PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JANUARY 23, 1998)
IMC HOME EQUITY LOAN OWNER TRUST 1998-2
$700,000,000 ADJUSTABLE RATE HOME EQUITY LOAN
ASSET BACKED NOTES, SERIES 1998-2
[LOGO] DUE APRIL 20, 2029
IMC MORTGAGE COMPANY
SELLER AND SERVICER
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
------------------------------
The IMC Home Equity Loan Owner Trust 1998-2 (the 'Issuer') will be formed
pursuant to a trust agreement to be dated as of March 1, 1998 (the 'Trust
Agreement') between Bear Stearns Asset Backed Securities, Inc. (the 'Depositor')
and Wilmington Trust Company, as owner trustee (the 'Owner Trustee'). The Issuer
is hereby offering $700,000,000 aggregate principal amount of its Adjustable
Rate Home Equity Loan Asset Backed Notes, Series 1998-2 (the 'Notes'). The Notes
will be issued pursuant to an indenture, dated as of March 1, 1998 (the
'Indenture'), between the Issuer and The Chase Manhattan Bank, as indenture
trustee (the 'Indenture Trustee'), and will be secured by a trust estate (the
'Trust Estate') consisting primarily of (i) a pool (the 'Pool') of fixed and
adjustable rate home equity loans secured by first liens on one-to-four family
residential properties (the 'Home Equity Loans'), (ii) the Issuer's rights under
the Sale and Servicing Agreement (as defined herein), (iii) the Note Insurance
Policy, as described herein and (iv) certain other assets described in the
Indenture. The Issuer also will issue instruments evidencing the residual
interest in the Trust Estate (the 'Residual Interest'). The Residual Interest
and the Notes are collectively referred to as the 'Securities.' Only the Notes
are offered hereby.
Simultaneously with the issuance of the Notes, the Seller will obtain from
MBIA Insurance Corporation (the 'Note Insurer') a financial guaranty note
insurance policy relating to the Notes (the 'Note Insurance Policy') in favor of
the Indenture Trustee. The Note Insurance Policy will require the Note Insurer
to make certain Insured Payments (as defined herein) on the Notes.
------------------------------
(continued on following page)
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENT IN THE NOTES,
SEE 'RISK FACTORS' BEGINNING ON PAGE S-12 HEREIN, 'PREPAYMENT AND YIELD
CONSIDERATIONS' BEGINNING ON PAGE S-30 HEREIN AND 'RISK FACTORS' BEGINNING ON
PAGE 15 IN THE PROSPECTUS.
THE NOTES REPRESENT NON-RECOURSE OBLIGATIONS OF THE ISSUER ONLY AND DO NOT
REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, THE SELLER, THE
SERVICER, THE INDENTURE TRUSTEE, THE OWNER TRUSTEE, THE NOTE
INSURER OR ANY OF THEIR AFFILIATES, EXCEPT AS DESCRIBED
HEREIN. NEITHER THE NOTES NOR THE HOME EQUITY LOANS
ARE INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY.
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. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
<CAPTION>
===================================================================================================================================
INITIAL NOTE PRICE TO UNDERWRITING PROCEEDS TO
PRINCIPAL BALANCE NOTE RATE PUBLIC DISCOUNT DEPOSITOR(1)
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Per Note.................... $700,000,000.00 Variable(2) 100.00000% 0.250% 99.75000%
- -----------------------------------------------------------------------------------------------------------------------------------
Total....................... $700,000,000.00 $700,000,000.00 $1,750,000.00 $698,250,000.00
===================================================================================================================================
</TABLE>
(1) Before deducting expenses, estimated to be $550,000.
(2) The Note Rate on the Notes is adjustable based on one-month LIBOR as
described herein.
------------------------------
The Notes are offered subject to prior sale, when, as, and if accepted by
the Underwriters and subject to the Underwriters' rights to reject orders in
whole or in part. It is expected that the Notes will be delivered in book-entry
form only through the Same-Day Funds Settlement System of The Depository Trust
Company, Cedel Bank, S.A. and the Euroclear System on or about March 31, 1998.
The Notes will be offered in Europe and the United States of America.
BEAR, STEARNS & CO. INC.
PAINEWEBBER INCORPORATED
DEUTSCHE MORGAN GRENFELL
J.P. MORGAN & CO.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS MARCH 20, 1998.
<PAGE>
(cover continued from previous page)
The Loan Balance of the Home Equity Loans as of the Statistical
Calculation Date was $457,208,083.38. The Home Equity Loans, all of which are
first liens, were originated or purchased by IMC Mortgage Company (the "Seller"
and "Servicer").
In addition to the Home Equity Loans as of the Statistical Calculation
Date, additional Home Equity Loans will be purchased by the Trust from the
Depositor on the Closing Date. All of the Home Equity Loans in the Trust as of
the Closing Date (the "Initial Home Equity Loans") will have a Cut-Off Date of
March 1, 1998 and the Seller expects that the Initial Home Equity Loans will
total at least $525,000,000 as of the Closing Date (as defined below). Although
the Home Equity Loans as of the Statistical Calculation Date consist of both
fixed and adjustable rate home equity loans, all of the additional Home Equity
Loans to be delivered on the Closing Date and all of the Subsequent Home Equity
Loans will be adjustable rate home equity loans. See "The Home Equity Loan Pool"
herein.
The Sale and Servicing Agreement provides that additional Home Equity
Loans (the "Subsequent Home Equity Loans") may be purchased by the Issuer from
the Seller from time to time on or before April 30, 1998 from funds on deposit
in the Pre-Funding Account. On the Closing Date an aggregate cash amount of not
more than $175,000,000 (the "Pre-Funded Amount") will be deposited with the
Indenture Trustee in the Pre-Funding Account to be used by the Issuer to acquire
Subsequent Home Equity Loans.
Payments of principal and interest will be made to holders (the
"Owners") of the Notes on the 20th day of each month (or, if such day is not a
business day, the next following business day) beginning April 20, 1998, (each,
a "Payment Date"). Interest will be paid on each Payment Date to the Owners of
the Notes based on the Note Principal Balance (as defined herein) at the Note
Rate subject to the limitations described herein.
The Notes will constitute non-recourse obligations of the Issuer. The
Seller will have limited obligations arising in respect of certain
representations and warranties on the Home Equity Loans. The Servicer will have
limited obligations that arise pursuant to certain representations and
warranties and to its contractual servicing obligations under that certain
agreement to be entered into among the Depositor, the Servicer, the Seller, the
Indenture Trustee and the Issuer (the "Sale and Servicing Agreement"), including
any obligation it may have to advance delinquent interest payments on the Home
Equity Loans.
The Notes will be unconditionally and irrevocably guaranteed as to
timely payment of interest due to Owners and as to ultimate payment of the Note
Principal Balance, in each case pursuant to the terms of the Note Insurance
Policy issued by the Note Insurer. See "The Note Insurer" herein.
The stated maturity for the Notes is the Payment Date occurring on
April 20, 2029 (the "Final Payment Date").
The yield to maturity on the Notes will be affected by, among other
things, the rate of payment of principal (including by reason of prepayments,
defaults and liquidations) of the Home Equity Loans and the timing and receipt
of such payments as described herein and in the Prospectus. See "Risk Factors"
in the Prospectus and "Prepayment and Yield Considerations" herein.
The Notes are subject to optional redemption in full by the holder(s)
of a majority of the Residual Interest at any time after the aggregate Loan
Balance of the Home Equity Loans has declined to less than 10% of the sum of (x)
the Original Aggregate Loan Balance and (y) the Pre-Funded Amount. In addition,
the Note Insurer will have rights, under the limited circumstances described in
the Sale and Servicing Agreement, to acquire all of the Home Equity Loans from
the Issuer and thereby effect a redemption of the Notes. See
"Administration--Redemption of the Notes" herein.
It is a condition to the issuance of the Notes that they be rated
"Aaa" by Moody's Investors Service, Inc. and "AAA" by Standard & Poor's, a
division of The McGraw-Hill Companies.
No election will be made to treat the Trust as a "real estate mortgage
investment conduit" (a "REMIC") for federal income tax purposes.
There is currently no secondary market for the Notes. The Underwriters
intend to make a secondary market for the Notes, but have no obligation to do
so. There can be no assurance that a secondary market for the Notes will develop
or, if one does develop, that it will provide investors with a satisfactory
level of liquidity or that it will continue.
---------------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE NOTES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. 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.
The Notes offered by this Prospectus Supplement will be a separate
series of Asset-Backed Notes being offered by the Depositor pursuant to its
Prospectus dated January 23, 1998, 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.
As provided herein under "The Note Insurer--Incorporation of Certain
Documents by Reference," the Seller will provide without charge to any person to
whom this Prospectus Supplement is delivered, upon oral or written request of
such person, a copy of any or all financial statements incorporated herein by
reference. Requests for such copies should be directed as provided under "The
Note Insurer--Incorporation of Certain Documents by Reference" herein.
----------------
To the extent statements contained herein do not relate to historical
or current information, this Prospectus Supplement may be deemed to consist of
forward looking statements that involve risks and uncertainties that may
adversely affect the distributions to be made on, or the yield of, the Notes,
which risks and uncertainties are discussed under "Risk Factors" and "Prepayment
and Yield Considerations" herein. As a consequence, no assurance can be given as
to the actual distributions on, or the yield of, the Notes.
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
NOTES OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS,
SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING" HEREIN.
<PAGE>
TABLE OF CONTENTS
Page
----
SUMMARY OF TERMS...................................................S-1
RISK FACTORS......................................................S-12
THE SELLER AND SERVICER...........................................S-14
General..........................................................S-14
Credit and Underwriting Guidelines...............................S-16
Delinquency, Loan Loss and Foreclosure Information...............S-17
THE ISSUER........................................................S-19
THE DEPOSITOR.....................................................S-19
USE OF PROCEEDS...................................................S-19
THE HOME EQUITY LOAN POOL.........................................S-19
General..........................................................S-19
Conveyance of Subsequent Home Equity Loans.......................S-29
Interest Payments on the Home Equity Loans.......................S-30
PREPAYMENT AND YIELD CONSIDERATIONS...............................S-30
General..........................................................S-30
Mandatory Prepayment.............................................S-31
Prepayment and Yield Scenarios for the Notes ....................S-31
ADDITIONAL INFORMATION............................................S-35
DESCRIPTION OF THE NOTES..........................................S-35
General..........................................................S-35
Payment Dates....................................................S-35
Payments.........................................................S-36
Calculation of One-Month LIBOR...................................S-37
Pre-Funding Account..............................................S-38
Capitalized Interest Account.....................................S-38
Book Entry Registration of the Notes.............................S-38
Assignment of Rights.............................................S-41
THE NOTE INSURER..................................................S-42
CREDIT ENHANCEMENT................................................S-46
Note Insurance Policy............................................S-46
Overcollateralization Provisions.................................S-46
ADMINISTRATION....................................................S-47
Covenant of the Seller to Take Certain Actions
with Respect to the Home Equity Loans in
Certain Situations...............................................S-47
Assignment of Home Equity Loans..................................S-48
Servicing and Sub-Servicing......................................S-49
Removal and Resignation of Servicer..............................S-53
Redemption of the Notes..........................................S-53
The Indenture Trustee............................................S-53
The Indenture....................................................S-54
Voting...........................................................S-55
Reporting Requirements...........................................S-55
Removal of Indenture Trustee for Cause...........................S-56
Depositor's Obligations..........................................S-56
Governing Law....................................................S-57
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES.....................................................S-57
STATE TAX CONSEQUENCES............................................S-57
ERISA CONSIDERATIONS..............................................S-57
RATINGS...........................................................S-59
LEGAL INVESTMENT CONSIDERATIONS...................................S-59
UNDERWRITING......................................................S-59
REPORT OF EXPERTS.................................................S-60
CERTAIN LEGAL MATTERS.............................................S-60
GLOBAL CLEARANCE, SETTLEMENT AND TAX
DOCUMENTATION PROCEDURES.......................................I-1
INDEX TO LOCATION OF PRINCIPAL DEFINED
TERMS............................................................A-1
<PAGE>
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the "Index to Location of
Principal Defined Terms" for the location of the definitions of certain
capitalized terms.
Securities Offered: $700,000,000 Adjustable Rate Home Equity Loan
Asset Backed Notes, Series 1998-2 (the
"Notes"). The Notes represent non-recourse
obligations of the Issuer. Proceeds of the
assets in the Trust Estate will be the sole
source of payments on the Notes.
Note Issuer: IMC Home Equity Loan Owner Trust 1998-2 (the
"Issuer" or the "Trust"), a Delaware business
trust established by the Depositor pursuant
to a trust agreement, dated as of March 1,
1998 (the "Trust Agreement"), between the
Depositor and the Owner Trustee. The Issuer
does not have, nor is it expected in the
future to have, any significant assets, other
than the assets included in the Trust Estate.
See "The Issuer" herein.
Depositor: Bear Stearns Asset Backed Securities, Inc.
(the "Depositor@), a Delaware corporation.
The Depositor is a wholly owned, special
purpose subsidiary of The Bear Stearns
Companies Inc. and an affiliate of Bear,
Stearns & Co. Inc. None of the Depositor, The
Bear Stearns Companies Inc., Bear, Stearns &
Co. Inc. or any affiliate of any of them has
guaranteed or is otherwise obligated with
respect to the Notes.
Seller and Servicer: IMC Mortgage Company (the "Seller" and the
"Servicer"), a Florida corporation. The
Seller's and Servicer's principal executive
offices are located at 5901 East Fowler
Avenue, Tampa, Florida 33617-2362.
Indenture Trustee: The Chase Manhattan Bank, a New York banking
corporation, as Indenture Trustee (the
"Indenture Trustee"). The Indenture Trustee
shall receive a fee (the "Indenture Trustee
Fee") equal to 0.00375% per annum, payable
monthly at one-twelfth the annual rate of the
aggregate outstanding Loan Balance of the
Home Equity Loans.
Owner Trustee: Wilmington Trust Company, a Delaware banking
corporation, as owner trustee under the Trust
Agreement (the "Owner Trustee"). The Owner
Trustee shall receive a fee (the "Owner
Trustee Fee") as provided under the Trust
Agreement.
Cut-Off Date: As of the close of business on March 1, 1998
(the "Cut-Off Date").
Statistical Calculation Date: As of the close of business on March 1, 1998
(the "Statistical Calculation Date").
Closing Date: On or about March 31, 1998.
Description of the Notes: The Notes represent non-recourse obligations
of the Issuer and will be issued pursuant to
an indenture to be dated as of March 1, 1998
(the "Indenture"), entered into between the
Issuer and the Indenture Trustee. The assets
included in the trust estate created by the
Indenture (the "Trust
S-1
<PAGE>
Estate") will be the sole source of payments
on the Notes. The Notes will be issued in a
single class.
The assets of the Trust Estate will consist
of (i) a pool (the "Pool") of fixed and
adjustable rate home equity loans (the "Home
Equity Loans") secured by first lien
mortgages or deeds of trust on one-to-four
family residential properties, including
units in condominiums, planned unit
developments, townhouses and manufactured
housing units (the "Properties"), and
including any note or other instrument of
indebtedness (each, a "Mortgage Note"); (ii)
all payments in respect of principal and
interest on the Home Equity Loans (other than
any principal or interest payments due
thereon on or prior to the Cut-Off Date
whether or not received); (iii) security
interests in the Properties; (iv) the
Issuer's rights under the Sale and Servicing
Agreement; (v) the Note Insurance Policy and
(vi) certain other property.
On the Closing Date, the Pre-Funded Amount
(as defined herein) will be deposited in a
trust account held by the Indenture Trustee
in the name of the Indenture Trustee for the
benefit of the Owners of the Notes and the
Note Insurer (the "Pre-Funding Account"). It
is intended that additional Home Equity Loans
satisfying the criteria specified in the Sale
and Servicing Agreement (the "Subsequent Home
Equity Loans") will be purchased by the
Issuer from the Seller from time to time on
or before April 30, 1998 from funds on
deposit in the Pre-Funding Account. As a
result, the aggregate principal balance of
the Home Equity Loans will increase by an
amount equal to the aggregate principal
balance of the Subsequent Home Equity Loans
so purchased and the amount in the
Pre-Funding Account will decrease
proportionately.
As described below, on the Closing Date, cash
will be deposited in the name of the
Indenture Trustee in the Capitalized Interest
Account (as defined herein). Funds in the
Capitalized Interest Account will be applied
by the Indenture Trustee to cover shortfalls
in interest during the Funding Period (as
described herein under "Pre-Funding Account")
on the Notes attributable to the provisions
allowing for purchase of Subsequent Home
Equity Loans after the Cut-Off Date.
Other Securities: In addition to the Notes, the Trust will
issue a class of security (the "Residual
Interest") which will represent the residual
interest in the Trust. The Notes and the
Residual Interest are herein referred to as
the "Securities." Only the Notes are offered
hereby.
Denominations: The Notes are issuable in minimum
denominations of an original principal amount
of $25,000 and multiples of $1,000 in excess
thereof.
The Home Equity Loans: Unless otherwise noted, all statistical
percentages in this Prospectus Supplement are
approximate and measured by the aggregate
Loan Balance of the Home Equity Loans as of
the Statistical Calculation Date. See
"Additional Information" in this Prospectus
Supplement. The Home Equity Loans to be
included in the Trust Estate on the Closing
Date (the "Initial Home Equity Loans")
consist of fixed and adjustable rate
conventional home equity loans and the
Mortgage Notes relating thereto. As of the
S-2
<PAGE>
Statistical Calculation Date, there are 4,483
Home Equity Loans. The Loan Balance of the
Home Equity Loans as of the Statistical
Calculation Date was $457,208,083.38. The
Home Equity Loans as of the Statistical
Calculation Date are secured by first lien
mortgages or deeds of trust primarily on
one-to-four family residential properties
located in 48 states and the District of
Columbia. No Loan-to-Value Ratio (based upon
appraisals made at the time of origination of
the related Home Equity Loan) relating to any
Home Equity Loan exceeded 90.00% as of the
Statistical Calculation Date except for 57
loans with an aggregate Loan Balance of
$6,615,271.47 (or 1.45% of the aggregate Loan
Balance of the Home Equity Loans), which had
a Loan-to-Value Ratio not greater than 100%.
None of the Home Equity Loans as of the
Statistical Calculation Date are insured by
pool mortgage insurance policies and no
significant portion of the Home Equity Loans
as of the Statistical Calculation Date are
insured by primary mortgage insurance
policies; however, certain distributions due
to the owners of the Notes (the "Owners") are
insured by the Note Insurer pursuant to the
Note Insurance Policy. The Home Equity Loans
are not guaranteed by the Issuer, the
Depositor, the Seller, the Servicer, the Note
Insurer, the Owner Trustee, the Indenture
Trustee or any of their affiliates. The Home
Equity Loans will be serviced by the Servicer
generally in accordance with the standards
and procedures required by Fannie Mae for
Fannie Mae mortgage-backed securities and in
accordance with the terms of that Sale and
Servicing Agreement dated as of March 1, 1998
(the "Sale and Servicing Agreement") among
the Issuer, the Depositor, the Seller, the
Servicer and the Indenture Trustee.
As of the Statistical Calculation Date, the
weighted average interest rate (the "Coupon
Rate") of the Home Equity Loans as of the
Statistical Calculation Date was 10.33%; the
Coupon Rates on the Home Equity Loans ranged
from 5.91% to 16.70%; the average Loan
Balance of the Home Equity Loans was
$101,987.08; the minimum and maximum Loan
Balances of the Home Equity Loans were
$9,981.98 and $665,480.61, respectively; the
weighted average Loan-to-Value Ratio of the
Home Equity Loans was 77.00%; the weighted
average remaining term to maturity of the
Home Equity Loans was 347 months; and the
remaining terms to maturity of the Home
Equity Loans ranged from 80 months to 360
months. As of the Statistical Calculation
Date, all of the Home Equity Loans were
secured by first mortgages. As of the
Statistical Calculation Date, Home Equity
Loans containing "balloon" payments
represented not more than 3.66% of the Home
Equity Loans. No Initial Home Equity Loan
will mature later than March 1, 2028. As of
the Statistical Calculation Date, no Home
Equity Loan provides for negative
amortization. See "The Home Equity Loan Pool"
herein.
