related thereto, such right of reimbursement being prior to the
rights of Holders to receive any related Liquidation Proceeds.
DESCRIPTION OF THE REVOLVING CREDIT LINE LOANS
REVOLVING CREDIT LINE LOANS
The Revolving Credit Line Loans were originated pursuant to loan
agreements and disclosure statements (the "Revolving Credit Line Loan
Agreements") and are secured by Mortgages or deeds of trust on Mortgaged
Properties. The Mortgaged Properties securing the Revolving Credit Line Loans
consist primarily of residential properties that are one to four-family
properties. ____% of the Mortgaged Properties are owner-occupied. See
"--Revolving Credit Line Loan Pool Statistics."
The Cut-off Date Pool Balance is $___________, which is equal to the
aggregate Principal Balance of the Revolving Credit Line Loans as of ______,
199__ (the "Cut-off Date"). As of the Cut-off Date, the Revolving Credit Line
Loans were not more than 59 days delinquent and had a Loan Rate of at least
____% per annum. The average Cut-off Date Principal Balance was $_______, the
minimum Cut-off Date Principal Balance was zero, the maximum Cut-off Date
Principal Balance was $_______, the minimum Loan Rate and the maximum Loan Rate
on the Cut-off Date were ____% and ____% per annum, respectively, and the
weighted average Loan Rate on the Cut-off Date was ____% per annum. As of the
Cut-off Date, the weighted average Credit Limit Utilization Rate was ____%, the
minimum Credit Limit Utilization Rate was zero and the maximum Credit Limit
Utilization Rate was ____%. The "Credit Limit Utilization Rate" is determined by
dividing the Cut-off Date Principal Balance of a Revolving Credit Line Loan by
the Credit Limit of the related Revolving Credit Line Loan Agreement. The
weighted average Combined Loan-to-Value Ratio of the Revolving Credit Line Loans
was ____% as of the Cut-off Date.
REVOLVING CREDIT LINE LOAN POOL STATISTICS
The Depositor has compiled the following additional information as of
the Cut-off Date with respect to the Revolving Credit Line Loans to be included
in the Trust.
[TABULAR INFORMATION]
ASSIGNMENT OF REVOLVING CREDIT LINE LOANS
At the time of issuance of the Securities, the Depositor will transfer
to the Trust all of its right, title and interest in and to each Revolving
Credit Line Loan (including its right to purchase any Additional Balances
arising in the future), the related Revolving Credit Line Loan Agreements,
Mortgages and other related documents (collectively, the "Related Documents")
and all Collections received on or with respect to each such Revolving Credit
Line Loan on or after the Cut-off Date pursuant to an assignment of the
Depositor's rights and obligations under the Purchase Agreement. The related
Trustee, concurrently with such transfer, will deliver the Securities. Each
Revolving Credit Line Loan transferred to the Owner Trust will be identified on
a schedule (the "Revolving Credit Line Loan Schedule") delivered to the Owner
Trustee pursuant to the Purchase Agreement. Such schedule will include
information as to the Cut-off Date Principal Balance of each Revolving Credit
Line Loan, as well as information with respect to the Loan Rate.
The Purchase Agreement will require, within the time period specified
therein, the Seller to deliver to the Owner Trustee (or a custodian, as the
Owner Trustee's agent for such purpose) the Revolving Credit Line Loans endorsed
in blank and the Related Documents. In lieu of delivery of original Mortgages,
the Seller may deliver true and correct copies thereof that have been certified
as to authenticity by the appropriate county recording office where such
Mortgage is recorded.
Under the terms of the Purchase Agreement, the Seller, acting at the
Depositor's request, will have [___ days after the Closing Date] to prepare and
record assignments of the Mortgages related to each Revolving Credit Line Loan
in favor of the Owner Trustee, unless opinions of counsel satisfactory to the
Rating Agencies and the Insurer are delivered to the Owner Trustee and the
Insurer to the effect that recordation of such assignments is not required in
the relevant jurisdictions to protect the interests of the Owner Trustee in the
Revolving Credit Line Loans.
Within 90 days after the Closing Date, the Owner Trustee will review
the Revolving Credit Line Loans and the Related Documents, and if any Revolving
Credit Line Loan or Related Document is found to be defective in any material
respect and such defect is not cured within 90 days following notification
thereof to the Seller and the Depositor by the Owner Trustee, the Seller will be
obligated to repurchase such defective Revolving Credit Line Loan and to deposit
the Repurchase Price into the Collection Account. Upon such retransfer, the
Principal Balance of such Revolving Credit Line Loan will be deducted from the
Pool Balance. In lieu of any such repurchase, the Seller may substitute an
Eligible Substitute Revolving Credit Line Loan. Any such repurchase or
substitution will be considered a payment in full of such Revolving Credit Line
Loan. The obligation of the Seller to accept a transfer of a Defective Revolving
Credit Line Loan is the sole remedy regarding any defects in the Revolving
Credit Line Loans and Related Documents available to the Owner Trustee or the
Holders.
With respect to any Revolving Credit Line Loan, the "Repurchase Price"
is equal to the Principal Balance of such Revolving Credit Line Loan at the time
of any transfer described above plus accrued and unpaid interest thereon to the
date of repurchase.
An "Eligible Substitute Revolving Credit Line Loan" is a Revolving
Credit Line Loan substituted by the Seller for a Defective Revolving Credit Line
Loan that must, on the date of such substitution, (i) have a Principal Balance
(or in the case of a substitution of more than one Revolving Credit Line Loan
for a Defective Revolving Credit Line Loan, an aggregate Principal Balance), not
5% more or less than the Principal Balance relating to such Defective Revolving
Credit Line Loan; (ii) have a Loan Rate not less than the Loan Rate of the
Defective Revolving Credit Line Loan and not more than 1% in excess of the Loan
Rate of such Defective Revolving Credit Line Loan; (iii) have a Loan Rate based
on the same index with adjustments to such Loan Rate made on the same date of
adjustment of the Loan Rate as that of the Defective Revolving Credit Line Loan;
(iv) have a Margin that is not less than the Margin of the Defective Revolving
Credit Line Loan and not more than 100 basis points higher than the Margin for
the Defective Revolving Credit Line Loan; (v) have a mortgage of the same or
higher level of priority as the Mortgage relating to the Defective Revolving
Credit Line Loan; (vi) have a remaining term to maturity not more than six
months earlier and not later than the remaining term to maturity of the
Defective Revolving Credit Line Loan; (vii) comply with each representation and
warranty as to the Revolving Credit Line Loans set forth in the Purchase
Agreement (deemed to be made as of the date of substitution); and (viii) satisfy
certain other conditions specified in the Purchase Agreement. To the extent the
Principal Balance of an Eligible Substitute Revolving Credit Line Loan is less
than the Principal Balance of the related Defective Revolving Credit Line Loan,
the Seller will be required to make a deposit to the Collection Account equal to
such difference ("Substitution Adjustment Amounts").
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the Owner
Trustee with respect to each Revolving Credit Line Loan (e.g., Cut-off Date
Principal Balance and 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 and to each Revolving Credit Line Loan and the
Related Documents, free of any lien (subject to certain exceptions); and (ii)
each Revolving Credit Line Loan was generated under a Revolving Credit Line Loan
Agreement that 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 that materially and adversely affects the interests
of the Holders in the related Revolving Credit Line Loan and Related Documents,
the Seller will have a period of 60 days after discovery or notice of such
breach to effect a cure. If the breach cannot be cured within such 60-day
period, the Seller will be obligated to substitute such Defective Revolving
Credit Line Loan or repurchase such Defective Revolving Credit Line Loan from
the Trust. The same procedure and limitations that are set forth above for the
repurchase or substitution of Defective Revolving Credit Line Loans will apply
to the transfer of a Revolving Credit Line Loan that is required to be
repurchased or substituted because of a breach of a representation or warranty
in the Purchase Agreement that materially and adversely affects the interests of
the Holders.
Revolving Credit Line Loans required to be transferred to the Seller as
described in the preceding paragraphs are referred to as "Defective Revolving
Credit Line Loans."
DESCRIPTION OF THE SERVICING AGREEMENT
The Servicer will establish and maintain on behalf of the Owner Trustee
an account (the "Collection Account") for the benefit of the Holders. The
Collection Account will be an Eligible Account. Subject to the investment
provision described in the following paragraphs, upon receipt by the Servicer of
amounts in respect of the Revolving Credit Line Loans (excluding amounts
representing administrative charges, annual fees, taxes, assessments, credit
insurance charges, insurance proceeds to be applied to the restoration or repair
of a Mortgaged Property or similar items), the Servicer will deposit such
amounts into the Collection Account. Amounts so deposited may be invested in
Eligible Investments (as described in the Servicing Agreement) maturing no later
than one Business Day prior to the date on which the amount on deposit therein
is required to be deposited into the related Distribution Account or on such
Distribution Date if approved by the Rating Agencies. No later than the fifth
Business Day prior to each Distribution Date (each, a "Determination Date"), the
Servicer will notify the Owner Trustee and the Indenture Trustee of the amount
of such deposit to be included in funds available for the related Distribution
Date.
The Owner Trustee and the Indenture Trustee will establish one or more
accounts (the "Security Account") into which will be deposited amounts withdrawn
from the Collection Account for distribution to Holders on a Distribution Date.
The Security Account will be an Eligible Account, and amounts on deposit therein
will be invested in Eligible Investments maturing on or before the Business Day
prior to the related Distribution Date.
An "Eligible Account" is an account that is (i) maintained with a
depository institution the debt obligations of which at the time of any deposit
therein have the highest short-term debt rating by the Rating Agencies, (ii)
maintained with a depository institution, which 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 ____, (iii) a segregated
trust account maintained with the Owner Trustee or an affiliate thereof in its
fiduciary capacity or (iv) otherwise acceptable to each Rating Agency as
evidenced by a letter from each Rating Agency to the Owner Trustee, without
reduction or withdrawal of their then current ratings of the Securities.
"Eligible Investments" are specified in the Servicing Agreement and are
limited to investments that meet the criteria of the Rating Agencies from time
to time as being consistent with their then current ratings of the Securities.
ALLOCATIONS AND COLLECTIONS
All Collections on the Revolving Credit Line Loans will generally be
allocated in accordance with the Revolving Credit Line Loan Agreements between
amounts collected in respect of interest and amounts collected in respect of
principal. As to any Distribution Date, "Interest Collections" will be equal to
the aggregate of the amounts collected during the related Collection Period,
including Liquidation Proceeds, allocated to interest pursuant to the terms of
the Revolving Credit Line Loan Agreements.
As to any Distribution Date, "Principal Collections" will be equal to
the sum of (i) the amounts collected during the related Collection Period,
including Liquidation Proceeds, and allocated to principal pursuant to the terms
of the Revolving Credit Line Loan Agreements and (ii) any Substitution
Adjustment Amounts. "Liquidation Proceeds" with respect to a Revolving Credit
Line Loan are equal to the aggregate of all amounts received upon liquidation of
such Revolving Credit Line Loan, including, without limitation, insurance
proceeds, reduced by related liquidation expenses, but not including the
portion, if any, of such amount that exceeds the Principal Balance of such
Revolving Credit Line Loan at the end of the Collection Period immediately
preceding the Collection Period in which such Revolving Credit Line Loan became
a liquidated Revolving Credit Line Loan, plus accrued and unpaid interest
thereon through the date of liquidation.
With respect to any date, the "Pool Balance" will be equal to the
aggregate of the Principal Balances of all Revolving Credit Line Loans as of
such date. The Principal Balance of a Revolving Credit Line Loan (other than a
liquidated Revolving Credit Line Loan) on any day is equal to the Cut-off Date
Principal Balance thereof, plus (i) any Additional Balances in respect of such
Revolving Credit Line Loan minus (ii) all Collections credited against the
Principal Balance of such Revolving Credit Line Loan in accordance with the
related Revolving Credit Line Loan Agreement prior to such day. The Principal
Balance of a liquidated Revolving Credit Line Loan after final recovery of
related Liquidation Proceeds shall be zero.
HAZARD InSURANCE
The Servicing Agreement provides that the Servicer maintain certain
hazard insurance on the Mortgaged Properties relating to the Revolving Credit
Line Loans. While the terms of the related Revolving Credit Line Loan Agreements
generally require borrowers to maintain certain hazard insurance, the Servicer
will not monitor the maintenance of such insurance.
The Servicing Agreement requires the Servicer to maintain for any
Mortgaged Property relating to a Revolving Credit Line Loan acquired upon
foreclosure of a Revolving Credit Line Loan, or by deed in lieu of such
foreclosure, hazard insurance with extended coverage in an amount equal to the
lesser of (i) the maximum insurable value of such Mortgaged Property or (ii) the
outstanding balance of such Revolving Credit Line Loan plus the outstanding
balance on any mortgage loan senior to such Revolving Credit Line Loan at the
time of foreclosure or deed in lieu of foreclosure, plus accrued interest and
the Servicer's good faith estimate of the related liquidation expenses to be
incurred in connection therewith. The Servicing Agreement provides that the
Servicer may satisfy its obligation to cause hazard policies to be maintained by
maintaining a blanket policy insuring against losses on such Mortgaged
Properties. If such blanket policy contains a deductible clause, the Servicer
will be obligated to deposit into the Collection Account the sums that would
have been deposited therein but for such clause. The Servicer will initially
satisfy these requirements by maintaining a blanket policy. As set forth above,
all amounts collected by the Servicer (net of any reimbursements to the
Servicer) under any hazard policy (except for amounts to be applied to the
restoration or repair of the Mortgaged Property) will ultimately be deposited
into the Collection Account.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm, hail and the like, and strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the Revolving Credit Line Loans will
be underwritten by different insurers and therefore will not contain identical
terms and conditions, the basic terms thereof are dictated by state laws and
most of such policies typically do not cover any physical damage resulting from
the following: war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), nuclear reactions, 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 or an exact description of the insurance policies relating to the
Mortgaged Properties.
REALIZATION UPON DEFAULTED REVOLVING CREDIT LINE LOANS
The Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Revolving Credit Line Loans
as come into default when, in accordance with applicable servicing procedures
under the Servicing 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 that 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 the related
Liquidation Proceeds. The Servicer will be reimbursed out of Liquidation
Proceeds for advances of its own funds as liquidation expenses before any
Liquidation Proceeds are distributed to the Holders.
SERVICING COMPENSATION aND PAYMENT OF EXPENSES
With respect to each Collection Period, other than the first Collection
Period, the Servicer will receive from Interest Collections in respect of the
Revolving Credit Line Loans a portion of such Interest Collections as a monthly
Servicing Fee in the amount equal to the Servicing Fee Rate on the Pool Balance
as of the first day of each such Collection Period. All assumption fees, late
payment charges and other fees and charges, to the extent collected from
borrowers, will be retained by the Servicer as additional servicing
compensation.
The Servicer will pay certain ongoing expenses associated with the
Trust and incurred by it in connection with its responsibilities under the
Servicing Agreement including, without limitation, payment of the fees and
disbursements of the Trustees, any custodian appointed by a Trustee, the
registrar and any paying agent. In addition, the Servicer will be entitled to
reimbursement for certain expenses incurred by it in connection with defaulted
Revolving Credit Line Loans and in connection with the restoration of Mortgaged
Properties, such right of reimbursement being prior to the rights of the Holders
to receive any related Liquidation Proceeds.
DESCRIPTION OF THE SECURITIES
GENERAL
The Notes will be issued pursuant to the Indenture, and the
Certificates will be issued pursuant to the Trust Agreement. The following
summaries describe certain provisions of the Securities, the Indenture and the
Trust Agreement. Such summaries do not purport to be complete and are subject
to, and qualified in their entirety by reference to, the provisions of the
applicable Agreement. As used herein, "Agreement" shall mean either the Trust
Agreement or the Indenture, as the context requires.
The Securities will be issued in fully registered, certificated form
only. The Securities will be freely transferable and exchangeable at the
corporate trust office of, with respect to the Certificates, the Owner Trustee
or, with respect to the Notes, the Indenture Trustee.
BOOK-ENTRY SECURITIES
The Securities will be Book-Entry Securities. Persons acquiring
beneficial ownership interests in the Securities ("Security Owners") will hold
their Securities through DTC in the United States[, or Cedel or Euroclear (in
Europe)] if they are participants of such systems, or indirectly through
organizations that are participants in such systems. The Book-Entry Securities
will be issued in one or more certificates that will equal the aggregate
Security Balance of the Securities and will initially be registered in the name
of Cede, 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 the Brussels, Belgium Branch of Morgan will act as depositary for
Euroclear.] Investors may hold such beneficial interests in the Book-Entry
Securities in minimum denominations of $_______ and integral multiples of $____
in excess thereof. Except as described below, no Person acquiring a Book-Entry
Security will be entitled to receive a physical certificate representing such
Security (each, a "Definitive Security"). Unless and until Definitive Securities
are issued, it is anticipated that the only "Holder" of the Securities will be
Cede, as nominee of DTC. Security Owners will not be Holders as such term is
used in the Trust Agreement and the Indenture. Security Owners are only
permitted to exercise their rights indirectly through Participants and DTC.
DISTRIBUTIONS
On each Distribution Date, Collections on the Revolving Credit Line
Loans will be applied in the following order of priority:
(i) to the Servicer, the Servicing Fee;
(ii) as payment for the accrued interest due and any overdue
accrued interest on the respective Security Balance of the Notes and
the Certificates;
(iii) as principal of the Securities, the excess of Principal
Collections over Additional Balances created during the preceding
Collection Period, such amount to be allocated between the Notes and
the Certificates pro rata, based on their respective Security Balances;
(iv) as principal of the Securities, as payment for any
Liquidation Loss Amounts on the Revolving Credit Line Loans;
(v) as payment for the premium for the [Letter of Credit]
[Surety Bond];
(vi) to reimburse prior draws made on the [Letter of Credit]
[Surety Bond]; and
(vii) any remaining amounts, to the Depositor.
As to any Distribution Date, the "Collection Period" is the calendar
month preceding the month of such Distribution Date.
"Liquidation Loss Amount" means, with respect to any liquidated
Revolving Credit Line Loan, the unrecovered Principal Balance thereof at the end
of the Collection Period in which such Revolving Credit Line Loan became a
liquidated Revolving Credit Line Loan, after giving effect to the Liquidation
Proceeds in connection therewith.
INTEREST
Note Rate. Interest will accrue on the Note Balance of the Notes (i) at
the per annum rate (the "Note Rate") equal to ___% per annum from the Closing
Date to the first Distribution Date and (ii) thereafter, from and including the
preceding Distribution Date to but excluding such current Distribution Date
(each, an "Accrual Period") at [a floating rate equal to LIBOR plus ___%]
[___%]. [Interest will be calculated on the basis of the actual number of days
in each Accrual Period divided by 360.] A failure to pay interest on any Notes
on any Distribution Date that continues for five days will constitute an Event
of Default under the Indenture.
Pass-Through Rate. Interest will accrue on the unpaid Certificate
Balance of the Certificates (i) at the per annum rate (the "Pass-Through Rate")
equal to ___% per annum from the Closing Date to the first Distribution Date and
(ii) thereafter, for each Accrual Period at [a floating rate equal to LIBOR plus
___%] [___%]. [Interest will be calculated on the basis of the actual number of
days in each Accrual Period divided by 360.] A failure to pay interest on any
Certificates on any Distribution Date that continues for five days constitutes
an Event of Default under the Trust Agreement.
OPTIONAL TERMINATION
The Trust will terminate on the Distribution Date following the earlier
of (i) ____________ and (ii) the final payment or other liquidation of the last
Revolving Credit Line Loan in the Trust. The Revolving Credit Line Loans will be
subject to optional repurchase by the Servicer on any Distribution Date after
the aggregate Principal Balance thereof is reduced to an amount less than or
equal to $_________ ([5]% of the initial aggregate Principal Balance thereof).
The Repurchase Price will be equal to the sum of the Pool Balance and accrued
and unpaid interest thereon at the weighted average of the Loan Rates through
the day preceding the Final Scheduled Distribution Date.
THE INDENTURE
The following summary describes certain terms of the Indenture. Such
summary does not purport to be complete and is subject to, and qualified in its
entirety by reference to, the provisions of the Indenture. Whenever particular
sections or defined terms of the Indenture are referred to, such sections or
defined terms are thereby incorporated herein by reference. See "Description of
the Securities" herein for a summary of certain additional terms of the
Indenture.
REPORTS TO NOTEHOLDERS
The Indenture Trustee will mail to each Noteholder, at such
Noteholder's request, at its address listed on the Note Register maintained with
the Indenture Trustee, a report setting forth certain amounts relating to the
Notes.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
With respect to the Notes, Events of Default under the Indenture will
consist of: (i) a default for five days or more in the payment of any interest
on any Note; (ii) a default in the payment of the principal of or any
installment of the principal of any Note when the same becomes due and payable;
(iii) a default in the observance or performance of any covenant or agreement of
the Trust made in the Indenture and the continuation of any such default for a
period of 30 days after notice thereof is given to the Trust by the Indenture
Trustee or to the Trust and the Indenture Trustee by the Holders of at least 25%
in aggregate principal amount of the Notes then outstanding; (iv) any
representation or warranty made by the Trust in the Indenture or in any
certificate delivered pursuant thereto or in connection therewith having been
incorrect in any material respect as of the time made, and such breach not
having been cured within 30 days after notice thereof is given to the Trust by
the Indenture Trustee or to the Trust and the Indenture Trustee by the Holders
of at least 25% in aggregate principal amount of Notes then outstanding; or (v)
certain events of bankruptcy, insolvency, receivership or liquidation of the
Trust. [The amount of principal required to be paid to Noteholders under the
Indenture will generally be limited to amounts available to be deposited into
the Collection Account. Therefore, the failure to pay principal of the Notes
generally will not result in the occurrence of an Event of Default until the
Final Scheduled Distribution Date for such Notes.] If there is an Event of
Default with respect to a Note due to late payment or nonpayment of interest due
on such Note, additional interest will accrue on such unpaid interest at the
interest rate on such Note (to the extent lawful) until such interest is paid.
Such additional interest on unpaid interest shall be due at the time such
interest is paid. If there is an Event of Default due to late payment or
nonpayment of principal of a Note, interest will continue to accrue on such
principal at the interest rate on the Note until such principal is paid. If an
Event of Default should occur and be continuing with respect to the Notes, the
Indenture Trustee or the Holders of a majority in aggregate principal amount of
Notes then outstanding may declare the principal of such Notes to be immediately
due and payable. Such declaration may, under certain circumstances, be rescinded
by the Holders of a majority in aggregate principal amount of the Notes then
outstanding. If the Notes are due and payable following an Event of Default with
respect thereto, the Indenture Trustee may institute proceedings to collect
amounts due, foreclose on Trust property or exercise remedies as a secured
party. If an Event of Default occurs and is continuing with respect to the
Notes, the Indenture Trustee will be under no obligation to exercise any of the
rights or powers under the Indenture at the request or direction of any Holders
of the Notes if the Indenture Trustee reasonably believes it will not be
adequately indemnified against the costs, expenses and liabilities that might be
incurred by it in complying with such request. Subject to the provisions for
indemnification and certain limitations contained in the Indenture, the Holders
of a majority in aggregate principal amount of the outstanding Notes will have
the right to direct the time, method and place of conducting any proceeding or
remedy available to the Indenture Trustee, and the Holders of a majority in
aggregate principal amount of the Notes then outstanding 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 Holders
of the outstanding Notes. No Noteholder will have the right to institute any
proceeding with respect to the Indenture, unless (i) such Noteholder previously
has given the Indenture Trustee written notice of a continuing Event of Default,
(ii) the Holders of not less than 25% in aggregate principal amount of the
outstanding Notes have made written request to the Indenture Trustee to
institute such proceeding in its own name as Indenture Trustee, (iii) such
Noteholder or Noteholders have offered the Indenture Trustee reasonable
indemnity, (iv) the Indenture Trustee has for 60 days failed to institute such
proceeding and (v) no direction inconsistent with such written request has been
given to the Indenture Trustee during the 60-day period by the Holders of a
majority in aggregate principal amount of the Notes. In addition, the Indenture
Trustee and the Noteholders, by accepting the Notes, will covenant that they
will not at any time institute against the Trust any bankruptcy, reorganization
or other proceeding under any federal or state bankruptcy or similar law. With
respect to the Trust, neither the Indenture Trustee or the Owner Trustee in
their respective individual capacities, any Holder of a Certificate representing
an ownership interest in the Trust nor any of their respective owners,
beneficiaries, agents, officers, directors, employees, affiliates, successors or
assigns will, in the absence of an express agreement to the contrary, be
personally liable for the payment of the principal of or interest on the Notes
or for the agreements of the Trust contained in the Indenture.
CERTAIN COVENANTS
The Indenture will provide that the Trust may not consolidate with or
merge into any other entity unless (i) the entity formed by or surviving such
consolidation or merger is organized under the laws of the United States, any
state or the District of Columbia, (ii) such entity expressly assumes the
Trust's obligation to make due and punctual payments upon the Notes and the
performance or observance of any agreement and covenant of the Trust under the
Indenture, (iii) no Event of Default shall have occurred and be continuing
immediately after such merger or consolidation, (iv) the Trust has been advised
that the ratings of the Securities then in effect would not be reduced or
withdrawn by any Rating Agency as a result of such merger or consolidation and
(v) the Trust has received an opinion of counsel to the effect that such
consolidation or merger would have no material adverse tax consequence to the
Trust or to any Holder. The Trust will not, among other things, (i) except as
expressly permitted by the Indenture, sell, transfer, exchange or otherwise
dispose of any of the assets of the Trust, (ii) claim any credit on or make any
deduction from the principal and interest payable in respect of the Notes (other
than amounts withheld under the Code or applicable state law) or assert any
claim against any present or former Noteholder because of the payment of taxes
levied or assessed upon the Trust, (iii) dissolve or liquidate in whole or in
part, (iv) permit the validity or effectiveness of the Indenture to be impaired
or permit any Person to be released from any covenants or obligations with
respect to the Notes under the Indenture except as may be expressly permitted
thereby or (v) permit any lien, charge, excise, claim, security interest,
mortgage or other encumbrance to be created on or extend to or otherwise arise
upon or burden the assets of the Trust or any part thereof, or any interest
therein or the proceeds thereof. The Trust may not engage in any activity other
than as specified under "The Trust" herein. The Trust will not incur, assume or
guarantee any indebtedness other than indebtedness incurred pursuant to the
Notes and the Indenture.