As of the Statistical Calculation Date,
92.37% of the Home Equity Loans were
adjustable rate home equity loans (the
"Adjustable Rate Home Equity Loans") and
7.63% of the Home Equity Loans were fixed
rate home equity loans (the "Fixed Rate Home
Equity Loans"). With respect to the
Adjustable Rate Home Equity Loans, as of the
Statistical Calculation
S-3
<PAGE>
Date there were 4,356 Adjustable Rate Home
Equity Loans. The Loan Balance of the
Adjustable Rate Home Equity Loans as of the
Statistical Calculation Date was
$422,332,342.02. As of the Statistical
Calculation Date, the Coupon Rates for the
Adjustable Rate Home Equity Loans ranged from
5.91% to 16.70%; the weighted average Coupon
Rate of such Home Equity Loans was 10.31%;
the average Loan Balance was $96,954.16; the
weighted average maximum Coupon Rate was
16.59%; the weighted average minimum Coupon
Rate was 10.01%; the weighted average gross
margin was 6.90%; the minimum gross margin
was 1.00%; and the maximum gross margin of
such Home Equity Loans was 13.29%.
With respect to the Fixed Rate Home Equity
Loans, as of the Statistical Calculation Date
there were 127 Fixed Rate Home Equity Loans.
The Loan Balance of the Fixed Rate Home
Equity Loans as of the Statistical
Calculation Date was $34,875,741.36. As of
the Statistical Calculation Date, the average
Loan Balance of the Fixed Rate Home Equity
Loans was $274,612.14; the Coupon Rates for
such Home Equity Loans ranged from 7.99% to
14.75%; and the weighted average Coupon Rate
for such Home Equity Loans was 10.56%.
Final Payment Date: The Final Payment Date for the Notes is April
20, 2029, although it is anticipated that the
actual final Payment Date for the Notes will
occur significantly earlier than the Final
Payment Date. See "Prepayment and Yield
Considerations" herein.
Payments--General: On the 20th day of each month, or if such a
day is not a Business Day, then the next
succeeding Business Day, commencing April 20,
1998 (each such day being a "Payment Date"),
the Indenture Trustee will be required,
subject to the availability of amounts
therefor, pursuant to the cash flow
priorities hereinafter described, to make
payments on the Notes to the Owners thereof
of record as of the last Business Day
preceding such Payment Date (the "Record
Date").
A "Business Day" is any day other than a
Saturday or Sunday or a day on which banking
institutions in The City of New York, Tampa,
Florida, the city in which the corporate
trust office of the Indenture Trustee is
located or the city in which the Note Insurer
is located are authorized or obligated by law
or executive order to be closed.
Interest: On each Payment Date, the Notes will be
entitled to payments in respect of Current
Interest.
"Current Interest" means, with respect to any
Payment Date the sum of (i) the aggregate
amount of interest accrued from and including
the preceding Payment Date (or from the
Closing Date in the case of the first Payment
Date) to and including the day prior to the
current Payment Date (the "Accrual Period")
at the Note Rate on the outstanding principal
balance of the Notes (the "Note Principal
Balance"), (ii) any Interest Carry Forward
Amount and (iii) the Preference Amount as it
relates to interest previously paid on such
Note prior to such Payment Date (in
accordance with the Note Insurance Policy);
provided, however, that Current Interest will
be reduced by the amount of any Civil Relief
Interest Shortfalls (as defined in the Sale
and Servicing Agreement). All calculations of
interest on the Notes will be
S-4
<PAGE>
made on the basis of the actual number of
days elapsed in the related Accrual Period
and a year of 360 days.
The "Interest Carry Forward Amount" for any
Payment Date is the sum of (x) the amount, if
any, by which (i) the Current Interest as of
the immediately preceding Payment Date
exceeded (ii) the amount of the actual
payments of interest made on such immediately
preceding Payment Date plus (y) 30 days'
interest on such amount, calculated at the
Note Rate.
On each Payment Date, the "Note Rate" will be
equal to the lesser of (x) with respect to
any Payment Date which occurs on or prior to
the Redemption Date (as defined herein),
One-Month LIBOR plus 0.19% per annum and for
any Payment Date thereafter, One-Month LIBOR
plus 0.50% per annum, and (y) the weighted
average of the Coupon Rates on the Home
Equity Loans, less approximately 0.64375% per
annum (the rate described in this clause (y),
the "Available Funds Cap").
If, on any Payment Date, the Available Funds
Cap limits the Note Rate (i.e., the rate set
by the Available Funds Cap is less than the
Formula Note Rate), the amount of any such
shortfall will be carried forward and be due
and payable on future Payment Dates and shall
accrue interest at the Formula Note Rate,
until paid (such shortfall, together with
such accrued interest, the "Available Funds
Cap Carry Forward Amount"). The Note
Insurance Policy does not cover the Available
Funds Cap Carry Forward Amount; the payment
of such amount may be funded only from (i)
any excess interest resulting from the
Available Funds Cap being in excess of the
Formula Note Rate on future Payment Dates, as
distributed in the priorities specified
herein and (ii) any Net Monthly Excess
Cashflow which would otherwise be paid to the
Servicer or the Indenture Trustee on account
of certain reimbursable amounts described in
the Sale and Servicing Agreement, or to the
Owners of the Residual Interests.
The "Formula Note Rate" for any Payment Date
is the rate determined by clause (x) of the
definition of "Note Rate" on such Payment
Date.
The "Redemption Date" is the first Monthly
Remittance Date on which the aggregate Loan
Balance of the Home Equity Loans has declined
to less than 10% of the sum of (x) the
aggregate Loan Balance of the Initial Home
Equity Loans as of the Cut-Off Date (the
"Original Aggregate Loan Balance") plus (y)
the original Pre-Funded Amount (such sum, the
"Maximum Collateral Amount").
Principal: On each Payment Date, payments in reduction
of the Note Principal Balance will be made in
the amounts described herein. The "Principal
Payment Amount" for each Payment Date shall
be the lesser of:
(a) the Total Available Funds (as defined
herein) plus any Insured Payment minus the
Current Interest and the Trust Fees and
Expenses for such Payment Date; and
(b) the excess, if any, of
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(i) the sum of:
(A) the Preference Amount with respect to
principal owed to each Owner of a Note
that remains unpaid as of such Payment
Date;
(B) the principal portion of all
scheduled monthly payments on the Home
Equity Loans due on or prior to the
related Due Date thereof, to the extent
actually received by the Servicer during
the related Remittance Period and any
Prepayments made by the Mortgagors and
actually received by the Servicer during
the related Remittance Period;
(C) the balance of each Home Equity Loan
(the "Loan Balance") that was repurchased
by the Seller or purchased by the
Servicer on or prior to the related
Monthly Remittance Date, to the extent
such Loan Balance is actually received by
the Servicer during the related
Remittance Period;
(D) any Substitution Amounts (i.e., the
excess, if any, of the Loan Balance of a
Home Equity Loan being replaced over the
outstanding principal balance of a
replacement Home Equity Loan plus accrued
and unpaid interest) delivered by the
Seller on the related Monthly Remittance
Date in connection with a substitution of
a Home Equity Loan (to the extent such
Substitution Amounts relate to
principal), to the extent such
Substitution Amounts are actually
received by the Servicer on the related
Remittance Date;
(E) all Net Liquidation Proceeds actually
collected by the Servicer with respect to
the Home Equity Loans during the related
Remittance Period (to the extent such Net
Liquidation Proceeds relate to
principal);
(F) the amount of any
Overcollateralization Deficit for such
Payment Date;
(G) the principal portion of the
proceeds received by the Indenture
Trustee upon termination of the Trust
Estate (to the extent such proceeds
relate to principal);
(H) on the Payment Date immediately
following the end of the Funding Period,
all amounts remaining on deposit in the
Pre-Funding Account to the extent not
used to purchase Subsequent Home Equity
Loans during the Funding Period; and
(I) the amount of any
Overcollateralization Increase Amount for
such Payment Date to the extent of any
Net Monthly Excess Cashflow available for
such purpose;
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over
(ii) the amount of any Overcollateralization
Reduction Amount for such Payment Date.
The "Remittance Period" with respect to any
Monthly Remittance Date is the period from
the second day of the month immediately
preceding such Monthly Remittance Date to the
first day of the month in which such Monthly
Remittance Date occurs. A "Monthly Remittance
Date" is any date on which funds on deposit
in the Principal and Interest Account are
remitted to the Note Account, which is the
18th day of each month, or if such day is not
a Business Day, the next preceding Business
Day, commencing in April 1998.
The "Preference Amount" is any amount (other
than amounts in respect of the Available
Funds Cap Carry Forward Amount) previously
distributed to an Owner on a Note that is
recoverable and sought to be recovered as a
voidable preference by a trustee in
bankruptcy pursuant to the United States
Bankruptcy Code (Title 11 of the United
States Code), as amended from time to time,
in accordance with a final nonappealable
order of a court having competent
jurisdiction.
The "Premium Amount" is the amount payable to
the Note Insurer as premium for the Note
Insurance Policy.
Monthly Servicing Fee: The Servicer will retain a fee (the
"Servicing Fee") equal to 0.50% per annum,
payable monthly at one-twelfth the annual
rate of the then outstanding principal
balance of each Home Equity Loan as of the
first day of each Remittance Period.
Credit Enhancement: The credit enhancement provided
for the benefit of the Notes consists of (x)
the overcollateralization mechanics which
utilize the excess interest created by the
internal cash flows of the Pool and (y) the
Note Insurance Policy.
Overcollateralization. The required
application of the cash flow from the Pool
results in a limited acceleration of the
Notes relative to the amortization of the
Home Equity Loans in the early months of the
transaction. The accelerated amortization is
achieved by the application of certain excess
interest to the payment in reduction of the
Note Principal Balance. This acceleration
feature creates overcollateralization (i.e.,
the excess of the aggregate outstanding Loan
Balance of the Home Equity Loans over the
Note Principal Balance). Once the required
level of overcollateralization is reached,
and subject to the provisions described in
the next paragraph, the acceleration feature
will cease unless necessary to maintain the
required level of overcollateralization.
The Sale and Servicing Agreement provides
that, subject to certain floors, caps and
triggers, the required level of
overcollateralization may increase or
decrease over time. An increase would result
in a temporary period of accelerated
amortization of the Notes to increase the
actual level of
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overcollateralization to its required level;
a decrease would result in a temporary period
of decelerated amortization to reduce the
actual level of overcollateralization to its
required level. See "Prepayment and Yield
Considerations", "Credit Enhancement
--Overcollateralization Provisions" herein
and "Enhancement" in the Prospectus.
Financial Guaranty Note Insurance Policy.
MBIA Insurance Corporation, a New York stock
insurance company (the "Note Insurer"), will
issue a financial guaranty note insurance
policy (the "Note Insurance Policy") with
respect to the Notes.
Pursuant to the provisions of the Note
Insurance Policy, the Note Insurer will
irrevocably and unconditionally guarantee
certain payments to the Indenture Trustee for
the benefit of the Owners of the Notes. The
amount of the actual payment, if any, made by
the Note Insurer to the Indenture Trustee for
the benefit of the Owners of the Notes under
the Note Insurance Policy on each Payment
Date (the "nsured Payment") is the excess, if
any, of (i) the sum of (a) the Current
Interest, (b) the Overcollateralization
Deficit and (c) the Preference Amount
(without duplication) over (ii) the Total
Available Funds (after any deduction for the
Trust Fees and Expenses) and after taking
into account the portion of the Principal
Payment Amount to be actually distributed on
such Payment Date (without regard to any
Insured Payment to be made with respect to
such Payment Date). The Note Insurance Policy
does not insure the payment of Available
Funds Cap Carry Forward Amounts.
Insured Payments do not cover Realized Losses
except to the extent that an
Overcollateralization Deficit exists. Insured
Payments do not cover the Servicer's failure
to make Delinquency Advances pursuant to the
Sale and Servicing Agreement, except to the
extent that an Overcollateralization Deficit
would otherwise result therefrom.
Nevertheless, the effect of the Note
Insurance Policy is to guaranty the timely
payment of interest on, and the ultimate
payment of the principal amount of, the
Notes.
The Note Insurance Policy is noncancellable
for any reason.
Unless a Note Insurer Default exists, the
Note Insurer shall have the right to exercise
certain rights of the Owners of the Notes, as
specified in the Indenture, without any
consent of such Owners; and such Owners may
exercise such rights only with the prior
written consent of the Note Insurer, except
as provided in the Indenture. In addition, to
the extent of unreimbursed payments under the
Note Insurance Policy, the Note Insurer will
be subrogated to the rights of the Owners of
the Notes on which such Insured Payments were
made. In connection with each Insured Payment
on a Note, the Indenture Trustee, as
attorney-in-fact for the Owner thereof, will
be required to assign to the Note Insurer the
rights of such Owner with respect to the Note
to the extent of such Insured Payment. "ote
Insurer Default" is defined under the Sale
and Servicing Agreement as the existence and
continuance of (x) the failure by the Note
Insurer to make a required payment under the
Note Insurance Policy or (y) the bankruptcy
or insolvency of the Note Insurer.
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The "rust Fees and Expenses" are the Premium
Amount, the Owner Trustee Fee, the Indenture
Trustee Fee and any Trustee Reimbursable
Expenses (each as defined herein).
Pre-Funding Account: On the Closing Date, an aggregate cash amount
(the "re-Funded Amount") of no more than
$175,000,000 will be deposited in the
Pre-Funding Account. During the period (the
"Funding Period") from the Closing Date until
the earliest to occur of (i) the date on
which the Pre-Funded Amount is reduced to
$100,000 or less, (ii) the occurrence of a
"Servicer Termination Event" (as defined in
the Sale and Servicing Agreement) or an
"Event of Default" (as defined herein) or
(iii) April 30, 1998, the Pre-Funded Amount
will be maintained in the Pre-Funding
Account. The Pre-Funded Amount will be
reduced during the Funding Period by the
amount thereof used to purchase Subsequent
Home Equity Loans in accordance with the Sale
and Servicing Agreement. Subsequent Home
Equity Loans purchased on any date (each, a
"Subsequent Transfer Date") must satisfy the
criteria set forth in the Sale and Servicing
Agreement. See "The Home Equity Loan Pool--
Conveyance of Subsequent Home Equity Loans"
herein. Any Pre-Funded Amount remaining at
the end of the Funding Period will be
distributed to the Owners of the Notes on the
Payment Date immediately following the end of
the Funding Period, thus resulting in a
partial principal prepayment of the Notes as
specified herein under "Description of the
Notes--Payments." All interest and other
investment earnings on amounts on deposit in
the Pre-Funding Account will be deposited in
the Capitalized Interest Account.
Capitalized Interest
Account: On the Closing Date, cash in an amount
satisfactory to the Note Insurer will be
deposited in a trust account (the
"Capitalized Interest Account") in the name
of, and maintained by, the Indenture Trustee
in trust for the Owners of the Notes. The
amount on deposit in the Capitalized Interest
Account, including reinvestment income
thereon, will be used by the Indenture
Trustee on each Payment Date during and
immediately after the Funding Period to fund
the excess, if any, of (i) the amount of
interest accruing on the outstanding
Pre-Funded Amount at a rate equal to the Note
Rate over (ii) the amount of any reinvestment
income on monies on deposit in the
Pre-Funding Account. Such amounts on deposit
will be so applied by the Indenture Trustee
on the Payment Dates during and immediately
after the Funding Period to fund any such
excess. Any amounts remaining in the
Capitalized Interest Account not needed for
such purpose will be paid to the Seller or
its designee at the end of the Funding
Period.
Mandatory Prepayment of
Certificates: It is intended that the principal amount of
Subsequent Home Equity Loans sold to the
Issuer will require application of
substantially all of the original Pre-Funded
Amount and it is not intended that there will
be any material amount of principal prepaid
to the Owners of the Notes from the
Pre-Funding Account. In the event that the
Seller is unable to sell Subsequent Home
Equity Loans to the Issuer during the Funding
Period in an amount equal to the Pre-Funded
Amount, principal prepayments to Owners of
the Notes will occur on the Payment Date
immediately following the end of the Funding
Period in an amount equal to the Pre-Funded
Amount remaining at the end of the Funding
Period.
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Book-Entry Registration of the
Notes: The Notes will initially be issued in
book-entry form. Persons acquiring beneficial
ownership interests in the Notes ("Beneficial
Owners") will hold their interests through
The Depository Trust Company ("DTC"), in the
United States, or Cedel Bank, S.A. ("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 Notes are Book-Entry Notes (as defined
herein), such Notes will be evidenced by one
or more Notes registered in the name of Cede
& Co. ("Cede"), as the nominee of DTC or one
of the European Depositaries. Cross-market
transfers between persons holding directly or
indirectly through DTC, on the one hand, and
counterparties holding directly or indirectly
through Cedel or Euroclear, on the other,
will be effected in DTC through Citibank,
N.A. ("Citibank") or The Chase Manhattan Bank
("Chase" and together with Citibank, the
"European Depositaries"), the relevant
depositaries of Cedel and Euroclear,
respectively, and each a participating member
of DTC or one of the European Depositaries.
The Notes will initially be registered in the
name of Cede. The interests of the Owners of
such Notes will be represented by
book-entries on the records of DTC and
participating members thereof. No Beneficial
Owner will be entitled to receive a
definitive note representing such person's
interest, except in the event that Definitive
Notes (as defined herein) are issued under
the limited circumstances described herein.
All references in this Prospectus Supplement
to any Notes reflect the rights of Beneficial
Owners only as such rights may be exercised
through DTC and its participating
organizations for so long as such Notes are
held by DTC. See "Description of the Notes--
Book-Entry Registration of the Notes" herein,
and "The Agreements--Book-Entry Securities"
in the Prospectus.
Optional Redemption - Clean-Up
Call: The holders of Residual Interests exceeding
in the aggregate a 50% percentage interest
(the "Majority Residualholders") may, at
their option, effect an early redemption of
the Notes and terminate the Trust on any
Payment Date on or after the Redemption Date
by purchasing all of the Home Equity
Loans at a price equal to or greater than
the Redemption Price (as defined under
"Administration--Redemption of Notes"
herein). The proceeds from any such
purchase of the Home Equity Loans will be
used by the Issuer to redeem the Notes and
terminate the Indenture. In addition, the
Note Insurer will have rights, under the
limited circumstances described in the Sale
and Servicing Agreement, to acquire all of
the Home Equity Loans from the Issuer and
thereby effect a redemption of the Notes and
terminate the Indenture. See
"Administration--Redemption of the Notes"
herein.
Ratings: It is a condition of issuance of the Notes
that they be rated "Aaa" by Moody's Investors
Services, Inc. ("Moody's") and "AAA" by
Standard & Poor's Rating Services, a division
of the McGraw-Hill Companies ("Standard &
Poor's"). Moody's and Standard & Poor's are
referred to herein collectively as the
"Rating Agencies". The ratings issued by the
Rating Agencies on the payment of principal
and interest on the Notes do not cover the
payment of any Available Funds Cap Carry
Forward Amounts. 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
entity.
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No Rating Agency is obligated to maintain any
rating on the Notes and, accordingly, there
can be no assurance that the rating assigned
to Notes upon initial issuance thereof will
not be lowered or withdrawn at any time
thereafter. See "Ratings" herein.
Federal Tax Aspects: No election will be made to treat the Trust
Estate or any portion thereof as a "real
estate mortgage investment conduit" (a
"REMIC") for federal income tax purposes.
Upon the issuance of the Notes, Arter &
Hadden LLP, counsel to the Issuer, will
deliver its opinion that the Notes will be
treated as debt obligations and not as
representing an ownership interest in the
Trust Estate or an equity interest in the
Issuer or the Seller. In addition, for
federal income tax purposes, the Issuer will
not be (i) classified as an association
taxable as a corporation, (ii) a taxable
mortgage pool as defined in Section 7701(i)
of the Code, or (iii) a "publicly traded
partnership" as defined in Treasury
Regulation Section 1.7704-1. An Owner of a
Note, by its acceptance of a Note, will be
deemed to have agreed to treat the Note as
indebtedness. An Owner will not be required
to report income with respect to the Note
under an accrual method unless the Owner
otherwise uses the accrual method or
purchases a Note which has original issue
discount.
The Notes will not represent "real estate
assets" for purposes of Section 856(c)(5)(A)
of the Internal Revenue Code of 1986, as
amended (the "Code"), or A[l]oans . . .
principally secured by an interest in real
property" within the meaning of Section
7701(a)(19)(C)(v) of the Code.
Investors are advised to consult their tax
advisors and to review "Certain Federal
Income Tax Consequences" herein and "Certain
Federal Income Tax Considerations" in the
Prospectus.
ERISA Considerations: Subject to the considerations discussed under
"ERISA Considerations" herein and in the
Prospectus, the Notes may be purchased by
employee benefit plans that are subject to
ERISA. See "ERISA Considerations" herein and
in the Prospectus.
Legal Investment
Considerations: The Notes will not constitute "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"). Accordingly, many
institutions with legal authority to invest
in comparably rated securities based on
qualifying first lien home equity loans may
not be legally authorized to invest in the
Notes.
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RISK FACTORS
Prospective investors in the Notes should consider, among other
things, the following risk factors (as well as the factors set forth under "Risk
Factors" in the Prospectus) in connection with the purchase of the Notes.
Sensitivity to Prepayments. The Home Equity Loans may be prepaid by
the related Mortgagors in whole or in part, at any time. However, approximately
47.99% of the Home Equity Loans as of the Statistical Calculation Date (by Loan
Balance) require the payment of a fee in connection with certain prepayments. In
addition, a substantial portion of the Home Equity Loans contain due-on-sale
provisions which, to the extent enforced by the Servicer, will result in
prepayment of such Home Equity Loans. See "Prepayment and Yield Considerations"
herein and "Certain Legal Aspects of the Loans--Due-on-Sale Clauses in Mortgage
Loans" and "--Enforceability of Prepayment and Late Payment Fees" in the
Prospectus. Generally, if prevailing interest rates fall significantly below the
interest rates on the Home Equity Loans, the Home Equity Loans are likely to be
subject to higher prepayment rates than if prevailing rates remain at or above
the interest rates on such Home Equity Loans. Conversely, if prevailing interest
rates rise significantly above the interest rates on the Home Equity Loans, the
rate of prepayments is likely to decrease.
92.37% of the Home Equity Loans as of the Statistical Calculation Date
are Adjustable Rate Home Equity Loans. Adjustable Rate Home Equity Loans 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 Adjustable Rate Home Equity Loans may be inclined to refinance such home
equity loans with a fixed rate loan to "lock in" a lower interest rate. The
existence of the applicable periodic rate cap, maximum Coupon Rate and minimum
Coupon Rate also may affect the likelihood of prepayments resulting from
refinancings. Similarly, when the market rate for fixed rate home equity loans
is below the mortgage coupon for the Fixed Rate Home Equity Loans, mortgagors
may have an increased incentive to refinance their home equity loans. In
addition, the delinquency and loss experience on Adjustable Rate Home Equity
Loans may differ from that on Fixed Rate Home Equity Loans because the amount of
the monthly payments on Adjustable Rate Home Equity Loans are subject to
adjustment on each payment change date.
The average life of the Notes, and, if purchased at other than par,
the yields realized by Owners of the Notes will be sensitive to levels of
payment (including prepayments (the "Prepayments")) on the Home Equity Loans. In
general, the yield on the Notes if purchased at a premium from the outstanding
principal amount thereof will be adversely affected by a higher than anticipated
level of Prepayments and enhanced by a lower than anticipated level. Conversely,
the yield on Notes if purchased at a discount from the outstanding principal
amount thereof will be enhanced by a higher than anticipated level of
Prepayments and adversely affected by a lower than anticipated level. See
"Prepayment and Yield Considerations" herein.
Risk of Home Equity Loan Coupon Rates Reducing the Note Rate. The
calculation of the Note Rate is based upon (i) the value of an index (One-Month
LIBOR) which is different from the value of the indices applicable to the
Adjustable Rate Home Equity Loans as described under "The Home Equity Loan Pool"
either as a result of the use of a different index, rate determination date or
rate adjustment date and (ii) the weighted average of the Coupon Rates of the
Home Equity Loans, which are subject to periodic adjustment caps, maximum rate
caps and minimum rate floors in the case of the Adjustable Rate Home Equity
Loans. As of the Statistical Calculation Date, 7.63% of the Home Equity Loans
were Fixed Rates Home Equity Loans and 92.37% of the Home Equity Loans were
Adjustable Rate Home Equity Loans. 83.14% of the Home Equity Loans by aggregate
Loan Balance as of the Statistical Calculation Date are Adjustable Rate Home
Equity Loans which adjust based upon the London interbank offered rate for
six-month United States dollar deposits ("Six-Month LIBOR"). Although a number
of Six-Month LIBOR Loans first adjust six months after origination, a
substantial majority of the Six-Month LIBOR Loans first adjust two or three
years from the date of origination. 9.23% of the Home Equity Loans by aggregate
Loan Balance as of the Statistical Calculation Date are Adjustable Rate Home
Equity Loans which adjust based on the CMT Index (the "CMT Loans"). Although a
substantial majority of CMT Loans first adjust one year after origination, a
number of the CMT Loans do not first adjust until two or three years from the
date of origination. The Note Rate adjusts monthly based upon One-Month LIBOR as
described under "Description of the Notes--Calculation of One-Month LIBOR"
herein, subject to the Available Funds Cap. Consequently, the interest which
becomes due on the Home Equity Loans (net of the
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Servicing Fee and the Trust Fees and Expenses) during any Remittance Period may
not equal the amount of interest that would accrue at One-Month LIBOR plus the
margin on the Notes during the related Accrual Period. In particular, the Note
Rate adjusts monthly, while the interest rates of the Adjustable Rate Home
Equity Loans adjust less frequently and the interest rates of the Fixed Rate
Home Equity Loans do not adjust at all with the result that the Available Funds
Cap may limit increases in the Note Rate for extended periods in a rising
interest rate environment. In addition, One-Month LIBOR, Six-Month LIBOR and the
CMT Index may respond to different economic and market factors, and there is not
necessarily a correlation among them. Thus, it is possible, for example, that
One-Month LIBOR may rise during periods in which Six-Month LIBOR or the CMT
Index are stable or are falling or that, even if each of One-Month LIBOR,
Six-Month LIBOR and the CMT Index rise during the same period, One-Month LIBOR
may rise more rapidly than Six-Month LIBOR and the CMT Index. Furthermore, if
the Available Funds Cap determines the Note Rate for a Payment Date, the value
of the Notes may be temporarily or permanently reduced.
Although Owners of the Notes will be entitled to receive any Available
Funds Cap Carry Forward Amount from and to the extent of funds available
therefor as described herein, there is no assurance that such funds will be
available. The failure to pay any Available Funds Cap Carry Forward Amount due
to a lack of funds therefor will not constitute an Event of Default under the
Indenture. In addition, the Note Insurance Policy does not cover, and the
ratings of the Notes do not address the likelihood of the payment of any
Available Funds Cap Carry Forward Amount.
The Subsequent Home Equity Loans and the Pre-Funding Account. Any
conveyance of Subsequent Home Equity Loans is subject to the following
conditions, among others (i) each such Subsequent Home Equity Loan must satisfy
the representations and warranties specified in the agreement pursuant to which
such Subsequent Home Equity Loans are transferred to the Issuer (each, a
"Subsequent Transfer Agreement") and in the Sale and Servicing Agreement; (ii)
the Seller will not select such Subsequent Home Equity Loans in a manner adverse
to the interest of the Owners of the Notes; (iii) the Seller will deliver
certain opinions of counsel with respect to the validity of the conveyance of
such Subsequent Home Equity Loans; (iv) each Subsequent Home Equity Loan will be
an adjustable rate Home Equity Loan; and (v) as of each cut-off date (each, a
"Subsequent Cut-Off Date") applicable thereto, the Home Equity Loans at that
time, including the Subsequent Home Equity Loans to be conveyed by the Seller as
of such Subsequent Cut-Off Date, will satisfy the criteria set forth in the Sale
and Servicing Agreement, as described herein under "The Home Equity Loan
Pool--Conveyance of Subsequent Home Equity Loans" and the Note Insurer shall
have consented to such conveyance. The Sale and Servicing Agreement will
provide that any of such requirements may be waived or modified in any respect
upon prior written consent of the Note Insurer.
To the extent that amounts on deposit in the Pre-Funding Account have
not been fully applied to the purchase of Subsequent Home Equity Loans by the
Issuer by the end of the Funding Period, the Owners of the Notes will receive a
prepayment of principal in an amount equal to the Pre-Funded Amount remaining in
the Pre-Funding Account on the Payment Date immediately following the Funding
Period. The Seller intends that the principal amount of Subsequent Home Equity
Loans sold to the Issuer will require the application of substantially all
amounts on deposit in the Pre-Funding Account and that therefore there will be
no material principal prepayment to the Owners of the Notes.
Each Subsequent Home Equity Loan must satisfy the eligibility criteria
referred to above at the time of its addition. However, Subsequent Home Equity
Loans may be originated or purchased by the Seller using credit criteria
different from those which were applied to the Initial Home Equity Loans and may
be of a different credit quality. Following the transfer of Subsequent Home
Equity Loans to the Issuer, it is anticipated that the aggregate characteristics
of the Home Equity Loans then held by the Issuer will not vary significantly
from those of the Initial Home Equity Loans. See "The Home Equity Loan
Pool--Conveyance of Subsequent Home Equity Loans" herein.
Other Legal Considerations. Applicable state laws generally regulate
interest rates and other charges, require certain disclosures, and require
licensing of the Seller. 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 Home Equity Loans. The Seller will be required
to repurchase any Home Equity Loans which, at the time of origination, did not
comply with applicable federal and state
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laws and regulations. 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 Home Equity Loans, may entitle the borrower
to a refund of amounts previously paid and, in addition, could subject the
Seller to damages and administrative enforcement. See "Certain Legal Aspects of
Loans" in the Prospectus.
The Home Equity 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 Home Equity Loans;
(ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of
age, race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under the
Consumer Credit Protection Act, in the extension of credit; and
(iii) the Fair Credit Reporting Act, which regulates the use
and reporting of information related to the borrower's credit
experience.
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 Home
Equity Loans and, in addition, could subject the Seller to damages and
administrative enforcement. The Seller will be required to repurchase any Home
Equity Loans which, at the time of origination did not comply with such federal
laws or regulations. See "Certain Legal Aspects of Loans" in the Prospectus.
It is possible that some of the Home Equity Loans will be 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. The Riegle Act adds certain additional provisions to Regulation Z,
which is the implementing regulation of the Truth-in-Lending Act. These
provisions impose additional disclosure and other requirements on creditors with
respect to non-purchase money home equity loans with high interest rates or high
upfront fees and charges. In general, home equity loans within the purview of
the Riegle Act have annual percentage rates over 10% greater than the yield on
Treasury Securities of comparable maturity and/or fees and points which exceed
the greater of 8% of the total loan amount or $400. The provisions of the Riegle
Act apply on a mandatory basis to all home equity loans originated on or after
October 1, 1995. These provisions can impose specific 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 home equity loan. The Seller will represent and warrant in the Sale and
Servicing Agreement that each Home Equity Loan was originated in compliance with
all applicable laws including the Truth-in-Lending Act, as amended.
Risk Associated with the Note Insurer. If the protection afforded by
overcollateralization is insufficient and if, upon the occurrence of an
Overcollateralization Deficit, the Note Insurer is unable to meet its
obligations under the Note Insurance Policy, then the Owners of the Notes could
experience a loss of their investment.
THE SELLER AND SERVICER
General
The Seller and Servicer, IMC Mortgage Company, is a Florida
corporation. IMC Mortgage Company completed an initial public offering of
certain shares of its common stock on June 25, 1996 and a secondary offering of
certain shares of its common stock in April 1997. The principal executive
offices of the Seller are located at 5901 East Fowler Avenue, Tampa, Florida
33617-2362 and its telephone number is (813) 984-8801.
S-14
<PAGE>
The Seller has been in the mortgage lending business since its
formation in 1993 and the Seller and certain other subsidiaries of the Seller
are engaged in originating, purchasing and servicing home equity loans secured
by first and second mortgages and deeds of trust on Properties located in 50
states and the District of Columbia.
In September 1997, IMC Mortgage Company began servicing loans
previously serviced by Industry Mortgage Company, L.P., a Delaware limited
partnership, which is a subsidiary of IMC Mortgage Company and an affiliate of
the Depositor. Consequently, information on loans serviced prior to September
1997 was generated by Industry Mortgage Company, L.P. and not by IMC Mortgage
Company. The transfer of servicing to IMC Mortgage Company is part of an ongoing
effort to consolidate mortgage banking functions of the Seller and Servicer.
Since both IMC Mortgage Company and Industry Mortgage Company, L.P. have the
same management and staff, such transfer has not resulted in any changes to the
management and staff previously servicing the loans for Industry Mortgage
Company, L.P. In addition, there has not been any changes made to any of the
servicing procedures previously utilized by Industry Mortgage Company, L.P.
The Seller will sell and assign each Home Equity Loan to the
Depositor, which will in turn sell and assign each Home Equity Loan to the
Issuer, without recourse, but subject to the terms of the Sale and Servicing
Agreement, in consideration of the net proceeds from the sale of the Notes,
which are being offered hereby. The Seller, in its capacity as Servicer, will
also service each Home Equity Loan pursuant to the Sale and Servicing Agreement.
The Servicer may not assign its obligations under the Sale and
Servicing Agreement, in whole or in part, unless it shall have first obtained
consent from the Note Insurer and confirmation in writing from the Rating
Agencies that such assignment shall not result in a downgrade or withdrawal of
the ratings assigned to the Notes by each respective Rating Agency; provided,
however, that any assignee must meet the eligibility requirements for a
successor servicer set forth in the Sale and Servicing Agreement.
The Servicer may, with the prior written consent of the Note Insurer,
enter into sub-servicing agreements (the "Sub-Servicing Agreements") with
qualified sub-servicers (the "Sub-Servicers") with respect to the servicing of
the Home Equity Loans. None of the Sub-Servicing arrangements discharge the
Servicer from its servicing obligations. Each Sub-Servicing Agreement shall be
terminated at such time as the Servicer resigns or is removed. See
"Administration--Servicing and Sub-Servicing" herein.
The Note Insurer or the Indenture Trustee (with the prior written
consent of the Note Insurer) (or, in certain circumstances the Owners, with the
consent of the Note Insurer), may remove the Servicer, and the Servicer may
resign, only in accordance with the terms of the Sale and Servicing Agreement.
No removal or resignation shall become effective until the Indenture Trustee or
a successor servicer shall have assumed the Servicer's responsibilities and
obligations in accordance therewith. Any collections received by the Servicer
after removal or resignation shall be endorsed by it to the Indenture Trustee
and remitted directly to the Indenture Trustee or the successor servicer.
Upon removal or resignation of the Servicer, the Indenture Trustee (x)
may solicit bids for a successor servicer as described in the Sale and Servicing
Agreement and (y) until such time as a successor servicer is appointed pursuant
to the terms of the Sale and Servicing Agreement, shall serve in the capacity of
Backup Servicer (the "Backup Servicer") subject to the right of the Indenture
Trustee to assign such duties to a party acceptable to the Note Insurer and
Majority Residualholders. If the Indenture Trustee is unable to obtain a
qualifying bid and is prevented by law from acting as servicer, the Indenture
Trustee will be required to appoint, or petition a court of competent
jurisdiction to appoint, an eligible successor. Any successor (including the
Backup Servicer) is required to be a housing and home finance institution, bank
or mortgage servicing institution which has been designated as an approved
seller-servicer by Fannie Mae or FHLMC for first and second home equity loans
having equity of not less than $5,000,000 as determined in accordance with
generally accepted accounting principles, and which shall assume all or any part
of the responsibilities, duties or liabilities of the Servicer.
The Notes will not represent an interest in or obligation of, nor are
the Home Equity Loans guaranteed by the Depositor, the Seller, the Servicer,
except as described herein, or any of their affiliates.
S-15
<PAGE>
Credit and Underwriting Guidelines
The following is a description of the underwriting guidelines
customarily and currently employed by the Seller with respect to home equity
loans which it originates or purchases from others. Each Home Equity Loan was
underwritten according to those guidelines. The Seller revises such guidelines
from time to time in connection with changing economic and market conditions.
In certain cases loans may be acquired or originated outside of the
criteria included in the guidelines as then in effect with the prior approval of
a pre-designated senior official of the Seller and in light of compensating
factors or other business considerations. No information is available with
respect to the portion of the Home Equity Loans as to which exceptions to the
criteria specified in the guidelines described herein were made. Substantially
all of the Home Equity Loans were acquired or originated in accordance with the
underwriting guidelines described herein or with such permitted exceptions as
are described herein.
The Seller's business consists primarily of acquiring home equity
loans. The Seller specializes in home equity loans that do not conform to the
underwriting standards of Fannie Mae ("Fannie Mae") or the Federal Home Loan
Mortgage Corporation ("FHLMC") and those standards typically applied by banks
and other primary lending institutions, particularly with regard to a
prospective borrower's credit history.
The Seller acquires and originates home equity loans through its
principal office in Tampa, Florida and full-service branch offices in
Cincinnati, Ohio, Ft. Washington, Pennsylvania, Lincoln, Rhode Island and Cherry
Hill, New Jersey. In addition, the Seller maintains retail branch offices
throughout the United States and acquires home equity loans from a referral
network of mortgage lenders and brokers, banks and other referral sources, which
may include one or more affiliates of the Seller.
Home equity loans acquired from mortgage brokers and other lenders are
pre-approved by the Seller prior to funding, or purchased in bulk after funding,
only after each loan has been re-underwritten by the Seller in accordance with
its established underwriting guidelines. These guidelines are designed to assess
the adequacy of the real property which serves as collateral for the loan and
the borrower's ability to repay the loan. The Seller analyzes, among other
factors, the equity in the collateral, the credit history and debt-to-income
ratio of the borrower, the property type, and the characteristics of the
underlying senior mortgage, if any.
The Seller purchases and originates home equity loans with different
credit characteristics depending on the credit profiles of individual borrowers.
The Seller primarily purchases and originates fixed rate or adjustable rate
loans which fully amortize (subject to adjustments by reason of being simple
interest loans) over a period not to exceed 30 years. The Seller also acquires
and originates balloon loans, which generally provide for scheduled amortization
over 30 years, with a due date and a balloon payment generally at the end of the
fifteenth year. The principal amount of the loans purchased or originated by the
Seller generally ranges up to a maximum of $400,000. Under current policy the
Seller generally does not acquire or originate home equity loans where the
combined Loan-to-Value Ratio exceeds 90%. The collateral securing loans acquired
or originated by the Seller is generally one- to four-family residences,
including condominiums and townhomes. The Seller accepts mobile homes or
unimproved land as collateral only in limited circumstances. The Seller does not
purchase loans where any senior mortgage contains open-end advance, negative
amortization or shared appreciation provisions.
The Seller's home equity loan program includes: (i) a full
documentation program for salaried borrowers and (ii) a non-income qualification
program for self-employed, and in limited instances, salaried borrowers. The
borrower's total monthly debt obligations (which include principal and interest
on all other mortgages, loans, charge accounts and all other scheduled
indebtedness) generally cannot exceed 50% of the borrower's monthly gross
income. Loans to substantially all borrowers who are salaried employees must be
supported by current employment information in addition to employment history.
This information for salaried borrowers is verified based on written
confirmation from employers or one or more pay-stubs, recent W-2 tax forms,
recent tax returns or telephone confirmation from the employers. For the
Seller's non-income qualification program, proof of a two year history of
S-16
<PAGE>
self-employment in the same business plus proof of current self-employed status
is required. The Seller typically requires lower combined Loan-to-Value Ratios
with respect to loans made to self-employed borrowers.
The Seller requires that a full appraisal of the property used as
collateral for any loan that is acquired or originated be performed in
connection with the origination of the loan. These appraisals are performed by
third party, fee-based appraisers. Appraisals of substantially all of the
Properties were completed on standard Fannie Mae/FHLMC forms and conform to
current Fannie Mae/FHLMC secondary market requirements for residential property
appraisals. Each such appraisal includes, among other things, an inspection of
the exterior of the subject property, photographs of two or more different views
of the property and data from sales within the preceding 12 months of similar
properties within the same general location as the subject property.