ANNUAL COMPLIANCE STATEMENT
The Trust will be required to file annually with the Indenture Trustee
a written statement as to the fulfillment of its obligations under the
Indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT
The Indenture Trustee will be required to mail each year to all
Noteholders a report relating to any change in its eligibility and qualification
to continue as Indenture Trustee under the Indenture, any amounts advanced by it
under the Indenture, the amount, interest rate and maturity date of any
indebtedness owing by the Trust to the Indenture Trustee in its individual
capacity, any change in the property and funds physically held by the Indenture
Trustee as such and any action taken by it that materially affects the Notes and
that has not been previously reported, but if no such changes have occurred,
then no report shall be required.
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture will be discharged with respect to the collateral
securing the Notes upon the delivery to the Indenture Trustee for cancellation
of all Notes or, with certain limitations, upon deposit with the Indenture
Trustee of funds sufficient for the payment in full of all Notes.
MODIFICATION OF INDENTURE
With the consent of the Holders of a majority in aggregate principal
amount of the Notes then outstanding, the Trust and the Indenture Trustee may
execute a supplemental indenture to add provisions to, change in any manner or
eliminate any provisions of, the Indenture, or modify (except as provided below)
in any manner the rights of the Noteholders. Without the consent of the Holder
of each outstanding Note affected thereby, however, no supplemental indenture
may: (i) change the due date of any installment of principal of or interest on
any Note or reduce the principal amount thereof, the interest rate specified
thereon or the redemption price with respect thereto or change any place of
payment where or the coin or currency in which any Note or any interest thereon
is payable; (ii) impair the right to institute suit for the enforcement of
certain provisions of the Indenture regarding payment; (iii) reduce the
percentage of the aggregate amount of the outstanding Notes, the consent of the
Holders of which is required for any supplemental indenture or the consent of
the Holders of which is required for any waiver of compliance with certain
provisions of the Indenture or of certain defaults thereunder and their
consequences as provided for in the Indenture; (iv) modify or alter the
provisions of the Indenture regarding the voting of Notes held by the Trust, the
Depositor or an affiliate thereof; (v) decrease the percentage of the aggregate
principal amount of Notes required to amend the sections of the Indenture that
specify the applicable percentage of aggregate principal amount of the Notes
necessary to amend the Indenture or certain other related agreements; or (vi)
permit the creation of any lien ranking prior to or on a parity with the lien of
the Indenture with respect to any of the collateral for the Notes or, except as
otherwise permitted or contemplated in the Indenture, terminate the lien of the
Indenture on any such collateral or deprive the Holder of any Note of the
security afforded by the lien of the Indenture. The Trust and the Indenture
Trustee may also enter into supplemental indentures without obtaining the
consent of the Noteholders, for the purpose of, among other things, adding any
provisions to or changing in any manner or eliminating any of the provisions of
the Indenture or modifying in any manner the rights of the Noteholders;
provided, that such action will not materially and adversely affect the
interests of any Noteholder.
VOTING RIGHTS
At all times, the voting rights of the Noteholders under the Indenture
will be allocated among the Notes pro rata in accordance with their outstanding
Note Balances.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE AND THE DEPOSITOR
Neither the Depositor, the Indenture Trustee nor any director, officer
or employee of the Depositor or the Indenture Trustee will be under any
liability to the Trust or the related Noteholders for any action taken or for
refraining from the taking of any action in good faith pursuant to the Indenture
or for errors in judgment; provided, however, that none of the Indenture
Trustee, the Depositor or any director, officer or employee thereof will be
protected against any liability that would otherwise be imposed by reason of
willful malfeasance, bad faith or negligence in the performance of duties or by
reason of reckless disregard of obligations and duties under the Indenture.
Subject to certain limitations set forth in the Indenture, the Indenture Trustee
and any director, officer, employee or agent of the Indenture Trustee will be
indemnified by the Trust and held harmless against any loss, liability or
expense incurred in connection with investigating, preparing to defend or
defending any legal action, commenced or threatened, relating to the Indenture
other than any loss, liability or expense incurred by reason of willful
malfeasance, bad faith or gross negligence in the performance of its duties
under the Indenture or by reason of reckless disregard of its obligations and
duties under the Indenture. Any such indemnification by the Trust will reduce
the amount distributable to the Noteholders. All Persons into which the
Indenture Trustee may be merged or with which it may be consolidated or any
Person resulting from such merger or consolidation shall be the successor of the
Indenture Trustee under the Indenture.
THE TRUST AGREEMENT
The following summary describes certain terms of the Trust Agreement.
Such summary does not purport to be complete and is subject to, and qualified in
its entirety by reference to, the provisions of the Trust Agreement. Whenever
particular sections or defined terms of the Trust Agreement are referred to,
such sections or defined terms are thereby incorporated herein by reference. See
"Description of the Securities" herein for a summary of certain additional terms
of the Trust Agreement.
REPORTS To HOLDERS
Concurrently with each distribution to the Certificateholders, the
Servicer will forward to the Owner Trustee for mailing to such Certificateholder
a statement setting forth:
(i) the amount of interest included in such distribution and
the related Pass-Through Rate;
(ii) the amount, if any, of overdue accrued interest included
in such distribution (and the amount of interest thereon);
(iii) the amount, if any, of the remaining overdue accrued
interest after giving effect to such distribution;
(iv) the amount, if any, of principal included in such
distribution;
(v) the amount, if any, of the reimbursement of previous
Liquidation Loss Amounts included in such distribution;
(vi) the amount, if any, of the aggregate unreimbursed
Liquidation Loss Amounts after giving effect to such distribution;
(vii) the Servicing Fee for such Distribution Date;
(viii) the Pool Balance as of the end of the preceding
Collection Period;
(ix) the number and aggregate Principal Balances of the
Revolving Credit Line 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 Collection Period; and
(x) the book value of any real estate acquired by the Trust
through foreclosure or deed in lieu of foreclosure.
In the case of information furnished pursuant to clauses (iii), (iv)
and (v) 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 Servicer will
be required to forward to the Owner Trustee a statement containing the
information set forth in clauses (iii) and (viii) above aggregated for such
calendar year.
AMENDMENT
The Trust Agreement may be amended by the Depositor and the Owner
Trustee without consent of the Certificateholders to cure any ambiguity, to
correct or supplement any provision or for the purpose of adding any provisions
to or changing in any manner or eliminating any of the provisions thereof or of
modifying in any manner the rights of such Certificateholders; provided,
however, that such action will not, as evidenced by an opinion of counsel
satisfactory to the Owner Trustee, adversely affect in any material respect the
interests of any Certificateholders. The Trust Agreement may also be amended by
the Depositor and the Owner Trustee with the consent of the Holders of
Certificates evidencing at least a majority in aggregate principal amount of
then outstanding Certificates and Certificateholders owning Voting Interests
aggregating not less than a majority of the aggregate Voting Interests for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of the Trust Agreement or modifying in any manner the rights
of the Holders.
INSOLVENcY EVENT
"Insolvency Event" means, with respect to any Person, any of the
following events or actions: certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings with respect to
such Person; and certain actions by such Person indicating its insolvency,
reorganization pursuant to bankruptcy proceedings or inability to pay its
obligations. Upon termination of the Trust, the Owner Trustee shall direct the
Indenture Trustee promptly to sell the assets of the Trust (other than the
Collection Account) in a commercially reasonable manner and on commercially
reasonable terms. The proceeds from any such sale, disposition or liquidation of
the Revolving Credit Line Loans will be treated as Collections on the Revolving
Credit Line Loans and will be deposited into the Collection Account. The Trust
Agreement will provide that the Owner Trustee does not have the power to
commence a voluntary proceeding in bankruptcy with respect to the Trust without
the unanimous prior approval of all Holders (including the Depositor) and the
delivery to the Owner Trustee by each Holder (including the Depositor) of a
certificate certifying that the Holder reasonably believes that the Trust is
insolvent.
LIABILITY OF tHE DEPOSITOR
Under the Trust Agreement, the Depositor will agree to be liable
directly to an injured party for the entire amount of any losses, claims,
damages or liabilities (other than those incurred by a Holder in the capacity of
an investor with respect to the Trust) arising out of or based on the
arrangement created by the Trust Agreement.
VOTING InTERESTS
As of any date, the aggregate Certificate Balance of all Certificates
then outstanding will constitute the voting interest of the Issuer (the "Voting
Interest"), except that, for purposes of determining Voting Interests,
Certificates owned by the Issuer or its affiliates (other than the Depositor)
will be disregarded and deemed not to be outstanding; and except that, in
determining whether the Owner Trustee is protected in relying upon any such
request, demand, authorization, direction, notice, consent or waiver, only
Certificates the Owner Trustee knows to be so owned will be so disregarded.
Certificates so owned that have been pledged in good faith may be regarded as
outstanding if the pledgee thereof establishes to the satisfaction of the Owner
Trustee the pledgor's right so to act with respect to such Certificates and that
the pledgee is not the Issuer or as affiliate thereof.
CERTAIN MATTERS REGARDING THE OWNER TRUSTEE AND THE DEPOSITOR
Neither the Depositor, the Owner Trustee nor any director, officer or
employee of the Depositor or the Owner Trustee will be under any liability to
the Trust or the related Holders for any action taken or for refraining from the
taking of any action in good faith pursuant to the Trust Agreement or for errors
in judgment; provided, however, that none of the Owner Trustee, the Depositor or
any director, officer or employee thereof will be protected against any
liability that would otherwise be imposed by reason of willful malfeasance, bad
faith or negligence in the performance of duties or by reason of reckless
disregard of obligations and duties under the Trust Agreement. Subject to
certain limitations set forth in the Trust Agreement, the Owner Trustee and any
director, officer, employee or agent of the Owner Trustee shall be indemnified
by the Trust and held harmless against any loss, liability or expense incurred
in connection with investigating, preparing to defend or defending any legal
action, commenced or threatened, relating to the Trust Agreement other than any
loss, liability or expense incurred by reason of willful malfeasance, bad faith
or gross negligence in the performance of its duties under such Trust Agreement
or by reason of reckless disregard of its obligations and duties under the Trust
Agreement. Any such indemnification by the Trust will reduce the amount
distributable to the Holders. All Persons into which the Owner Trustee may be
merged or with which it may be consolidated or any Person resulting from such
merger or consolidation shall be the successor of the Owner Trustee under the
Trust Agreement.
ADMINISTRATION AGREEMENT
The _______________, in its capacity as Administrator, will enter into
the Administration Agreement with the Trust and the Owner Trustee pursuant to
which the Administrator will agree, to the extent provided in such
Administration Agreement, to provide notices and perform other administrative
obligations required by the Indenture and the Trust Agreement.
THE INDENTURE TRUSTEE
________________________ is the Indenture Trustee under the Indenture.
The mailing address of the Indenture Trustee is ________________,
Attention:_____________________.
THE OWNER TRUSTEE
__________________________ is the Owner Trustee under the Trust
Agreement. The mailing address of the Owner Trustee is _________________,
Attention: ____________________.
USE OF PROCEEDS
The net proceeds from the sale of the Securities will be applied by the
Depositor towards the purchase price of the Revolving Credit Line Loans.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Tax Counsel, for federal income tax purposes, the
Notes will be characterized as indebtedness, and the Trust will not be
characterized as an association (or a publicly-traded partnership) taxable as a
corporation. Each Holder of a Note, by its acceptance of a Note, will agree to
treat such Note as indebtedness for federal, state and local income and
franchise tax purposes.
Prospective purchasers should see "Certain Federal Income Tax
Considerations" in the Prospectus for a discussion of the application of certain
federal income and state tax laws to the Trust and the Securities.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Certain Federal Income Tax Considerations" herein and in the Prospectus,
potential investors should consider the state income tax consequences of the
acquisition, ownership, and disposition of the Securities offered hereunder.
State income tax law may differ substantially from the corresponding federal tax
law, and the tax considerations set forth herein and in the Prospectus do not
purport to describe any aspect of the income tax laws of any state. Therefore,
potential investors should consult their own tax advisors with respect to the
various state tax consequences of investments in the Securities offered
hereunder. See "State Tax Considerations" in the Prospectus.
ERISA CONSIDERATIONS
PROHIBITED TRANSACTIONS
Section 406 of ERISA prohibits parties in interest with respect to a
Plan from engaging in certain transactions (including loans) involving a Plan
and its assets unless a statutory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes certain excise taxes (or, in some
cases, a civil penalty may be assessed pursuant to Section 502(i) of ERISA) on
parties in interest that engage in nonexempt prohibited transactions.
PLAN ASSET REGULATION
The United States Department of Labor ("Labor") has issued final
regulations concerning the definition of what constitutes the assets of a Plan
for purposes of ERISA and the prohibited transaction provisions of the Code (the
"Plan Asset Regulation"). The Plan Asset Regulation describes the circumstances
under which the assets of an entity in which a Plan invests will be considered
to be "plan assets" such that any Person who exercises control over such assets
would be subject to ERISA's fiduciary standards. Under the Plan Asset
Regulation, generally when a Plan invests in another entity, the Plan's assets
do not include, solely by reason of such investment, any of the underlying
assets of the entity. However, the Plan Asset Regulation provides that, if a
Plan acquires an "equity interest" in an entity that is neither a
"publicly-offered security" (as defined therein) nor a security issued by an
investment company registered under the Investment Company Act of 1940, the
assets of the entity will be treated as assets of the Plan investor unless
certain exceptions apply. If the [Notes/Certificates] were deemed to be equity
interests and no statutory, regulatory or administrative exemption were to
apply, the Trust could be considered to hold plan assets by reason of a Plan's
investment in the [Notes] [Certificates]. Such plan assets would include an
undivided interest in any assets held by the Trust. In such an event, the Owner
Trustee and other Persons, in providing services with respect to the Trust's
assets, may be parties in interest with respect to such Plans, subject to the
fiduciary responsibility provisions of Title I of ERISA, including the
prohibited transaction provisions of Section 406 of ERISA and Section 4975 of
the Code with respect to transactions involving the Trust's assets. [Under the
Plan Asset Regulation, the term "equity interest" is defined as any interest in
an entity other than an instrument that is treated as indebtedness under
"applicable local law" and that has no "substantial equity features." If the
Notes constitute debt without substantial equity features for purposes of the
Plan Assets Regulation, then a Plan's acquisition of Notes will not cause the
assets of the Issuer to be deemed assets of such Plan for purposes of sections
404 and 406 of ERISA or section 4975 of the Code, and the Plan's interest will
be deemed solely to include an interest in such Notes. Conversely, if the Notes
do not constitute debt without substantial equity features for purposes of the
Plan Assets Regulation, then a Plan's acquisition of Notes may cause the assets
of the Issuer to be deemed to be assets of such Plan for purposes of sections
404 and 406 of ERISA and section 4975 of the Code. In such event, ERISA's
fiduciary provisions (including the prohibited transaction restrictions of
section 406 of ERISA) and section 4975 of the Code might apply to transactions
involving the assets of the Issuer. Although the Notes generally will be treated
as debt for federal income tax purposes, no assurance can be given that such
Notes will or will not constitute debt without substantial equity features for
purposes of the Plan Assets Regulations. If the Notes were deemed to be equity
interests in the Trust and no statutory, regulatory or administrative exemption
were to apply, the Trust could be considered to hold plan assets by reason of a
Plan's investment in the Notes.]
THE UNDERWRITERS' EXEMPTION
The Representative believes that the Underwriter Exemption will apply
to the acquisition and holding of the [Notes/Certificates] by Plans and that all
conditions of the Underwriter Exemption other than those within the control of
the investors will be met. See "ERISA Considerations" in the Prospectus.
REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any
[Notes/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 [Notes/Certificates], a fiduciary of a Plan should
make its own determination as to whether the Trust, as obligor on the
[Notes/Certificates], is a party in interest with respect to the Plan, the
availability of the exemptive relief provided in the Plan Asset Regulations and
the availability of any other prohibited transaction exemptions. Purchasers
should analyze whether the decision may have an impact with respect to purchases
of the [Notes/Certificates].
LEGAL INVESTMENT CONSIDERATIONS
The Securities will not constitute "mortgage related securities" for
purposes of SMMEA, because not all of the Mortgages securing the Revolving
Credit Line Loans are 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 Securities. The
appropriate characterization of the Securities under various legal investment
restrictions, and thus the ability of investors subject to these restrictions to
purchase Securities, may be subject to significant interpretive uncertainties.
All investors whose investment authority is subject to legal restrictions should
consult their own legal advisors to determine whether, and to what extent, the
Securities will constitute legal investments for them. The Depositor makes no
representation as to the proper characterization of the Securities for legal
investment or financial institution regulatory purposes or as to the ability of
particular investors to purchase Securities under applicable legal investment
restrictions. The uncertainties described above and any unfavorable future
determinations concerning legal investment or financial institution regulatory
characteristics of the Securities may adversely affect the liquidity of the
Securities.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Depositor has agreed to sell to the Underwriters, and the
Underwriters have agreed to purchase from the Depositor, the Securities. The
Underwriters are obligated to purchase all the Securities offered hereby if any
are purchased. Distribution of the Securities will be made by the Underwriters
from time to time in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. Proceeds to the Depositor are expected to be
$_________ from the sale of the Notes and $__________ from the sale of the
Certificates, before deducting expenses payable by the Depositor of $_________.
In connection with the purchase and sale of the Securities, the Underwriters may
be deemed to have received compensation from the Depositor in the form of
underwriting discounts, concessions or commissions.
In connection with the offering of the Securities, the Underwriters may
engage in transactions that stabilize, maintain or otherwise affect the price of
any Class of Securities. Specifically, the Underwriters may overallot the
offering, creating a syndicate short position. The Underwriters may bid for an
purchase the Securities in the open market to cover syndicate short positions.
In addition, the Underwriters may bid for and purchase the Securities in the
open market to stabilize the price of the Securities. These activities may
stabilize of maintain the market price of the Securities above independent
market levels. The Underwriters are not required to engage in these activities,
and may end these activities at any time.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriters against certain liabilities, including liabilities under the
Securities Act, or contribute payments the Underwriters may be required to make
in respect thereof. [Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to directors, officers or persons
controlling the registrant pursuant to the foregoing provisions, the registrant
has been informed that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.] The Depositor is an affiliate of the
Representative.
LEGAL MATTERS
Certain legal matters with respect to the Securities will be passed
upon for the Depositor by Brown & Wood LLP, New York, New York and for the
Representative by Brown & Wood LLP, New York, New York.
RATINGS
It is a condition to issuance that each Class of the Notes be rated at
least ____ by _______ and ____ by ________. It is a condition to issuance that
the Certificates be rated at least ____ by _______ and ____ by ________. A
securities rating addresses the likelihood of the receipt by Holders of
distributions on the Revolving Credit Line Loans. The rating takes into
consideration the structural, legal and tax aspects associated with the
Certificates and the Notes. The ratings on the Securities do not, however,
constitute statements regarding the possibility that Holders might realize a
lower than anticipated yield. 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.
The ratings assigned by Duff & Phelps Credit Rating Co. ("Duff &
Phelps") to securities address the likelihood of the receipt by the holders of
such securities of all distributions to which they are entitled under the
transaction structure. Duff & Phelps' ratings reflect its analysis of the
riskiness of the related mortgages and its analysis of the structure of the
transaction as set forth in the operative documents. Duff & Phelps' ratings do
not address the effect on yield on the securities attributable to prepayments or
recoveries on the underlying assets.
The ratings assigned by Fitch IBCA, Inc. ("Fitch") to securities
address the likelihood of the receipt of all distributions on the assets by the
related holders of securities under the agreements pursuant to which such
securities are issued. Fitch's ratings take into consideration the credit
quality of the related pool, including any credit support providers, the
structural and legal aspects associated with such securities, and the extent to
which the payment stream on the pool is adequate to make the payments required
by such securities. Fitch's ratings on such securities do not, however,
constitute a statement regarding frequency of prepayments of the assets.
The ratings assigned by Moody's Investors Service, Inc. ("Moody's") to
securities address the likelihood of the receipt by holders of securities of all
distributions to which such holders are entitled. Moody's ratings on securities
do not represent any assessment of the likelihood or rate of principal
prepayments. The ratings do not address the possibility that holders of
securities might suffer a lower than anticipated yield as a result of
prepayments.
The ratings assigned by Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. ("Standard & Poor's"), to securities address the
likelihood of the receipt of all distributions on the assets by the related
holders of securities under the agreements pursuant to which such securities are
issued. Standard & Poor's ratings take into consideration the credit quality of
the related pool, including any credit support providers, structural and legal
aspects associated with such securities, and the extent to which the payment
stream on such pool is adequate to make payments required by such securities.
Standard & Poor's ratings on such certificates do not, however, constitute a
statement regarding frequency of prepayments on the related assets. The letter
"r" attached to a Standard & Poor's rating highlights derivative, hybrid and
certain other types of securities that Standard & Poor's believes may experience
high volatility or high variability in expected returns due to non-credit risks.
The absence of an "r" symbol in the rating of a class of securities should not
be taken as an indication that such securities will exhibit no volatility or
variability in total return.
<TABLE>
<CAPTION>
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<S> <C>
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 DEPOSITOR 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.
BEAR STEARNS HOME EQUITY LOAN
TRUST 199__-__
TABLE OF CONTENTS $______ [FIXED] [FLOATING] RATE
ASSET-BACKED NOTES
Page
$______ [FIXED] [FLOATING] RATE
PROSPECTUS SUPPLEMENT ASSET-BACKED CERTIFICATES
Summary...................................................... S-3
Risk Factors..................................................S-10
The Trust.....................................................S-11
The [Letter of Credit] [Surety Bond] Issuer...................S-12
The Home Equity Lending Program...............................S-12
Servicing of the Revolving Credit Line Loans..................S-14
Description of the Revolving Credit Line Loans................S-16
Description of the Servicing Agreement........................S-18
Description of the Securities.................................S-20
The Indenture.................................................S-21
The Trust Agreement...........................................S-24 BEAR STEARNS ASSET BACKED SECURITIES, INC.
Administration Agreement......................................S-25 (DEPOSITOR)
The Indenture Trustee.........................................S-26
The Owner Trustee.............................................S-26
Use of Proceeds...............................................S-26
Certain Federal Income Tax Considerations.....................S-26
State Tax Considerations......................................S-27
ERISA Considerations..........................................S-27 PROSPECTUS SUPPLEMENT
Legal Investment Considerations...............................S-28 _______, 199__
Underwriting..................................................S-29
Legal Matters.................................................S-29
Ratings.......................................................S-29
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...................................20
The Trust Funds.................................................24
Enhancement.....................................................31
Servicing of Loans..............................................33
The Agreements..................................................39
Certain Legal Aspects of the Loans..............................47
The Depositor...................................................57
Use of Proceeds.................................................57
Certain Federal Income Tax Considerations.......................57
State Tax Considerations........................................77
FASIT Securities................................................77
ERISA Considerations............................................80
Legal Matters...................................................84
Financial Information...........................................84
Rating..........................................................84
Legal Investment................................................85
Plan of Distribution............................................85
Glossary of Terms...............................................86
=================================================================== ==============================================================
</TABLE>
PROSPECTUS
ASSET-BACKED CERTIFICATES
ASSET-BACKED NOTES
(Issuable in Series)
BEAR STEARNS ASSET BACKED SECURITIES, INC.
(DEPOSITOR)
Bear Stearns Asset Backed Securities, Inc. (the "Depositor") may offer from
time to time under this Prospectus and related Prospectus Supplements the
Asset-Backed Certificates (the "Certificates") and the Asset-Backed Notes (the
"Notes" and, together with the Certificates, 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
Servicing 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 (collectively, the "Seller") composed of (a) Primary Assets, which
may include one or more pools of (i) closed-end and/or revolving home equity
loans (the "Mortgage Loans"), secured generally by subordinate liens 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 generally by
subordinate liens 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
accounts 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. (COVER CONTINUED ON
NEXT PAGE)
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF, AND CERTIFICATES OF A GIVEN
SERIES EVIDENCE BENEFICIAL INTERESTS IN, THE RELATED TRUST FUND ONLY AND ARE
NOT GUARANTEED BY ANY GOVERNMENTAL AGENCY OR BY THE DEPOSITOR, THE SEL-
LER, THE TRUSTEES,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" BEGINNING ON PAGE 9 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 REPRE-
SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The Securities offered by this Prospectus and by the related Prospectus
Supplement are offered by Bear, Stearns & Co. Inc. and the other underwriters
set forth in the related Prospectus Supplement, if any, subject to prior sale,
to withdrawal, cancellation or modification of the offer without notice, to
delivery to and acceptance by Bear, Stearns & Co. Inc. and the other
underwriters, if any, and certain further conditions. Retain this Prospectus for
future reference. This Prospectus may not be used to consummate sales of the
Securities offered hereby unless accompanied by a Prospectus Supplement.
------------------------
BEAR, STEARNS & CO. INC.