A credit report by an independent, nationally recognized credit
repository agency reflecting the applicant's credit history is required. The
credit report typically contains information reflecting delinquencies,
repossessions, judgments, foreclosures, garnishments, bankruptcies and similar
instances of adverse credit that can be discovered by a search of public
records.
Certain laws protect loan applicants by offering them a period of time
after loan documents are signed, termed the rescission period, during which the
applicant has the right to cancel the loan. The rescission period must have
expired prior to the funding of the loan and may not be waived by the applicant
except as permitted by law.
The Seller requires title insurance coverage issued by an approved
ALTA or CLTA title insurance company on all property securing home equity loans
it originates or purchases. The loan originator and its assignees are generally
named as the insured. Title insurance policies indicate the lien position of the
home equity loan and protect the Seller against loss if the title or lien
position is not indicated. The applicant is also required to secure hazard and,
in certain instances, flood insurance in an amount sufficient to cover the new
loan and any senior mortgage.
Delinquency, Loan Loss and Foreclosure Information
In September 1997, the Servicer began servicing loans previously
serviced by its subsidiary, Industry Mortgage Company, L.P. IMC Mortgage Company
and Industry Mortgage Company, L.P. have the same management and staff and
therefore the transfer of servicing has not resulted in any changes to the
management and staff previously servicing the loans for Industry Mortgage
Company, L.P. The delinquency and loss experience percentages indicated below
are calculated on the basis of the total home equity loans serviced as of the
end of the periods indicated and reflect information generated by IMC Mortgage
Company. However, because the total amount of loans originated or purchased by
IMC Mortgage Company and its subsidiaries has increased substantially over these
periods as a result of new originations, the total amount of loans serviced as
of the end of any indicated period will include many loans which will not have
been outstanding long enough to give rise to some or all of the indicated
periods of delinquencies. In addition, the information in the tables below has
not been adjusted to eliminate the effect of the significant growth in the size
of Industry Mortgage Company, L.P.'s home equity loan portfolio during the
periods shown. Accordingly, loss and delinquency as percentages of aggregate
principal balance of home equity loans serviced for each period would be higher
than those shown if a group of home equity loans were artificially isolated at a
point in time and the information showed the activity only in that isolated
group. As a result, the historical delinquency experience and loan loss
information set forth below may not be indicative of the future performance of
the home equity loans.
S-17
<PAGE>
Delinquency and Default Experience of the Servicer's Servicing
Portfolio of Home Equity Loans
<TABLE>
<CAPTION>
Year Ending December 31,
-----------------------------------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
Number of Dollar Number of Dollar Number of Dollar
Loans Amount Loans Amount Loans Amount
<S> <C> <C> <C> <C> <C> <C>
Portfolio At 102,275 $6,956,905,062 35,390 $2,148,068,446 9,376 $535,797,748
Delinquency
Percentage (1)
30 - 59 days 2.598% 2.371% 3.390% 3.093% 2.613% 2.570%
60 - 89 days 1.438% 1.292% 1.077% 1.068% 0.672% 0.642%
90 + days 4.042% 3.886% 2.427% 2.616% 1.237% 1.223%
------ ------ ------ ------ ------ ------
Total 8.078% 7.549% 6.894% 6.777% 4.522% 4.435%
====== ======= ====== ====== ====== ======
Delinquency
Default
Percentage (2)
Foreclosure 1.235% 1.420% 0.863% 1.003% 0.779% 0.749%
Bankruptcy(3) 1.208% 1.139% 1.064% 1.069% 0.576% 0.630%
Real Estate 0.462% 0.441% 0.276% 0.313% 0.117% 0.160%
------ ------ ------ ------ ------ ------
Owned
Total Default 2.904% 3.000% 2.204% 2.385% 1.472% 1.539%
====== ====== ====== ====== ====== ======
</TABLE>
- -----------------
(1) The delinquency percentage represents the number and dollar value
of account balances contractually past due, including home equity
loans in foreclosure or bankruptcy but exclusive of real estate
owned.
(2) The default percentage represents the number and dollar value of account
balances on home equity loans in foreclosure, bankruptcy or real estate
owned.
(3) The bankruptcy percentage represents all home equity loans that are in
bankruptcy regardless of delinquency status.
Loan Loss Experience on the Servicer's Servicing
Portfolio of Home Equity Loans
<TABLE>
<CAPTION>
Year Ending December 31,
---------------------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Average Amount Outstanding(1) $4,315,237,578 $1,207,171,960 $294,251,859
Gross Losses(2) $6,274,022 $1,581,695 $278,632
Recoveries(3) $0 $1,727 $0
Net Losses(4) $6,274,022 $1,579,968 $278,632
Net Losses as a Percentage of 0.145% 0.131% 0.095%
Average Amount Outstanding
</TABLE>
- -----------------
(1) "Average Amount Outstanding" during the period is the arithmetic
average of the principal balances of the home equity loans
outstanding on the last business day of each month during the
period.
(2) "Gross Losses" are actual losses incurred on liquidated
properties for each respective period. Losses include all
principal, foreclosure costs and accrued interest to date.
(3) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(4) "Net Losses" means "Gross Losses" minus "Recoveries."
S-18
<PAGE>
THE ISSUER
The Issuer is a Delaware business trust established by the Depositor
pursuant to the Trust Agreement under the laws of the State of Delaware. After
its formation, the Issuer will not engage in any activity other than (i)
acquiring, holding and managing the Home Equity Loans and the other assets of
the Trust Estate and the proceeds therefrom, (ii) issuing the Notes and the
Residual Interest, (iii) making payments on the Notes and the Residual Interest
and (iv) engaging in other activities that are necessary, suitable or convenient
to accomplish the foregoing or are incidental thereto or in connection
therewith. The Residual Interest represents the residual interest in the assets
of the Trust Estate. The Notes and the Residual Interests will be delivered by
the Issuer to the Depositor as consideration for the Home Equity Loans sold to
it and the Depositor will in turn deliver the Residual Interests and the
proceeds of the Notes to the Seller as consideration for the Home Equity Loans
sold to it, all pursuant to the Sale and Servicing Agreement. The Issuer does
not have, nor is it expected in the future to have, any significant assets,
other than the assets included in the Trust Estate.
THE DEPOSITOR
Bear Stearns Asset Backed Securities, Inc. is a Delaware corporation
organized in 1995. The Depositor is a wholly owned subsidiary of The Bear
Stearns Companies Inc. and an affiliate of Bear, Stearns & Co. Inc. The
Depositor was formed as a limited purpose finance company to, among other
things, sell assets and enter into agreements in connection with the
establishment of one of more trusts which will issue and sell, bonds, notes,
debt, equity securities and other securities instruments collateralized or
otherwise representing an interest in, among other things, pools of home equity
loans. None of the Depositor, The Bear Stearns Companies Inc., Bear, Stearns &
Co. Inc. or any of their affiliates will insure or guarantee payments on the
Notes.
USE OF PROCEEDS
The Seller will sell the Initial Home Equity Loans to the Depositor and
the Depositor will sell the Initial Home Equity Loans to the Issuer concurrently
with delivery of the Notes. Net proceeds from the sale of the Notes will be
applied by the Depositor (i) to the purchase of the Initial Home Equity Loans
from the Seller, (ii) to the deposit of the Pre-Funded Amount in the Pre-Funding
Account and (iii) to the deposit of certain amounts in the Capitalized Interest
Account. The Seller in turn will use the net proceeds from the sale of the
Initial Home Equity Loans to pay off extensions of credit provided by, among
others, certain of the Underwriters with respect to certain Home Equity Loans.
Such net proceeds less the Pre-Funded Amount and the amount deposited in the
Capitalized Interest Account will (together with the Residual Interest retained
by the Seller) represent the purchase price to be paid by the Issuer to the
Depositor and by the Depositor to the Seller for the Initial Home Equity Loans.
THE HOME EQUITY LOAN POOL
General
The statistical information presented in this Prospectus Supplement
concerning the pool of Home Equity Loans is based on the pool of Home Equity
Loans as of Statistical Calculation Date. The pool of Home Equity Loans
aggregated $457,208,083.38 as of the Statistical Calculation Date. Additional
Home Equity Loans will be purchased by the Trust for inclusion in the Trust from
the Depositor on the Closing Date. Such additional Initial Home Equity Loans
will represent Initial Home Equity Loans acquired or to be acquired by the
Depositor from the Seller on or prior to the Closing Date. The Seller expects
that the actual pool of Initial Home Equity Loans as of the Closing Date will
represent at least $525,000,000. In addition, with respect to the pool of Home
Equity Loans as of the Statistical Calculation Date as to which statistical
information is presented herein, some amortization of the pool will occur prior
to the Closing Date. Moreover, certain loans included in the pool of Home Equity
Loans as of the Statistical Calculation Date may prepay in full, or may be
determined not to meet the eligibility requirements for the final pool, and may
not be included in the final pool. As a result of the foregoing, the statistical
distribution of characteristics for the Initial Home Equity Loan pool as of the
Closing Date will vary from the statistical distribution of such characteristics
for the Home Equity Loans as of the Statistical Calculation Date as presented in
this Prospectus Supplement. Unless otherwise noted, all statistical percentages
in this Prospectus Supplement are measured by the aggregate principal balance of
the Home Equity Loans as of the Statistical Calculation Date.
S-19
<PAGE>
Subsequent Home Equity Loans are intended to be purchased by the Issuer
from the Seller from time to time on or before April 30, 1998 from funds on
deposit in the Pre-Funding Account. The Initial Home Equity Loans and the
Subsequent Home Equity Loans are referred to collectively as the "Home Equity
Loans."
This subsection describes generally certain characteristics of the Home
Equity Loans as of the Statistical Calculation Date. Unless otherwise noted, all
statistical percentages in this Prospectus Supplement are measured by the
aggregate principal balance of the Home Equity Loans as of the Statistical
Calculation Date. The columns entitled "% of Aggregate Loan Balance" in the
following tables may not sum to 100% due to rounding.
As of the Statistical Calculation, there are 4,483 Home Equity Loans. The
Loan Balance of the Home Equity Loans as of the Statistical Calculation Date was
$457,208,083.38. The Home Equity Loans as of the Statistical Calculation Date
are secured by first lien deeds of trust, security deeds or mortgages, which are
located in 48 states and the District of Columbia. Although the Home Equity
Loans as of the Statistical Calculation Date consist of both fixed and
adjustable rate home equity loans, all of the additional Home Equity Loans to be
delivered on the Closing Date and all of the Subsequent Home Equity Loans will
be adjustable rate home equity loans. The Properties securing the Home Equity
Loans consist primarily of one-to-four family residential properties. The
Properties may be owner-occupied and non-owner occupied investment properties
(which include second and vacation homes). All of the Home Equity Loans as of
the Statistical Calculation Date have a first payment date on or after June 1,
1995. All of the Home Equity Loans as of the Statistical Calculation Date are
secured by first liens on the related properties.
The Loan-to-Value Ratios shown below were calculated based upon either the
appraised values of the Properties at the time of origination (the "Appraised
Values") or the sales price. In a limited number of circumstances, and within
the Seller's underwriting guidelines, the Seller has reduced the Appraised Value
of Properties where the Properties are unique, have a high value or where the
comparables are not within Fannie Mae guidelines. The purpose for making these
reductions is to value the Properties more conservatively than would otherwise
be the case if the appraisal were accepted as written.
No assurance can be given that values of the Properties have remained or
will remain at their levels on the dates of origination of the related Home
Equity Loans. If the residential real estate market has experienced or should
experience an overall decline in property values such that the outstanding
balances of the Home Equity Loans, together with the outstanding balances of any
first mortgage, become equal to or greater than the value of the Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry.
As of the Statistical Calculation Date, 92.37% of the Home Equity Loans
were Adjustable Rate Home Equity Loans, of which 83.14% of the Home Equity Loans
by aggregate Loan Balance were Six-Month LIBOR Loans and 9.23% of the Home
Equity Loans by aggregate Loan Balance were CMT Loans, and 7.63% of the Home
Equity Loans were Fixed Rate Home Equity Loans. The Coupon Rates with respect to
all of the Adjustable Rate Home Equity Loans are subject to periodic and
lifetime rate adjustment caps.
As of the Statistical Calculation Date, the weighted average Coupon Rate
of the Home Equity Loans as of the Statistical Calculation Date was 10.33%; the
Coupon Rates of the Home Equity Loans ranged from 5.91% to 16.70%; the average
Loan Balance of the Home Equity Loans was $101,987.08; the minimum and maximum
Loan Balances of the Home Equity Loans were $9,981.98 and $665,480.61,
respectively; the weighted average Loan-to-Value Ratio of the Home Equity Loans
was 77.00%; the weighted average remaining term to maturity of the Home Equity
Loans was 347 months; and the remaining terms to maturity of the Home Equity
Loans ranged from 80 months to 360 months. As of the Statistical Calculation
Date, Home Equity Loans containing "balloon" payments represented not more than
3.66% of the aggregate Loan Balance of the Home Equity Loans. No Home Equity
Loan will mature later than March 1, 2028.
With respect to the Adjustable Rate Home Equity Loans, as of the
Statistical Calculation Date there were 4,356 Adjustable Rate Home Equity Loans.
The Loan Balance of the Adjustable Rate Home Equity Loans as of the Statistical
Calculation Date was $422,332,342.02. As of the Statistical Calculation Date,
the Coupon Rates for such
S-20
<PAGE>
Home Equity Loans ranged from 5.91% to 16.70%; the weighted average Coupon Rate
of such Home Equity Loans was 10.31%; the average Loan Balance was $96,954.16;
the weighted average maximum Coupon Rate was 16.59%; the weighted average
minimum Coupon Rate was 10.01%; the weighted average gross margin was 6.90%; the
minimum gross margin was 1.00%; and the maximum gross margin of such Home Equity
Loans was 13.29%.
Six-Month LIBOR Loans. As of the Statistical Calculation Date, the
Six-Month LIBOR Loans consist of 4,026 loans aggregating $380,121,749.65, all of
which have semi-annual interest rate and semi-annual payment adjustment
frequencies. While a number of the Six-Month LIBOR Loans first adjust six months
after origination, a substantial majority of the Six-Month LIBOR Loans first
adjust two or three years from the date of origination. The Six-Month LIBOR
Loans have a weighted average margin of 6.93%. The margin for the Six-Month
LIBOR Loans ranges from 1.00% to 13.29%. The Six-Month LIBOR Loans have a
weighted average initial periodic semi-annual rate adjustment cap of 2.26% and a
weighted average periodic semi-annual rate adjustment cap of 1.58%. The weighted
average initial Coupon Rate is 10.38%, with initial Coupon Rates that range from
5.91% to 16.70%. The Six-Month LIBOR Loans have a weighted average maximum
Coupon Rate of 16.70%. The weighted average number of months to the next rate
adjustment date on the Six-Month LIBOR Loans is 15 months.
CMT Loans. As of the Statistical Calculation Date, the CMT Loans consist
of 330 loans aggregating $42,210,592.37, all of which have annual interest rate
and annual payment adjustment frequencies based on the weekly average yield on
United States Treasury securities adjusted to a constant maturity of one year.
While a number of the CMT Loans first adjust one year after origination, a
substantial portion of the CMT Loans first adjust two or three years from the
date of origination. The CMT Loans have a weighted average margin of 6.61%. The
margin for the CMT Loans ranges from 3.25% to 9.90%. The CMT Loans have a
weighted average initial periodic annual rate adjustment cap of 2.29% and a
weighted average periodic annual rate adjustment cap of 1.97%. The weighted
average initial Coupon Rate is 9.74%, with initial Coupon Rates that range from
6.50% to 14.63%. The CMT Loans have a weighted average maximum Coupon Rate of
15.65%. The weighted average number of months to the next rate adjustment date
on the CMT Loans is 9 months.
With respect to the Fixed Rate Home Equity Loans, as of the Statistical
Calculation Date there were 127 Fixed Rate Home Equity Loans. The Loan Balance
of the Fixed Rate Home Equity Loans as of the Statistical Calculation Date was
$34,875,741.36. As of the Statistical Calculation Date, the average Loan Balance
of the Fixed Rate Home Equity Loans was $274,612.14; the Coupon Rates ranged
from 7.99% to 14.75% and the weighted average Coupon Rate for such Home Equity
Loans was 10.56%.