June 4, 1998
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
Each Series of Securities will be issued in one or more classes (each, a
"Class"). Interest on and principal of the Securities of a Series will be
payable on each Distribution Date specified in the related Prospectus Supplement
at the times, at the rates, in the amounts and in the order of priority set
forth in the related Prospectus Supplement.
If a Series includes multiple Classes, such Classes may vary with respect
to the amount, percentage and timing of distributions of principal, interest or
both and one or more Classes may be subordinated to other Classes with respect
to distributions of principal, interest or both as described herein and in the
related Prospectus Supplement. If so specified in the related Prospectus
Supplement, the Primary Assets and other assets comprising the Trust Fund may be
divided into one or more Asset Groups and each Class of the related Series will
evidence beneficial ownership of the corresponding Asset Group, as applicable.
The rate of reduction of the aggregate principal balance of each Class of a
Series may depend upon the rate of payment (including prepayments) with respect
to the Loans or, in the case of Private Securities, Underlying Loans, as
applicable. In such a case, 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.
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Securities to be offered
hereunder will, among other things, set forth with respect to such Series of
Securities: (i) the aggregate principal amount, interest rate and authorized
denominations of each Class of such Securities; (ii) certain information
concerning the Primary Assets, the Seller and any Servicer; (iii) the terms of
any Enhancement with respect to such Series; (iv) the terms of any insurance
related to the Primary Assets; (v) information concerning any other assets in
the related Trust Fund, including any Reserve Fund; (vi) the Final Scheduled
Distribution Date of each Class of such Securities; (vii) the method to be used
to calculate the amount of principal required to be applied to the Securities of
each Class of such Series on each Distribution Date, the timing of the
application of principal and the order of priority of the application of such
principal to the respective Classes and the allocation of principal to be so
applied; (viii) the Distribution Dates and any Assumed Reinvestment Rate; (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 assets included in 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 related Agreements and
will not receive such reports directly with respect to 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 (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended (the "Securities Act"), 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, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and Northeast Regional
Office, 7 World Trade Center, Suite 1300, New York, New York 10048. The
Commission also maintains a Web site at http://www.sec.gov from which such
Registration Statement and exhibits may be obtained.
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 "Exchange Act"). The Depositor intends to cause each Trust Fund
to suspend filing such reports if and when such reports are no longer required
under the Exchange 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.
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 Exchange Act after the date of this
Prospectus and prior to the termination of any offering of the Securities issued
by such Trust Fund shall be deemed to be incorporated by reference in this
Prospectus and to be a part of this Prospectus from the date of the filing of
such documents. Any statement contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for all purposes of this Prospectus to the extent that a statement contained
herein or in the accompanying Prospectus Supplement or in any other subsequently
filed document that also is or is deemed to be incorporated by reference
modifies or replaces such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Depositor on behalf of any Trust Fund will provide without charge to
each person to whom this Prospectus is delivered, on the written or oral request
of such person, a copy of any or all of the documents referred to above that
have been or may be incorporated by reference in this Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
this Prospectus incorporates). Such requests should be directed to the Depositor
at 245 Park Avenue, New York, New York 10167.
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each Series of Securities contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of Securities of such Series. Capitalized terms used and not otherwise
defined herein or in the related Prospectus Supplement shall have the meanings
set forth in the "Glossary of Terms" herein.
SECURITIES OFFERED............... Asset-Backed Certificates (the
"Certificates") and/or Asset-Backed Notes
(the "Notes"). Certificates are issuable from
time to time in Series pursuant to a Pooling
and Servicing Agreement or Trust Agreement,
as the case may be. 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 Subordinated 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., the Depositor,
the Servicer, any Trustee, the Seller or any
affiliate of the foregoing 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 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, allocated among the Classes of
such Series in the order and amounts and
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 (i) each Class of Notes is the
date not later than which principal of the
Notes will be fully paid and (ii) 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 that 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, to the extent
described in the related Prospectus
Supplement, depend upon the rate of payment
(including prepayments, liquidations due to
default, the receipt of proceeds from
casualty Insurance Policies and repurchases)
of the Loans or Underlying Loans relating to
the Private Securities, as applicable, in the
related Trust Fund. Unless otherwise
specified in the related Prospectus
Supplement, the actual final Distribution
Date of any Security is likely to occur
earlier and may occur substantially earlier
or may occur later than its Final Scheduled
Distribution Date as a result of the
application of prepayments to the reduction
of the principal balances of the Securities
and as a result of defaults on the Primary
Assets. The rate of payments on the Loans or
Underlying Loans relating to the Private
Securities, as applicable, in the Trust Fund
for a Series will depend on a variety of
factors, including certain characteristics of
such Loans or Underlying Loans, as
applicable, and the prevailing level of
interest rates from time to time, as well as
on a variety of economic, demographic, tax,
legal, social and other factors. No assurance
can be given as to the actual prepayment
experience with respect to a Series. See
"Risk Factors--Yield May Vary" and
"Description of the Securities--Weighted
Average Life of the Securities" herein.
OPTIONAL TERMINATION............. One or more Classes of Securities of any
Series may be redeemed or repurchased in
whole or in part, at the Depositor's or the
Servicer's option, at such time and under the
circumstances specified in the related
Prospectus Supplement, at the price set forth
therein. If so specified in the related
Prospectus Supplement for a Series of
Securities, the Depositor, the Servicer or
such other entity that is specified in the
related Prospectus Supplement may, at its
option, cause an early termination of the
related Trust Fund by repurchasing all of the
Primary Assets remaining in the Trust Fund on
or after a specified date, or on or after
such time as the aggregate principal balance
of the Securities of the Series or the
Primary Assets relating 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 related 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 (the
"FHA") or partially guaranteed by the
Veterans Administration (the "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 "Closed-End
Loans") and/or revolving home equity loans or
certain balances therein (the "Revolving
Credit Line Loans" and, together with the
Closed-End 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." The 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 the
related Mortgaged Property, which may be
subordinated to one or more senior liens on
the Mortgaged Property as described in the
related Prospectus Supplement. As specified
in the related Prospectus Supplement, Home
Improvement Contracts may be unsecured or
secured by purchase money security interests
in the Home Improvements financed thereby.
The Mortgaged Properties and the Home
Improvements are collectively referred to
herein as the "Properties."
The related Prospectus Supplement will
describe certain characteristics of the Loans
for a Series including, without limitation
and to the extent relevant: (i) the aggregate
unpaid Principal Balance of the Loans (or the
aggregate unpaid Principal Balance included
in the Trust Fund for the related Series);
(ii) 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; (iii) the range and the average
outstanding Principal Balance of the Loans;
(iv) 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; (v)
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; (vi)
the percentage (by Principal Balance as of
the Cut-off Date) of Loans that accrue
interest at adjustable or fixed interest
rates; (vii) any enhancement relating to the
Loans; (viii) the percentage (by Principal
Balance as of the Cut-off Date) of Loans that
are secured by Mortgaged Properties or Home
Improvements, or that are unsecured; (ix) the
geographic distribution of any Mortgaged
Properties securing the Loans; (x) the use
and type of each Property securing a Loan;
(xi) the lien priority of the Loans; (xii)
the delinquency status and year of
origination of the Loans; (xiii) whether such
Loans are Closed-End Loans and/or Revolving
Credit Line Loans; and (xiv) in the case of
Revolving Credit Line Loans, the general
payment and credit line features of such
Loans and other pertinent features thereof.
(2) PRIVATE SECURITIES....... Primary Assets for a Series may consist, in
whole or in part, of Private Securities,
which include (i) pass-through certificates
representing beneficial interests in loans of
the type that would otherwise be eligible to
be Loans (the "Underlying Loans") or (ii)
collateralized obligations secured by
Underlying Loans. Such pass-through
certificates or collateralized obligations
will have previously been (i) offered and
distributed to the public pursuant to an
effective registration statement or (ii)
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, that a period of three years has
elapsed since the later of the date such
securities were acquired from the related
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 related PS Trustee as registered owner of
such Private Securities.
The related Prospectus Supplement for a
Series will specify (on an approximate basis,
as described above, and as of the date
specified in the related Prospectus
Supplement), to the extent relevant and to
the extent such information is reasonably
available to the Depositor and the Depositor
reasonably believes such information to be
reliable: (i) the aggregate approximate
principal amount and type of any Private
Securities to be included in the Trust Fund
for such Series; (ii) certain characteristics
of the Underlying Loans, including (a) the
payment features of such Underlying Loans
(i.e., whether they are Closed-End Loans
and/or Revolving Credit Line Loans, 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 that 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 in
respect of the Primary Assets for a Series
will be remitted directly to an account
(each, a "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 applicable 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
(each, a "Distribution Account") to be
established for such Series, each in the
manner and at the times specified in the
related Prospectus Supplement. All amounts
deposited into such Distribution Account(s)
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 specified in the related
Prospectus Supplement.
C. PRE-FUNDING AND
CAPITALIZED INTEREST
ACCOUNTS.................. If specified in the related Prospectus
Supplement, a Trust Fund will include one or
more segregated trust accounts (each, a
"Pre-Funding Account") established and
maintained with the Trustee of the Trust Fund
for the related Series (the "Trustee"). 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 into 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 generally will be selected on
the basis of the same criteria as those used
to select the initial Primary Assets, and the
same representations and warranties will be
made with respect thereto. 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 related
Closing Date, a portion of the proceeds of
the sale of the Securities of such Series
will be deposited into the Capitalized
Interest Account and used to fund the excess,
if any, of (i) the sum of (a) the amount of
interest accrued on the Securities of such
Series and (b) 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 (ii) 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 as
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, insurance policy (each, a
"Security Policy") or other form of credit
support (collectively, "Enhancement") in
favor of the applicable 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 (each, a "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
Subordinated Securities. The rights of the
related Subordinated Securityholders 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
Agencies in one or more reserve funds to be
established in the name of the applicable
Trustee (each, a "Reserve Fund"), which will
be used, as specified in such Prospectus
Supplement, by such 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 Agencies, 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 related Prospectus
Supplement, the Depositor and the applicable
Trustee will enter into a guaranteed
investment contract or an investment
agreement (the "Deposit Agreement") pursuant
to which all or a portion of the amounts held
in the Collection Account, the Distribution
Account(s) or in any Reserve Fund will be
invested with the entity specified in such
Prospectus Supplement. Such 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
such 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 of or interest on a Loan will be
made by the Servicer only to the extent
described in the related Prospectus
Supplement. Such advances will be intended to
provide liquidity only and, unless otherwise
specified in the related Prospectus
Supplement, will be reimbursable to the
Servicer from scheduled payments of principal
and interest, late collections, the proceeds
of liquidation of the related Loans or 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 the related
Holder in accordance with such 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 methods regardless of such
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 related 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, such 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 a REMIC
"residual interest" (each, a "Residual
Interest"). A Holder of a Residual Interest
will be required to include in its income its
pro rata share of the taxable income of the
REMIC. In certain circumstances, the Holder
of a Residual Interest may have REMIC taxable
income or tax liability attributable to REMIC
taxable income for a particular period in
excess of cash distributions for such period
or have an after-tax return that is less than
the after-tax return on comparable debt
instruments. In addition, a portion (or, in
some cases, all) of the income from a
Residual Interest (i) may not be subject to
offset by losses from other activities or
investments, (ii) for a Holder that is
subject to tax under the Code on unrelated
business taxable income, may be treated as
unrelated business taxable income and (iii)
for a foreign Holder, may not qualify for
exemption from or reduction of withholding.
In addition, (i) Residual Interests are
subject to transfer restrictions and (ii)
certain transfers of Residual Interests will
not be recognized for federal income tax
purposes. Further, individual Holders are
subject to limitations on the deductibility
of expenses of the REMIC. See "Certain
Federal Income Tax Considerations."
B. NON-REMIC
PASS-THROUGH
SECURITIES................ If so specified in the related Prospectus
Supplement, the Trust Fund for a Series will
be treated as a grantor trust and will not be
classified as an association taxable as a
corporation for federal income tax purposes,
and Holders of Securities of such Series
("Pass-Through Securities") will be treated
as owning directly rights to receive certain
payments of interest or principal, or both,
on the Primary Assets held in the Trust Fund
for such Series. All income with respect to a
Stripped Security will be accounted for as
original issue discount and, unless otherwise
specified in the related Prospectus
Supplement, will be reported by the
applicable 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 Fund as a
partnership in which such Certificateholder
is a partner for federal income and state tax
purposes. Alternative characterizations of
such Trust Fund 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 plan or arrangement subject
to the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), or the
Code should carefully review with its own
legal advisors whether the purchase or
holding of Securities could give rise to a
transaction prohibited or otherwise
impermissible under ERISA or the Code.
Certain Classes of Securities may not be
transferred unless the applicable Trustee and
the Depositor are furnished with a letter of
representation or an opinion of counsel to
the effect that such transfer will not result
in a violation of the prohibited transaction
provisions of ERISA and the Code and will not
subject the applicable Trustee, the Depositor
or the Servicer to additional obligations.
See "Description of the Securities--General"
and "ERISA Considerations."
LEGAL INVESTMENT................. Unless otherwise specified in the related
Prospectus Supplement, Securities of each
Series offered by this Prospectus and the
related Prospectus Supplement will not
constitute "mortgage related securities"
under the Secondary Mortgage Market
Enhancement Act of 1984, as amended
("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 incurred to obtain funds to
acquire such Primary Assets, (iii) to
establish any Reserve Funds described in the
related Prospectus Supplement and (iv) to pay
costs of structuring and issuing such
Securities, including the costs of obtaining
Enhancement, if any. If so specified in the
related Prospectus Supplement, the purchase
of the Primary Assets for a Series will be
effected by an exchange of Securities with
the Seller of such Primary Assets. See "Use
of Proceeds."
RATINGS.......................... It will be a requirement for issuance of any
Series that the Securities offered by this
Prospectus and the related Prospectus
Supplement be rated by at least one Rating
Agency in one of its four highest applicable
rating categories. The rating or ratings
applicable to Securities of each Series
offered hereby and by the related Prospectus
Supplement will be as set forth in the
related Prospectus Supplement. A securities
rating should be evaluated independently of
similar ratings on different types of
securities. A securities rating is not a
recommendation to buy, hold or sell
securities, and does not address the effect
that the rate of prepayments on Loans or
Underlying Loans relating to Private
Securities, as applicable, for a Series may
have on the yield to investors in the
Securities of such Series. See "Risk
Factors--Ratings Are Not Recommendations."
<PAGE>
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 (the "Underwriters") expect to make a secondary market in
the related Securities, but will have 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 or any failure to receive distributions on the Securities. Further, unless
otherwise stated in the related Prospectus Supplement, at the times set forth in
such Prospectus Supplement, certain Primary Assets and/or any balance remaining
in the Collection Account or Distribution Account(s) immediately after making
all payments due on the Securities of such Series and other payments specified
in Securities 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 under the related Indenture (the "Indenture 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 source of funds from which 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."
YIELD MAY VARY; SUBORDINATION. 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 on 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; (iii) the exercise by the party
entitled thereto of any right of optional termination; and (iv) in the case of
Trust Funds comprised of Revolving Credit Line Loans, any provisions in the
related Agreement described in the applicable Prospectus Supplement respecting
any non-amortization, early amortization or scheduled amortization period. 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."
The rights of Subordinated Securityholders to receive distributions to
which they would otherwise be entitled with respect to the Trust Fund will be
subordinate to the rights of the Servicer and the Holders of Senior Securities,
to the extent described in the related Prospectus Supplement. As a result of the
foregoing, investors must be prepared to bear the risk that they may be subject
to delays in payment and may not recover their initial investments in the
Subordinated Securities.
BALLOON PAYMENTS. Certain of the Loans as of the related Cut-off Date may
not be fully amortizing over their terms to maturity, and thus will require
substantial principal payments (i.e., balloon payments) at their stated
maturity. Loans with balloon payments involve a greater degree of risk because
the ability of a borrower to make a balloon payment typically will depend upon
such borrower's ability either to timely refinance the related Loan or to timely
sell the related Property. The ability of a borrower to accomplish either of
these goals will be affected by a number of factors, including the level of
available mortgage rates at the time of sale or refinancing, the borrower's
equity in the related Property, the financial condition of the borrower and tax
laws. Losses on such Loans that are not otherwise covered by the credit
enhancement described in the applicable Prospectus Supplement will be borne by
the Holders of one or more Classes of Securities of the related Series.
PROPERTY VALUES MAY BE INSUFFICIENT. If the Mortgage Loans 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.
RISKS RELATING TO CERTAIN GEOGRAPHIC REGIONS WHERE MORTGAGE LOANS MAY BE
CONCENTRATED. Certain geographic regions of the United States from time to time
will experience weaker regional economic conditions and housing markets, and,
consequently, will experience higher rates of loss and delinquency than will be
experienced on mortgage loans generally. The Mortgage Loans underlying certain
Series of Securities may be concentrated in these regions, and such
concentration may present risk considerations in addition to those generally
present for similar mortgage-backed securities without such concentration.
BOOK-ENTRY REGISTRATION. If Securities are issued in book-entry form, such
registration may reduce the liquidity of such Securities in the secondary
trading market, since investors may be unwilling to purchase Securities for
which they cannot obtain physical certificates. Since transactions in book-entry
Securities can be effected only through the Depository Trust Company ("DTC"),
participating organizations, Financial Intermediaries and certain banks, the
ability of a Holder to pledge a book-entry Security to persons or entities that
do not participate in the DTC system may be limited due to lack of a physical
certificate representing such Securities. Security Owners will not be recognized
as Holders as such term is used in the related Agreement, and Security Owners
will be permitted to exercise the rights of Holders only indirectly through DTC
and its Participants.
In addition, Holders may experience some delay in their receipt of
distributions of principal of and interest on book-entry Securities, since
distributions are required to be forwarded by the applicable Trustee to DTC and
DTC will then be required to credit such distributions to the accounts of
Depository participants, which thereafter will be required to credit them to the
accounts of Holders either directly or indirectly through Financial
Intermediaries.
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 assurance that investors will be
able to reinvest such a prepayment at yields equaling or exceeding the yields on
the related Securities. It is possible that the yield on any such reinvestment
will be lower, and may be significantly lower, than the yield on the related
Securities.
The ability of a Trust Fund to invest in subsequent Loans during the
related Pre-Funding Period will be dependant on the ability of the Seller to
originate or acquire Loans that satisfy the requirements for transfer to the
Trust Fund. The ability of the Seller to originate or acquire such Loans will be
affected by a variety of social and economic factors, including the prevailing
level of market interest rates, unemployment levels and consumer perceptions of
general economic conditions.
Although subsequent Loans must satisfy the characteristics described in the
related Prospectus Supplement and generally must be selected on the basis of the
same criteria as those used to select the initial Loans, 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.
BANKRUPTCY RISKS. Federal and state statutory provisions, including the
federal bankruptcy laws and state laws affording relief to debtors, may
interfere with or affect the ability of the secured mortgage lender to realize
upon its security. For example, in a proceeding under the federal Bankruptcy
Code, a lender may not foreclose on a mortgaged property without the permission
of the bankruptcy court. The rehabilitation plan proposed by the related debtor
may provide, if the mortgaged property is not the debtor's principal residence
and the court determines that the value of the mortgaged property is less than
the principal balance of the related mortgage loan, for the reduction of the
secured indebtedness to the value of the mortgaged property as of the date of
the commencement of the bankruptcy, rendering the lender a general unsecured
creditor for the difference, and also may reduce the monthly payments due under
such mortgage loan, change the rate of interest and alter the mortgage loan
repayment schedule. The effect of any such proceedings under the federal
Bankruptcy Code, including but not limited to any automatic stay, could result
in delays in receiving payments on the Loans underlying a Series of Securities
and possible reductions in the aggregate amount of such payments.
CONSEQUENCES OF OWNING ORIGINAL ISSUE DISCOUNT SECURITIES. Debt Securities
that are Compound Interest Securities will be, and certain of the Debt
Securities may be, issued with original issue discount for federal income tax
purposes. A Holder of Debt Securities issued with original issue discount will
be required to include original issue discount in ordinary gross income for
federal income tax purposes as it accrues, in advance of receipt of the cash
attributable to such income. Accrued but unpaid interest on the Debt Securities
that are Compound Interest Securities generally will be treated as having
original issue discount for this purpose. See "Certain Federal Income Tax
Considerations--Interest and Acquisition Discount" herein.
REMIC-RELATED RISKS. Holders of Residual Interest Securities will be
required to report on their federal income tax returns as ordinary income their
pro rata share of the taxable income of the REMIC, regardless of the amount or
timing of their receipt of cash payments, as described in "Certain Federal
Income Tax Considerations." Accordingly, under certain circumstances, Holders of
Securities that constitute Residual Interest Securities may have taxable income
and tax liabilities arising from such investment during a taxable year in excess
of the cash received during such period. Individual Holders of Residual Interest
Securities may be limited in their ability to deduct servicing fees and other
expenses of the REMIC. In addition, Residual Interest Securities are subject to
certain restrictions on transfer. Because of the special tax treatment of
Residual Interest Securities, the taxable income arising in a given year on a
Residual Security will not be equal to the taxable income associated with
investment in a corporate bond or stripped instrument having similar cash flow
characteristics and pre-tax yield. Therefore, the after-tax yield on the
Residual Interest Security may be significantly less than that of a corporate
bond or stripped instrument having similar cash flow characteristics.
Additionally, prospective purchasers of a REMIC Residual Interest Security
should be aware that the IRS recently finalized regulations that provide that a
REMIC Residual Interest Security acquired after January 3, 1995 cannot be
marked-to-market. Prospective purchasers of a REMIC Residual Interest Security
should consult their tax advisors regarding the possible application of such
regulations. See "Certain Federal Income Tax Considerations--Taxation of Holders
of Residual Interest Securities--Mark to Market Rules."
UNSECURED HOME IMPROVEMENT AND OTHER LOANS. The Trust Fund for any Series
may include Home Improvement Contracts that are not secured by an interest in
real estate or otherwise. The Trust Fund for any Series may also include home
equity contracts that were originated with Loan-to-Value Ratios or Combined
Loan-to-Value Ratios in excess of the value of the related Mortgaged Property
pledged as security therefor. Under such circumstances, the Trust Fund for the
related Series could be treated as a general unsecured creditor as to any
unsecured portion of any such Loan. In the event of a default under a Loan that
is unsecured in whole or in part, the related Trust Fund will have recourse only
against the borrower's assets generally for the unsecured portion of the Loan,
along with all other general unsecured creditors of the borrower. In a
bankruptcy or insolvency proceeding relating to a borrower on any such Loan, the
unsecured obligations of the borrower with respect to such Loan may be
discharged, even though the value of the borrower's assets made available to the
related Trust Fund as a general unsecured creditor is insufficient to pay
amounts due and owning under the related Loan.
RISK OF LOSSES ASSOCIATED WITH ADJUSTABLE RATE LOANS. Adjustable rate Loans
may be underwritten on the basis of an assessment that Mortgagors will have the
ability to make payments in higher amounts after relatively short periods of
time. In some instances, Mortgagors' income may not be sufficient to enable them
to continue to make their loan payments as such payments increase and thus the
likelihood of default will increase.
POTENTIAL LIABILITY FOR ENVIRONMENTAL CONDITIONS. Real property pledged as
security to a lender may be subject to certain environmental risks. Federal,
state and local laws and regulations impose a wide range of requirements on
activities that may affect the environment, health and safety. In certain
circumstances, these laws and regulations impose obligations on owners or
operators of residential properties such as those subject to the Loans. The
failure to comply with such laws and regulations may result in fines and
penalties.
In particular, under various federal, state and local laws and regulations,
an owner or operator of real estate may be liable for the costs of addressing
hazardous substances on, in or beneath such property and related costs. Such
liability could exceed the value of the property and the aggregate assets of the
owner or operator. In addition, persons who transport or dispose of hazardous
substances, or arrange for the transportation, disposal or treatment of
hazardous substances, at off-site locations may also be held liable if there are
releases or threatened releases of hazardous substances at such off-site
locations.
In addition, under the laws of some states and under the Federal
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
contamination of property may give rise to a lien on the property to assure the
payment of the costs of clean-up. In several states, such a lien has priority
over the lien of an existing mortgage against such property.
Under the laws of some states, and under CERCLA and the Federal Solid Waste
Disposal Act, there is a possibility that a lender may be held liable as an
"owner" or "operator" for costs of addressing releases or threatened releases of
hazardous substances at a property, or releases of petroleum from an underground
storage tank, under certain circumstances. See "Certain Legal Aspects of the
Loans--Environmental Risks."
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;
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience; and
(iv) for loans that were originated or closed after November 7, 1989,
the Home Equity Loan Consumer Protection Act of 1988, which requires
additional application disclosures, limits changes that may be made to the
loan documents without the borrower's consent and restricts a lender's
ability to declare a default or to suspend or reduce a borrower's credit
limit to certain enumerated events.
THE RIEGLE ACT. Certain mortgage loans are subject to the Riegle Community
Development and Regulatory Improvement Act of 1994 (the "Riegle Act"), which
incorporates the Home Ownership and Equity Protection Act of 1994. These
provisions impose additional disclosure and other requirements on creditors with
respect to non-purchase money mortgage loans with high interest rates or high
up-front fees and charges. The provisions of the Riegle Act apply on a mandatory
basis to all mortgage loans originated on or after October 1, 1995. These
provisions can impose specified statutory liabilities upon creditors who fail to
comply with their provisions and may affect the enforceability of the related
loans. In addition, any assignee of the creditor would generally be subject to
all claims and defenses that the consumer could assert against the creditor,
including, without limitation, the right to rescind the mortgage loan.
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 the obligor in the credit
sale transaction could assert against the seller of the goods.
Violations of certain provisions of these federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Loans and in addition, could subject the Trust Fund to damages and
administrative enforcement. See "Certain Legal Aspects of the Loans."