S-21
<PAGE>
Geographic Distribution of Properties
The geographic distribution of the Home Equity Loans by state as of the
Statistical Calculation Date was as follows:
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
State Home Equity Loans Loan Balance Loan Balance
- ----- ----------------- ------------ ------------
<S> <C> <C> <C>
Alaska 1 $ 224,905.46 0.05%
Arizona 40 4,206,685.60 0.92
Arkansas 7 650,740.15 0.14
California 255 37,808,528.67 8.27
Colorado 87 11,181,552.00 2.45
Connecticut 121 12,314,377.01 2.69
Delaware 13 1,049,268.64 0.23
District of Columbia 15 2,391,348.74 0.52
Florida 237 25,505,116.65 5.58
Georgia 200 24,579,814.65 5.38
Hawaii 13 2,340,580.09 0.51
Idaho 43 3,104,658.21 0.68
Illinois 345 35,867,198.37 7.84
Indiana 156 9,683,113.74 2.12
Iowa 23 1,671,421.92 0.37
Kansas 10 790,924.39 0.17
Kentucky 35 2,235,097.98 0.49
Louisiana 13 1,020,303.80 0.22
Maine 11 986,490.37 0.22
Maryland 162 20,739,923.68 4.54
Massachusetts 97 11,898,904.53 2.60
Michigan 458 34,264,206.03 7.49
Minnesota 93 9,205,919.87 2.01
Mississippi 13 850,129.26 0.19
Missouri 72 6,071,640.07 1.33
Montana 7 629,313.41 0.14
Nebraska 6 432,067.15 0.09
Nevada 32 3,796,540.59 0.83
New Hampshire 13 1,300,724.36 0.28
New Jersey 208 26,856,605.13 5.87
New Mexico 101 11,108,276.64 2.43
New York 291 37,620,360.25 8.23
North Carolina 187 17,119,160.83 3.74
Ohio 315 20,711,191.63 4.53
Oklahoma 21 1,271,429.68 0.28
Oregon 49 5,370,464.77 1.17
Pennsylvania 166 15,239,122.19 3.33
Rhode Island 37 3,593,999.94 0.79
South Carolina 39 3,159,431.84 0.69
South Dakota 4 316,266.57 0.07
Tennessee 36 4,295,830.09 0.94
Texas 170 14,470,672.13 3.17
Utah 54 6,152,517.73 1.35
Vermont 2 385,235.98 0.08
Virginia 59 7,734,932.91 1.69
Washington 77 7,603,217.90 1.66
West Virginia 18 1,334,503.45 0.29
Wisconsin 67 5,803,644.64 1.27
Wyoming 4 259,723.69 0.06
- ---------- ----
Total 4,483 $457,208,083.38 100.00%
===== =============== ======
</TABLE>
S-22
<PAGE>
Loan-to-Value Ratios
The original loan-to-value ratios as of the origination dates of the
Home Equity Loans (based upon either appraisals made at the time of origination
or the sales price thereof) (the ALoan-to-Value Ratios") as of the Statistical
Calculation Date were distributed as follows:
<TABLE>
<CAPTION>
Range of Number of Aggregate % of Aggregate
Original LTV's Home Equity Loans Loan Balance Loan Balance
-------------- ------------------ ------------- --------------
<S> <C> <C> <C>
5.01 to 10.00% 1 $ 9,991.37 0.00%
10.01 to 15.00 2 108,791.19 0.02
15.01 to 20.00 3 286,319.48 0.06
20.01 to 25.00 8 278,191.25 0.06
25.01 to 30.00 11 512,989.01 0.11
30.01 to 35.00 16 733,005.64 0.16
35.01 to 40.00 24 1,688,886.11 0.37
40.01 to 45.00 45 3,356,924.62 0.73
45.01 to 50.00 69 4,198,105.19 0.92
50.01 to 55.00 77 6,093,930.16 1.33
55.01 to 60.00 151 12,762,812.27 2.79
60.01 to 65.00 356 30,300,746.52 6.63
65.01 to 70.00 493 40,900,103.97 8.95
70.01 to 75.00 817 86,535,182.62 18.93
75.01 to 80.00 1,318 142,697,690.29 31.21
80.01 to 85.00 574 62,295,589.13 13.63
85.01 to 90.00 461 57,833,553.09 12.65
90.01 to 95.00 11 1,831,128.22 0.40
95.01 to 100.00 46 4,784,143.25 1.05
-- ------------ ----
Total 4,483 $457,208,083.38 100.00%
===== =============== =======
</TABLE>
Statistical Calculation Date Loan Balances
The distribution of the outstanding principal amounts of the Home Equity
Loans as of the Statistical Calculation Date were as follows:
<TABLE>
<CAPTION>
Statistical Calculation Date Number of Aggregate % of Aggregate
Loan Balances Home Equity Loans Loan Balance Loan Balance
- --------------------------- ----------------- ------------ -------------
<S> <C> <C> <C>
Up to $ 25,000.00 116 $ 2,420,014.75 0.53%
25,000.01 to 50,000.00 854 33,636,738.01 7.36
50,000.01 to 75,000.00 1,094 68,049,369.08 14.88
75,000.01 to 100,000.00 808 70,473,969.46 15.41
100,000.01 to 125,000.00 496 55,289,411.76 12.09
125,000.01 to 150,000.00 362 49,627,335.67 10.85
150,000.01 to 175,000.00 191 30,768,305.50 6.73
175,000.01 to 200,000.00 127 23,754,034.19 5.20
200,000.01 to 250,000.00 197 44,205,844.27 9.67
250,000.01 to 300,000.00 110 29,914,672.91 6.54
300,000.01 to 350,000.00 48 15,591,337.14 3.41
350,000.01 to 400,000.00 39 14,663,159.58 3.21
400,000.01 to 450,000.00 21 8,925,677.52 1.95
450,000.01 to 500,000.00 16 7,634,185.75 1.67
500,000.01 to 550,000.00 3 1,588,547.18 0.35
650,000.01 to 700,000.00 1 665,480.61 0.15
- ---------- ----
Total 4,483 $457,208,083.38 100.00%
===== =============== =======
</TABLE>
S-23
<PAGE>
Types of Mortgaged Properties
The Properties securing the Home Equity Loans as of the Statistical
Calculation Date were of the property types as follows:
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
Property Types Home Equity Loans Loan Balance Loan Balance
- -------------- ----------------- ------------ --------------
<S> <C> <C> <C>
Single Family Detached 4,102 $421,933,853.38 92.28%
Two- to Four-Family 179 18,604,939.98 4.07
Condominium 79 7,310,988.19 1.60
Single Family Attached 60 5,044,430.25 1.10
Townhouse 27 2,010,843.19 0.44
Manufactured Housing 23 1,468,924.09 0.32
Multi-Family 9 519,134.08 0.11
Planned Unit Development 4 314,970.22 0.07
- --------------- ------
Total 4,483 $457,208,083.38 100.00%
===== =============== ======
</TABLE>
Distribution of Months Since Origination
The distribution of the number of months since the date of origination
of the Home Equity Loans as of the Statistical Calculation Date was as follows:
<TABLE>
<CAPTION>
Number of Months Number of Aggregate % of Aggregate
Since Origination Home Equity Loans Loan Balance Loan Balance
- ----------------- ----------------- ------------- -------------
<S> <C> <C> <C>
0 to 1 263 $ 20,578,203.75 4.50%
2 to 12 4,199 433,404,442.35 94.79
13 to 24 17 2,373,852.06 0.52
25 to 36 1 54,466.29 0.01
37 or more 3 797,118.93 0.17
- --------------- ------
Total 4,483 $457,208,083.38 100.00%
===== =============== ======
</TABLE>
Distribution of Remaining Term to Maturity
The distribution of the number of months remaining to maturity of the
Home Equity Loans as of the Statistical Calculation Date was as follows:
<TABLE>
<CAPTION>
Months Remaining Number of Aggregate % of Aggregate
to Maturity Home Equity Loans Loan Balance Loan Balance
- ---------------- ------------------ ------------ --------------
<S> <C> <C> <C>
61 to 120 11 $ 1,983,914.73 0.43%
121 to 180 91 17,366,065.67 3.80
181 to 240 21 3,615,740.56 0.79
241 to 300 1 247,693.06 0.05
301 to 360 4,359 433,994,669.36 94.92
----- --------------- ------
Total 4,483 $457,208,083.38 100.00%
===== =============== ======
</TABLE>
S-24
<PAGE>
Occupancy Status (1)
The occupancy status of the Properties securing the Home Equity Loans as
of the Statistical Calculation Date was as follows:
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
Occupancy Status Home Equity Loans Loan Balance Loan Balance
- ---------------- ----------------- ------------ --------------
<S> <C> <C> <C>
Owner Occupied 4,175 $432,465,501.96 94.59%
Investor Owned 291 21,938,171.97 4.80
Vacation/Second Home 17 2,804,409.45 0.61
-- --------------- ------
Total 4,483 $457,208,083.38 100.00%
===== =============== ======
</TABLE>
- -----------
(1) Based on representations by the borrowers at the time of origination of the
Home Equity Loan.
Statistical Calculation Date Coupon Rates for the Fixed Rate Home Equity Loans
The Coupon Rates borne by the Notes relating to the Fixed Rate Home
Equity Loans as of the Statistical Calculation Date were distributed as follows:
<TABLE>
<CAPTION>
Range of Number of Aggregate % of Aggregate
Coupon Rates Home Equity Loans Loan Balance Loan Balance
- ------------ ----------------- ------------ --------------
<S> <C> <C> <C>
7.001 to 8.000% 1 $ 299,595.26 0.86%
8.001 to 9.000 22 5,920,376.40 16.98
9.001 to 10.000 26 8,044,313.76 23.07
10.001 to 11.000 40 10,231,060.31 29.34
11.001 to 12.000 26 7,273,604.65 20.86
12.001 to 13.000 5 1,358,656.83 3.90
13.001 to 14.000 4 946,338.19 2.71
14.001 to 15.000 3 801,795.96 2.30
-- -------------- ------
Total 127 $34,875,741.36 100.00%
=== ============== ======
</TABLE>
Statistical Calculation Date Coupon Rates for the Adjustable Rate Home Equity
Loans
The Coupon Rates borne by the Notes relating to the Adjustable Rate Home
Equity Loans as of the Statistical Calculation Date were distributed as follows:
<TABLE>
<CAPTION>
Range of Number of Aggregate % of Aggregate
Coupon Rates Home Equity Loans Loan Balance Loan Balance
- ------------ ------------------ ------------- --------------
<S> <C> <C> <C>
5.001 to 6.000% 1 $ 78,182.96 0.02%
6.001 to 7.000 17 3,151,606.50 0.75
7.001 to 8.000 95 13,318,002.32 3.15
8.001 to 9.000 446 56,109,379.79 13.29
9.001 to 10.000 1,098 117,100,498.57 27.73
10.001 to 11.000 1,337 127,547,474.33 30.20
11.001 to 12.000 817 67,579,464.89 16.00
12.001 to 13.000 345 24,980,962.66 5.92
13.001 to 14.000 135 8,380,733.80 1.98
14.001 to 15.000 56 3,606,627.12 0.85
15.001 to 16.000 6 324,197.31 0.08
16.001 to 17.000 3 155,211.77 0.04
- --------------- ------
Total 4,356 $422,332,342.02 100.00%
===== =============== ======
</TABLE>
S-25
<PAGE>
Distribution of Maximum Coupon Rates for the Adjustable Rate Home Equity Loans
The maximum Coupon Rates borne by the Mortgage Notes relating to the
Adjustable Rate Home Equity Loans as of the Statistical Calculation Date were as
follows:
<TABLE>
<CAPTION>
Range of Maximum Number of Aggregate % of Aggregate
Coupon Rates Home Equity Loans Loan Balance Loan Balance
- ----------------- ------------------ ------------- --------------
<S> <C> <C> <C>
Up to 8.000% 1 $ 39,053.39 0.01%
10.001 to 11.000 2 248,827.53 0.06
11.001 to 12.000 11 956,518.55 0.23
12.001 to 13.000 51 6,955,354.79 1.65
13.001 to 14.000 99 12,986,360.63 3.07
14.001 to 15.000 342 42,253,816.19 10.00
15.001 to 16.000 799 87,610,837.42 20.74
16.001 to 17.000 1,221 123,185,463.06 29.17
17.001 to 18.000 984 86,632,536.87 20.51
18.001 to 19.000 499 37,993,959.41 9.00
19.001 to 20.000 219 14,931,581.22 3.54
20.001 to 21.000 99 6,361,333.74 1.51
21.001 to 22.000 23 1,857,756.23 0.44
22.001 to 23.000 5 261,209.99 0.06
23.001 to 24.000 1 57,733.00 0.01
- --------------- ------
Total 4,356 $422,332,342.02 100.00%
===== =============== ======
</TABLE>
Distribution of Minimum Coupon Rates for the Adjustable Rate Home Equity Loans
The minimum Coupon Rates borne by the Mortgage Notes relating to the
Adjustable Rate Home Equity Loans as of the Statistical Calculation Date were as
follows:
<TABLE>
<CAPTION>
Range of Minimum Number of Aggregate % of Aggregate
Coupon Rates Home Equity Loans Loan Balance Loan Balance
---------------- ----------------- -------------- ---------------
<S> <C> <C> <C>
Up to 5.000% 9 $ 1,081,539.54 0.26%
5.001 to 6.000 36 4,718,353.94 1.12
6.001 to 7.000 93 12,299,029.33 2.91
7.001 to 8.000 152 18,511,712.79 4.38
8.001 to 9.000 527 63,366,701.23 15.00
9.001 to 10.000 1,140 120,126,313.00 28.44
10.001 to 11.000 1,244 115,965,558.19 27.46
11.001 to 12.000 685 54,756,548.16 12.97
12.001 to 13.000 292 20,269,277.10 4.80
13.001 to 14.000 120 7,711,584.16 1.83
14.001 to 15.000 50 3,088,522.61 0.73
15.001 to 16.000 5 281,990.20 0.07
16.001 to 17.000 3 155,211.77 0.04
- --------------- ------
Total 4,356 $422,332,342.02 100.00%
===== =============== ======
</TABLE>
S-26
<PAGE>
Distribution of Margins for the Adjustable Rate Home Equity Loans
Six-Month LIBOR Loans. The margins borne by the Mortgage Notes
relating to the Six-Month LIBOR Loans as of the Statistical Calculation Date
were as follows:
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
Range of Margins Home Equity Loans Loan Balance Loan Balance
---------------- ----------------- ------------ --------------
<S> <C> <C> <C>
Up to 2.000% 3 $ 331,867.61 0.08%
2.001 to 3.000 6 582,582.45 0.14
3.001 to 4.000 29 4,088,505.84 0.97
4.001 to 5.000 143 16,492,579.83 3.91
5.001 to 6.000 743 78,357,282.24 18.55
6.001 to 7.000 1,511 147,594,217.58 34.95
7.001 to 8.000 866 71,877,798.52 17.02
8.001 to 9.000 379 28,561,264.90 6.76
9.001 to 10.000 164 14,347,093.45 3.40
10.001 to 11.000 98 10,389,756.69 2.46
11.001 to 12.000 63 5,486,101.27 1.30
12.001 to 13.000 18 1,744,180.07 0.41
13.001 to 14.000 3 268,519.20 0.06
- --------------- ----
Subtotal 4,026 $380,121,749.65 90.01%
===== =============== ======
</TABLE>
CMT Loans. The margins borne by the Mortgage Notes relating to the CMT
Loans as of the Statistical Calculation Date were as follows:
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
Range of Margins Home Equity Loans Loan Balance Loan Balance
- ---------------- ------------------ ------------- --------------
<S> <C> <C> <C>
3.001 to 4.000% 7 $ 868,269.88 0.21%
4.001 to 5.000 16 2,503,226.20 0.59
5.001 to 6.000 67 8,236,543.96 1.95
6.001 to 7.000 131 18,280,657.33 4.33
7.001 to 8.000 100 11,275,971.29 2.67
8.001 to 9.000 6 862,649.58 0.20
9.001 to 10.000 3 183,274.13 0.04
- ---------- ----
Subtotal 330 $ 42,210,592.37 9.99%
=== =============== =====
Total 4,356 $422,332,342.02 100.00%
===== =============== =======
</TABLE>
S-27
<PAGE>
Distribution of Next Coupon Rate Change for the Adjustable Rate Home Equity
Loans
Six-Month LIBOR Loans. The month of the next Coupon Rate change for
each of the Mortgage Notes relating to the Six-Month LIBOR Loans as of the
Statistical Calculation Date was as follows:
<TABLE>
<CAPTION>
Month of Next Number of Initial Aggregate % of Aggregate
Coupon Rate Change Home Equity Loans Loan Balance Loan Balance
- ------------------ ---------------- ------------- -------------
<S> <C> <C> <C>
April 1998 159 $ 17,825,931.54 4.22%
May 1998 207 20,739,417.51 4.91
June 1998 260 24,158,488.54 5.72
July 1998 290 31,372,394.37 7.43
August 1998 187 18,351,783.92 4.35
September 1998 215 24,881,203.66 5.89
November 1998 4 438,757.19 0.10
December 1998 4 387,591.98 0.09
January 1999 17 1,349,435.94 0.32
February 1999 12 1,094,579.62 0.26
March 1999 5 820,971.83 0.19
April 1999 7 855,033.76 0.20
May 1999 11 1,133,800.33 0.27
June 1999 63 6,005,530.71 1.42
July 1999 108 8,897,869.53 2.11
August 1999 99 8,606,781.60 2.04
September 1999 184 16,708,634.29 3.96
October 1999 176 15,227,617.90 3.61
November 1999 402 37,106,046.90 8.79
December 1999 550 49,203,376.83 11.65
January 2000 555 50,043,822.41 11.85
February 2000 202 15,318,444.83 3.63
March 2000 8 510,747.97 0.12
May 2000 1 54,466.29 0.01
July 2000 1 31,417.11 0.01
August 2000 10 948,743.87 0.22
September 2000 17 1,559,850.17 0.37
October 2000 52 4,818,649.84 1.14
November 2000 99 9,058,277.44 2.14
December 2000 79 7,816,401.17 1.85
January 2001 29 3,123,823.81 0.74
February 2001 5 692,025.35 0.16
March 2001 2 167,700.00 0.04
January 2002 1 64,253.76 0.02
October 2002 1 33,258.88 0.01
November 2002 3 664,689.51 0.16
December 2002 1 49,929.29 0.01
- --------- ----
Subtotal 4,026 $380,121,749.65 90.01%
===== =============== ======
S-28
<PAGE>
CMT Loans. The month of the next Coupon Rate change for each of the
Mortgage Notes relating to the CMT Loans as of the Statistical Calculation Date
was as follows:
Month of Next Number of Aggregate % of Aggregate
Coupon Rate Change Home Equity Loans Loan Balance Loan Balance
- ------------------ ----------------- -------------- ---------------
<S> <C> <C> <C>
April 1998 14 $ 1,543,178.72 0.37%
May 1998 30 4,283,374.48 1.01
June 1998 91 11,545,694.36 2.73
July 1998 65 9,589,260.90 2.27
August 1998 9 2,164,117.30 0.51
September 1998 1 169,501.01 0.04
October 1998 13 1,198,139.27 0.28
November 1998 5 564,448.55 0.13
December 1998 11 879,909.99 0.21
January 1999 14 1,249,301.16 0.30
February 1999 2 287,858.38 0.07
March 1999 1 69,509.35 0.02
July 1999 1 113,899.16 0.03
August 1999 1 113,734.41 0.03
September 1999 1 68,438.06 0.02
November 1999 4 433,295.93 0.10
January 2000 1 46,268.85 0.01
April 2000 6 607,544.62 0.14
May 2000 15 2,085,785.24 0.49
June 2000 33 3,858,531.60 0.91
July 2000 11 1,279,940.66 0.30
August 2000 1 58,860.37 0.01
- --------- ----
Subtotal 330 $ 42,210,592.37 9.99%
=== =============== =====
Total 4,356 $422,332,342.02 100.00%
===== =============== =======
</TABLE>
Conveyance of Subsequent Home Equity Loans
The Sale and Servicing Agreement permits the Issuer to acquire
Subsequent Home Equity Loans in an aggregate principal balance equal to the
Pre-Funded Amount. Accordingly, the statistical characteristics of the Home
Equity Loans will vary as of each Subsequent Cut-Off Date upon the acquisition
of Subsequent Home Equity Loans, but the Seller does not expect such variance to
be material.
The obligation of the Issuer to purchase a Subsequent Home Equity Loan
on a Subsequent Transfer Date for assignment to the Home Equity Loan Pool is
subject, among other factors, to the following requirements: (i) the rating on
the Notes shall not have been downgraded by any Rating Agency; (ii) such
Subsequent Home Equity Loan may not be 30 or more days contractually delinquent
as of the related Subsequent Cut-Off Date (except that Subsequent Home Equity
Loans representing not more than 1% of the aggregate Loan Balance of the
Subsequent Home Equity Loans may be not more than 60 days contractually
delinquent as of the related Subsequent Cut-Off Date); (iii) the weighted
average margin of the Subsequent Home Equity Loans will be at least 6.80%; (iv)
such Subsequent Home Equity Loan will be an Adjustable Rate Home Equity Loan;
(v) the original term to maturity of such Subsequent Home Equity Loan may not
exceed 30 years; (vi) such Subsequent Home Equity Loan must be a first lien;
(vii) following the purchase of such Subsequent Home Equity Loan by the Trust,
the Home Equity Loans (including the Subsequent Home Equity Loans) (a) will have
a weighted average Coupon Rate of at least 10.15%; (b) will have a weighted
average Loan-to-Value Ratio of not more than 77.60%; (c) will have at least
93.00% Home Equity Loans which are owner occupied; and (d) will have at least
91.00% Home Equity Loans secured by single family detached properties.
S-29
<PAGE>
Interest Payments on the Home Equity Loans
Almost all of the Home Equity Loans provide that interest is charged
to the obligor (the "Mortgagor") thereunder, and payments are due from such
Mortgagors, as of a scheduled day of each month which is fixed at the time of
origination. Scheduled monthly payments made by the Mortgagors on the Home
Equity Loans either earlier or later than the scheduled due dates thereof will
not affect the amortization schedule or the relative application of such
payments to principal and interest.
There are a small number of Home Equity Loans on which interest is
charged to the Mortgagor at the Coupon Rate on the outstanding principal
balanced calculated based on the number of days elapsed between receipt of the
Mortgagor's last payment through receipt of the Mortgagor's most current payment
(such Home Equity Loans, "Date-of-Payment Loans"). Such interest is deducted
from the Mortgagor's payment amount and the remainder, if any, of the payment is
applied as a reduction to the outstanding principal balance of such Mortgage
Note. Although the Mortgagor is required to remit equal monthly payments on a
specified monthly payment date that would reduce the outstanding principal
balance of such Mortgage Note to zero at such Mortgage Note's maturity date,
payments that are made by the Mortgagor after the due date therefor would cause
the outstanding principal balance of such Mortgage Note not to be reduced to
zero on its maturity date. In such a case, the Mortgagor would be required to
make an additional principal payment at the maturity date for such Mortgage
Note. If it were assumed that all the Mortgagors on the Date-of-Payment Loans
were to pay on the latest date possible without the Date-of-Payment Loans being
in default, the amount of such additional principal payment would be a de
minimis amount of the aggregate Loan Balance of the Home Equity Loans. On the
other hand, if a Mortgagor makes a payment (other than a Prepayment) before the
due date therefor, the reduction in the outstanding principal balance of such
Note would occur over a shorter period of time than would have occurred had it
been based on the schedule of amortization in effect on the Cut-Off Date.
Accordingly, the timing of principal payments to the Owners of the Notes may be
affected by the fact that actual Mortgagor payments may not be made on the due
date therefor.
PREPAYMENT AND YIELD CONSIDERATIONS
General
The weighted average life of, and, if purchased at other than par, the
yield to maturity on, the Notes will relate to the rate of payment of principal
of the Home Equity Loans, including, for this purpose, Prepayments, liquidations
due to defaults, casualties and condemnations, and repurchases of Home Equity
Loans by the Seller. The Home Equity Loans may be prepaid by the related
Mortgagors, in whole or in part, at any time. However, approximately 47.99% of
the Home Equity Loans as of the Statistical Calculation Date (by Loan Balance)
require the payment of a fee in connection with certain prepayments. The actual
rate of principal prepayments on pools of home equity loans is influenced by a
variety of economic, tax, geographic, demographic, social, legal and other
factors and has fluctuated considerably in recent years. In addition, the rate
of principal prepayments may differ among pools of home equity loans at any time
because of specific factors relating to the home equity loans in the particular
pool, including, among other things, the age of the home equity loans, the
geographic locations of the properties securing the loans and the extent of the
mortgagors' equity in such properties, and changes in the mortgagors' housing
needs, job transfers and unemployment.
The Home Equity Loans may be subject to a greater rate of principal
prepayments in a declining interest rate environment. For example, if prevailing
interest rates fall significantly, Adjustable Rate Home Equity Loans could be
subject to higher prepayment rates than if prevailing interest rates remain
constant because the availability of fixed rate home equity loans at competitive
interest rates may encourage mortgagors to refinance their adjustable rate home
equity loan to "lock in" a lower fixed interest rate. In addition, the fact that
a substantial majority of the Six-Month LIBOR Loans and the CMT Loans do not
adjust for substantial period of time may affect the prepayment experience on
such loans. Similarly, when the market rate for fixed rate home equity loans is
below the mortgage coupon for the Fixed Rate Home Equity Loans, mortgagors may
have an increased incentive to refinance their home equity loans. However, no
assurance can be given as to the level of prepayments that the Home Equity Loans
will experience.
S-30
<PAGE>
In addition to the foregoing factors affecting the weighted average
life of the Notes, the overcollateralization provisions of the transaction
result in an additional reduction of the Note Principal Balance relative to the
amortization of the Home Equity Loans in early months of the transaction. This
creates overcollateralization which results from the excess of the aggregate
Loan Balance of the Home Equity Loans over the Note Principal Balance.
Mandatory Prepayment
In the event that prior to the end of the Funding Period the Seller is
unable to sell Subsequent Home Equity Loans to the Issuer in an amount equal to
the Pre-Funded Amount, the Owners of the Notes will receive a partial prepayment
on the Payment Date immediately following the end of the Funding Period in an
amount equal to the Pre-Funded Amount remaining at the end of the Funding
Period.
The Seller intends to use substantially all of the amount on deposit
in the Pre-Funding Account to purchase Subsequent Home Equity Loans such that no
material amount of principal is expected to be prepaid at the end of the Funding
Period.
Prepayment and Yield Scenarios for the Notes
As indicated above, if purchased at other than par (disregarding, for
purposes of this discussion, the effects on an investor's yield resulting from
the timing of the settlement date), the yield to maturity on a Note will be
affected by the rate of the payment of principal of the Home Equity Loans. If
the actual rate of payments on the Home Equity Loans is slower than the rate
anticipated by an investor who purchases Notes at a discount, the actual yield
to such investor will be lower than such investor's anticipated yield. If the
actual rate of payments on the Home Equity Loans is faster than the rate
anticipated by an investor who purchases Notes at a premium, the actual yield to
such investor will be lower than such investor's anticipated yield.
The Final Payment Date for the Notes is April 20, 2029. This date is
the Payment Date in the twelfth month after the date on which the initial Note
Principal Balance as of the Closing Date would be reduced to zero, assuming that
no Prepayments are received on the Home Equity Loans, that scheduled monthly
payments of principal and interest on the Home Equity Loans are timely received
and that the overcollateralization mechanics of the transaction are not used to
make accelerated payments of principal to the Owners of the Notes. The weighted
average life of the Notes is likely to be shorter than would be the case if
payments actually made on the Home Equity Loans conformed to the foregoing
assumptions, and the actual final Payment Date with respect to the Notes could
occur significantly earlier than the Final Payment Date because (i) Prepayments
are likely to occur and (ii) the Majority Residualholders may cause a redemption
of the Notes on or after the Redemption Date.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average life of the
Notes will be influenced by the rate at which principal of the Home Equity Loans
is paid, which may be in the form of scheduled amortization or prepayments (for
this purpose, the term "prepayment" includes Prepayments and liquidations due to
default). Prepayments on home equity loans are commonly measured relative to a
prepayment standard or model.
The model used in this Prospectus Supplement is the constant
prepayment rate ("CPR") which represents an assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of home
equity loans for the life of such home equity loans. CPR does not purport to be
a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of home equity loans, including the
Home Equity Loans. The Seller believes that no existing statistics of which it
is aware provide a reliable basis for Owners of the Notes to predict the amount
or the timing of receipt of prepayments on the Home Equity Loans.
Since the tables were prepared on the basis of the assumptions in the
following paragraph, there are discrepancies between the characteristics of the
actual Home Equity Loans and the characteristics of the Home Equity Loans
assumed in preparing the tables. Any such discrepancy may have an effect upon
the percentages of the Note Principal Balance outstanding and weighted average
life of the Notes set forth in the tables. In addition, since the actual
S-31
<PAGE>
Home Equity Loans have characteristics which differ from those assumed in
preparing the tables set forth below, the payments of principal on the Notes may
be made earlier or later than as indicated in the tables.
For the purpose of the tables below, it is assumed that: (i) the Home
Equity Loans consist of pools of loans having the approximate characteristics as
set forth in the "Representative Loan Pools" table below, (ii) the Closing Date
for the Notes occurs on March 31, 1998, (iii) payments on the Notes are made on
the 20th day of each month regardless of the day on which the Payment Date
actually occurs, commencing in April 1998 in accordance with the priorities
described herein, (iv) the difference between the gross Coupon Rate and the net
Coupon Rate is equal to the Servicing Fee and the net Coupon Rate is further
reduced by the Trust Fees and Expenses, (v) the Home Equity Loans= prepayment
rates occur at the CPR rates set forth in the table, (vi) prepayments include 30
days= interest thereon, (vii) no reinvestment income from any Trust account is
available for payment to the Owners of the Notes other than the Pre-Funding
Account, which accrues on the funds therein based on the "Assumed Delivery of
Home Equity Loans" set forth below; (viii) the scheduled monthly payments of
principal and interest on the Home Equity Loans will be timely delivered on the
first day of the Remittance Period (with no defaults), (ix) the level of
Six-Month LIBOR remains constant at approximately 5.6875%, (x) the level of
One-Month LIBOR remains constant at approximately 5.6836%, (xi) the level of 1
year CMT remains constant at approximately 5.511%, (xii) the Coupon Rate for
each Adjustable Rate Home Equity Loan is adjusted on its next rate change date
(and on subsequent rate change dates, if necessary) to equal the sum of (a) the
applicable index and (b) the respective gross margin (subject to applicable
interest rate caps and floors), (xiii) the overcollateralization levels are set
as specified in the Sale and Servicing Agreement and (xiv) no optional
redemption is exercised (except in the case of the "Weighted Average Life to
Call" set forth below).
S-32
<PAGE>
REPRESENTATIVE LOAN POOLS
Six-Month LIBOR Loans
<TABLE>
<CAPTION>
Gross Months Rate Initial Periodic Maximum Minimum
Pool Loan Coupon Net Coupon to Rate Reset Periodic Rate Coupon Coupon
Number Balance Rate Rate Change Frequency Margin Rate Cap Cap Rate Rate
- ------ ---------------- ------ ---------- ------ --------- ------ -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 2,640,239.26 10.671% 10.171% 8 6 6.544% 1.361% 1.226% 17.065% 9.100%
2 161,225,248.48 10.031 9.531 4 6 6.456 1.331 1.086 16.228 9.688
3 241,235,293.07 10.596 10.096 20 6 7.039 2.788 1.821 16.961 10.446
4 34,826,627.81 10.394 9.894 32 6 8.471 2.906 2.203 17.000 9.606
5 1,210,700.40 11.299 10.799 51 6 6.623 4.028 2.465 18.072 9.149
6 942,703.53 10.671 10.171 9 6 6.544 1.361 1.226 17.065 9.100
7 57,565,847.82 10.031 9.531 5 6 6.456 1.331 1.086 16.228 9.688
8 86,133,619.27 10.596 10.096 21 6 7.039 2.788 1.821 16.961 10.446
9 12,434,928.00 10.394 9.894 33 6 8.471 2.906 2.203 17.000 9.606
10 432,283.38 11.299 10.799 52 6 6.623 4.028 2.465 18.072 9.149
<CAPTION>
Original Remaining Remaining
Term of Term of Term of Assumed
Pool Amortization Amortization Maturity Amortization Delivery
Number (in months) (in months) (in months) Method of Home Equity Loans
- ------ ------------ ------------ ----------- ------------- --------------------
<S> <C> <C> <C> <C> <C>
1 342 336 156 Balloon Closing Date
2 358 353 353 Level Closing Date
3 360 356 356 Level Closing Date
4 360 357 357 Level Closing Date
5 360 356 356 Level Closing Date
6 342 342 162 Balloon April 1998
7 358 358 358 Level April 1998
8 360 360 360 Level April 1998
9 360 360 360 Level April 1998
10 360 360 360 Level April 1998
</TABLE>
CMT Loans
<TABLE>
<CAPTION>
Gross Months Rate Initial Periodic Maximum Minimum
Pool Loan Coupon Net Coupon to Rate Reset Periodic Rate Coupon Coupon
Number Balance Rate Rate Change Frequency Margin Rate Cap Cap Rate Rate
- ------ ---------------- ------ ---------- ------ --------- ------ -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
11 $ 38,668,572.87 9.486% 8.986% 4 12 6.503% 2.094% 1.931% 15.387% 9.113%
12 1,160,321.38 10.362 9.862 17 12 6.787 2.838 1.964 16.593 9.001
13 9,157,225.36 10.729 10.229 27 12 7.052 3.071 2.146 16.623 10.141
14 13,806,703.37 9.486 8.986 5 12 6.503 2.094 1.931 15.387 9.113
15 414,295.43 10.362 9.862 18 12 6.787 2.838 1.964 16.593 9.001
16 3,269,619.20 10.729 10.229 28 12 7.052 3.071 2.146 16.632 10.141
<CAPTION>
Original Remaining Remaining
Term of Term of Term of Assumed
Pool Amortization Amortization Maturity Amortization Delivery
Number (in months) (in months) (in months) Method of Home Equity Loans
- ------ ------------ ------------ ----------- ------------- --------------------
<S> <C> <C> <C> <C> <C>
11 357 349 349 Level Closing Date
12 349 341 341 Level Closing Date
13 360 351 351 Level Closing Date
14 357 357 357 Level April 1998
15 349 349 349 Level April 1998
16 360 360 360 Level April 1998
</TABLE>
Fixed Rate Home Equity Loans
<TABLE>
<CAPTION>
Assumed
Gross Original Term of Term of Delivery
Pool Loan Coupon Net Coupon Term of Amortization Amortization Maturity Amortization of Home
Number Balance Rate Rate (in months) (in months) (in months) Method Equity Loans
- ------ ------- ------ ---------- -------------------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
17 $ 14,460,094.35 10.745% 10.245% 360 357 174 Balloon Closing Date
18 20,415,647.02 10.426 9.926 334 331 331 Level Closing Date
</TABLE>
S-33
<PAGE>
The following table sets forth the percentages of the initial
principal amount of the Notes that would be outstanding after each of the dates
shown, based on a rate equal to 0.0%, 15.0%, 22.5%, 30.0%, 37.5% and 45.0% of
the CPR (as defined above).
PERCENTAGE OF INITIAL NOTE PRINCIPAL BALANCE(1)
<TABLE>
<CAPTION>
Payment Date 0.0% 15.0% 22.5% 30.0% 37.5% 45.0%
---- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100
03/20/1999 96 81 74 67 59 52
03/20/2000 95 68 56 45 35 27
03/20/2001 95 57 43 32 23 15
03/20/2002 94 48 33 22 14 8
03/20/2003 94 40 25 15 9 4
03/20/2004 93 34 20 11 5 2
03/20/2005 92 29 15 7 3 1
03/20/2006 92 24 12 5 2 0
03/20/2007 91 20 9 3 1 0
03/20/2008 90 17 7 2 0 0
03/20/2009 88 14 5 1 0 0
03/20/2010 87 12 4 1 0 0
03/20/2011 85 10 3 0 0 0
03/20/2012 83 8 2 0 0 0
03/20/2013 80 7 1 0 0 0
03/20/2014 78 6 1 0 0 0
03/20/2015 75 4 1 0 0 0
03/20/2016 72 4 0 0 0 0
03/20/2017 69 3 0 0 0 0
03/20/2018 66 2 0 0 0 0
03/20/2019 62 2 0 0 0 0
03/20/2020 57 1 0 0 0 0
03/20/2021 52 1 0 0 0 0
03/20/2022 46 1 0 0 0 0
03/20/2023 40 0 0 0 0 0
03/20/2024 33 0 0 0 0 0
03/20/2025 25 0 0 0 0 0
03/20/2026 17 0 0 0 0 0
03/20/2027 7 0 0 0 0 0
03/20/2028 0 0 0 0 0 0
Weighted
Average
Life to 21.1 5.4 3.6 2.6 2.0 1.6
Maturity
(Years)(2)
Weighted
Average Life 21.0 5.0 3.3 2.4 1.8 1.4
to Call
(Years)(2)
</TABLE>
- ---------------
(1) The percentages in the above table have been rounded to the nearest whole
number.
(2) The weighted average life of the Notes is determined by (i) multiplying the
amount of each principal payment by the number of years from the date of
issuance to the related Payment Date, (ii) adding the results, and (iii)
dividing by the initial Note Principal Balance and rounding to one decimal
place.
S-34
<PAGE>
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Home Equity Loans
and the Properties is based upon the pool as constituted at the close of
business on the Statistical Calculation Date. Prior to the issuance of the
Notes, Home Equity Loans may be removed from the pool as a result of incomplete
documentation or non-compliance with representations and warranties set forth in
the Sale and Servicing Agreement, if the Seller deems such removal necessary or
appropriate. An aggregate amount of at least $67,791,916.62 of additional Home
Equity Loans will also be included in the pool prior to the issuance of the
Notes and the Subsequent Home Equity Loans will be added to the pool after the
issuance of the Notes.
A current report on Form 8-K will be available to purchasers of the
Notes and will be filed, and incorporated by reference to the Registration
Statement together with the Indenture, the Trust Agreement and the Sale and
Servicing Agreement, with the Securities and Exchange Commission within fifteen
days after the initial issuance of the Notes and within fifteen days of the
addition of any Subsequent Home Equity Loans. In the event Initial Home Equity
Loans are removed from, added to, or Subsequent Home Equity Loans are added to
the pool as set forth in the preceding paragraph, such removal or addition will
be noted in a current report on Form 8-K. A description of the pool of Initial
Home Equity Loans, as of the Closing Date including such additional Home Equity
Loans, will be filed in a current report on Form 8-K within fifteen days after
the initial issuance of the Notes.
DESCRIPTION OF THE NOTES
General
The Issuer will issue the Notes pursuant to the Indenture. The Issuer
will also issue the Residual Interest pursuant to the Trust Agreement, which
represents the residual interest in the Trust Estate. The summaries of certain
provisions of the Indenture, the Sale and Servicing Agreement and the Trust
Agreement (collectively, the "Agreements") set forth below, under the caption
"Administration" herein, while complete in material respects, do not purport to
be exhaustive. For more details regarding the terms of the Agreements,
prospective investors in the Notes are advised to review the Agreements, a copy
of each of which the Seller will provide (without exhibits) without charge upon
written request addressed to the Seller.
The Notes will be secured by the Trust Estate created by the
Indenture. The Notes represent non-recourse obligations of the Issuer and
proceeds of the assets in the Trust Estate will be the sole source of payments
of the Notes. The Notes will not represent an interest in or obligation of the
Depositor, the Servicer, the Note Insurer, the Owner Trustee, the Indenture
Trustee, the Underwriters, any of their respective affiliates or any other
entity.
Payment Dates
On each Payment Date, the Owners of the Notes will be entitled to
receive, from amounts then on deposit in a trust account established and
maintained by the Indenture Trustee in accordance with the Sale and Servicing
Agreement (the "Note Account") and until the Note Principal Balance is reduced
to zero, the aggregate payment amount as of such Payment Date as described
below. Payments will be made in immediately available funds to Owners of Notes
by wire transfer or otherwise, to the account of such Owner at a domestic bank
or other entity having appropriate facilities therefor, if such Owner has so
notified the Indenture Trustee at least five Business Days prior to the Record
Date, or by check mailed to the address of the person entitled thereto as it
appears on the register (the "Register") maintained by the Indenture Trustee as
registrar (the "Registrar"). Beneficial Owners may experience some delay in the
receipt of their payments due to the operations of DTC. See "Risk Factors--Book
Entry Registration" and "Description of the Notes--Book Entry Registration of
the Notes" herein and "The Agreements--Book Entry Securities" in the Prospectus.
The Indenture will provide that an Owner, upon receiving the final
payment on such Owner's Notes, will be required to send such Note to the
Indenture Trustee. The Indenture additionally will provide that, in any event,
any Note as to which the final payment thereon has been made shall be deemed
canceled for all purposes of the Indenture and the Note Insurance Policy.
Each Owner of record of the Notes will be entitled to receive such
Owner's Percentage Interest in the amounts due on such Payment Date. The
"Percentage Interest" as of any date of determination will be equal to the
percentage
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<PAGE>
obtained by dividing the principal balance of such Note as of the Cut-Off Date
by the Note Principal Balance as of the Cut-Off Date.
Payments
Upon receipt, the Indenture Trustee will be required to deposit into
the Note Account, (i) any Insured Payments, (ii) the proceeds of any liquidation
of the assets of the Trust Estate, (iii) all remittances made to the Indenture
Trustee by the Servicer, (iv) on the Payment Dates in April and May 1998, the
Capitalized Interest Requirement (as defined in the Sale and Servicing
Agreement) and (v) on the Payment Date immediately following the end of the
Funding Period any portion of the Pre-Funding Amount remaining unused.
On each Payment Date, the Indenture Trustee is required to make the
following payments and transfers from monies then on deposit in the Note Account
as specified below in the following order of priority of each such transfer and
payment:
(i) first, on each Payment Date from amounts then on deposit in
the Note Account the Indenture Trustee shall distribute (A)
to itself, the Indenture Trustee Fee and the Indenture
Trustee Reimbursable Expenses, (B) to the Owner Trustee,
the Owner Trustee Fee and (C) provided that no Note Insurer
Default has occurred and is continuing, the Premium Amount
for such Payment Date to the Note Insurer;
(ii) second, on each Payment Date, the Indenture Trustee shall
allocate an amount equal to the sum of (x) the Total
Monthly Excess Spread (as defined herein) with respect to
such Payment Date plus (y) any Overcollateralization
Reduction Amount with respect to such Payment Date (such
sum being the "Total Monthly Excess Cashflow" with respect
to such Payment Date) in the following order of priority:
(A) first, such Total Monthly Excess Cashflow shall be
allocated to the payment of the Principal Payment
Amount (excluding any Overcollateralization Increase
Amount) pursuant to clause (iv)(C) below in an amount
equal to the amount, if any, by which (x) the
Principal Payment Amount (excluding any
Overcollateralization Increase Amount) exceeds (y)
the Available Funds for such Payment Date (net of the
related Current Interest and the Trust Fees and
Expenses) (the amount of such difference being an
"Available Funds Shortfall"); and
(B) second, any portion of the Total Monthly Excess
Cashflow remaining after the allocation described in
clause (A) above shall be paid to the Note Insurer in
respect of amounts owed on account of any
Reimbursement Amount (as defined in the Sale and
Servicing Agreement) owed to the Note Insurer;
(iii) third, the amount, if any, of the Total Monthly Excess
Cashflow on a Payment Date remaining after the allocations
and payments described in clause (ii) above is the "Net
Monthly Excess Cashflow" with respect to such Payment Date
and is required to be applied in the following order or
priority:
(A) first, such Net Monthly Excess Cashflow shall be used
to reduce to zero, through the payment of an
Overcollateralization Increase Amount to the Owners
of the Notes pursuant to clause (iv)(C) below, any
Overcollateralization Deficiency Amount (as defined
in the Sale and Servicing Agreement) as of such
Payment Date;
(B) second, any portion of the Net Monthly Excess
Cashflow remaining after the application described in
clause (A) above shall be used to pay any Available
Funds Cap Carry Forward Amount to the Owners of the
Notes; and
(C) third, any Net Monthly Excess Cashflow remaining
after the applications and payments described in
clauses (A) and (B) above shall be paid to the
Servicer to the extent of any unreimbursed
Delinquency Advances and unreimbursed Servicing
Advances;
S-36
<PAGE>
(iv) fourth, following the making by the Indenture Trustee of
all allocations, transfers and disbursements described
above from amounts (including any related Insured Payment)
then on deposit in the Note Account, the Indenture Trustee
shall distribute:
(A) (x) to the Note Insurer, the amounts described in
clause (ii)(B) above and (y) to the Servicer the
amounts described in clause (iii)(C) above;
(B) to the Owners of the Notes, the Current Interest
(including the proceeds of any Insured Payments made
by the Note Insurer) on a pro rata basis without any
priority among the Notes;
(C) to the Owners of the Notes, the Principal Payment
Amount until the Note Principal Balance is reduced to
zero;
(D) to the Indenture Trustee, as reimbursement of
expenses of the Indenture Trustee not reimbursed
pursuant to (i) above and incurred in connection with
duties and obligations under the Indenture; and
(v) fifth, following the making by the Indenture Trustee of all
allocations, transfers and disbursements described above,
from amounts then on deposit in the Note Account, the
Indenture Trustee shall distribute to the holders of the
Residual Interest, the remaining distributable amounts as
specified in the Sale and Servicing Agreement, for such
Payment Date.