CONTRACTS WILL NOT BE STAMPED. In order to give notice of the right, title
and interest of Holders 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 applicable 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 Holders 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 Agencies 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 Agencies if in their 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 (each, an
"Indenture") between the related Trust Fund and the entity named in the related
Prospectus Supplement as Indenture 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 Subordinated 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 applicable Trustee specified in the Prospectus Supplement without
the payment of any service charge other than any tax or governmental charge
payable in connection with such registration of transfer or exchange. If
specified in the related Prospectus Supplement, one or more Classes of a Series
may be available in book-entry form only.
Unless otherwise provided in the related Prospectus Supplement, payments of
principal of and interest on a Series of Securities will be made on the
Distribution Dates specified in the Prospectus Supplement relating to such
Series by check mailed to Holders of such Series, registered as such at the
close of business on the record date specified in the related Prospectus
Supplement applicable to such Distribution Dates at their addresses appearing on
the security register, except that (a) payments may be made by wire transfer (at
the expense of the Holder requesting payment by wire transfer) in certain
circumstances described in the related Prospectus Supplement and (b) final
payments of principal in retirement of each Security will be made only upon
presentation and surrender of such Security at the office of the applicable
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
applicable Trustee, or a paying agent on behalf of such 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 deposits may be net of certain amounts payable to
the related Servicer and any other person specified in such Prospectus
Supplement. Such amounts thereafter will be deposited into the Distribution
Account(s) 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-outstanding 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 Agencies or a rate insured by means of a surety
bond, guaranteed investment contract, Deposit Agreement or other arrangement
satisfactory to the Rating Agencies. 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 per annum rate specified, or calculated in the method
described, in the related Prospectus Supplement. Interest on such Securities of
a Series will be payable on the Distribution Date specified in the related
Prospectus Supplement. The rate of interest on Securities of a Series may be
variable or may change with changes in the annual percentage rates of the Loans
or Underlying Loans relating to the Private Securities, as applicable, included
in the related Trust Fund and/or as prepayments occur with respect to such Loans
or Underlying Loans, as applicable. Principal Only Securities may not be
entitled to receive any interest distributions or may be entitled to receive
only nominal interest distributions. Any interest on Zero Coupon Securities that
is not paid on the related Distribution Date will accrue and be added to the
principal thereof on such Distribution Date.
Interest payable on the Securities on a Distribution Date will include all
interest accrued during the period specified in the related Prospectus
Supplement. In the event interest accrues during the calendar month preceding a
Distribution Date, the effective yield to Holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the Securities were to
accrue through the day immediately preceding such Distribution Date.
PAYMENTS OF PRINCIPAL
On each Distribution Date for a Series, principal payments will be made to
the Holders of the Securities of such Series on which principal is then payable,
to the extent set forth in the related Prospectus Supplement. Such payments will
be made in an aggregate amount determined as specified in the related Prospectus
Supplement and will be allocated among the respective Classes of a Series in the
manner, at the times and in the priority (which may, in certain cases, include
allocation by random lot) set forth in the related Prospectus Supplement.
FINAL SCHEDULED DISTRIBUTION DATE
The Final Scheduled Distribution Date with respect to each Class of a
Series 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 (the "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
applicable Trustee will redeem a principal amount of outstanding Securities of
such Series as will cause the Available Interest Amount to equal the amount of
interest that will have accrued through such designated interest accrual date
for such Series of Securities outstanding immediately after such redemption.
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION
The Depositor or the Servicer may, at its option, redeem, in whole or in
part, one or more Classes of Notes or purchase one or more Classes of
Certificates of any Series, on any Distribution Date under the circumstances, if
any, specified in the Prospectus Supplement relating to such Series.
Alternatively, if so specified in the related Prospectus Supplement for a Series
of Certificates, the Depositor, the Servicer, or another entity designated in
the related Prospectus Supplement may, at its option, cause an early termination
of a Trust Fund by repurchasing all of the Primary Assets from such Trust Fund
on or after a date specified in the related Prospectus Supplement, or on or
after such time as the aggregate outstanding principal amount of the
Certificates or Primary Assets, as specified in the related Prospectus
Supplement, is equal to or 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.
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 into the Collection Account or
Distribution Account(s) 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.
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 "Closed-End Loans") and/or revolving
home equity loans or certain balances therein (the "Revolving Credit Line Loans"
and, together with the Closed-End Loans, the "Mortgage Loans") secured by
mortgages primarily on Single Family Properties that 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.
The full principal amount of a Closed-End Loan is advanced at origination
of the loan and generally is repayable in equal (or substantially equal)
installments of an amount sufficient to fully amortize such loan at its stated
maturity. Unless otherwise described in the related Prospectus Supplement, the
original terms to stated maturity of Closed-End Loans will not exceed 360
months. Principal amounts on a Revolving Credit Line Loan may be drawn down (up
to a maximum amount as set forth in the related Prospectus Supplement) or repaid
under each Revolving Credit Line Loan from time to time, but may be subject to a
minimum periodic payment. Except to the extent provided in the related
Prospectus Supplement, the Trust Fund will not include any amounts borrowed
under a Revolving Credit Line Loan after the Cut-off Date. As more fully
described in the related Prospectus Supplement, interest on each Revolving
Credit Line Loan, excluding introductory rates offered from time to time during
promotional periods, is computed and payable monthly on the average daily
Principal Balance of such Loan. Under certain circumstances, under either a
Revolving Credit Line Loan or a Closed-End Loan, a borrower may choose an
interest only payment option and is obligated to pay only the amount of interest
that accrues on the loan during the billing cycle. An interest only payment
option may be available for a specified period before the borrower must begin
paying at least the minimum monthly payment of a specified percentage of the
average outstanding balance of the loan.
The rate of prepayment on the Mortgage Loans cannot be predicted. Home
equity loans have been originated in significant volume only during the past few
years and the Depositor is not aware of any publicly available studies or
statistics on the rate of prepayment of such loans. Generally, home equity loans
are not viewed by borrowers as permanent financing. Accordingly, the Mortgage
Loans may experience a higher rate of prepayment than traditional first mortgage
loans. On the other hand, because home equity loans such as the Revolving Credit
Line Loans generally are not fully amortizing, the absence of voluntary borrower
prepayments could cause rates of principal payments lower than, or similar to,
those of traditional fully-amortizing first mortgages. The prepayment experience
of the related Trust Fund may be affected by a wide variety of factors,
including general economic conditions, prevailing interest rate levels, the
availability of alternative financing and homeowner mobility and the frequency
and amount of any future draws on any Revolving Credit Line Loans. Other factors
that might be expected to affect the prepayment rate of a pool of home equity
mortgage loans or home improvement contracts include the amounts of, and
interest rates on, the underlying first mortgage loans, and the use of first
mortgage loans as long-term financing for home purchase and subordinate mortgage
loans as shorter-term financing for a variety of purposes, including home
improvement, education expenses and purchases of consumer durables such as
automobiles. Accordingly, the Mortgage Loans may experience a higher rate of
prepayment than traditional fixed-rate mortgage loans. In addition, any future
limitations on the right of borrowers to deduct interest payments on home equity
loans for federal income tax purposes may further increase the rate of
prepayments of the Loans. Moreover, the enforcement of a "due-on-sale" provision
(as described below) will have the same effect as a prepayment of the related
Loan. See "Certain Legal Aspects of the Loans--Due-on-Sale Clauses in Mortgage
Loans."
Collections on Revolving Credit Line Loans may vary because, among other
things, borrowers may (i) make payments during any month as low as the minimum
monthly payment for such month or, during the interest-only period for certain
Revolving Credit Line Loans and, in more limited circumstances, Closed-End Loans
with respect to which an interest-only payment option has been selected, the
interest and the fees and charges for such month or (ii) make payments as high
as the entire Principal Balance plus accrued interest and the fees and charges
thereon. It is possible that borrowers may fail to make the required periodic
payments. In addition, collections on the Mortgage Loans may vary due to
seasonal purchasing and the payment habits of borrowers.
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 that include one- to four-residential
dwelling units and space used for retail, professional or other commercial uses.
Such uses, which will not involve more than 50% of the space in the structure,
may include doctor, dentist or law offices, real estate agencies, boutiques,
newsstands, convenience stores or other similar types of uses intended to cater
to individual customers as specified in the related Prospectus Supplement. The
properties may be located in suburban or metropolitan districts. Any such
non-residential use will be in compliance with local zoning laws and
regulations. The Mortgaged Properties may consist of detached individual
dwellings, individual condominiums, townhouses, duplexes, row houses, individual
units in planned unit developments and other attached dwelling units. Each
Single Family Property will be located on land owned in fee simple by the
borrower or on land leased by the borrower for a term at least ten years (unless
otherwise provided in the related Prospectus Supplement) greater than the term
of the related Loan. Attached dwellings may include owner-occupied structures
where each borrower owns the land upon which the unit is built, with the
remaining adjacent land owned in common or dwelling units subject to a
proprietary lease or occupancy agreement in a cooperatively owned apartment
building.
Unless otherwise specified in the related Prospectus Supplement, Mortgages
on Cooperative Dwellings consist of a lien on the shares issued by such
Cooperative Dwelling and the proprietary lease or occupancy agreement relating
to such Cooperative Dwelling.
The aggregate Principal Balance of Loans secured by Properties that are
owner-occupied will be disclosed in the related Prospectus Supplement. Unless
otherwise specified in the Prospectus Supplement, the sole basis for a
representation that a given percentage of the Loans 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 in 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 subordinated to other mortgages on the same Mortgaged
Property or by purchase money security interests in the Home Improvements
financed thereby. Unless otherwise specified in the applicable Prospectus
Supplement, the Home Improvement Contracts will be fully amortizing and may have
fixed interest rates or adjustable interest rates and may provide for other
payment characteristics as described below and in the related Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement, the home
improvements (the "Home Improvements") securing the Home Improvement Contracts
include, but are not limited to, replacement windows, house siding, new roofs,
swimming pools, satellite dishes, kitchen and bathroom remodeling goods and
solar heating panels. The initial Loan-to-Value Ratio of a Home Improvement
Contract will be computed in the manner described in the related Prospectus
Supplement.
ADDITIONAL INFORMATION. The selection criteria that 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 (the "FHA") or partially guaranteed by the
Veterans Administration (the "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 or origination of such loan.
The insurance premiums for Loans insured by the FHA are collected by
lenders approved by the Department of Housing and Urban Development ("HUD") and
are paid to the FHA. The regulations governing FHA single-family mortgage
insurance programs provide that insurance benefits are payable either upon
foreclosure (or other acquisition of possession) and conveyance of the mortgaged
premises to HUD or upon assignment of the defaulted Loan to HUD. With respect to
a defaulted FHA-insured Loan, the Servicer is limited in its ability to initiate
foreclosure proceedings. When it is determined, either by the Servicer or HUD,
that default was caused by circumstances beyond the mortgagor's control, the
Servicer is expected to make an effort to avoid foreclosure by entering, if
feasible, into one of a number of available forms of forbearance plans with the
mortgagor. Such plans may involve the reduction or suspension of regular
mortgage payments for a specified period, with such payments to be made upon or
before the maturity date of the mortgage, or the recasting of payments due under
the mortgage up to or beyond the maturity date. In addition, when a default
caused by such circumstances is accompanied by certain other criteria, HUD may
provide relief by making payments to the Servicer in partial or full
satisfaction of amounts due under the Loan (which payments are to be repaid by
the mortgagor to HUD) or by accepting assignment of the loan from the Servicer.
With certain exceptions, at least three full monthly installments must be due
and unpaid under the Loan and HUD must have rejected any request for relief from
the mortgagor before the Servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The Servicer of each FHA-insured Loan will be obligated
to purchase any such debenture issued in satisfaction of such Loan upon default
for an amount equal to the principal amount of any such debenture.
The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal amount of the defaulted Loan adjusted to reimburse the
Servicer for certain costs and expenses and to deduct certain amounts received
or retained by the Servicer after default. When entitlement to insurance
benefits results from foreclosure (or other acquisition of possession) and
conveyance to HUD, the Servicer is compensated for no more than two-thirds of
its foreclosure costs, and is compensated for interest accrued and unpaid prior
to such date but in general only to the extent it was allowed pursuant to a
forbearance plan approved by HUD. When entitlement to insurance benefits results
from assignment of the Loan to HUD, the insurance payment includes full
compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA-insured Loan, bears
interest from a date 30 days after the mortgagor's first uncorrected failure to
perform any obligation to make any payment due under the Loan and, upon
assignment, from the date of assignment to the date of payment of the claim, in
each case at the same interest rate as the applicable HUD debenture interest
rate as described above.
Loans designated in the related Prospectus Supplement as guaranteed by the
VA will be partially guaranteed by the VA under the Serviceman's Readjustment
Act of 1944, as amended (the "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 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 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 or Home Improvements or that are unsecured; (i) the geographic
distribution of any Mortgaged Properties securing the Loans; (j) the percentage
of Loans (by Principal Balance as of the Cut-off Date) that are secured by
Single Family Properties, shares relating to Cooperative Dwellings, Condominium
Units, investment property and vacation or second homes; (k) the lien priority
of the Loans; (l) the delinquency status and year of origination of the Loans;
(m) whether such Loans are Closed-End Loans and/or Revolving Credit Line Loans;
and (n) in the case of Revolving Credit Line Loans, the general payments and
credit line terms of such Loans and other pertinent features thereof. 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 that include pass-through certificates representing
beneficial interests in loans of the type that would otherwise be eligible to be
Loans (the "Underlying Loans") or (b) collateralized obligations secured by
Underlying Loans. Such pass-through certificates or collateralized obligations
will have previously been (a) offered and distributed to the public pursuant to
an effective registration statement or (b) purchased in a transaction not
involving any public offering from a person who is not an affiliate of the
issuer of such securities at the time of sale (nor an affiliate thereof at any
time during the three preceding months); provided a period of three years
elapsed since the later of the date the securities were acquired from the issuer
or an affiliate thereof. Although individual Underlying Loans may be insured or
guaranteed by the United States or an agency or instrumentality thereof, they
need not be, and Private Securities themselves will not be so insured or
guaranteed.
Private Securities will have been issued pursuant to a pooling and
servicing agreement, a trust agreement or similar agreement (a "PS Agreement").
The seller/servicer of the Underlying Loans will have entered into the PS
Agreement with the trustee under such PS Agreement (the "PS Trustee"). The PS
Trustee or its agent, or a custodian, will possess the Underlying Loans.
Underlying Loans will be serviced by a servicer (the "PS Servicer") directly or
by one or more sub-servicers who may be subject to the supervision of the PS
Servicer.
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, cash collateral accounts, Security 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 Closed-End Loans and/or Revolving Credit Line Loans,
whether they are fixed rate or adjustable rate and whether they provide for
fixed level payments or other payment features), (b) the approximate aggregate
Principal Balance, if known, of such Underlying Loans insured or guaranteed by a
governmental entity, (c) the servicing fee or range of servicing fees with
respect to the Underlying Loans, (d) the minimum and maximum stated maturities
of such Underlying Loans at origination, (e) the lien priority of such
Underlying Loans and (f) the delinquency status and year of origination of such
Underlying Loans; (iii) the maximum original term-to-stated maturity of the
Private Securities; (iv) the weighted average term-to-stated maturity of the
Private Securities; (v) the pass-through or certificate rate or ranges thereof
for the Private Securities; (vi) the PS Sponsor, the PS Servicer (if other than
the PS Sponsor) and the PS Trustee for such Private Securities; (vii) certain
characteristics of credit support if any, such as Reserve Funds, Security
Policies 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 into the
applicable Distribution Account, which will also be established by the
applicable Trustee for each such Series of Securities, for distribution to the
related Holders. Unless otherwise specified in the related Prospectus
Supplement, the applicable Trustee will invest the funds in the Collection
Account and the Distribution Account(s) 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 into the
Distribution Account(s) or otherwise distributed and, in the case of funds in
the Distribution Account(s), 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 Agencies.
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 into 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"). In no case will the Pre-Funded
Amount exceed 50% of the aggregate principal amount of the related Securities,
and in no case will the Pre-Funding Period exceed one year. The Primary Assets
to be so purchased generally will be selected on the basis of the same criteria
as those used to select the initial Primary Assets, and the same representations
and warranties will be made with respect thereto. 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 into the Capitalized Interest Account and used to fund the
excess, if any, of the sum of (i) the amount of interest accrued on the
Securities of such Series and (ii) if specified in the related Prospectus
Supplement, certain fees or expenses during the Pre-Funding Period, over the
amount of interest available therefor from the Primary Assets in the Trust Fund.
Any amounts on deposit in the Capitalized Interest Account at the end of the
Pre-Funding Period that are not necessary for such purposes will be distributed
to the person specified in the related Prospectus Supplement.
ENHANCEMENT
If stated in the Prospectus Supplement relating to a Series of Securities,
simultaneously with the Depositor's assignment of the Primary Assets to the
Trustee, the Depositor will obtain a Security Policy, issue Subordinated
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 Agencies. The Enhancement will
support the payment of principal of 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.
SUBORDINATED SECURITIES
If specified in the related Prospectus Supplement, Enhancement for a Series
may consist of one or more Classes of Subordinated Securities. The rights of the
related Subordinated Securityholders 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 (the "Pool Insurance Policy") for the Loans in the related Trust Fund.
The Pool Insurance Policy will cover any loss (subject to the limitations
described in a related Prospectus Supplement) by reason of default. but will not
cover the portion of the Principal Balance of any Loan that is required to be
covered by any primary mortgage Insurance Policy. The amount and terms of any
such coverage will be set forth in the related Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICY. Although the terms of such policies vary
to some degree, a special hazard Insurance Policy typically provides that, where
there has been damage to Property securing a defaulted or foreclosed Loan (title
to which has been acquired by the insured) and to the extent such damage is not
covered by the standard hazard Insurance Policy or any flood Insurance Policy,
if applicable, required to be maintained with respect to such Property, or in
connection with partial loss resulting from the application of the coinsurance
clause in a standard hazard Insurance Policy, the special hazard insurer will
pay the lesser of (i) the cost of repair or replacement of such Property or (ii)
upon transfer of such Property to the special hazard insurer, the unpaid
Principal Balance of such Loan at the time of acquisition of such Property by
foreclosure or deed in lieu of foreclosure, plus accrued interest to the date of
claim settlement and certain expenses incurred by the Servicer with respect to
such Property. If the unpaid Principal Balance plus accrued interest and certain
expenses is paid by the special hazard insurer, the amount of further coverage
under the special hazard Insurance Policy will be reduced by such amount less
any net proceeds from the sale of such Property. Any amount paid as the cost of
repair of such Property will reduce coverage by such amount. Special hazard
Insurance Policies typically do not cover losses occasioned by war, civil
insurrection, certain governmental actions, errors in design, faulty workmanship
or materials (except under certain circumstances), nuclear reaction, flood (if
the mortgaged property is in a federally designated flood area), chemical
contamination and certain other risks.
Restoration of the Property with the proceeds described under (i) above is
expected to satisfy the condition under any Pool Insurance Policy that such
Property be restored before a claim under such Pool Insurance Policy may be
validly presented with respect to the defaulted Loan secured by such Property.
The payment described under (ii) above will render unnecessary presentation of a
claim in respect of such Loan under any Pool Insurance Policy. Therefore, so
long as such Pool Insurance Policy remains in effect, the payment by the special
hazard insurer of the cost of repair or of the unpaid Principal Balance of the
related Loan plus accrued interest and certain expenses will not affect the
total amount in respect of 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 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 the 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 applicable Trustee as part of the Trust Fund for such Series or for the
benefit of any Enhancer with respect to such Series (each, a "Reserve Fund")
cash, a letter or letters of credit, cash collateral accounts, Eligible
Investments, or other instruments meeting the criteria of the Rating Agencies
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 applicable
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 into a Reserve Fund will be invested by the applicable
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 Agencies 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 applicable
Trustee for such Series of Securities will enter into a Deposit Agreement with
the entity specified in such Prospectus Supplement on or before the sale of such
Series of Securities. The purpose of a Deposit Agreement would be to accumulate
available cash for investment so that such cash, together with income thereon,
can be applied to future distributions on one or more Classes of Securities. The
Prospectus Supplement for a Series of Securities pursuant to which a Deposit
Agreement is used will contain a description of the terms of such Deposit
Agreement.
SERVICING OF LOANS
GENERAL
Customary servicing functions with respect to Loans comprising the Primary
Assets in the Trust Fund will be provided by the Servicer directly pursuant to
the related Servicing Agreement or Pooling and Servicing Agreement, as the case
may be, with respect to a Series of Securities.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The Servicer will make reasonable efforts to collect all payments required
to be made under the Loans and will, consistent with the terms of the related
Agreement for a Series and any applicable Enhancement, follow such collection
procedures as it follows with respect to comparable loans held in its own
portfolio. Consistent with the above, the Servicer may, in its discretion, (i)
waive any assumption fee, late payment charge, or other charge in connection
with a Loan and (ii) to the extent provided in the related Agreement, arrange
with an obligor a schedule for the liquidation of delinquencies by extending the
Due Dates for Scheduled Payments on such Loan.
If specified in the related Prospectus Supplement, the Servicer, to the
extent permitted by law, will establish and maintain escrow or impound accounts
(each, an "Escrow Account") with respect to Loans in which payments by obligors
to pay taxes, assessments, mortgage and hazard Insurance Policy 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 Federal Deposit Insurance Corporation or that 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 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 in respect of principal, including prepayments, on
such Primary Assets;
(ii) All payments in respect of interest on such Primary Assets after
deducting therefrom, at the discretion of the Servicer but only to the
extent of the amount permitted to be withdrawn or withheld from the
Collection Account in accordance with the related Agreement, the Servicing
Fee in respect of such Primary Assets;
(iii) All amounts received by the Servicer in connection with the
liquidation of Primary Assets or property acquired in respect thereof,
whether through foreclosure sale, repossession or otherwise, including
payments in connection with such Primary Assets received from the obligor,
other than amounts required to be paid or refunded to the obligor pursuant
to the terms of the applicable loan documents or otherwise pursuant to law,
net of related liquidation expenses ("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 Policy
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 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; provided, that 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
Insurance Proceeds) that represent late recoveries of Scheduled Payments
with respect to 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 Insurance Proceeds;
(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 into the
Collection Account and not previously withheld, and to the extent that
Liquidation Proceeds after such reimbursement exceed the Principal Balance
of the related Loan, together with accrued and unpaid interest thereon to
the Due Date for such Loan next succeeding the date of its receipt of such
Liquidation Proceeds, to pay to itself out of such excess the amount of any
unpaid Servicing Fee and any assumption fees, late payment charges, or
other charges on the related Loan;
(iv) in the event it has elected not to pay itself the Servicing Fee
out of the interest component of any Scheduled Payment, late payment or
other recovery with respect to a particular Loan prior to the deposit of
such Scheduled Payment, late payment or recovery into the Collection
Account, to pay to itself the Servicing Fee, as adjusted pursuant to the
related Agreement, from any such Scheduled Payment, late payment or such
other recovery, to the extent permitted by the related Agreement;
(v) to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it pursuant to the related Agreement;
(vi) to pay to the applicable person with respect to each Primary
Asset or REO Property acquired in respect thereof that has been repurchased
or removed from the Trust Fund by the Depositor, the Servicer or the Seller
pursuant to the related Agreement, all amounts received thereon and not
distributed as of the date on which the related repurchase price was
determined;
(vii) to make payments to the applicable Trustee of such Series for
deposit into the related 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 into 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 that represent late recoveries of
principal or interest, Insurance Proceeds or Liquidation Proceeds respecting
which any such Advance was made. If an Advance is made and subsequently
determined to be nonrecoverable from late collections, Insurance Proceeds or
Liquidation Proceeds from the related Loan, the Servicer may be entitled to
reimbursement from other funds in the Collection Account or Distribution
Account(s), 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
any improvements on the Property, in order to recover the full amount of any
partial loss. If the insured's coverage falls below this specified percentage,
such clause will provide that the hazard insurer's liability in the event of
partial loss will not exceed the greater of (i) the actual cash value (the
replacement cost less physical depreciation) of the Property, including the
improvements, if any, damaged or destroyed or (ii) such proportion of the loss,
without deduction for depreciation, as the amount of insurance carried bears to
the specified percentage of the full replacement cost of such Property and
improvements. Since the amount of hazard insurance to be maintained on the
improvements securing the Loans declines as the Principal Balances owing thereon
decrease, and since the value of the Properties will fluctuate 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 Insurance Policies
(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 into 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 that
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 into 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
Insurance Proceeds. 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 change in
the terms of such Loan (a "Modification") to the extent provided in the related
Prospectus Supplement. Such Modifications may only be entered into if they meet
the underwriting policies and procedures employed by the Servicer in servicing
receivables for its own account and meet the other conditions set forth in the
related Prospectus Supplement.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement for a
Series, when any Property is about to be conveyed by the obligor, the Servicer
will, to the extent it has knowledge of such prospective conveyance and prior to
the time of the consummation of such conveyance, exercise its rights to
accelerate the maturity of the related Loan under the applicable "due-on-sale"
clause, if any, unless it reasonably believes that such clause is not
enforceable under applicable law or if the enforcement of such clause would
result in loss of coverage under any primary mortgage Insurance Policy. In such
event, the Servicer is authorized to accept from or enter into an assumption
agreement with the person to whom such property has been or is about to be
conveyed, pursuant to which such person becomes liable under the Loan and
pursuant to which the original obligor is released from liability and such
person is substituted as the obligor and becomes liable under the Loan. Any fee
collected in connection with an assumption will be retained by the Servicer as
additional servicing compensation. The terms of a Loan may not be changed in
connection with an assumption.
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 each applicable Trustee and independent accountants, payment of Security
Policy and Insurance Policy premiums, if applicable, 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 applicable Trustee for deposit
into the related 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 Principal Balance of and unpaid interest on the
related Loan that 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
Insurance Proceeds, 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 applicable Trustee to the
effect that such firm has examined certain documents and records relating to the
servicing of the Loans by the Servicer and that, on the basis of such
examination, such firm is of the opinion that the servicing has been conducted
in compliance with such Agreement, except for (i) such exceptions as such firm
believes to be immaterial and (ii) such other exceptions as are set forth in
such statement.
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will also provide for delivery to the applicable
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 a 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, that 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 that 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 that is not incidental to its servicing
responsibilities under such Agreement that, in its opinion, may involve it in
any expense or liability. The Servicer may, in its discretion, undertake any
such action that it may deem necessary or desirable with respect to the related
Agreement and the rights and duties of the parties thereto and the interests of
the Holders thereunder. In such event the legal expenses and costs of such
action and any liability resulting therefrom may be expenses, costs, and
liabilities of the Trust Fund and the Servicer may be entitled to be reimbursed
therefor out of the Collection Account.
THE AGREEMENTS
The following summaries describe certain provisions of the Agreements. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Agreements. Where
particular provisions or terms used in the Agreements are referred to, such
provisions or terms are as specified in the related Agreements.
ASSIGNMENT OF PRIMARY ASSETS
GENERAL. At the time of issuance of the Securities of a Series, the
Depositor will transfer, convey and assign to the Trust Fund all right, title
and interest of the Depositor in the Primary Assets and other property to be
transferred to the Trust Fund for a Series. Such assignment will include all
principal and interest due on or with respect to the Primary Assets after the
Cut-off Date specified in the related Prospectus Supplement (except for any
Retained Interests). The Trustee will, concurrently with such assignment,
execute and deliver the Securities.
ASSIGNMENT OF CONTRACTS. 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 Holders 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
Holders 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 Loan Rate; the current Scheduled Payment of
principal and interest; the maturity date, if any, of the related Mortgage Note;
if the Loan is an adjustable rate Loan, the Lifetime Rate Cap, if any, and the
current index.
ASSIGNMENT OF PRIVATE SECURITIES. The Depositor will cause Private
Securities to be registered in the name of the PS Trustee (or its nominee or
correspondent). The PS Trustee (or its nominee or correspondent) will have
possession of any certificated Private Securities. Unless otherwise specified in
the related Prospectus Supplement, the PS 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,
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 PS 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 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
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)
a Principal Balance, after deduction of all Scheduled Payments due in the month
of substitution, not in excess of the Principal Balance of the Deleted Primary
Asset (the amount of any shortfall to be deposited to the Collection Account in
the month of substitution for distribution to Holders), (ii) an interest rate
not less than (and not more than 2% greater than) the interest rate of the
Deleted Primary Asset, (iii) a remaining term-to-stated maturity not greater
than (and not more than two years less than) that of the Deleted Primary Asset,
and will comply with all of the representations and warranties set forth in the
applicable Agreement as of the date of substitution.
Unless otherwise provided in the related Prospectus Supplement, the
above-described cure, repurchase or substitution obligations constitute the sole
remedies available to the Holders or the Trustee for a material defect in a
document for a Primary Asset.
The Depositor or another entity will make representations and warranties
with respect to Primary Assets for a Series. If the Depositor or such entity
cannot cure a breach of any such representations and warranties in all material
respects within the time period specified in the related Prospectus Supplement
after notification by the Trustee of such breach, and if such breach is of a
nature that materially and adversely affects the value of such Primary Asset,
the Depositor or such entity will be 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 applicable 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 applicable Trustee to institute such proceeding in its
own name as Trustee thereunder and have offered to such Trustee reasonable
indemnity, and such Trustee for 60 days has neglected or refused to institute
any such proceeding.
REPORTS TO HOLDERS
The applicable 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 amount 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 amount 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 applicable 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 each
applicable Trustee a report by independent public accountants with respect to
the Servicer's servicing of the Loans. See "Servicing of Loans--Evidence as to
Compliance" herein.
If so specified in the Prospectus Supplement for a Series of Securities,
such Series or one or more Classes of such Series will be issued in book-entry
form. In such event, owners of beneficial interests in such Securities will not
be considered Holders and will not receive such reports directly from the
applicable Trustee. The applicable Trustee will forward such reports only to the
entity or its nominee that is the registered holder of the global certificate
that 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 policies 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(s) to enable the applicable 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 applicable Trustee for such Series, or to the Servicer and such 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 that 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 applicable Trustee, or to
the Servicer and such 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 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 applicable 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 applicable Trustee or exercising
any trust or power conferred upon such Trustee. However, the applicable 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 such Trustee reasonable
security or indemnity against the cost, expenses and liabilities that may be
incurred by such Trustee therein or thereby. The applicable Trustee may decline
to follow any such direction if such 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 non-assenting Holders.
INDENTURE. Unless otherwise specified in the related Prospectus Supplement,
Events of Default under the Indenture for each Series of Notes include: (i) a
default for thirty (30) days or more in the payment of any principal of or
interest on any Note of such Series; (ii) failure to perform any other covenant
of the Depositor or the Trust Fund in the Indenture that 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 Indenture 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 Indenture
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 Indenture 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 of 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 Indenture 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 Indenture 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 Indenture 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 Indenture 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 Indenture 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 that is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, in case an Event of Default shall occur and be continuing
with respect to a Series of Notes, the Indenture 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 Indenture Trustee security or indemnity satisfactory to
it against the costs, expenses and liabilities that might be incurred by it in
complying with such request or direction. Subject to such provisions for
indemnification and certain limitations contained in the Indenture, the Holders
of a majority of the then-aggregate outstanding amount of the Notes of such
Series shall have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Indenture Trustee or exercising
any trust or power conferred on the Indenture 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 TRUSTEES
The identity of the commercial bank, savings and loan association or trust
company named as the Trustee or Indenture Trustee, as the case may be, for each
Series of Securities will be set forth in the related Prospectus Supplement.
Entities 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, each Trustee will have the power to
appoint co-trustees or separate trustees. In the event of such appointment, all
rights, powers, duties and obligations conferred or imposed upon the applicable
Trustee by the Agreement relating to such Series will be conferred or imposed
upon such Trustee and each such separate trustee or co-trustee jointly, or, in
any jurisdiction in which such 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 applicable Trustee. The applicable Trustee may also appoint
agents to perform any of the responsibilities of such Trustee, which agents will
have any or all of the rights, powers, duties and obligations of such Trustee
conferred on them by such appointment; provided, that the applicable Trustee
will continue to be responsible for its duties and obligations under the
Agreement.
DUTIES OF TRUSTEES
No Trustee will make any representations as to the validity or sufficiency
of the related 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 applicable Trustee will be required to perform only those duties
specifically required of it under such Agreement. Upon receipt of the various
certificates, statements, reports or other instruments required to be furnished
to it, the applicable Trustee will be required to examine them to determine
whether they are in the form required by the related Agreement. However, such
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 related
Agreement.
Each Trustee may be held liable for its own negligent action or failure to
act, or for its own misconduct; provided, however, that no Trustee will 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 related
Holders in an Event of Default. No Trustee will be required to expend or risk
its own funds or otherwise incur any financial liability in the performance of
any of its duties under the related 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 TRUSTEES
Each 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 such 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. Each Trustee may also be
removed at any time (i) if such Trustee ceases to be eligible to continue as
such under the related Agreement, (ii) if such 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
applicable Trustee and to the Depositor. Any resignation or removal of a
Trustee and appointment of a successor Trustee will not become effective until
acceptance of the appointment by the successor Trustee.
AMENDMENT OF AGREEMENT
Unless otherwise specified in the Prospectus Supplement, the Agreement for
each Series of Securities may be amended by the Depositor, the Servicer (with
respect to a Series relating to Loans), and the applicable 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
applicable Trustee or the 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
any 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 delivered to the applicable Trustee. Any such amendment except
pursuant to clause (vi) above shall be deemed not to adversely affect in any
material respect the interests of any Holder if the applicable 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, each
Agreement for each Series may also be amended by the applicable 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 such
Holders propose to transmit, the applicable Trustee will afford such Holders
access during business hours to the most recent list of Holders of that Series
held by such Trustee.
No Agreement will provide for the holding of any annual or other meeting
of Holders.
BOOK-ENTRY SECURITIES
If specified in the Prospectus Supplement for a Series of Securities, such
Series or one or more Classes of such Series may be issued in book-entry form.
In such event, beneficial owners of such Securities will not be considered
"Holders" under the Agreements and may exercise the rights of Holders only
indirectly through the participants in the applicable book-entry system.
REMIC ADMINISTRATOR
For any Series with respect to which a REMIC election is made, preparation
of certain reports and certain other administrative duties with respect to the
Trust Fund may be performed by a REMIC administrator, who may be an affiliate
of the Depositor.
TERMINATION
POOLING AND SERVICING AGREEMENT; TRUST AGREEMENT. The obligations created
by the Pooling and Servicing Agreement or Trust Agreement for a Series will
terminate upon the distribution to Holders of all amounts distributable to them
pursuant to such Agreement under the circumstances described in the related
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 Indenture Trustee for cancellation of all
the Notes of such Series or, with certain limitations, upon deposit with the
Indenture 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 Indenture Trustee, in trust, of money and/or direct
obligations of or obligations guaranteed by the United States of America that,
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 of and
interest on, if any, their Notes until maturity.
CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans, home improvement installment sales contracts and home
improvement installment loan agreements that 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 that authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In certain states, such foreclosure also
may be accomplished by judicial action in the manner provided for foreclosure
of mortgages. In some states, the trustee must record a notice of default and
send a copy to the borrower-trustor and to any person who has recorded a
request for a copy of a notice of default and notice of sale. In addition, the
trustee in some states must provide notice to any other individual having an
interest in the real property, including any junior lienholders. If the deed of
trust is not reinstated within any applicable cure period, a notice of sale
must be posted in a public place and, in most states, published for a specified
period of time in one or more newspapers. In addition, some state laws require
that a copy of the notice of sale be posted on the property and sent to all
parties having an interest of record in the property. The trustor, borrower, or
any person having a junior encumbrance on the real estate, may, during a
reinstatement period, cure the default by paying the entire amount in arrears
plus the costs and expenses incurred in enforcing the obligation. Generally,
state law controls the amount of foreclosure expenses and costs, including
attorney's fees, which may be recovered by a lender. If the deed of trust is
not reinstated, a notice of sale must be posted in a public place and, in most
states, published for a specified period of time in one or more newspapers. In
addition, some state laws require that a copy of the notice of sale be posted
on the property, recorded and sent to all parties having an interest in the
real property.
An action to foreclose a mortgage is an action to recover the mortgage
debt by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful
nor in bad 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 that 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.
ENVIRONMENTAL RISKS
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and safety.
These include laws and regulations governing air pollutant emissions, hazardous
and toxic substances, impacts to wetlands, leaks from underground storage tanks
and the management, removal and disposal of lead- and asbestos-containing
materials. In certain circumstances, these laws and regulations impose
obligations on the owners or operators of residential properties such as those
subject to the Loans. The failure to comply with such laws and regulations may
result in fines and penalties.
Moreover, under various federal, state and local laws and regulations, an
owner or operator of real estate may be liable for the costs of addressing
hazardous substances on, in or beneath such property and related costs. Such
liability may be imposed without regard to whether the owner or operator knew
of, or was responsible for, the presence of such substances, and could exceed
the value of the property and the aggregate assets of the owner or operator. In
addition, persons who transport or dispose of hazardous substances, or arrange
for the transportation, disposal or treatment of hazardous substances, at
off-site locations may also be held liable if there are releases or threatened
releases of hazardous substances at such off-site locations.
In addition, under the laws of some states and under the Federal
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), contamination of property may give rise to a lien on the property
to assure the payment of the costs of clean-up. In several states, such a lien
has priority over the lien of an existing mortgage against such property. Under
CERCLA, such a lien is subordinate to pre-existing, perfected security
interests.
Under the laws of some states, and under CERCLA, there is a possibility
that a lender may be held liable as an "owner or operator" for costs of
addressing releases or threatened releases of hazardous substances at a
property, regardless of whether or not the environmental damage or threat was
caused by a current or prior owner or operator. CERCLA and some state laws
provide an exemption from the definition of "owner or operator" for a secured
creditor who, without "participating in the management" of a facility, holds
indicia of ownership primarily to protect its security interest in the
facility. The Solid Waste Disposal Act (the "SWDA") provides similar protection
to secured creditors in connection with liability for releases of petroleum
from certain underground storage tanks. However, if a lender "participates in
the management" of the facility in question or is found not to have held its
interest primarily to protect a security interest, the lender may forfeit its
secured creditor exemption status.
A regulation promulgated by the U.S. Environmental Protection Agency (the
"EPA") in April 1992 attempted to clarify the activities in which lenders could
engage both prior to and subsequent to foreclosure of a security interest
without forfeiting the secured creditor exemption under CERCLA. The rule was
struck down in 1994 by the United States Court of Appeals for the District of
Columbia Circuit in KELLEY EX REL STATE OF MICHIGAN V. ENVIRONMENTAL PROTECTION
AGENCY, 15 F.3d 1100 (D.C Cir. 1994), REH'G DENIED, 25 F.3d 1088, CERT. DENIED
SUB NOM. AM. BANKERS ASS'N V. KELLEY, 115 S.Ct. 900 (1995). Another EPA
regulation promulgated in 1995 clarifies the activities in which lenders may
engage without forfeiting the secured creditor exemption under the underground
storage tank provisions of the SWDA. That regulation has not been struck down.
On September 30, 1996, Congress amended both CERCLA and the SWDA to
provide additional clarification regarding the scope of the lender liability
exemptions under the two statutes. Among other things, the 1996 amendments
specify the circumstances under which a lender will be protected by the CERCLA
and SWDA exemptions, both while the borrower is still in possession of the
secured property and following foreclosure on the secured property.
Generally, the amendments state that a lender who holds indicia of
ownership primarily to protect a security interest in a facility will be
considered to participate in management only if, while the borrower is still in
possession of the facility encumbered by the security interest, the lender (i)
exercises decision-making control over environmental compliance related to the
facility such that the lender has undertaken responsibility for hazardous
substance handling or disposal practices related to the facility or (ii)
exercises control at a level comparable to that of a manager of the facility
such that the lender has assumed or manifested responsibility for (a) overall
management of the facility encompassing daily decision-making with respect to
environmental compliance or (b) overall or substantially all of the operational
functions (as distinguished from financial or administrative functions) of the
facility other than the function of environmental compliance. The amendments
also specify certain activities that are not considered to be "participation in
management," including monitoring or enforcing the terms of the extension of
credit or security interest, inspecting the facility, and requiring a lawful
means of addressing the release or threatened release of a hazardous substance.
The 1996 amendments also specify that a lender who did not participate in
management of a facility prior to foreclosure will not be considered an "owner
or operator," even if the lender forecloses on the facility and after
foreclosure sells or liquidates the facility, maintains business activities,
winds up operations, undertakes an appropriate response action, or takes any
other measure to preserve, protect, or prepare the facility prior to sale or
disposition, if the lender seeks to sell or otherwise divest the facility at
the earliest practicable, commercially reasonable time, on commercially
reasonable terms, taking into account market conditions and legal and
regulatory requirements.
The CERCLA and SWDA lender liability amendments specifically address the
potential liability of lenders who hold mortgages or similar conventional
security interests in real property, such as the Trust Fund does in connection
with the Mortgage Loans and the Home Improvement Contracts.
If a lender is or becomes liable under CERCLA, it may be authorized to
bring a statutory action for contribution against any other "responsible
parties," including a previous owner or operator. However, such persons or
entities may be bankrupt or otherwise judgment proof, and the costs associated
with environmental cleanup and related actions may be substantial. Moreover,
some state laws imposing liability for addressing hazardous substances do not
contain exemptions from liability for lenders. Whether the costs of addressing
a release or threatened release at a property pledged as collateral for one of
the Loans would be imposed on the Trust Fund, and thus occasion a loss to the
Holders, therefore depends on the specific factual and legal circumstances at
issue.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. The
right of redemption should be distinguished from the equity of redemption,
which is a non-statutory right that must be exercised prior to the foreclosure
sale. In some states, redemption may occur only upon payment of the entire
principal balance of the loan, accrued interest and expenses of foreclosure. In
other states, redemption may be authorized if the former borrower pays only a
portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The
exercise of a right of redemption would defeat the title of any purchaser at a
foreclosure sale, or of any purchaser from the lender subsequent to foreclosure
or sale under a deed of trust. Consequently, the practical effect of a right of
redemption is to force the lender to retain the property and pay the expenses
of ownership until the redemption period has run. In some states, there is no
right to redeem property after a trustee's sale under a deed of trust.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGES
The Mortgage Loans comprising or underlying the Primary Assets included in
the Trust Fund for a Series will be secured by Mortgages or deeds of trust,
which may be second or more junior mortgages to other mortgages held by other
lenders or institutional investors. The rights of the Trust Fund (and therefore
the Holders), as mortgagee under a junior mortgage, are subordinate to those of
the mortgagee under the senior mortgage, including the prior rights of the
senior mortgagee to receive hazard insurance and condemnation proceeds and to
cause the property securing the mortgage loan to be sold upon default of the
mortgagor, thereby extinguishing the junior mortgagee's lien unless the junior
mortgagee asserts its subordinate interest in the property in foreclosure
litigation and, possibly, satisfies the defaulted senior mortgage. A junior
mortgagee may satisfy a defaulted senior loan in full and, in some states, may
cure such default and bring the senior loan current, in either event adding the
amounts expended to the balance due on the junior loan. In most states, absent
a provision in the mortgage or deed of trust, no notice of default is required
to be given to a junior mortgagee.
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 that 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 that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower.
In certain other states, the lender has the option of bringing a personal
action against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower following a foreclosure sale to
the excess of the outstanding debt over the fair market value of the property
at the time of the public sale. The purpose of these statutes is generally to
prevent a beneficiary or a mortgagee from obtaining a large deficiency judgment
against the former borrower as a result of low or no bids at the foreclosure
sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws, the Federal
Soldiers' and Sailors' Relief Act and state laws affording relief to debtors,
may interfere with or affect the ability of the secured lender to realize upon
collateral and/or enforce a deficiency judgment. For example, with respect to
federal bankruptcy law, the filing of a petition acts as a stay against the
enforcement of remedies for collection of a debt. Moreover, a court with
federal bankruptcy jurisdiction may permit a debtor through a Chapter 13
Bankruptcy Code rehabilitative plan to cure a monetary default with respect to
a loan on a debtor's residence by paying arrearages within a reasonable time
period and reinstating the original loan payment schedule even though the
lender accelerated the loan and the lender has taken all steps to realize upon
his security (provided no sale of the property has yet occurred) prior to the
filing of the debtor's Chapter 13 petition. Some courts with federal bankruptcy
jurisdiction have approved plans, based on the particular facts of the
reorganization case, that effected the curing of a loan default by permitting
the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan may be modified if the borrower has filed a petition
under Chapter 13. These courts have suggested that such modifications may
include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and
the outstanding balance of the loan. Federal bankruptcy law and limited case
law indicate that the foregoing modifications could not be applied to the terms
of a loan secured by property that is the principal residence of the debtor. In
all cases, the secured creditor is entitled to the value of its security plus
post-petition interest, attorney's fees and costs to the extent the value of
the security exceeds the debt.
In a Chapter 11 case under the Bankruptcy Code, the lender is precluded
from foreclosing without authorization from the bankruptcy court. The lender's
lien may be transferred to other collateral and/or be limited in amount to the
value of the lender's interest in the collateral as of the date of the
bankruptcy. The 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 mortgage loan. In addition, substantive requirements
are imposed upon lenders in connection with the origination and the servicing
of mortgage loans by numerous federal and some state consumer protection laws.
The laws include the federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act and related statutes and regulations. These federal laws
impose specific statutory liabilities upon lenders who originate loans and who
fail to comply with the provisions of the law. In some cases, this liability
may affect assignees of the loans.
DUE-ON-SALE CLAUSES IN MORTGAGE LOANS
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases, typically
involving single family residential mortgage transactions, their enforceability
has been limited or denied. In any event, the Garn-St. Germain Depository
Institutions Act of 1982 (the "Garn-St. Germain Act") preempts state
constitutional, statutory and case law that prohibits the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain exceptions. As a result, due-on-sale
clauses have become generally enforceable except in those states whose
legislatures exercised their authority to regulate the enforceability of such
clauses with respect to mortgage loans that were (i) originated or assumed
during the "window period" under the Garn-St. Germain Act, which ended in all
cases not later than October 15, 1982, and (ii) originated by lenders other
than national banks, federal savings institutions and federal credit unions.
FHLMC has taken the position in its published mortgage servicing standards
that, out of a total of eleven "window period states," five states (Arizona,
Michigan, Minnesota, New Mexico and Utah) have enacted statutes extending, on
various terms and for varying periods, the prohibition on enforcement of
due-on-sale clauses with respect to certain categories of window period loans.
Also, the Garn-St. Germain Act does "encourage" lenders to permit assumption of
loans at the original rate of interest or at some other rate less than the
average of the original rate and the market rate.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from such bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations, upon the late charges a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan
is prepaid. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his
defaults under the loan documents. Examples of judicial remedies that have been
fashioned include judicial requirements that the lender undertake affirmative
and expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon his
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that borrowers under security agreements receive notices in addition to
the statutorily-prescribed minimums. For the most part, these cases have upheld
the notice provisions as being reasonable or have found that, in cases
involving the sale by a trustee under a deed of trust or by a mortgagee under a
mortgage having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full or
in part without penalty. The regulations of the Office of Thrift Supervision
(the "OTS") prohibit the imposition of a prepayment penalty or equivalent fee
for or in connection with the acceleration of a loan by exercise of a
due-on-sale clause. A mortgagee to whom a prepayment in full has been tendered
may be compelled to give either a release of the mortgage or an instrument
assigning the existing mortgage. The absence of a restraint on prepayment,
particularly with respect to mortgage loans having higher mortgage rates, may
increase the likelihood of refinancing or other early retirements of such
mortgage loans.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. Similar federal
statutes were in effect with respect to mortgage loans made during the first
three months of 1980. The OTS, as successor to the Federal Home Loan Bank
Board, is authorized to issue rules and regulations and to publish
interpretations governing implementation of Title V. Title V authorizes any
state to reimpose interest rate limits by adopting, before April 1, 1983, a
state law, or by certifying that the voters of such state have voted in favor
of any provision, constitutional or otherwise, which expressly rejects an
application of the federal law. Fifteen states adopted such a law prior to the
April 1, 1983 deadline. In addition, even where Title V is not so rejected, any
state is authorized by the law to adopt a provision limiting discount points or
other charges on mortgage loans covered by Title V.
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 in effect
in the applicable jurisdiction (the "UCC"). Pursuant to the UCC, the sale of
chattel paper is treated in a manner similar to perfection of a security
interest in chattel paper. Under the related Agreement, the Depositor will
transfer physical possession of the contracts to the Trustee or a designated
custodian or may retain possession of the contracts as custodian for the
Trustee. In addition, the Depositor will make an appropriate filing of a UCC-1
financing statement in the appropriate states to give notice of the Trustee's
ownership of the contracts. Unless otherwise specified in the related
Prospectus Supplement, the contracts will not be stamped or otherwise marked to
reflect their assignment from the Depositor to the Trustee. Therefore, if
through negligence, fraud or otherwise, a subsequent purchaser were able to
take physical possession of the contracts without notice of such assignment,
the Trustee's interest in the contracts could be defeated.
SECURITY INTERESTS IN HOME IMPROVEMENTS
The contracts that are secured by the Home Improvements financed thereby
grant to the originator of such contracts a purchase money security interest in
such Home Improvements to secure all or part of the purchase price of such Home
Improvements and related services. A financing statement generally is not
required to be filed to perfect a purchase money security interest in consumer
goods. Such purchase money security interests are assignable. In general, a
purchase money security interest grants to the holder a security interest that
has priority over a conflicting security interest in the same collateral and
the proceeds of such collateral. However, to the extent that the collateral
subject to a purchase money security interest becomes a fixture, in order for
the related purchase money security interest to take priority over a
conflicting interest in the fixture, the holder's interest in such Home
Improvement must generally be perfected by a timely fixture filing. In general,
under the UCC, a security interest does not exist under the UCC in ordinary
building material incorporated into an improvement on land. Home Improvement
Contracts that finance lumber, bricks, other types of ordinary building
material or other goods that are deemed to lose such characterization, upon
incorporation of such materials into the related property, will not be secured
by a purchase money security interest in the Home Improvement being financed.
ENFORCEMENT OF SECURITY INTEREST IN HOME IMPROVEMENTS
So long as the Home Improvement has not become subject to the real estate
law, a creditor can repossess a Home Improvement securing a contract by
voluntary surrender, by "self-help" repossession that is "peaceful" (i.e.,
without breach of the peace) or, in the absence of voluntary surrender and the
ability to repossess without breach of the peace, by judicial process. The
holder of a contract must give the debtor a number of days' notice, which
varies from 10 to 30 days depending on the state, prior to commencement of any
repossession. The UCC and consumer protection laws in most states place
restrictions on repossession sales, including requiring prior notice to the
debtor and commercial reasonableness in effecting such a sale. The law in most
states also requires that the debtor be given notice of any sale prior to
resale of the unit that the debtor may redeem it at or before such resale.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgement from a debtor for any deficiency on repossession and
resale of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgements, and in many cases the
defaulting borrower would have no assets with which to pay a judgement.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgement.