<PAGE>
"Available Funds" as to each Payment Date is the amount on deposit in the
Note Account on such Payment Date (net of Total Monthly Excess Cashflow and
disregarding the amounts of any Insured Payments to be made on such Payment Date
and inclusive of any investment earnings on eligible investments therein).
"Total Available Funds" as to each Payment Date is the sum of (x) the
amount on deposit in the Note Account on such Payment Date (net of Total Monthly
Excess Cashflow) on such Payment Date and (y) any amounts of Total Monthly
Excess Cashflow to be applied on such Payment Date (disregarding the amount of
any Insured Payment to be made on such Payment Date).
The Indenture Trustee or Paying Agent (as defined in the Indenture) shall
(i) receive as attorney-in-fact of each Owner of Notes any Insured Payment from
the Note Insurer and deposit such amounts into the Note Account and (ii)
disburse the same to each Owner of Notes. The Sale and Servicing Agreement will
provide that to the extent the Note Insurer makes Insured Payments, either
directly or indirectly (as by paying through the Indenture Trustee), to the
Owners of such Notes, the Note Insurer will be subrogated to the rights of such
Owners of Notes with respect to such Insured Payments and shall receive
reimbursement for such Insured Payment as provided in the Sale and Servicing
Agreement, but only from the sources and in the manner provided in the Sale and
Servicing Agreement, such subrogation and reimbursement to have no effect on the
Note Insurer's obligations under the Note Insurance Policy.
Each Owner of a Note will be required promptly to notify the Indenture
Trustee in writing upon the receipt of a court order relating to a Preference
Amount and will be required to enclose a copy of such order with such notice to
the Indenture Trustee.
Calculation of One-Month LIBOR
On each LIBOR Determination Date (as defined below), the Indenture Trustee
will determine LIBOR for the next Accrual Period for the Notes.
"One-Month LIBOR" means, as of any LIBOR Determination Date, the London
interbank offered rate for one-month United States dollar deposits which appears
in the Telerate Page 3750 as of 11:00 a.m., London time, on such date. If such
rate does not appear on Telerate Page 3750, the rate for that day will be
determined on the basis of the rates at which deposits in United States dollars
are offered by the Reference Banks at approximately 11:00 a.m., London time, on
that day to prime banks in the London interbank market for a period equal to one
month. The Indenture Trustee will request the principal London office of each of
the Reference Banks to provide a quotation of its rate. If at least two such
quotations are provided, the rate for that day will be the arithmetic mean of
the quotations (rounded upwards if necessary to the nearest whole multiple of
1/16%). If fewer than two quotations are provided as requested, the rate for
that day
S-37
<PAGE>
will be the arithmetic mean of the rates quoted by major banks in New
York City, selected by the Servicer, at approximately 11:00 a.m., New York City
time, on that day for loans in United States dollars to leading European banks
for a period equal to one month.
"LIBOR Determination Date" means, with respect to any Accrual Period, the
second London business day preceding the commencement of such Accrual Period.
For purposes of determining One-Month LIBOR, a "London business day" is any day
on which dealings in deposits of United States dollars are transacted in the
London interbank market.
"Telerate Page 3750" means the display page currently so designated on the
Dow Jones Telerate Service (or such other page as may replace that page on that
service for the purpose of displaying comparable rates or prices).
"Reference Banks" means leading banks selected by the Indenture Trustee and
engaged in transactions in Eurodollar deposits in the international Eurocurrency
market.
Pre-Funding Account
On the Closing Date, the Pre-Funded Amount will be deposited in the
Pre-Funding Account, which account shall be in the name of and maintained by the
Indenture Trustee in trust for the Owners of the Notes. During the Funding
Period, the Pre-Funded Amount will be maintained in the Pre-Funding Account. The
Pre-Funded Amount will be reduced during the Funding Period by the amount
thereof used to purchase Subsequent Home Equity Loans in accordance with the
Sale and Servicing Agreement. Any Pre-Funded Amount remaining at the end of the
Funding Period will be distributed to the Owners of the Notes on the Payment
Date immediately following the end of the Funding Period in reduction of the
Note Principal Balance of such Owner's Notes, thus resulting in a partial
principal prepayment of such Notes.
Amounts on deposit in the Pre-Funding Account will be invested in Eligible
Investments. All interest and any other investment earnings on amounts on
deposit in the Pre-Funding Account will be deposited in the Capitalized Interest
Account prior to each Payment Date during the Funding Period.
Capitalized Interest Account
On the Closing Date cash will be deposited in the Capitalized Interest
Account, which account shall be in the name of and maintained by the Indenture
Trustee in trust for the Owners of the Notes. The amount on deposit in the
Capitalized Interest Account, including reinvestment income thereon, will be
used by the Indenture Trustee on each Payment Date during and immediately after
the Funding Period to fund the excess, if any, of (i) the amount of interest
accruing on the outstanding Pre-Funded Amount at a rate equal to the Note Rate
over (ii) the amount of any reinvestment income on monies on deposit in the
Pre-Funding Account; such amounts on deposit will be so applied by the Indenture
Trustee on the each Payment Date during and immediately after the Funding Period
to fund any such excess. Any amounts remaining in the Capitalized Interest
Account at the end of the Funding Period and not needed for such purpose will be
paid to the Seller and will not thereafter be available for distribution to the
Owners of the Notes. Amounts on deposit in the Capitalized Interest Account will
be invested in Eligible Investments.
Book Entry Registration of the Notes
The Notes will originally be issued as book-entry notes (the ABook-Entry
Notes"). Persons acquiring beneficial ownership interests in such Book-Entry
Notes ("Beneficial Owners") may elect to hold their Book-Entry Notes directly
through DTC in the United States, or Cedel or Euroclear (in Europe) if they are
participants of such system ("Participants"), or indirectly through
organizations which are Participants. The Book-Entry Notes will be issued in one
or more Notes which in the aggregate equal the principal balance of such Notes
and will initially be registered in the name of Cede & Co., the nominee of DTC.
Cedel and Euroclear will hold omnibus positions on behalf of their Participants
through customers= securities accounts in Cedel's and Euroclear's names on the
books of their respective depositaries which in turn will hold such positions in
customers' securities accounts in the depositaries' names on the books of DTC.
Citibank will act as depositary for Cedel and Chase will act as depositary for
Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively the "European Depositaries"). Investors may hold such beneficial
interests in the Book-Entry Notes in minimum denominations representing
principal amounts of $1,000 and multiples of $1 in excess thereof. Except as
described below, no Beneficial Owner will be entitled to receive a physical
certificate representing such Note (a "Definitive Note"). Unless and until
Definitive Notes are issued, it is
S-38
<PAGE>
anticipated that the only "Owner" of such Book-Entry Notes will be Cede & Co.,
as nominee of DTC. Beneficial Owners will not be Owners as that term is used in
the Agreements. Beneficial Owners are only permitted to exercise their rights
indirectly through Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry Note will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Note will be recorded on the records
of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a DTC Participant and on
the records of Cedel and Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Book-Entry Notes from the Indenture Trustee through DTC and DTC
Participants. While such Notes are outstanding (except under the circumstances
described below), under the rules, regulations and procedures creating and
affecting DTC and its operations (the "Rules"), DTC is required to make
book-entry transfers among Participants on whose behalf it acts with respect to
such Notes and is required to receive and transmit distributions of principal
of, and interest on, such Notes. Participants and indirect participants with
whom Beneficial Owners have accounts with respect to Book-Entry Notes are
similarly required to make book-entry transfers and receive and transmit such
distributions on behalf of their respective Beneficial Owners. Accordingly,
although Beneficial Owners will not possess notes, the Rules provide a mechanism
by which Beneficial Owners will receive distributions and will be able to
transfer their interest.
Beneficial Owners will not receive or be entitled to receive
certificates representing their respective interests in the Notes, except under
the limited circumstances described below. Unless and until Definitive Notes are
issued, Beneficial Owners who are not Participants may transfer ownership of
Notes only through Participants and indirect participants by instructing such
Participants and indirect participants to transfer such Notes, by book-entry
transfer, through DTC for the account of the purchasers of such Notes, which
account is maintained with their respective Participants. Under the Rules and in
accordance with DTC's normal procedures, transfers of ownership of such Notes
will be executed through DTC and the accounts of the respective Participants at
DTC will be debited and credited. Similarly, the Participants and indirect
participants will make debits or credits, as the case may be, on their records
on behalf of the selling and purchasing Beneficial Owners.
Because of time zone differences, credits of securities received in
Cedel or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedel Participants on such business day. Cash received in Cedel or
Euroclear as a result of sales of securities by or through a Cedel Participant
(as defined below) or Euroclear Participant (as defined below) to a DTC
Participant will be received with value on the DTC settlement date but will be
available in the relevant Cedel or Euroclear cash account only as of the
business day following settlements in DTC. For information with respect to tax
documentation procedures relating to the Notes, see "Certain Federal Income Tax
Considerations--Miscellaneous Tax Aspects" and "--Tax Treatment of Foreign
Investors" in the Prospectus and "Global Clearance, Settlement and Tax
Documentation Procedures--Certain U.S. Federal Income Tax Documentation
Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC
rules. Transfers between Cedel Participants and Euroclear Participants will
occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
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<PAGE>
DTC, which is a New York-chartered limited purpose trust company,
performs services for its Participants ("DTC Participants"), some of which
(and/or their representatives) own DTC. In accordance with its normal
procedures, DTC is expected to record the positions held by each DTC Participant
in the Book-Entry Notes, whether held for its own account or as a nominee for
another person. In general, beneficial ownership of Book-Entry Notes will be
subject to the rules, regulations and procedures governing DTC and DTC
Participants as in effect from time to time.
Cedel Bank, S.A. was incorporated in 1970 as a limited company under
Luxembourg law. Cedel is owned by banks, securities dealers and financial
institutions, and currently has about 100 shareholders, including United States
financial institutions or their subsidiaries. No single entity may own more than
five percent of Cedel's stock.
Cedel is registered as a bank in Luxembourg, and as such is subject to
regulation by the Institut Monetaire Luxembourgeois, "IML," the Luxembourg
Monetary Authority, which supervises Luxembourg banks.
Cedel holds securities for its participant organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 28
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Cedel is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Cedel Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear Securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Payments on the Book-Entry Notes will be made on each Payment Date by
the Indenture Trustee to DTC. DTC will be responsible for crediting the amount
of such payments to the accounts of the applicable DTC Participants in
accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payment to the Beneficial Owners of the
Book-Entry Notes that it represents and to each Financial Intermediary for which
it acts as agent. Each such Financial Intermediary will be responsible for
disbursing funds to the Beneficial Owners of the Book-Entry Notes that it
represents.
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Under a book-entry format, Beneficial Owners of the Book-Entry Notes
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Indenture Trustee to Cede. Distributions with respect to
Book-Entry Notes held through Cedel or Euroclear will be credited to the cash
accounts of Cedel Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. Because DTC can only act
on behalf of Financial Intermediaries, the ability of a Beneficial Owner to
pledge Book-Entry Notes to persons or entities that do not participate in the
Depository system, or otherwise take actions in respect of such Book-Entry
Notes, may be limited due to the lack of physical certificates for such
Book-Entry Notes. In addition, issuance of the Book-Entry Notes in book-entry
form may reduce the liquidity of such Notes in the secondary market since
certain potential investors may be unwilling to purchase Notes for which they
cannot obtain physical certificates.
Monthly and annual reports on the Issuer provided by the Servicer to
Cede, as nominee of DTC, may be made available to Beneficial Owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Notes of such Beneficial Owners are credited.
DTC has advised the Indenture Trustee that, unless and until
Definitive Notes are issued, DTC will take any action permitted to be taken by
the holders of the Book-Entry Notes under the Indenture only at the direction of
one or more Financial Intermediaries to whose DTC accounts the Book-Entry Notes
are credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Notes. Cedel or the
Euroclear Operator, as the case may be, will take any action permitted to be
taken by an Owner under the Indenture on behalf of a Cedel Participant or
Euroclear Participant only in accordance with its relevant rules and procedures
and subject to the ability of the Relevant Depositary to effect such actions on
its behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Notes which conflict with actions taken with
respect to other Notes.
Definitive Notes will be issued to Beneficial Owners of the Book-Entry
Notes, or their nominees, rather than to DTC, only if (a) DTC or the Depositor
advises the Indenture Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as a nominee and
depository with respect to the Book-Entry Notes and the Depositor or the
Indenture Trustee is unable to locate a qualified successor, (b) the Depositor,
at its sole option, elects to terminate a book-entry system through DTC or (c)
DTC, at the direction of the Beneficial Owners representing a majority of the
outstanding Percentage Interests of the Notes, advises the Indenture Trustee in
writing that the continuation of a book-entry system through DTC (or a successor
thereto) is no longer in the best interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Indenture Trustee will be required to notify all
Beneficial Owners of the occurrence of such event and the availability through
DTC of Definitive Notes. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Notes and instructions for
re-registration, the Indenture Trustee will issue Definitive Notes, and
thereafter the Indenture Trustee will recognize the holders of such Definitive
Notes as Owners under the Indenture.
Although DTC has agreed to the foregoing procedures in order to
facilitate transfers of Notes among Participants of DTC, Cedel and Euroclear,
they are under no obligation to perform or continue to perform such procedures
and such procedures may be discontinued at any time.
Assignment of Rights
An Owner may pledge, encumber, hypothecate or assign all or any part
of its right to receive distributions under any Notes, but such pledge,
encumbrance, hypothecation or assignment shall not constitute a transfer of an
ownership interest sufficient to render the transferee an Owner of such Notes
without compliance with the provisions of the Indenture described above.
S-41
<PAGE>
THE NOTE INSURER
The information set forth in this section has been provided by the
Note Insurer. No representation is made by the Underwriters, the Issuer, the
Seller, the Servicer, the Depositor or any of their affiliates as to the
accuracy or completeness of such information or any information related to the
Note Insurer incorporated by reference herein.
The Note Insurer, in consideration of the payment of the premium and
subject to the terms of the Note Insurance Policy, will unconditionally and
irrevocably guarantee to any Owner that an amount equal to each full and
complete Insured Payment will be received by the Indenture Trustee or its
successor, as trustee for the Owners, on behalf of the Owners from the Note
Insurer, for distribution by the Indenture Trustee to each Owner of each Owner's
proportionate share of the Insured Payment. The Note Insurer's obligations under
the Note Insurance Policy with respect to a particular Insured Payment shall be
discharged to the extent funds equal to the applicable Insured Payment are
received by the Indenture Trustee, whether or not such funds are properly
applied by the Indenture Trustee. Insured Payments shall be made only at the
time set forth in the Note Insurance Policy and no accelerated Insured Payments
shall be made regardless of any acceleration of the Notes, unless such
acceleration is at the sole option of the Note Insurer.
Notwithstanding the foregoing paragraph, the Note Insurance Policy
does not cover shortfalls, if any, attributable to the liability of the Issuer
or the Indenture Trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability).
The Note Insurer will pay any Insured Payment that is a Preference
Amount no later than 12:00 noon, New York City time, on the later of the Payment
Date on which the related Preference Amount is due or the third Business Day
following receipt on a Business Day by the Fiscal Agent (as described below) of
(i) a certified copy of the order requiring the return of such preference
payment, (ii) an opinion of counsel satisfactory to the Note Insurer that such
order is final and not subject to appeal, (iii) an assignment in such form as is
reasonably required by the Note Insurer, irrevocably assigning to the Note
Insurer all rights and claims of the Owner relating to or arising under the
Notes against the debtor which made such preference payment or otherwise with
respect to such preference payment and (iv) appropriate instruments to effect
the appointment of the Note Insurer as agent for such Owner in any legal
proceeding related to such preference payment, such instruments being in a form
satisfactory to the Note Insurer; provided, that if such documents are received
after 12:00 noon, New York City time on such Business Day, they will be deemed
to be received on the following Business Day. Such payments shall be disbursed
to the receiver or trustee in bankruptcy named in the final order of the court
exercising jurisdiction on behalf of the Owner and not to any Owner directly
unless such Owner has returned principal or interest paid on the Notes to such
receiver or trustee in bankruptcy, in which case such payment shall be disbursed
to such Owner.
The Note Insurer will pay any other amount payable under the Note
Insurance Policy no later than 12:00 noon New York City time, on the later of
the Payment Date on which the Insured Payment is due or the second Business Day
following receipt in New York, New York, on a Business Day by State Street Bank
and Trust Company, N.A., as Fiscal Agent for the Note Insurer or any successor
fiscal agent appointed by the Note Insurer (the "Fiscal Agent") of a Notice (as
described below); provided that if such Notice is received after 12:00 noon New
York City time on such Business Day, it will be deemed to be received on the
following Business Day. If any such Notice received by the Fiscal Agent is not
in proper form or is otherwise insufficient for the purpose of making a claim
under the Note Insurance Policy, it shall be deemed not to have been received by
the Fiscal Agent for purposes of this paragraph, and the Note Insurer or the
Fiscal Agent, as the case may be, shall promptly so advise the Indenture Trustee
and the Indenture Trustee may submit an amended Notice.
Insured Payments due under the Note Insurance Policy, unless otherwise
stated therein, will be disbursed by the Fiscal Agent to the Indenture Trustee
on behalf of Owners by wire transfer of immediately available funds in the
amount of the Insured Payment less, in respect of Insured Payments related to
Preference Amounts, any amount held by the Indenture Trustee for the payment of
such Insured Payment and legally available therefor.
The Fiscal Agent is the agent of the Note Insurer only and the Fiscal
Agent shall in no event be liable to Owners for any acts of the Fiscal Agent or
any failure of the Note Insurer to deposit or cause to be deposited, sufficient
funds to make payments due under the Note Insurance Policy.
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<PAGE>
Subject to the terms of the Sale and Servicing Agreement, the Note
Insurer shall be subrogated to the rights of each Owner to receive payments
under the Notes to the extent of any payment by the Note Insurer under the Note
Insurance Policy.
As used in the Note Insurance Policy, the following terms shall have
the following meanings:
"Agreement" means the Sale and Servicing Agreement dated as of March
1, 1998 among Bear Stearns Asset Backed Securities, Inc., as
Depositor, IMC Mortgage Company, as Seller and Servicer, IMC Home
Equity Loan Owner Trust 1998-2, as Issuer, and The Chase Manhattan
Bank, as Indenture Trustee, without regard to any amendment or
supplement thereto, unless the Note Insurer shall have consented in
writing thereto.
"Business Day" means any day other than a Saturday, a Sunday or a
day on which banking institutions in New York City, Tampa, Florida,
the city in which the corporate trust office of the Indenture Trustee
under the Indenture is located or the city in which the principal
office of the Note Insurer is located are authorized or obligated by
law or executive order to close.