CONSUMER PROTECTION LAWS
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract that is the seller of goods that gave rise to the transaction (and
certain related lenders and assignees) to transfer such contract free of notice
of claims by the debtor thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses 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 that 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 that 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 (each, an "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
Policy premiums associated with the property.
The method of enforcing the rights of the lender under an Installment
Sales Contract varies on a state-by-state basis depending upon the extent to
which state courts are willing, or able pursuant to state statute, to enforce
the contract strictly according to the terms. The terms of Installment Sales
Contracts generally provide that upon a default by the borrower, the borrower
loses his or her right to occupy the property, the entire indebtedness is
accelerated, and the buyer's equitable interest in the property is forfeited.
The lender in such a situation does not have to foreclose in order to obtain
title to the property, although in some cases a quiet title action is in order
if the borrower has filed the Installment Sales Contract in local land records
and an ejectment action may be necessary to recover possession. In a few
states, particularly in cases of borrower default during the early years of an
Installment Sales Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Sales Contracts from the harsh consequences of
forfeiture. Under such statutes, a judicial or nonjudicial foreclosure may be
required, the lender may be required to give notice of default and the borrower
may be granted some grace period during which the Installment Sales Contract
may be reinstated upon full payment of the default amount and the borrower may
have a post-foreclosure statutory redemption right. In other states, courts in
equity may permit a borrower with significant investment in the property under
an Installment Sales Contract for the sale of real estate to share in the
proceeds of sale of the property after the indebtedness is repaid or may
otherwise refuse to enforce the forfeiture clause. Nevertheless, generally
speaking, the lender's procedures for obtaining possession and clear title
under an Installment Sales Contract in a given state are simpler and less
time-consuming and costly than are the procedures for foreclosing and obtaining
clear title to a property subject to one or more liens.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service, (i) are entitled to have interest rates reduced and capped at
6% per annum, on obligations (including Loans) incurred prior to the
commencement of military service for the duration of military service, (ii) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on such obligations entered into prior to
military service for the duration of military service and (iii) may have the
maturity of such obligations incurred prior to military service extended, the
payments lowered and the payment schedule readjusted for a period of time after
the completion of military service. However, the benefits of (i), (ii), or
(iii) above are subject to challenge by creditors and if, in the opinion of the
court, the ability of a person to comply with such obligations is not
materially impaired by military service, the court may apply equitable
principles accordingly. If a borrower's obligation to repay amounts otherwise
due on a Loan included in a Trust Fund for a Series is relieved pursuant to the
Soldiers' and Sailors' Civil Relief Act of 1940, none of the Trust Fund, the
Servicer, the Depositor nor any Trustee will be required to advance such
amounts, and any loss in respect thereof may reduce the amounts available to be
paid to the Holders of the Securities of such Series. Unless otherwise
specified in the related Prospectus Supplement, any shortfalls in interest
collections on Loans or Underlying Loans relating to the Private Securities, as
applicable, included in a Trust Fund for a Series resulting from application of
the Soldiers' and Sailors' Civil Relief Act of 1940 will be allocated to each
Class of Securities of such Series that is entitled to receive interest in
respect of such Loans or Underlying Loans in proportion to the interest that
each such Class of Securities would have otherwise been entitled to receive in
respect of such Loans or Underlying Loans had such interest shortfall not
occurred.
THE DEPOSITOR
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 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 is a summary of certain anticipated material federal income
tax consequences of the purchase, ownership, and disposition of the Securities
and is based on the opinion of Brown & Wood LLP, special counsel to the
Depositor (in such capacity, "Tax Counsel"). 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 summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances. 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. Prospective investors may wish to
consult their own tax advisers concerning the federal, state, local and any
other tax consequences as relates specifically to such investors in connection
with the purchase, ownership and disposition of the Securities.
The federal income tax consequences to Holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness; (ii) an
election is made to treat the Trust Fund relating to a particular Series of
Securities as a real estate mortgage investment conduit (a "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 (v) an
election is made to treat the Trust Fund relating to a particular Series of
Securities as a Financial Asset Securitization Investment Trust ("FASIT") under
the Code. 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.
As used herein, the term "U.S. Person" means a citizen or resident of the
United States, a corporation, partnership or other entity created or organized
in or under the laws of the United States, any state thereof or the District of
Columbia (other than a partnership that is not treated as a United States
person under any applicable Treasury regulations), an estate whose income is
subject to U.S. federal income tax regardless of its source of income, or a
trust if a court within the United States is able to exercise primary
supervision of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust. Notwithstanding
the preceding sentence, to the extent provided in regulations, certain trusts
in existence on August 20, 1996 and treated as United States persons prior to
such date that elect to continue to be treated as United States persons shall
be considered U.S. Persons as well.
TAXATION OF DEBT SECURITIES
STATUS AS REAL PROPERTY LOANS. Except to the extent otherwise provided in
the related Prospectus Supplement, if the Securities are regular interests in a
REMIC ("Regular Interest Securities") or represent interests in a grantor
trust, Tax Counsel is of the opinion that: (i) Securities held by a domestic
building and loan association will constitute "loans... secured by an interest
in real property" within the meaning of Code section 7701(a)(19)(C)(v); and
(ii) Securities held by a real estate investment trust will constitute "real
estate assets" within the meaning of Code section 856(c)(4)(A) and interest on
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).
INTEREST AND ACQUISITION DISCOUNT. In the opinion of Tax Counsel, 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."
Tax Counsel is of the opinion that Debt Securities that are Compound
Interest Securities will, and certain of the other Debt Securities issued at a
discount 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 and amended on 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. In the
opinion of Tax Counsel, a Holder of a Debt Security must include such OID in
gross income as ordinary interest income as it accrues under a method taking
into account an economic accrual of the discount. In general, OID must be
included in income in advance of the receipt of the cash representing that
income. The amount of OID on a Debt Security will be considered to be zero if
it is less than a de minimis amount determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that Class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular Class of Debt Securities is sold for cash on
or prior to the Closing Date, the issue price for such Class will be treated as
the fair market value of such Class on the Closing Date. The issue price of a
Debt Security also includes the amount paid by an initial Debt Security Holder
for accrued interest that relates to a period prior to the issue date of the
Debt Security. The stated redemption price at maturity of a Debt Security
includes the original principal amount of the Debt Security, but generally will
not include distributions of interest if such distributions constitute
"qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as
described below); provided, that such interest payments are unconditionally
payable at intervals of one year or less during the entire term of the Debt
Security. The OID Regulations state that interest payments are unconditionally
payable only if a late payment or nonpayment is expected to be penalized or
reasonable remedies exist to compel payment. Certain Debt Securities may
provide for default remedies in the event of late payment or nonpayment of
interest. In the opinion of Tax Counsel, the interest on such Debt Securities
will be unconditionally payable and constitute qualified stated interest, not
OID. However, absent clarification of the OID Regulations, where Debt
Securities do not provide for default remedies, the interest payments will be
included in the Debt Security's stated redemption price at maturity and taxed
as OID. Interest is payable at a single fixed rate only if the rate
appropriately takes into account the length of the interval between payments.
Distributions of interest on Debt Securities with respect to which deferred
interest will accrue, will not constitute qualified stated interest payments,
in which case the stated redemption price at maturity of such Debt Securities
includes all distributions of interest as well as principal thereon. Where the
interval between the issue date and the first Distribution Date on a Debt
Security is either longer or shorter than the interval between subsequent
Distribution Dates, all or part of the interest foregone, in the case of the
longer interval, and all of the additional interest, in the case of the shorter
interval, will be included in the stated redemption price at maturity and
tested under the de minimis rule described below. In the case of a Debt
Security with a long first period that has non-de minimis OID, all stated
interest in excess of interest payable at the effective interest rate for the
long first period will be included in the stated redemption price at maturity
and the Debt Security will generally have OID. Holders of Debt Securities
should consult their own tax advisors to determine the issue price and stated
redemption price at maturity of a Debt Security.
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.
Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a qualified
variable rate and not as contingent interest if, generally, (i) such interest
is unconditionally payable at least annually, (ii) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and (iii)
interest is based on a "qualified floating rate," an "objective rate," or a
combination of "qualified floating rates" that do not operate in a manner that
significantly accelerates or defers interest payments on such Debt Security. In
the case of Compound Interest Securities, certain Interest Weighted Securities,
and certain of the other Debt Securities, none of the payments under the
instrument will be considered qualified stated interest, and thus the aggregate
amount of all payments will be included in the stated redemption price.
The Internal Revenue Service (the "IRS") recently issued final regulations
(the "Contingent Payment Regulations") governing the calculation of OID on
instruments having contingent interest payments. The Contingent Payment
Regulations, represent the only guidance regarding the views of the IRS with
respect to contingent interest instruments and specifically do not apply for
purposes of calculating OID on debt instruments subject to Code Section
1272(a)(6), such as the Debt Security. Additionally, the OID Regulations do not
contain provisions specifically interpreting Code Section 1272(a)(6). Until the
Treasury issues guidance to the contrary, the applicable Trustee intends to
base its computation on Code Section 1272(a)(6) and the OID Regulations as
described in this 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 Holder of a Debt Security issued with OID must include in gross
income, for all days during its taxable year on which it holds such Debt
Security, the sum of the "daily portions" of such original issue discount. The
amount of OID includible in income by a Holder will be computed by allocating
to each day during a taxable year a pro rata portion of the original issue
discount that accrued during the relevant accrual period. In the case of a Debt
Security that is not a Regular Interest Security and the principal payments on
which are not subject to acceleration resulting from prepayments on the Loans,
the amount of OID includible in income of a Holder for an accrual period
(generally the period over which interest accrues on the debt instrument) will
equal the product of the yield to maturity of the Debt Security and the
adjusted issue price of the Debt Security, reduced by any payments of qualified
stated interest. The adjusted issue price is the sum of its issue price plus
prior accruals or OID, reduced by the total payments made with respect to such
Debt Security in all prior periods, other than qualified stated interest
payments.
The amount of OID to be included in income by a Holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a "Pay-Through Security"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments is
to be determined on the basis of three factors: (i) the original yield to
maturity of the Pay-Through Security (determined on the basis of compounding at
the end of each accrual period and properly adjusted for the length of the
accrual period), (ii) events that 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 IRS 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 otherwise provided in the related
Prospectus Supplement, the applicable 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. In the opinion of Tax Counsel,
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 WEIGHTED SECURITIES. It is not clear how income should be accrued
with respect to Regular Interest Securities or Stripped Securities (as defined
under "--Tax Status as a Grantor Trust; General" herein) the payments on which
consist solely or primarily of a specified portion of the interest payments on
qualified mortgages held by the REMIC or on Loans underlying Pass-Through
Securities ("Interest Weighted Securities"). The Trustee intends to take the
position that all of the income derived from an Interest Weighted Security
should be treated as OID and that the amount and rate of accrual of such OID
should be calculated by treating the Interest Weighted Security as a Compound
Interest Security. However, in the case of Interest Weighted Securities that
are entitled to some payments of principal and that are Regular Interest
Securities the Internal Revenue Service could assert that income derived from
an Interest Weighted Security should be calculated as if the Security were a
security purchased at a premium equal to the excess of the price paid by such
Holder for such Security over its stated principal amount, if any. Under this
approach, a Holder would be entitled to amortize such premium only if it has in
effect an election under Section 171 of the Code with respect to all taxable
debt instruments held by such Holder, as described below. Alternatively, the
IRS could assert that an Interest Weighted Security should be taxable under the
rules governing bonds issued with contingent payments. Such treatment may be
more likely in the case of Interest Weighted Securities that are Stripped
Securities as described below. See "--Tax Status as a Grantor Trust--Discount
or Premium on Pass-Through Securities."
VARIABLE RATE DEBT SECURITIES. In the opinion of Tax Counsel, in the case
of Debt Securities bearing interest at a rate that varies directly, according
to a fixed formula, with an objective index, it appears that (i) the yield to
maturity of such Debt Securities and (ii) in the case of Pay-Through
Securities, the present value of all payments remaining to be made on such Debt
Securities, should be calculated as if the interest index remained at its value
as of the issue date of such Securities. Because the proper method of adjusting
accruals of OID on a variable rate Debt Security is uncertain, Holders of
variable rate Debt Securities should consult their own tax advisers regarding
the appropriate treatment of such Securities for federal income tax purposes.
MARKET DISCOUNT. In the opinion of Tax Counsel, a purchaser of a Security
may be subject to the market discount rules of Sections 1276-1278 of the Code.
A Holder that acquires a Debt Security with more than a prescribed de minimis
amount of "market discount" (generally, the excess of the principal amount of
the Debt Security over the purchaser's purchase price) will be required to
include accrued market discount in income as ordinary income in each month, but
limited to an amount not exceeding the principal payments on the Debt Security
received in that month and, if the Securities are sold, the gain realized. Such
market discount would accrue in a manner to be provided in Treasury regulations
but, until such regulations are issued, such market discount would in general
accrue either (i) on the basis of a constant yield (in the case of a
Pay-Through Security, taking into account a prepayment assumption) or (ii) in
the ratio of (a) in the case of Securities (or in the case of a Pass-Through
Security, as set forth below, the Loans underlying such Security) not
originally issued with original issue discount, stated interest payable in the
relevant period to total stated interest remaining to be paid at the beginning
of the period or (b) in the case of Securities (or, in the case of a
Pass-Through Security, as described below, the Loans underlying such Security)
originally issued at a discount, OID in the relevant period to total OID
remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the Debt Security (or, in the case of a Pass-Through Security, the Loans),
the excess of interest paid or accrued to purchase or carry a Security (or, in
the case of a Pass-Through Security, as described below, the underlying Loans)
with market discount over interest received on such Security is allowed as a
current deduction only to the extent such excess is greater than the market
discount that accrued during the taxable year in which such interest expense
was incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon the
sale, disposition, or repayment of the Security (or in the case of a
Pass-Through Security, an underlying Loan). A Holder may elect to include
market discount in income currently as it accrues, on all market discount
obligations acquired by such Holder during the taxable year such election is
made and thereafter, in which case the interest deferral rule will not apply.
PREMIUM. In the opinion of Tax Counsel, 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 IRS. 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 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, in the opinion
of Tax Counsel (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 securities, "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)(4)(A), and income with respect to the Securities will be considered
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of Code Section 856(c)(3)(B) (assuming,
for both purposes, that at least 95% of the REMIC's assets are qualifying
assets). If less than 95% of the REMIC's assets consist of assets described in
(i) or (ii) above, then a Security will qualify for the tax treatment described
in (i) or (ii) in the proportion that such REMIC assets are qualifying assets.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, in the opinion of Tax Counsel, all of the expenses of a
REMIC will be taken into account by Holders of the Residual Interest
Securities. In the case of a "single class REMIC," however, the expenses will
be allocated, under Treasury regulations, among the Holders of the Regular
Interest Securities and the Holders of the Residual Interest Securities on a
daily basis in proportion to the relative amounts of income accruing to each
Holder on that day. In the case of a Holder of a Regular Interest Security who
is an individual or a "pass-through interest holder" (including certain
pass-through entities but not including real estate investment trusts), such
expenses will be deductible only to the extent that such expenses, plus other
"miscellaneous itemized deductions" of the Holder, exceed 2% of such Holder's
adjusted gross income. In addition, for taxable years beginning after December
31, 1990, the amount of itemized deductions otherwise allowable for the taxable
year for an individual whose adjusted gross income exceeds the applicable
amount (which amount will be adjusted for inflation for taxable years beginning
after 1990) will be reduced by the lesser of (i) 3% of the excess of adjusted
gross income over the applicable amount, or (ii) 80% of the amount of itemized
deductions otherwise allowable for such taxable year. The reduction or
disallowance of this deduction may have a significant impact on the yield of
the Regular Interest Security to such a Holder. In general terms, a single
class REMIC is one that either (i) would qualify, under existing Treasury
regulations, as a grantor trust if it were not a REMIC (treating all interests
as ownership interests, even if they would be classified as debt for federal
income tax purposes) or (ii) is similar to such a trust and that is structured
with the principal purpose of avoiding the single class REMIC rules. Unless
otherwise specified in the related 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, in the opinion of Tax Counsel, 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.
CALCULATION OF REMIC INCOME. In the opinion of Tax Counsel, the taxable
income or net loss of a REMIC is determined under an accrual method of
accounting and in the same manner as in the case of an individual, with certain
adjustments. In general, the taxable income or net loss will be the difference
between (i) the gross income produced by the REMIC's assets, including stated
interest and any original issue discount or market discount on loans and other
assets, and (ii) deductions, including stated interest and original issue
discount accrued on Regular Interest Securities, amortization of any premium
with respect to Loans, and servicing fees and other expenses of the REMIC. A
Holder of a Residual Interest Security that is an individual or a "pass-through
interest holder" (including certain pass-through entities, but not including
real estate investment trusts) will be unable to deduct servicing fees payable
on the loans or other administrative expenses of the REMIC for a given taxable
year, to the extent that such expenses, when aggregated with such Holder's
other miscellaneous itemized deductions for that year, do not exceed two
percent of such Holder's adjusted gross income.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the Startup
Day (generally, the day that the interests are issued). That 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
In the opinion of Tax Counsel, the Holder of a Certificate 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.
In the opinion of Tax Counsel, 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. In the opinion of Tax Counsel, 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. In the opinion of Tax Counsel, 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. In the opinion of Tax Counsel, 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. In the opinion of Tax Counsel, 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 Small
Business Job Protection Act of 1996 has eliminated the special rule permitting
Section 593 institutions ("thrift institutions") to use net operating losses
and other allowable deductions to offset their excess inclusion income from
Residual Interest Securities that have "significant value" within the meaning
of the REMIC Regulations, effective for taxable years beginning after December
31, 1995, except with respect to Residual Interest Securities continuously held
by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect on excess inclusions on the alternative
minimum taxable income of a residual Holder. First, alternative minimum taxable
income for such residual Holder is determined without regard to the special
rule that taxable income cannot be less than excess inclusions. Second, a
residual Holder's alternative minimum taxable income for a tax year cannot be
less than excess inclusions for the year. Third, the amount of any alternative
minimum tax net operating loss deductions must be computed without regard to
any excess inclusions. These rules are effective for tax years beginning after
December 31, 1986, unless a residual Holder elects to have such rules apply
only to tax years beginning after August 20, 1996.
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 Day
multiplied by (ii) the adjusted issue price of such Residual Interest Security
at the beginning of such quarterly period. The adjusted issue price of a
Residual Interest 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), increased by the aggregate of the daily accruals
for prior calendar quarters, and decreased (but not below zero) by the amount
of loss allocated to a Holder and the amount of distributions made on the
Residual Interest Security before the beginning of the quarter. The long-term
federal rate, which is announced monthly by the Treasury Department, is an
interest rate that is based on the average market yield of outstanding
marketable obligations of the United States government having remaining
maturities in excess of nine years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Securities may be disregarded. See "--Restrictions on Ownership and
Transfer of Residual Interest Securities" and "--Tax Treatment of Foreign
Investors" below.
RESTRICTIONS ON OWNERSHIP AND TRANSFER OF RESIDUAL INTEREST SECURITIES. As
a condition to qualification as a REMIC, reasonable arrangements must be made
to prevent the ownership of a REMIC residual interest by any "Disqualified
Organization." Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in Section 1381(a)(2)(C) of the
Code, or any entity exempt from the tax imposed by Sections 1-1399 of the Code,
if such entity is not subject to tax on its unrelated business income.
Accordingly, the applicable Pooling and Servicing Agreement will prohibit
Disqualified Organizations from owning a Residual Interest Security. In
addition, no transfer of a Residual Interest Security will be permitted unless
the proposed transferee shall have furnished to the Trustee an affidavit
representing and warranting that it is neither a Disqualified Organization nor
an agent or nominee acting on behalf of a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
Interest Security at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
Residual Interest Security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all federal
tax purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. A Residual Interest Security is a "noneconomic
residual interest" unless, at the time of the transfer (i) the present value of
the expected future distributions on the Residual Interest Security at least
equals the product of the present value of the anticipated excess inclusions
and the highest rate of tax for the year in which the transfer occurs and (ii)
the transferor reasonably expects that the transferee will receive
distributions from the REMIC at or after the time at which the taxes accrue on
the anticipated excess inclusions in an amount sufficient to satisfy the
accrued taxes. If a transfer of a Residual Interest 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 REMIC Residual Interest
Security should be aware that the IRS recently finalized regulations (the
"Final Mark-to-Market Regulations"), which provide that a REMIC Residual
Interest Security acquired after January 3, 1995 cannot be marked-to-market.
Prospective purchasers of a REMIC Residual Interest Security should consult
their tax advisors regarding the possible application of the Mark to Market
Regulations.
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 further specified in the related Prospectus Supplement, if a
REMIC election is not made and the Trust Fund is not structured as a
partnership, then, in the opinion of Tax Counsel, the Trust Fund relating to a
Series of Securities will be classified for federal income tax purposes as a
grantor trust under Subpart E, Part 1 of Subchapter J of the Code and not as an
association taxable as a corporation (the Securities of such Series,
"Pass-Through Securities"). In some Series there will be no separation of the
principal and interest payments on the Loans. In such circumstances, a Holder
will be considered to have purchased a pro rata undivided interest in each of
the Loans. In other cases ("Stripped Securities"), sale of the Securities will
produce a separation in the ownership of all or a portion of the principal
payments from all or a portion of the interest payments on the Loans.
In the opinion of Tax Counsel, 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 applicable Trustee and the
Servicer and similar fees (collectively, the "Servicing Fee")), 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 applicable 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 deductible to any extent in computing such Holder's
alternative minimum tax liability. In addition, for taxable years beginning
after December 31, 1990, the amount of itemized deductions otherwise allowable
for the taxable year for an individual whose adjusted gross income exceeds the
applicable amount (which amount will be adjusted for inflation in taxable years
beginning after 1990) will be reduced by the lesser of (i) 3% of the excess of
adjusted gross income over the applicable amount or (ii) 80% of the amount of
itemized deductions otherwise allowable for such taxable year.
DISCOUNT OR PREMIUM ON PASS-THROUGH SECURITIES. In the opinion of Tax
Counsel, 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 related 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 Certificate, 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.
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 (the "excess
servicing fee") 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's
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 that 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.
In the case of a Stripped Security that is an Interest Weighted Security,
the applicable Trustee intends, absent contrary authority, to report income to
Holders as OID, in the manner described above for Interest Weighted Securities.
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 non-Interest
Weighted Security is composed of an unstripped undivided ownership interest in
Loans and an installment obligation consisting of stripped principal payments;
(ii) the non-Interest Weighted Securities are subject to the contingent payment
provisions of the Proposed Regulations; or (iii) each Interest Weighted
Stripped Security 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. Pass-Through Securities will be, and,
although the matter is not free from doubt, Stripped Securities should be
considered to represent "real estate assets" within the meaning of Section
856(c)(4)(A) 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" within 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, in the opinion of Tax Counsel, 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 and will generally be
long-term capital gain or loss if the holding period of the Security is one
year or more and short-term capital gain or loss if the holding period of the
Security is less than one year. Non-corporate taxpayers are subject to reduced
maximum rates on long-term capital gains and are generally subject to tax at
ordinary income rates on short-term capital gains. The deductibility of capital
losses is subject to certain limitations. Prospective investors should consult
their own tax advisors concerning these tax law provisions.
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 REMIC Residual 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
applicable Trustee with its taxpayer identification number (the "TIN"); (ii)
furnishes the applicable 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 applicable
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 applicable 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.
NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations"), which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New
Regulations attempt to unify certification requirements and modify reliance
standards. 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.
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, under the Code, unless interest (including OID)
paid on a Security (other than a Residual Interest Security) is considered to
be "effectively connected" with a trade or business conducted in the United
States by a nonresident alien individual, foreign partnership or foreign
corporation ("Nonresidents"), in the opinion of Tax Counsel, such interest will
normally qualify as portfolio interest (except where (i) the recipient is a
holder, directly or by attribution, of 10% or more of the capital or profits
interest in the issuer, or (ii) the recipient is a controlled foreign
corporation to which the issuer is a related person) and will be exempt from
federal income tax. Upon receipt of appropriate ownership statements, the
issuer normally will be relieved of obligations to withhold tax from such
interest payments. These provisions supersede the generally applicable
provisions of United States law that would otherwise require the issuer to
withhold at a 30% rate (unless such rate were reduced or eliminated by an
applicable tax treaty) on, among other things, interest and other fixed or
determinable, annual or periodic income paid to Nonresidents. Holders of
Pass-Through Securities and Stripped Securities, including Ratio Strip
Securities, however, may be subject to withholding to the extent that the Loans
were originated on or before July 18, 1984.
Interest and OID of Holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the Holder. They will, however, generally be subject to the
regular United States income tax.
Payments to Holders of Residual Interest Securities who are foreign
persons will generally be treated as interest for purposes of the 30% (or lower
treaty rate) United States withholding tax. Holders should assume that such
income does not qualify for exemption from United States withholding tax as
"portfolio interest." It is clear that, to the extent that a payment represents
a portion of REMIC taxable income that constitutes excess inclusion income, a
Holder of a Residual Interest Security will not be entitled to an exemption
from or reduction of the 30% (or lower treaty rate) withholding tax rule. If
the payments are subject to United States withholding tax, they generally will
be taken into account for withholding tax purposes only when paid or
distributed (or when the Residual Interest Security is disposed of). The
Treasury has statutory authority, however, to promulgate regulations that 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 FUND AS A PARTNERSHIP
Tax Counsel is of the opinion that a Trust Fund structured as a
partnership will not be an association (or publicly traded partnership) taxable
as a corporation for federal income tax purposes. This opinion is based on the
assumption that the terms of the Trust Agreement and related documents will be
complied with, and on counsel's conclusions that 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, in the opinion of Tax Counsel, 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. In such a circumstance, Tax Counsel is, except
as otherwise provided in the related Prospectus Supplement, of the opinion 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, in the opinion of Tax Counsel, 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. In the opinion of Tax Counsel, if a Noteholder
sells a Note, the Holder will recognize gain or loss in an amount equal to the
difference between the amount realized on the sale and the Holder's adjusted
tax basis in the Note. The adjusted tax basis of a Note to a particular
Noteholder will equal the Holder's cost for the Note, increased by any market
discount, acquisition discount, OID and gain previously included by such
Noteholder in income with respect to the Note and decreased by the amount of
bond premium (if any) previously amortized and by the amount of principal
payments previously received by such Noteholder with respect to such Note. Any
such gain or loss will be capital gain or loss if the Note was held as a
capital asset, except for gain representing accrued interest and accrued market
discount not previously included in income. Capital losses generally may be
used only to offset capital gains.
FOREIGN HOLDERS. In the opinion of Tax Counsel, interest payments made (or
accrued) to a Noteholder who is a nonresident alien, foreign corporation or
other non-United States person (a "foreign person") generally will be
considered "portfolio interest," and generally will not be subject to United
States federal income tax and withholding tax, if the interest is not
effectively connected with the conduct of a trade or business within the United
States by the foreign person and the foreign person (i) is not actually or
constructively a "10 percent shareholder" of the Trust Fund or the Seller
(including a Holder of 10% of the outstanding Certificates) or a "controlled
foreign corporation" with respect to which the Trust Fund or the Seller is a
"related person" within the meaning of the Code and (ii) provides the Trustee
or other person who is otherwise required to withhold U.S. tax with respect to
the Notes with an appropriate statement (on Form W-8 or a similar form), signed
under penalties of perjury, certifying that the beneficial owner of the Note is
a foreign person and providing the foreign person's name and address. If a Note
is held through a securities clearing organization or certain other financial
institutions, the organization or institution may provide the relevant signed
statement to the withholding agent; in that case, however, the signed statement
must be accompanied by a Form W-8 or substitute form provided by the foreign
person that owns the Note. If such interest is not portfolio interest, then it
will be subject to United States federal income and withholding tax at a rate
of 30 percent, unless reduced or eliminated pursuant to an applicable tax
treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax; provided, that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the 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.
The New Regulations described herein make certain modifications to the
backup withholding and information reporting rules. The New Regulations
generally will 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.
POSSIBLE ALTERNATIVE TREATMENTS OF THE NOTES. If, contrary to the opinion
of Tax Counsel, the IRS successfully asserted that one or more of the Notes did
not represent debt for federal income tax purposes, the Notes might be treated
as equity interests in the Trust Fund. If so treated, the Trust Fund might be
taxable as a corporation with the adverse consequences described above (and the
taxable corporation would not be able to reduce its taxable income by
deductions for interest expense on Notes recharacterized as equity).
Alternatively, and most likely in the view of 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
Servicer 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. If the Trust Fund is a partnership, in the opinion
of Tax Counsel, the Trust Fund will not be subject to federal income tax.
Rather, in the opinion of Tax Counsel, 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.
In the opinion of Tax Counsel, the tax items of a partnership are
allocable to the partners in accordance with the Code, Treasury regulations and
the partnership agreement (here, the Trust Agreement and related documents).
The Trust Agreement will provide, in general, that the Certificateholders will
be allocated taxable income of the Trust Fund for each month equal to the sum
of (i) the interest that accrues on the Certificates in accordance with their
terms for such month, including interest accruing at the Pass-Through Rate for
such month and interest on amounts previously due on the Certificates but not
yet distributed; (ii) any Trust Fund income attributable to discount on the
Loans that corresponds to any excess of the principal amount of the
Certificates over their initial issue price (iii) prepayment premium payable to
the Certificateholders for such month; and (iv) any other amounts of income
payable to the Certificateholders for such month. Such allocation will be
reduced by any amortization by the Trust Fund of premium on Loans that
corresponds to any excess of the issue price of Certificates over their
principal amount. All remaining taxable income of the Trust Fund will be
allocated to the Depositor. Based on the economic arrangement of the parties,
in the opinion of Tax Counsel, 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, in the opinion of Tax
Counsel, even under the foregoing method of allocation, Certificateholders may
be allocated income equal to the entire Pass-Through Rate plus the other items
described above even though the Trust Fund might not have sufficient cash to
make current cash distributions of such amount. Thus, cash basis Holders will
in effect be required to report income from the Certificates on the accrual
basis and Certificateholders may become liable for taxes on Trust Fund income
even if they have not received cash from the Trust Fund to pay such taxes. In
addition, because tax allocations and tax reporting will be done on a uniform
basis for all Certificateholders but Certificateholders may be purchasing
Certificates at different times and at different prices, Certificateholders may
be required to report on their tax returns taxable income that is greater or
less than the amount reported to them by the Trust Fund.
In the opinion of Tax Counsel, all of the taxable income allocated to a
Certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
Holder under the Code.
In the opinion of Tax Counsel, 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 Fund 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, in
the opinion of Tax Counsel, 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. In the opinion of Tax Counsel, 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. Pursuant to final Treasury
regulations issued May 9, 1997 under Section 708 of the Code, if such a
termination occurs, the Trust Fund (the "old partnership") would be deemed to
contribute its assets to a new partnership (the "new partnership") in exchange
for interests in the new partnership. Such interests would be deemed
distributed to the partners of the old partnership in liquidation thereof,
which would not constitute a sale or exchange.
DISPOSITION OF CERTIFICATES. Generally, in the opinion of Tax Counsel,
capital gain or loss will be recognized on a sale of Certificates in an amount
equal to the difference between the amount realized and the seller's tax basis
in the Certificates sold. A Certificateholder's tax basis in a Certificate will
generally equal the Holder's cost increased by the Holder's share of Trust Fund
income (includible in income) and decreased by any distributions received with
respect to such Certificate. In addition, both the tax basis in the
Certificates and the amount realized on a sale of a Certificate would include
the Holder's share of the Notes and other liabilities of the Trust Fund. A
Holder acquiring Certificates at different prices may be required to maintain a
single aggregate adjusted tax basis in such Certificates, and, upon sale or
other disposition of some of the Certificates, allocate a portion of such
aggregate tax basis to the Certificates sold (rather than maintaining a
separate tax basis in each Certificate for purposes of computing gain or loss
on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the Holder's share
of unrecognized accrued market discount on the Loans would generally be treated
as ordinary income to the Holder and would give rise to special tax reporting
requirements. The Trust Fund does not expect to have any other assets that
would give rise to such special reporting requirements. Thus, to avoid those
special reporting requirements, the Trust Fund will elect to include market
discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise
to a capital loss upon the retirement of the Certificates.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the
Certificateholders in proportion to the principal amount of Certificates owned
by them as of the close of the last day of such month. As a result, a Holder
purchasing Certificates may be allocated tax items (which will affect its tax
liability and tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
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 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-l 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 (a) the name, address and identification number of
such person, (b) 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 (c) certain
information on Certificates that were held, bought or sold on behalf of such
person throughout the year. In addition, brokers and financial institutions
that hold Certificates through a nominee are required to furnish directly to
the Trust Fund information as to themselves and their ownership of
Certificates. A clearing agency registered under Section 17A of the Exchange
Act is not required to furnish any such information statement to the Trust
Fund. The information referred to above for any calendar year must be furnished
to the Trust Fund on or before the following January 31. Nominees, brokers and
financial institutions that fail to provide the Trust Fund with the information
described above may be subject to penalties.
The Depositor will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which
the partnership information return is filed. Any adverse determination
following an audit of the return of the Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the
Certificateholders, and, under certain circumstances, a Certificateholder may
be precluded from separately litigating a proposed adjustment to the items of
the Trust Fund. An adjustment could also result in an audit of a
Certificateholder's returns and adjustments of items not related to the income
and losses of the Trust Fund.
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to
non-U.S. persons because there is no clear authority dealing with that issue
under facts substantially similar to those described herein. Although it is not
expected that the Trust Fund would be engaged in a trade or business in the
United States for such purposes, the Trust Fund will withhold as if it were so
engaged in order to protect the Trust Fund from possible adverse consequences
of a failure to withhold. The Trust Fund expects to withhold on the portion of
its taxable income that is allocable to foreign Certificateholders pursuant to
Section 1446 of the Code, as if such income were effectively connected to a
U.S. trade or business, at a rate of 35% for foreign Holders that are taxable
as corporations and 39.6% for all other foreign Holders. Subsequent adoption of
Treasury regulations or the issuance of other administrative pronouncements may
require the Trust Fund to change its withholding procedures. In determining a
Holder's withholding status, the Trust Fund may rely on IRS Form W-8, IRS Form
W-9 or the Holder's certification of nonforeign status signed under penalties
of perjury.
Each foreign Holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the
branch profits tax) on its share of the Trust Fund's income. Each foreign
Holder must obtain a taxpayer identification number from the IRS and submit
that number to the Trust Fund on Form W-8 in order to assure appropriate
crediting of the taxes withheld. A foreign Holder generally would be entitled
to file with the IRS a claim for refund with respect to taxes withheld by the
Trust Fund taking the position that no taxes were due because the Trust Fund
was not engaged in a U.S. trade or business. However, interest payments made
(or accrued) to a Certificateholder who is a foreign person generally will be
considered guaranteed payments to the extent such payments are determined
without regard to the income of the Trust Fund. If these interest payments are
properly characterized as guaranteed payments, then the interest will not be
considered "portfolio interest." As a result, Certificateholders will be
subject to United States federal income tax and withholding tax at a rate of 30
percent, unless reduced or eliminated pursuant to an applicable treaty. In such
case, a foreign Holder would only be entitled to claim a refund for that
portion of the taxes in excess of the taxes that should be withheld with
respect to the guaranteed payments.
BACKUP WITHHOLDING. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the Holder is an exempt recipient under
applicable provisions of the Code. The New Regulations described herein make
certain modifications to the backup withholding and information reporting
rules. 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.
STATE TAX CONSIDERATIONS
In addition to the federal income tax considerations 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.
FASIT SECURITIES
GENERAL. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory vehicle
for the issuance of mortgage-backed and asset-backed securities ("FASIT
Securities"). Although the FASIT provisions of the Code became effective on
September 1, 1997, no Treasury regulations or other administrative guidance has
been issued with respect to those provisions. Accordingly, definitive guidance
cannot be provided with respect to many aspects of the tax treatment of Holders
of FASIT Securities. Investors also should note that the FASIT discussions
contained herein constitutes only a summary of the federal income tax
consequences to Holders of FASIT Securities. With respect to each Series of
FASIT Securities, the related Prospectus Supplement will provide a detailed
discussion regarding the federal income tax consequences associated with the
particular transaction.
FASIT Securities will be classified as either FASIT Regular Securities,
which generally will be treated as debt for federal income tax purposes, or
FASIT Ownership Securities, which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect
to the taxable income or loss of the related Series. The Prospectus Supplement
for each Series of Securities will indicate whether one or more FASIT elections
will be made for such Series, and which Securities of such Series will be
designated as Regular Securities, and which, if any, will be designated as
Ownership Securities.
QUALIFICATION AS A FASIT. The Trust Fund underlying a Series (or one or
more designated pools of assets held in the Trust Fund) will qualify under the
Code as a FASIT in which the FASIT Regular Securities and the FASIT Ownership
Securities will constitute the "regular interests" and the "ownership
interests," respectively, if (i) a FASIT election is in effect, (ii) certain
tests concerning (a) the composition of the FASIT's assets and (b) the nature
of the Holders' interest in the FASIT are met on a continuing basis and (iii)
the Trust Fund is not a regulated company as defined in Section 851(a) of the
Code.
ASSET COMPOSITION. In order for a Trust Fund (on one or more designated
pools of assets held by a Trust Fund) to be eligible for FASIT status,
substantially all of the assets of the Trust Fund (or the designated pool) must
consist of "permitted assets" as of the close of the third month beginning
after the Closing Date and at all times thereafter (the "FASIT Qualification
Test"). Permitted assets include (i) cash or cash equivalents, (ii) debt
instruments with fixed terms that would qualify as REMIC regular interests if
issued by a REMIC (generally, instruments that provide for interest at a fixed
rate, a qualifying variable rate, or a qualifying interest-only ("IO") type
rate, (iii) foreclosure property, (iv) certain hedging instruments (generally,
interest and currency rate swaps and credit enhancement contracts) that are
reasonably required to guarantee or hedge against the FASIT's risks associated
with being the obligor on FASIT interests, (v) contract rights to acquire
qualifying debt instruments or qualifying hedging instruments, (vi) FASIT
regular interests and (vii) REMIC regular interests. Permitted assets do not
include any debt instruments issued by the Holder of the FASIT's ownership
interest or by any person related to such Holder.
INTERESTS IN A FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT also must meet certain requirements. All
of the interests in a FASIT must belong to either of the following: (i) one or
more Classes of regular interests or (ii) a single Class of ownership interest
that is held by a fully taxable domestic corporation. In the case of Series
that include FASIT Ownership Securities, the ownership interest will be
represented by the FASIT Ownership Securities.
A FASIT interest generally qualifies as a regular interest if (i) it is
designated as a regular interest, (ii) it has a stated maturity no greater than
thirty years, (iii) it entitles its Holder to a specified principal amount,
(iv) the issue price of the interest does not exceed 125% of its stated
principal amount, (v) the yield to maturity of the interest is less than the
applicable Treasury rate published by the IRS plus 5% and (vi) if it pays
interest, such interest is payable at either (a) a fixed rate with respect to
the principal amount of the regular interest or (b) a permissible variable rate
with respect to such principal amount. Permissible variable rates for FASIT
regular interests are the same as those for REMIC regular interest (i.e.,
certain qualified floating rates and weighted average rates). See "Certain
Federal Income Tax Considerations--Taxation of Debt Securities--Variable Rate
Debt Securities."
If a FASIT Security fails to meet one or more of the requirements set out
in clauses (iii), (iv) or (v) above, but otherwise meets the above
requirements, it may still qualify as a type of regular interest known as a
"High-Yield Interest." In addition, if a FASIT Security fails to meet the
requirements of clause (vi), but the interest payable on the Security consists
of a specified portion of the interest payments on permitted assets and that
portion does not vary over the life of the Security, the Security also will
qualify as a High-Yield Interest. A High-Yield Interest may be held only by
domestic corporations that are fully subject to corporate income tax ("Eligible
Corporations"), other FASITs and dealers in securities who acquire such
interests as inventory, rather than for investment. In addition, Holders of
High-Yield Interests are subject to limitations on offset of income derived
from such interest. See "Certain Federal Income Tax Considerations--FASIT
Securities--Tax Treatment of FASIT Regular Securities--Treatment of High-Yield
Interests."
CONSEQUENCES OF DISQUALIFICATION. If a Series of FASIT Securities fails to
comply with one or more of the Code's ongoing requirements for FASIT status
during any taxable year, the Code provides that its FASIT status may be lost
for that year and thereafter. If FASIT status is lost, the treatment of the
former FASIT and the interests therein for federal income tax purposes is
uncertain. The former FASIT might be treated as a grantor trust, as a separate
association taxed as a corporation, or as a partnership. The FASIT Regular
Securities could be treated as debt instruments for federal income tax purposes
or as equity interests. Although the Code authorizes the Treasury to issue
regulations that address situations where a failure to meet the requirements
for FASIT status occurs inadvertently and in good faith, such regulations have
not yet been issued. It is possible that disqualification relief might be
accompanied by sanctions, such as the imposition of a corporate tax on all or a
portion of the FASIT's income for a period of time in which the requirements
for FASIT status are not satisfied.
TAX TREATMENT OF FASIT REGULAR SECURITIES. Payments received by Holders of
FASIT Regular Securities generally should be accorded the same tax treatment
under the Code as payments received on other taxable corporate debt instruments
and on REMIC Regular Securities. As in the case of Holders of REMIC Regular
Securities, Holders of FASIT Regular Securities must report income from such
Securities under an accrual method of accounting, even if they otherwise would
have used the case receipts and disbursements method. Except in the case of
FASIT Regular Securities issued with original issue discount or acquired with
market discount or premium, interest paid or accrued on a FASIT Regular
Security generally will be treated as ordinary income to the Holder and a
principal payment on such Security will be treated as a return of capital to
the extent that the Holder's basis is allocable to that payment. FASIT Regular
Securities issued with original issue discount or acquired with market discount
or premium generally will treat interest and principal payments on such
Securities in the same manner described for REMIC Regular Securities. See
"Certain Federal Income Tax Considerations--Taxation of Debt Securities,"
"--Market Discount," and "--Premium" above. High-Yield Securities may be held
only by fully taxable domestic corporations, other FASITs, and certain
securities dealers. Holders of High-Yield Securities are subject to limitations
on their ability to use current losses or net operating loss carryforwards or
carrybacks to offset any income derived from those Securities.
If a FASIT Regular Security is sold or exchanged, the Holder generally
will recognize gain or loss upon the sale in the manner described above for
REMIC Regular Securities. See "Certain Federal Income Tax Considerations--Sale
or Exchange." In addition, if a FASIT Regular Security becomes wholly or
partially worthless as a result of Default and Delinquencies of the underlying
assets, the Holder of such Security should be allowed to deduct the loss
sustained (or alternatively be able to report a lesser amount of income). See
"Certain Federal Income Tax Considerations--Taxation of Debt
Instruments--Effects of Default and Delinquencies."
FASIT Regular Securities held by a REIT will qualify as "real estate
assets" within the meaning of section 856(c)(4)(A) of the Code, and interest on
such Securities will be considered Qualifying REIT Interest to the same extent
that REMIC Securities would be so considered. FASIT Regular Securities held by
a Thrift Institution taxed as a "domestic building and loan association" will
represent qualifying assets for purposes of the qualification requirements set
forth in Code Section 7701(a)(19) to the same extent that REMIC Securities
would be so considered. See "Certain Federal Income Tax
Considerations--Taxation of Debt Securities--Status as Real Property Loans." In
addition, FASIT Regular Securities held by a financial institution to which
Section 585 of the Code applies will be treated as evidences of indebtedness
for purposes of Section 582(c)(1) of the Code. FASIT Securities will not
qualify as "Government Securities" for either REIT or RIC qualification
purposes.
TREATMENT OF HIGH-YIELD INTERESTS. High-Yield Interests are subject to
special rules regarding the eligibility of Holders of such interests, and the
ability of such Holders to offset income derived from their FASIT Security with
losses. High-Yield Interests may be held only by Eligible Corporations other
FASITs, and dealers in securities who acquire such interests as inventory. If a
securities dealer (other than an Eligible Corporation) initially acquires a
High-Yield Interest as inventory, but later begins to hold it for investment,
the dealer will be subject to an excise tax equal to the income from the
High-Yield Interest multiplied by the highest corporate income tax rate. In
addition, transfers of High-Yield Interests to disqualified Holders will be
disregarded for federal income tax purposes, and the transferor still will be
treated as the Holder of the High-Yield Interest.
The Holder of a High-Yield Interest may not use non-FASIT current losses
or net operating loss carryforwards or carrybacks to offset any income derived
from the High-Yield Interest, for either regular federal income tax purposes or
for alternative minimum tax purposes. In addition, the FASIT provisions contain
an anti-abuse rule that imposes corporate income tax on income derived from a
FASIT Regular Security that is held by a pass-through entity (other than
another FASIT) that issues debt or equity securities backed by the FASIT
Regular Security and that have the same features as High-Yield Interests.
TAX TREATMENT OF FASIT OWNERSHIP SECURITIES. A FASIT Ownership Security
represents the residual equity interest in a FASIT. As such, the Holder of a
FASIT Ownership Security determines its taxable income by taking into account
all assets, liabilities and items of income, gain, deduction, loss and credit
of a FASIT. In general, the character of the income to the Holder of a FASIT
Ownership Interest will be the same as the character of such income of the
FASIT, except that any tax-exempt interest income taken into account by the
Holder of a FASIT Ownership Interest is treated as ordinary income. In
determining that taxable income, the Holder of a FASIT Ownership Security must
determine the amount of interest, original issue discount, market discount and
premium recognized with respect to the FASIT's assets and the FASIT Regular
Securities issued by the FASIT according to a constant yield methodology and
under an accrual method of accounting. In addition, Holders of FASIT Ownership
Securities are subject to the same limitations on their ability to use losses
to offset income from their FASIT Security as are the Holders of High-Yield
Interests. See "Certain Federal Income Tax Considerations--Treatment of
High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Securities. Accordingly, losses
on dispositions of a FASIT Ownership Security generally will be disallowed
where, within six months before or after the disposition, the seller of such
Security acquires any other FASIT Ownership Security or, in the case of a FASIT
holding mortgage assets, any interest in a Taxable Mortgage Pool that is
economically comparable to a FASIT Ownership Security. In addition, if any
security that is sold or contributed to a FASIT by the Holder of the related
FASIT Ownership Security was required to be marked-to-market under Code section
475 by such Holder, then section 475 will continue to apply to such securities,
except that the amount realized under the mark-to-market rules will be a
greater of the securities' value under present law or the securities' value
after applying special valuation rules contained in the FASIT provisions. Those
special valuation rules generally require that the value of debt instruments
that are not traded on an established securities market be determined by
calculating the present value of the reasonably expected payments under the
instrument using a discount rate of 120% of the applicable federal rate,
compounded semiannually.
The Holder of a FASIT Ownership Security will be subject to a tax equal to
100% of the net income derived by the FASIT from any "prohibited transactions."
Prohibited transactions include (i) the receipt of income derived from assets
that are not permitted assets, (ii) certain dispositions of permitted assets,
(iii) the receipt of any income derived from any loan originated by a FASIT and
(iv) in certain cases, the receipt of income representing a servicing fee or
other compensation. Any Series for which a FASIT election is made generally
will be structured in order to avoid application of the prohibited transaction
tax.
BACKUP WITHHOLDING, REPORTING AND TAX ADMINISTRATION. Holders of FASIT
Securities will be subject to backup withholding to the same extent Holders of
REMIC Securities would be subject. See "Certain Federal Income Tax
Considerations--Miscellaneous Tax Aspects--Backup Withholding." For purposes of
reporting and tax administration, Holders of record of FASIT Securities
generally will be treated in the same manner as Holders of REMIC Securities.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
HOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO MANY
ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE SECURITIES.
ERISA CONSIDERATIONS
The following describes certain considerations under ERISA and the Code,
which apply only to Securities of a Series that are not divided into
subclasses. If Securities are divided into subclasses, the related Prospectus
Supplement will contain information concerning considerations relating to ERISA
and the Code that are applicable to such Securities and such subclasses of
Securities.
ERISA imposes requirements on employee benefit plans (and on certain other
retirement plans and arrangements, including certain individual retirement
accounts and annuities, Keogh plans and collective investment funds and
separate accounts in which such plans, accounts or arrangements are invested)
(collectively "Plans") subject to ERISA and on persons who are fiduciaries with
respect to such Plans. Generally, ERISA applies to investments made by Plans.
Among other things, ERISA requires that the assets of Plans be held in trust
and that the trustee, or other duly authorized fiduciary, have exclusive
authority and discretion to manage and control the assets of such Plans. ERISA
also imposes certain duties on persons who are fiduciaries of Plans. Under
ERISA, any person who exercises any authority or control respecting the
management or disposition of the assets of a Plan is considered to be a
fiduciary of such Plan (subject to certain exceptions not here relevant).
Certain employee benefit plans, such as governmental plans (as defined in ERISA
Section 3(32)) and, if no election has been made under Section 410(d) of the
Code, church plans (as defined in ERISA Section 3(33)), are not subject to
ERISA requirements. Accordingly, assets of such plans may be invested in
Securities without regard to the ERISA considerations described above and
below, subject to the provisions of applicable state law. Any such plan that is
qualified and exempt from taxation under Code Sections 401(a) and 501(a),
however, is subject to the prohibited transaction rules set forth in Code
Section 503.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA and Section 4975 of the Code prohibit a
broad range of transactions involving Plan assets and persons ("Parties in
Interest") having certain specified relationships to a Plan and imposes
additional prohibitions where Parties in Interest are fiduciaries with respect
to such Plan. Certain Parties in Interest that participate in a prohibited
transaction may be subject to an excise tax imposed pursuant to Section 4975 of
the Code, or a penalty imposed pursuant to Section 502(i) of ERISA, unless a
statutory, regulatory or administrative exemption is available.
On November 13, 1986, the United States Department of Labor (the "DOL")
issued final regulations (Labor Reg. Section 2510.3-101) concerning the
definition of what constitutes the assets of a Plan (the "Plan Asset
Regulation"). Under this regulation, the underlying assets and properties of
corporations, partnerships and certain other entities in which a Plan acquires
an "equity" interest could be deemed for purposes of ERISA to be assets of the
investing Plan in certain circumstances.
Under the Plan Asset Regulation, the term "equity" interest is defined as
any interest in an entity other than an instrument that is treated as
indebtedness under "applicable local law" and which has no "substantial equity
features." If the Trust Fund issues Notes that are not treated as equity
interests in the Trust Fund for purposes of the Plan Asset Regulation, a Plan's
investment in such Notes would not cause the assets of the Trust to be deemed
Plan assets. However, the Seller, the Servicer, the Special Servicer, the
Backup Servicer, the Indenture Trustee, the Owner Trustee and the Depositor may
be the sponsor of or investment advisor with respect to one or more Plans.
Because such parties may receive certain benefits in connection with the sale
of the Notes, the purchase of Notes using Plan assets over which any such
parties (or any affiliates thereof) has investment authority might be deemed to
be a violation of the prohibited transaction rules of ERISA and the Code for
which no exemption may be available. Accordingly, Notes may not be purchased
using the assets of any Plan if the Seller, the Servicer, the Special Servicer,
the Indenture Trustee, the Owner Trustee, the Depositor or any of their
affiliates (a) has investment or administrative discretion with respect to such
Plan assets; (b) has authority or responsibility to give, or regularly gives,
investment advice with respect to such Plan assets for a fee and pursuant to an
agreement of understanding that such advice (i) will serve as a primary basis
for investment decisions with respect to such Plan assets and (ii) will be
based on the particular investment needs for such Plan; or (c) is an employer
maintaining or contributing to such Plan.
In addition, the Trust Fund, any underwriter, trustee, servicer,
administrator or producer of credit support or their affiliates might be
considered or might become Parties in Interest with respect to a Plan. Also,
any holder of Notes, because of its activities or the activities of its
respective affiliates, may be deemed to be a Party in Interest with respect to
certain Plans, including but not limited to Plans sponsored by such holder. In
either case, the acquisition or holding of Notes by or on behalf of such a Plan
could be considered to give rise to an indirect prohibited transaction within
the meaning of ERISA and the Code, unless it is subject to one or more
exemptions such as: Prohibited Transaction Class Exemption ("PTCE") 84-14,
which exempts certain transactions effected on behalf of a Plan by a "qualified
professional asset manager"; PTCE 90-1, which exempts certain transactions
involving insurance company pooled separate accounts; PTCE 91-38, which exempts
certain transactions involving bank collective investment funds; PTCE 95-60,
which exempts certain transactions involving insurance company general
accounts; or PTCE 96-23, which exempts certain transactions effected on behalf
of a Plan by certain "in-house asset managers." There can be no assurance that
any of these class exemptions will apply with respect to any particular Plan
investment in Notes, or, even if it did apply, that any exemption would apply
to all prohibited transactions that may occur in connection with such an
investment. Each prospective purchaser or transferee of a Note that is a Plan
or a person acting on behalf or investing the assets of a Plan shall be
required to represent (or, with respect to any transfer of a beneficial
interest in a Global Note, shall be deemed to represent) to the Indenture
Trustee and the Note Registrar that the relevant conditions for exemptive
relief under at least one of the foregoing exemptions have been satisfied.
The Plan Asset Regulation provides that, generally, the assets of a
corporation or partnership in which a Plan invests will not be deemed for
purposes of ERISA to be assets of such Plan if the equity interest acquired by
the investing Plan is a publicly-offered security. A publicly-offered security,
as defined in the Plan Asset Regulation, is a security that is widely held,
freely transferable and registered under the Exchange Act.
If no exception under the Plan Asset Regulation applies, then if a Plan
(or a person investing Plan assets, such as an insurance company general
account) acquires an equity interest in the Trust Fund, then the assets of the
Trust Fund would be considered to be assets of the Plan. Because the Loans held
by the Trust Fund may be deemed Plan assets of each Plan that purchases
Securities, an investment in the Securities by a Plan might be a prohibited
transaction under ERISA Sections 406 and 407 and subject to an excise tax under
Code Section 4975 and may cause transactions undertaken in the course of
operating the Trust Fund to constitute prohibited transactions, unless a
statutory or administrative exemption applies.
In Prohibited Transaction Class Exemption 83-1 ("PTCE 83-1"), which
amended Prohibited Transaction Class Exemption 81-7, the DOL exempted from
ERISA's prohibited transaction rules certain transactions relating to the
operation of residential mortgage pool investment trusts and the purchase, sale
and holding of "mortgage pool pass-through certificates" in the initial
issuance of such certificates. PTCE 83-1 permits, subject to certain
conditions, transactions that might otherwise be prohibited between Plans and
Parties in Interest with respect to those Plans related to the origination,
maintenance and termination of mortgage pools consisting of mortgage loans
secured by first or second mortgages or deeds of trust on single-family
residential property, and the acquisition and holding of certain mortgage pool
pass-through certificates representing an interest in such mortgage pools by
Plans. If the general conditions (discussed below) of PTCE 83-1 are satisfied,
investments by a Plan in Securities that represent interests in a Pool
consisting of Loans conforming to these requirements ("Single Family
Securities") will be exempt from the prohibitions of ERISA Sections 406(a) and
407 (relating generally to transactions with Parties in Interest who are not
fiduciaries) if the Plan purchases the Single Family Securities at no more than
fair market value and will be exempt from the prohibitions of ERISA Sections
406(b)(1) and (2) (relating generally to transactions with fiduciaries) if, in
addition, the purchase is approved by an independent fiduciary, no sales
commission is paid to the pool sponsor, the Plan does not purchase more than
25% of all Single Family Securities, and at least 50% of all Single Family
Securities are purchased by persons independent of the pool sponsor or pool
trustee. PTCE 83-1 does not provide an exemption for transactions involving
Subordinated Securities. Accordingly, unless otherwise provided in the related
Prospectus Supplement, no transfer of a Subordinated Security or a Security
that is not a Single Family Security may be made to a Plan.
The discussion in this and the next succeeding paragraph applies only to
Single Family Securities. The Depositor believes that, for purposes of PTCE
83-1, the term "mortgage pass-through certificate" would include: (i)
Securities issued in a Series consisting of only a single Class of Securities;
and (ii) Securities issued in a Series in which there is only one Class of
those particular Trust Securities; provided, that the Securities in the case of
clause (i), or the Securities in the case of clause (ii), evidence the
beneficial ownership of both a specified percentage of future interest payments
(greater than 0%) and a specified percentage (greater than 0%) of future
principal payments on the Loans. It is not clear whether a Class of Securities
that evidences the beneficial ownership in a Trust Fund divided into Loan
groups, beneficial ownership of a specified percentage of interest payments
only or principal payments only, or a notional amount of either principal or
interest payments, or a Class of Securities entitled to receive payments of
interest and principal on the Loans only after payments to other Classes or
after the occurrence of certain specified events would be a "mortgage
pass-through certificate" for purposes of PTCE 83-1.
PTCE 83-1 sets forth three general conditions that must be satisfied for
any transaction to be eligible for exemption: (i) the maintenance of a system
of insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying Holders against reductions in
pass-through payments due to property damage or defaults in loan payments in an
amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan; (ii) the existence of a pool trustee who
is not an affiliate of the pool sponsor; and (iii) a limitation on the amount
of the payment retained by the pool sponsor, together with other funds inuring
to its benefit, to not more than adequate consideration for selling the
mortgage loans plus reasonable compensation for services provided by the pool
sponsor to the Pool. The Depositor believes that the first general condition
referred to above will be satisfied with respect to the Securities in a Series
issued without a subordination feature, or the unsubordinated Securities only
in a Series issued with a subordination feature; provided, that the
subordination and Reserve Account, subordination by shifting of interests, the
pool insurance or other form of credit enhancement described herein (such
subordination, pool insurance or other form of credit enhancement being the
system of insurance or other protection referred to above) with respect to a
Series of Securities is maintained in an amount not less than the greater of
one percent of the aggregate Principal Balance of the Loans or the Principal
Balance of the largest Loan. See "Description of the Securities" herein. In the
absence of a ruling that the system of insurance or other protection with
respect to a Series of Securities satisfies the first general condition
referred to above, there can be no assurance that these features will be so
viewed by the DOL. The Trustee will not be affiliated with the Depositor.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Single Family Securities
must make its own determination as to whether the first and third general
conditions, and the specific conditions described briefly in the preceding
paragraph, of PTCE 83-1 have been satisfied, or as to the availability of any
other prohibited transaction exemptions. Each Plan fiduciary should also
determine whether, under the general fiduciary standards of investment prudence
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.
The DOL issued to Bear, Stearns & Co. Inc., an individual exemption
(Prohibited Transaction Exemption 90-30; Exemption Application No. D-8207, 55
Fed. Reg. 21461 (1990)) (the "Underwriter Exemption"), which applies to certain
sales and servicing of "certificates" that are obligations of a "trust" with
respect to which Bear, Stearns & Co. Inc. is the underwriter, manager or
co-manager of an underwriting syndicate. The Underwriter Exemption provides
relief generally similar to that provided by PTCE 83-1, but is broader in
several respects.
The Underwriter Exemption contains several requirements, some of which
differ from those in PTCE 83-l. The Underwriter Exemption contains an expanded
definition of "certificate," which includes an interest that entitles the
Holder to pass-through payments of principal, interest and/or other payments.
The Underwriter Exemption contains an expanded definition of "trust," which
permits the trust corpus to consist of secured consumer receivables. The
definition of "trust," however, does not include any investment pool unless,
inter alia, (i) the investment pool consists only of assets of the type that
have been included in other investment pools, (ii) certificates evidencing
interests in such other investment pools have been purchased by investors other
than Plans for at least one year prior to the Plan's acquisition of
certificates pursuant to the Underwriter Exemption and (iii) certificates in
such other investment pools have been rated in one of the three highest generic
rating categories of the four credit rating agencies noted below. Generally,
the Underwriter Exemption holds that the acquisition of the certificates by a
Plan must be on terms (including the price for the certificates) that are at
least as favorable to the Plan as they would be in an arm's length transaction
with an unrelated party. The Underwriter Exemption requires that the rights and
interests evidenced by the certificates not be "subordinated" to the rights and
interests evidenced by other certificates of the same trust. The Underwriter
Exemption requires that certificates acquired by a Plan have received a rating
at the time of their acquisition that is in one of the three highest generic
rating categories of Standard & Poor's, a division of The McGraw-Hill
Companies, Inc., Moody's Investors Service, Inc., Duff & Phelps Credit Rating
Co. or Fitch IBCA, Inc. The Underwriter Exemption specifies that the pool
trustee must not be an affiliate of the pool sponsor, nor an affiliate of the
Underwriter, the pool servicer, any obligor with respect to mortgage loans
included in the trust constituting more than five percent of the aggregate
unamortized principal balance of the assets in the trust, or any affiliate of
such entities. Finally, the Underwriter Exemption stipulates that any Plan
investing in the certificates must be an "accredited investor" as defined in
Rule 501(a)(1) of Regulation D of the Commission under the Securities Act.
On July 21, 1997, the DOL published in the Federal Register an amendment
to the Underwriter Exemption, which extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. The amendment generally
allows mortgage loans or other secured receivables (the "Obligations")
supporting payments to certificateholders, and having a value equal to no more
than twenty-five percent (25%) of the total principal amount of the
certificates being offered by the trust, to be transferred to the trust within
a 90-day or three-month period following the closing date (the "Specified
Funding Period"), instead of requiring that all such Obligations 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 certificates being offered (the "Specified
Funding Limit") must not exceed twenty-five percent (25%).
(2) All Obligations transferred after the Closing Date (the "Additional
Obligations") must meet the same terms and conditions for eligibility as the
original Obligations used to create the trust, which terms and conditions have
been approved by an Exemption Rating Agency.
(3) The transfer of such Additional Obligations to the trust during the
Specified Funding Period must not result in the certificates to be covered by
the Exemption receiving a lower credit rating from an Exemption Rating Agency
upon termination of the Specified Funding Period than the rating that was
obtained at the time of the initial issuance of the certificates by the trust.
(4) Solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate for all of the Obligations in the trust at the
end of the Specified Funding Period must not be more than 100 basis points
lower than the average interest rate for the Obligations transferred to the
trust on the Closing Date.
(5) In order to insure that the characteristics of the Additional
Obligations are substantially similar to the original Obligations which were
transferred to the Trust Fund:
(i) the characteristics of the Additional Obligations must be monitored by
an insurer or other credit support provider that 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 Exemption Rating Agency
rating the certificates, the related underwriter and the related trustee)
stating whether or not the characteristics of the Additional Obligations
conform to the characteristics described in the related prospectus or
prospectus supplement and/or pooling and servicing agreement. In preparing such
letter, the independent accountant must use the same type of procedures as were
applicable to the Obligations transferred to the trust as of the Closing Date.
(6) The period of pre-funding must end no later than three months or 90
days after the Closing Date or earlier in certain circumstances if the
pre-funding account falls below the minimum level specified in the pooling and
servicing agreement or an Event of Default occurs.
(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 related prospectus or prospectus supplement 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 period of pre-funding;
(iii) the percentage and/or dollar amount of the Specified Funding Limit
for the trust; and
(iv) that the amounts remaining in the pre-funding account at the end of
the Specified Funding Period will be remitted to certificateholders as
repayments of principal.
(9) The related pooling and servicing agreement must describe the
Permitted Investments for the pre-funding account and/or capitalized interest
account and, if not disclosed in the related prospectus or prospectus
supplement, the terms and conditions for eligibility of Additional Obligations.
Neither PTCE 83-1 nor the Underwriter Exemption applies to a trust which
contains unsecured obligations.
Any Plan fiduciary that proposes to cause a Plan to purchase Securities
should consult with their counsel concerning the impact of ERISA and the Code,
the applicability of PTCE 83-1 and the Underwriter Exemption, and the potential
consequences in their specific circumstances, prior to making such investment.
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 MATTERS
The legality of the Securities of each Series, including certain material
federal income tax consequences with respect thereto, will be passed upon for
the Depositor by Brown & Wood LLP, One World Trade Center, New York, New York
10048.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of Securities,
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related Series of Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
RATING
It is a condition to the issuance of the Securities of each Series offered
hereby and by the Prospectus Supplement that they shall have been rated in one
of the four highest rating categories by the nationally recognized statistical
rating agency or agencies (each, a "Rating Agency") specified in the related
Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of the
value of the Trust Fund assets and any credit enhancement with respect to the
related Class and will reflect such Rating Agency's assessment solely of the
likelihood that the related Holders will receive payments to which such Holders
are entitled under the related Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments on the related Loans
will be made, the degree to which the rate of such prepayments might differ
from that originally anticipated or the likelihood of early optional
termination of the Series of Securities. 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. Such rating will
not address the possibility that prepayment at higher or lower rates than
anticipated by an investor may cause such investor to experience a lower than
anticipated yield or that an investor purchasing a Security at a significant
premium might fail to recoup its initial investment under certain prepayment
scenarios.
There is also no assurance that any such rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely by
the Rating Agencies in the future if in their judgment circumstances so
warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Trust Fund assets or any credit enhancement with
respect to a Series, such rating might also be lowered or withdrawn because of,
among other reasons, an adverse change in the financial or other condition of a
credit enhancement provider or a change in the rating of such credit
enhancement provider's long term debt.
The amount, type and nature of credit enhancement, if any, established
with respect to a Series of Securities will be determined on the basis of
criteria established by each Rating Agency rating Classes of such Series. Such
criteria are sometimes based upon an actuarial analysis of the behavior of
mortgage loans in a larger group. Such analysis is often the basis upon which
each Rating Agency determines the amount of credit enhancement required with
respect to each such Class. There can be no assurance that the historical data
supporting any such actuarial analysis will accurately reflect future
experience nor any assurance that the data derived from a large pool of
mortgage loans accurately predicts the delinquency, foreclosure or loss
experience of any particular pool of Loans. No assurance can be given that
values of any Properties have remained or will remain at their levels on the
respective dates of origination of the related Loans. If the residential real
estate markets should experience an overall decline in property values such
that the Principal Balances of the Loans in a particular Trust Fund and any
secondary financing on the related Properties become equal to or greater than
the value of such Properties, the rates of delinquencies, foreclosures and
losses could be higher than those now generally experienced in the mortgage
lending industry. In additional, adverse economic conditions (which may or may
not affect real property values) may affect the timely payment by mortgagors of
scheduled payments of principal of and interest on the Loans and, accordingly,
the rates of delinquencies, foreclosures and losses with respect to any Trust
Fund. To the extent that such losses are not covered by credit enhancement,
such losses will be borne, at least in part, by the Holders of one or more
Classes of the Securities of the related Series.
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.
<PAGE>
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
complete definition of such terms.
"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.
"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.
"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 applicable Trustee is
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.
"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.
"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.
"Compound Interest Security" means any Security of a Series on which all
or a portion of the interest accrued thereon is added to the principal balance
of such Security on each Distribution Date, through the Accrual Termination
Date, and with respect to which no interest shall be payable until such Accrual
Termination Date, after which interest payments will be made on the Compound
Value thereof.
"Compound Value" means, with respect to a Class of Compound Interest
Securities, the original principal balance of such Class, plus all accrued and
unpaid interest, if any, previously added to the principal balance thereof and
reduced by any payments of principal previously made on such Class of Compound
Interest Securities.
"Condominium" means a form of ownership of real property wherein each
owner is entitled to the exclusive ownership and possession of his or her
individual Condominium Unit and also owns a proportionate undivided interest in
all parts of the Condominium Building (other than the individual Condominium
Units) and all areas or facilities, if any, for the common use of the
Condominium Units.
"Condominium 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 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, receives proprietary leases or occupancy agreements that confer
exclusive rights to occupy specific units and that is described in Section 216
of the Code.
"Cooperative Dwelling" means an individual housing unit in a building
owned by a Cooperative.
"Cut-off Date" means the date designated as such in the related Prospectus
Supplement for a Series.
"Deferred Interest" means the excess of the interest accrued on the
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.
"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 Date" means, with respect to a Series or Class of
Securities, each date specified as a distribution date for such Series or Class
in the related Prospectus Supplement.
"Due Date" means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest is due
and payable by the obligor on any Primary Asset pursuant to the terms thereof.
"Eligible Investments" means any one or more of the obligations or
securities described as such in the related Agreement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Event of Default" means an event of default under and as specified in the
related Agreement.
"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.
"Holder" means the person or entity in whose name a Security is
registered.
"Insurance Policies" means certain mortgage insurance, hazard insurance
and other insurance policies maintained with respect to the 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 that is identified as such in the
related Prospectus Supplement.
"Lifetime Rate Cap" means the lifetime limit if any, on the Loan Rate
during the life of each adjustable rate Loan.
"Loan Rate" means, unless otherwise indicated herein or in the Prospectus
Supplement, the interest rate borne by a Loan.
"Loan-to-Value Ratio" means, with respect to a Loan, the ratio determined
as set forth in the related Prospectus Supplement.
"Minimum Principal Payment Agreement" means a minimum principal payment
agreement with an entity meeting the criteria of the Rating Agencies.
"Mortgage" means the mortgage, deed of trust or other similar security
instrument securing a Mortgage Note, as the context may require.
"Mortgage Note" means the note or other evidence of indebtedness of a
Mortgagor under the Loan.
"Mortgaged Property" means the related property subject to a Mortgage.
"Mortgagor" means the obligor on a Mortgage Note.
"1986 Act" means the Tax Reform Act of 1986.
"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.
"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.
"Primary Assets" means the Private Securities and/or Loans, as the case
may be, that 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.
"Regular Interest" means a regular interest in a REMIC.
"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.
"REO Property" means real property that secured a defaulted Loan,
beneficial ownership of which has been acquired upon foreclosure, deed in lieu
of foreclosure, repossession or otherwise.
"Residual Interest" means a residual interest in a REMIC.
"Retained Interest" means, with respect to a Primary Asset, the amount or
percentage specified in the related Prospectus Supplement that 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.
"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 Subordinated Securityholders, 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.
"Subordinated Securityholder" means a Holder of a Subordinated Security.
"Subordinated Securities" means a Class of Securities as to which the
rights of Holders to receive distributions of principal, interest or both is
subordinated to the rights of Holders of Senior Securities, and may be
allocated losses and shortfalls prior to the allocation thereof to other
Classes of Securities, to the extent and under the circumstances specified in
the related Prospectus Supplement.
"Trustee" means the trustee under the applicable Agreement, and its
successors.
"Trust Fund" means, with respect to any Series of Securities, the trust
holding all money, instruments, securities and other property, including all
proceeds thereof, held, with respect to a Series of Certificates, 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
Indenture Trustee as security for such Notes, including, without limitation,
the Primary Assets (except any Retained Interests), all amounts in the
Distribution Account(s), 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.
"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.
EXHIBIT 5.1
November 13, 1998
Bear Stearns Asset Backed Securities, Inc.
245 Park Avenue
New York, New York 10167
Re: Bear Stearns Asset Backed Securities, Inc.
Registration Statement No. 333-9532 on Form S-3
-----------------------------------------------
Ladies and Gentlemen:
We have acted as counsel for Bear Stearns Asset Backed Securities,
Inc., a Delaware corporation (the "Company"), in connection with the preparation
of the registration statement on Form S-3 (the "Registration Statement")
relating to the Securities (defined below) and with the authorization and
issuance from time to time in one or more series (each, a "Series") of up to
$1,501,059,000 aggregate principal amount of asset-backed securities (the
"Securities"). As set forth in the Registration Statement, each Series of
Securities will be issued under and pursuant to the conditions of a separate
pooling and servicing agreement, master pooling and servicing agreement, pooling
agreement, trust agreement or indenture (each, an "Agreement") among the
Company, a trustee (the "Trustee") and, where applicable, a servicer (the
"Servicer"), each to be identified in the prospectus supplement for such Series
of Securities.
We have examined copies of the Company's Certificate of Incorporation,
the Company's By-laws and forms of each Agreement, as incorporated by reference
as exhibits to the Registration Statement, and the forms of Securities included
in any Agreement so incorporated by reference in the Registration Statement and
such other records, documents and statutes as we have deemed necessary for
purposes of this opinion.
Based upon the foregoing, we are of the opinion that:
1. When any Agreement relating to a Series of Securities has been duly
authorized by all necessary action on the part of the Company and has been duly
executed and delivered by the Company, the Servicer, if any, the Trustee and any
other party thereto, such Agreement will constitute a legal, valid and binding
agreement of the Company, enforceable against the Company in accordance with its
terms, except as enforcement thereof may be limited by bankruptcy, insolvency or
other laws relating to or affecting creditors' rights generally or by general
equity principles.
2. When a Series of Securities has been duly authorized by all
necessary action on the part of the Company (subject to the terms thereof being
otherwise in compliance with applicable law at such time), duly executed and
authenticated by the Trustee for such Series in accordance with the terms of the
related Agreement and issued and delivered against payment therefor as described
in the Registration Statement, such Series of Securities will be legally issued,
fully paid and nonassessable, and the holders thereof will be entitled to the
benefits of the related Agreement.
In rendering the foregoing opinions, we express no opinion as to the
laws of any jurisdiction other than the laws of the State of New York (excluding
choice of law principles therein) and the federal laws of the United States of
America.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the references to this firm under the heading
"Legal Matters" in each Prospectus forming a part of the Registration Statement,
without admitting that we are "experts" within the meaning of the Securities Act
of 1933, as amended, or the Rules and Regulations of the Commission issued
thereunder, with respect to any part of the Registration Statement, including
this exhibit.
Very truly yours,
/s/ Brown & Wood LLP
EXHIBIT 8.1
November 13 1998
Bear Stearns Asset Backed Securities, Inc.
245 Park Avenue
New York, New York 10167
Re: Bear Stearns Asset Backed Securities, Inc.
Registration Statement No. 333-9532 on Form S-3
-----------------------------------------------
Ladies and Gentlemen:
We have acted as special tax counsel for Bear Stearns Asset Backed
Securities, Inc., a Delaware corporation (the "Company"), in connection with the
preparation of the registration statement on Form S-3 (the "Registration
Statement") relating to the Securities (defined below) and with the
authorization and issuance from time to time in one or more series (each, a
"Series") of up to $1,501,059,000 aggregate principal amount of asset-backed
securities (the "Securities"). The Registration Statement is being filed with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended. As set forth in the Registration Statement, each Series of Securities
will be issued under and pursuant to the conditions of a separate pooling and
servicing agreement, master pooling and servicing agreement, pooling agreement,
trust agreement or indenture (each an "Agreement") among the Company, a trustee
(the "Trustee") and, where applicable, a servicer (the "Servicer"), each to be
identified in the prospectus supplement for such Series of Securities.
We have examined the prospectus and forms of prospectus supplement
related thereto contained in the Registration Statement (each, a "Prospectus")
and such other documents, records and instruments as we have deemed necessary
for the purposes of this opinion.
In arriving at the opinion expressed below, we have assumed that each
Agreement will be duly authorized by all necessary corporate action on the part
of the Company, the Trustee, the Servicer (where applicable) and any other party
thereto for such Series of Securities and will be duly executed and delivered by
the Company, the Trustee, the Servicer and any other party thereto substantially
in the applicable form incorporated by reference as an exhibit to the
Registration Statement, that each Series of Securities will be duly executed and
delivered in substantially the forms set forth in the related Agreement
incorporated by reference as an exhibit to the Registration Statement, and that
Securities will be sold as described in the Registration Statement.
As special tax counsel to the Company, we have advised the Company with
respect to certain material federal income tax aspects of the proposed issuance
of each Series of Securities pursuant to the related Agreement. Such advice has
formed the basis for the description of selected federal income tax consequences
for holders of such Securities that appear under the heading "Certain Federal
Income Tax Considerations" in each Prospectus forming a part of the Registration
Statement. Such description does not purport to discuss all possible federal
income tax ramifications of the proposed issuance of the Securities, but with
respect to those federal income tax consequences described therein, such
description is accurate in all material respects.
This opinion is based on the facts and circumstances set forth in the
Registration Statement and in the other documents reviewed by us. Our opinion as
to the matters set forth herein could change with respect to a particular Series
of Securities as a result of changes in facts or circumstances, changes in the
terms of the documents reviewed by us, or changes in the law subsequent to the
date hereof. Because the Prospectuses contemplate Series of Securities with
numerous different characteristics, you should be aware that the particular
characteristics of each Series of Securities must be considered in determining
the applicability of this opinion to a particular Series of Securities.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the references to this firm under the heading
"Certain Federal Income Tax Considerations" in each Prospectus forming a part of
the Registration Statement, without admitting that we are "experts" within the
meaning of the 1933 Act or the Rules and Regulations of the Commission issued
thereunder, with respect to any part of the Registration Statement, including
this exhibit.
Very truly yours,
/s/ Brown & Wood LLP