"Insured Payment" means for any Payment Date, the excess, if any, of
(i) the sum of (a) the Current Interest, (b) the Overcollateralization
Deficit and (c) the Preference Amount (without duplication) over (ii)
the Total Available Funds (after any deduction for the Trust Fees and
Expenses and after taking into account the portion of the Principal
Payment Amount to be actually paid on such Payment Date without regard
to any related Insured Payment to be made with respect to such Payment
Date). Insured Payments do not include the payment of any Available
Funds Cap Carry Forward Amounts.
"Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing by telecopy substantially in the form of Exhibit
A attached to the Note Insurance Policy, the original of which is
subsequently delivered by registered or certified mail, from the
Indenture Trustee specifying the Insured Payment which shall be due
and owing on the applicable Payment Date.
"Owner" means each Owner (as defined in the Indenture) who, on the
applicable Payment Date, is entitled under the terms of the applicable
Note to payment thereunder.
"Preference Amount" means any amount previously distributed to an
Owner on a Note that is recoverable and sought to be recovered as a
voidable preference by a trustee in bankruptcy pursuant to the United
States Bankruptcy Code (11 U.S.C.) as amended from time to time, in
accordance with a final nonappealable order of a court having
competent jurisdiction.
Capitalized terms used in the Note Insurance Policy and not otherwise
defined therein will have the respective meanings set forth in the Agreement as
of the date of execution of the Note Insurance Policy, without giving effect to
any subsequent amendment to or modification of the Agreement unless such
amendment or modification has been approved in writing by the Note Insurer.
Any notice under the Note Insurance Policy or service of process on
the Fiscal Agent of the Note Insurer may be made at the address listed below for
the Fiscal Agent of the Note Insurer or such other address as the Note Insurer
shall specify in writing to the Indenture Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New
York, New York, 10006, Attention: Municipal Registrar and Paying Agency, or such
other address as the Fiscal Agent shall specify to the Indenture Trustee in
writing.
The Note Insurance Policy is being issued under and pursuant to, and
shall be construed under, the laws of the State of New York, without giving
effect to the conflict of laws principles thereof.
THE INSURANCE PROVIDED BY THE NOTE INSURANCE POLICY IS NOT COVERED BY
THE PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW
YORK INSURANCE LAW.
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The Note Insurance Policy is not cancelable for any reason. The
premium on the Note Insurance Policy is not refundable for any reason including
payment, or provision being made for payment, prior to the maturity of the
Notes.
The Note Insurer is the principal operating subsidiary of MBIA Inc., a
New York Stock Exchange listed company. MBIA Inc. is not obligated to pay the
debts of or claims against the Note Insurer. The Note Insurer is domiciled in
the State of New York and licensed to do business in and is subject to
regulation under the laws of all 50 states, the District of Columbia, the
Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands,
the Virgin Islands of the United States and the Territory of Guam. The Note
Insurer has two European branches, one in the Republic of France and the other
in the Kingdom of Spain. New York has laws prescribing minimum capital
requirements, limiting classes and concentration of investments and requiring
the approval of policy rates and forms. State laws also regulate the amount of
both the aggregate and individual risks that may be insured, the payment of
dividends by the Note Insurer, changes in control and transactions among
affiliates. Additionally, the Note Insurer is required to maintain contingency
reserves on its liabilities in certain amounts and for certain periods of time.
Effective February 17, 1998, MBIA, Inc. acquired all of the
outstanding stock of Capital Markets Assurance Corporation ("CMAC"), a New York
domiciled financial guarantee insurance company, through a merger with its
parent CapMAC Holdings Inc. MBIA, Inc. then contributed the common stock of CMAC
to the Note Insurer. Pursuant to a reinsurance agreement, CMAC has ceded all of
its net insured risks, as well as its unearned premiums and contingency
reserves, to the Note Insurer and the Note Insurer has reinsured CMAC's net
outstanding exposure. MBIA Inc. is not obligated to pay the debts of or claims
against CMAC.
The consolidated financial statements of the Note Insurer, a
wholly-owned subsidiary of MBIA Inc., and its subsidiaries as of December 31,
1996 and December 31, 1995 and for each of the three years in the period ended
December 31, 1996, prepared in accordance with generally accepted accounting
principles, included in the 1996 Annual Report on Form 10-K of MBIA Inc. and the
consolidated financial statements of the Note Insurer and its subsidiaries as of
September 30, 1997 and for the nine month periods ended September 30, 1997 and
September 30, 1996, included in the Quarterly Report on Form 10-Q of MBIA Inc.
for the period ending September 30, 1997, are hereby incorporated by reference
into this Prospectus Supplement and shall be deemed to be a part hereof. Any
statement contained in a document incorporated by reference herein shall be
modified or superseded for purposes of this Prospectus Supplement to the extent
that a statement contained herein or in any other subsequently filed document
which also is incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus
Supplement.
All financial statements of the Note Insurer and its subsidiaries
included in documents filed by MBIA Inc. pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the date
of this Prospectus Supplement and prior to the termination of the offering of
the Notes shall be deemed to be incorporated by reference into this Prospectus
Supplement and to be a part hereof from the respective dates of filing such
documents.
The tables below present selected financial information of the Note
Insurer determined in accordance with statutory accounting practices prescribed
or permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP").
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------------------ SAP --------------------
December 31, September 30,
1996 1997
---- ----
(Audited) (Unaudited)
(In millions)
Admitted Assets $4,476 $5,165
Liabilities 3,009 3,457
Capital and Surplus 1,467 1,708
----------------- GAAP -------------------
December 31, September 30
1996 1997
---- ----
(Audited) (Unaudited)
(In millions)
Assets $5,066 $5,819
Liabilities 2,262 2,594
Shareholder's Equity 2,804 3,225
--------------------
Copies of the financial statements of the Note Insurer incorporated by
reference herein and copies of the Note Insurer's 1996 year-end audited
financial statements prepared in accordance with statutory accounting practices
are available, without charge, from the Note Insurer. The address of the Note
Insurer is 113 King Street, Armonk, New York 10504. The telephone number of the
Note Insurer is (914) 273-4545.
The Note Insurer does not accept any responsibility for the accuracy
or completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted heretofrom, other than with respect to the accuracy
of the information regarding the Note Insurance Policy and Note Insurer set
forth under the heading "The Note Insurer" herein. Additionally, the Note
Insurer makes no representations regarding the Notes or the advisability of
investing in the Notes.
Moody's rates the claims paying ability of the Note Insurer and CMAC
"Aaa".
Standard & Poor's rates the claims paying ability of the Note Insurer
and CMAC "AAA".
Fitch IBCA, Inc. (formerly known as Fitch Investors Service, L.P.)
rates the claims paying ability of the Note Insurer "AAA". (CMAC has not
requested a rating from Fitch IBCA, Inc.)
Each rating of the Note Insurer should be evaluated independently. The
ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Note Insurer and its ability to pay claims on its
policies of insurance. Any further explanation as to the significance of the
above ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the
Notes and such ratings may be subject to revision or withdrawal at any time by
the rating agencies. Any downward revision or withdrawal of any of the above
ratings may have an adverse effect on the market price of the Notes. The Note
Insurer does not guaranty the market price of the Notes nor does it guaranty
that the ratings on the Notes will not be revised or withdrawn.
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CREDIT ENHANCEMENT
Note Insurance Policy
See "The Note Insurer" herein for a description of the Note Insurance
Policy.
Overcollateralization Provisions
Overcollateralization Resulting from Cash Flow Structure. The Sale and
Servicing Agreement requires that, on each Payment Date, Net Monthly Excess
Cashflow be applied on such Payment Date as an accelerated payment of principal
on the Notes, but only to the limited extent hereafter described. Net Monthly
Excess Cashflow equals the excess of (i) the excess, if any of (x) the interest
which is collected on the Home Equity Loans during a Remittance Period (net of
the Servicing Fee and of certain miscellaneous administrative amounts) plus any
Delinquency Advances and Compensating Interest over (y) the sum of the Current
Interest and the Trust Fees and Expenses (the difference between (x) and (y) is
the "Total Monthly Excess Spread"), over (ii) the portion of the Total Monthly
Excess Cashflow that is used to cover shortfalls in Available Funds on such
Payment Date or used to reimburse the Note Insurer.
The application of Net Monthly Excess Cashflow has the effect of
accelerating the amortization of the Notes relative to the amortization of the
Home Equity Loans. To the extent that any Net Monthly Excess Cashflow is not so
used, the Sale and Servicing Agreement provides that it will be used to
reimburse the Owners of the Notes with respect to any Available Funds Cap Carry
Forward Amount and then to reimburse the Servicer with respect to any amounts
owing to it, and, thereafter, paid to the Owners of the Residual Interest.
Pursuant to the Sale and Servicing Agreement, Net Monthly Excess
Cashflow will be applied as an accelerated payment of principal on the Notes
until the Overcollateralization Amount has increased to the level required.
"Overcollateralization Amount" means, the excess, if any, of (x) the sum of (i)
the aggregate Loan Balances of the Home Equity Loans as of the close of business
on the last day of the preceding Remittance Period and (ii) any amount on
deposit in the Pre-Funding Account at such time exclusive of Pre-Funding Account
Earnings (as defined in the Sale and Servicing Agreement) over (y) the aggregate
Note Principal Balance as of such Payment Date (after taking into account the
payment of the Principal Payment Amount (except for any Overcollateralization
Reduction Amount or Overcollateralization Increase Amount) on such Payment
Date). Any amount of Net Monthly Excess Cashflow actually applied as an
accelerated payment of principal is an "Overcollateralization Increase Amount."
The required level of the Overcollateralization Amount with respect to a Payment
Date is the "Specified Overcollateralization Amount." The Sale and Servicing
Agreement generally provides that the Specified Overcollateralization Amount
may, over time, decrease, or increase, subject to certain floors, caps and
triggers including triggers that allow the related Specified
Overcollateralization Amount to decrease or "step down" based on the performance
on the Home Equity Loans with respect to certain tests specified in the Sale and
Servicing Agreement based on delinquency rates and cumulative losses. In
addition, Net Monthly Excess Cashflow will be applied to the payment in
reduction of principal of the Notes during the period that the Home Equity Loans
are unable to meet certain tests specified in the Sale and Servicing Agreement
based on delinquency rates and cumulative losses.
In the event that the Specified Overcollateralization Amount is
permitted to decrease or "step down" on a Payment Date in the future, the Sale
and Servicing Agreement provides that a portion of the principal which would
otherwise be distributed to the Owners of the Notes on such Payment Date shall
be distributed to the Owners of the Residual Interest over the period specified
in the Sale and Servicing Agreement. This has the effect of decelerating the
amortization of the Notes relative to the amortization of the Home Equity Loans
and of reducing the Overcollateralization Amount. With respect to any Payment
Date, the excess, if any, of (x) the Overcollateralization Amount on such
Payment Date after taking into account all distributions to be made on such
Payment Date (except for any distributions of the Overcollateralization
Reduction Amount as described in this sentence) over (y) the Specified
Overcollateralization Amount is the "Excess Overcollateralization Amount" for
such Payment Date. If, on any Payment Date, the Excess Overcollateralization
Amount is, or, after taking into account all other distributions to be made on
such Payment Date would be, greater than zero (i.e., the Overcollateralization
Amount is or would be greater than the Specified Overcollateralization Amount),
then any amounts relating to principal which would otherwise be distributed to
the Owners of the Notes on such Payment Date shall instead be distributed to the
Owners of the Residual Interest (to the extent available therefor) in an amount
equal to the lesser of (x) the Excess Overcollateralization Amount and (y) the
amount available for distribution on account of principal with respect to the
Notes on such Payment Date; such amount being the "Overcollateralization
Reduction Amount" with respect to the related Payment Date.
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The Sale and Servicing Agreement provides generally that, on any
Payment Date all amounts collected on account of principal (other than any such
amount applied to the payment of an Overcollateralization Reduction Amount)
during the prior Remittance Period will be distributed to the Owners of the
Notes on such Payment Date. If any Home Equity Loan became a Liquidated Loan
during such prior Remittance Period, the Net Liquidation Proceeds related
thereto and allocated to principal may be less than the principal balance of the
related Home Equity Loan; the amount of any such insufficiency is a "Realized
Loss." In addition, the Sale and Servicing Agreement provides that the principal
balance of any Home Equity Loan which becomes a Liquidated Loan shall
thenceforth equal zero. The Sale and Servicing Agreement does not contain any
requirement that the amount of any Realized Loss be distributed to the Owners of
the Notes on the Payment Date which immediately follows the event of loss; i.e.,
the Sale and Servicing Agreement does not require the current recovery of
losses. However, the occurrence of a Realized Loss will reduce the
Overcollateralization Amount, which to the extent that such reduction causes the
Overcollateralization Amount to be less than the related Specified
Overcollateralization Amount applicable to the related Payment Date, will
require the payment of an Overcollateralization Increase Amount on such Payment
Date (or, if insufficient funds are available on such Payment Date, on
subsequent Payment Dates, until the Overcollateralization Amount equals the
Specified Overcollateralization Amount).
Overcollateralization and the Note Insurance Policy. The Sale and
Servicing Agreement defines a "Overcollateralization Deficit" with respect to a
Payment Date to be the amount, if any, by which (x) the Note Principal Balance
with respect to such Payment Date, after taking into account all distributions
to be made on such Payment Date (without regard to any Insured Payment to be
made on such Payment Date and except for any Overcollateralization Deficit),
exceeds (y) the sum of (i) the aggregate Loan Balances of the Home Equity Loans
as of the close of business on the last day of the prior Remittance Period and
(ii) the amount, if any, on deposit in the Pre-Funding Account on such Payment
Date (exclusive of Pre-Funding Account Earnings). The Sale and Servicing
Agreement requires the Indenture Trustee to make a claim for an Insured Payment
under the Note Insurance Policy not later than the second Business Day prior to
any Payment Date as to which the Indenture Trustee has determined that an
Overcollateralization Deficit will occur for the purpose of applying the
proceeds of such Insured Payment as a payment of principal to the Owners of the
Notes on such Payment Date. The Note Insurance Policy is thus similar to the
overcollateralization provisions described above insofar as the Note Insurance
Policy guarantees ultimate, rather than current, payment of the amounts of any
Realized Losses to the Owners of the Notes. Investors in the Notes should
realize that, under extreme loss or delinquency scenarios, they may temporarily
receive no distributions of principal when they would otherwise be entitled
thereto under the principal allocation provisions described herein.
Nevertheless, the exposure to risk of loss of principal of the Owners of the
Notes depends in part on the ability of the Note Insurer to satisfy its
obligations under the Note Insurance Policy. In that respect and to the extent
that the Note Insurer satisfies such obligations, the Owners of the Notes are
insulated from shortfalls in Available Funds that may arise.
ADMINISTRATION
In addition to the provisions of the Agreements summarized elsewhere
in the Prospectus and this Prospectus Supplement there is set forth below a
summary of certain other provisions of the Agreements.
Covenant of the Seller to Take Certain Actions with Respect to the Home Equity
Loans in Certain Situations
Pursuant to the Sale and Servicing Agreement, upon the discovery by
the Depositor, the Seller, the Note Insurer, any Sub-Servicer, any Owner, the
Custodian or the Indenture Trustee that the representations and warranties set
forth therein between the Seller and the Depositor are untrue in any material
respect as of the Closing Date with the result that the interests of the Owners
or of the Note Insurer are materially and adversely affected, the party
discovering such breach is required to give prompt written notice to the other
parties.
Upon the earliest to occur of the Seller's discovery, its receipt of
notice of breach from any of the other parties or such time as a situation
resulting from an existing statement which is untrue materially and adversely
affects the interests of the Owners or the Note Insurer, the Seller will be
required promptly to cure such breach in all material respects or the Seller
shall on or prior to the second Monthly Remittance Date next succeeding such
discovery, such receipt of notice or such time (i) substitute in lieu of each
Home Equity Loan which has given rise to the requirement for action by the
Seller a "Qualified Replacement Mortgage" (as such is defined in the Sale and
Servicing Agreement) and deliver an amount equal to the excess, if any, of the
Loan Balance of the Home Equity Loan being replaced over the outstanding
principal balance of the replacement Home Equity Loan plus interest (the
"Substitution Amount") to the Indenture Trustee on behalf of the Issuer as part
of the Monthly Remittance remitted by the Servicer on such Monthly Remittance
Date or (ii) purchase such Home Equity Loan from the Issuer at a purchase price
equal to the Loan
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Purchase Price (as defined below) thereof. The Seller shall also deliver an
Officer's Certificate to the Indenture Trustee and the Note Insurer concurrently
with the delivery of a Qualified Replacement Mortgage stating that such Home
Equity Loan meets the requirements of a Qualified Replacement Mortgage and that
all other conditions to the substitution thereof have been satisfied. The
obligation of the Seller to so substitute or repurchase any Home Equity Loan as
to which a representation of warranty is untrue in any material respect and has
not been remedied constitutes the sole remedy available to the Owners and the
Indenture Trustee.
"Loan Purchase Price" means an amount equal to the Loan Balance of such
Home Equity Loan as of the date of purchase (assuming that the Monthly
Remittance Amount remitted by the Servicer on such Monthly Remittance Date has
already been remitted), plus all accrued and unpaid interest on such Home Equity
Loan at the Coupon Rate to but not including the Monthly Remittance Date in the
Remittance Period of such purchase together with (without duplication) the
aggregate amount of (i) all unreimbursed Delinquency Advances and Servicing
Advances theretofore made with respect to such Home Equity Loan, (ii) all
Delinquency Advances which the Servicer has theretofore failed to remit with
respect to such Home Equity Loan and (iii) all reimbursed Delinquency Advances
to the extent that such reimbursement is not made from the Mortgagor or from
Liquidation Proceeds from the respective Home Equity Loan.
Assignment of Home Equity Loans
The Seller on the Closing Date will sell, transfer, assign, set over
and otherwise convey without recourse to the Depositor and the Depositor will
sell, transfer, assign, set over and otherwise convey without recourse to the
Issuer all its respective right, title and interest in and to each Initial Home
Equity Loan and all its respective right, title and interest in and to principal
and interest due on each such Initial Home Equity Loan after the Cut-Off Date;
provided, however, that the Seller will reserve and retain all its right, title
and interest in and to principal (including Prepayments received on or before
the Cut-Off Date) and interest due on each Initial Home Equity Loan on or prior
to the Cut-Off Date (whether or not received on or prior to the Cut-Off Date).
The Issuer will pledge each Initial Home Equity Loan to the Indenture Trustee
for the benefit of the Owners of the Notes and the Note Insurer pursuant to the
Indenture.
In connection with the transfer and assignment of the Initial Home
Equity Loans on the Closing Date and the Subsequent Home Equity Loans on each
Subsequent Transfer Date, the Seller will be required to:
(i) deliver without recourse to BankBoston, N.A. (the
"Custodian") on behalf of the Indenture Trustee on the Closing Date
with respect to each Initial Home Equity Loan or on each Subsequent
Transfer Date with respect to each Subsequent Home Equity Loan
identified in the Schedule of Home Equity Loans (A) the original
Mortgage Notes, endorsed in blank or to the order of the "The Chase
Manhattan Bank, as Indenture Trustee for the IMC Adjustable Rate Home
Equity Loan Asset Backed Notes, Series 1998-2", (B) (1) the original
title insurance commitment or a copy thereof certified as a true copy
by the closing agent or the Seller, or if available, the original
title insurance policy or a copy certified by the issuer of the title
insurance policy or (2) the attorney's opinion of title, (C) originals
or copies of all intervening assignments certified as true copies by
the closing agent or the Seller, showing a complete chain of title
from origination to the Indenture Trustee, if any, including
warehousing assignments, if recorded, (D) originals of all assumption
and modification agreements, if any, and (E) either: (1) the original
Mortgage, with evidence of recording thereon (if such original
Mortgage has been returned to the Seller from the applicable recording
office) or a copy (if such original Mortgage has not been returned to
the Seller from the applicable recording office) of the Mortgage
certified as a true copy by the closing agent or the Seller or (2) a
copy of the Mortgage certified by the public recording office in those
instances where the original recorded Mortgage has been lost or
retained by the recording office;
(ii) cause, within 60 days following the Closing Date with
respect to the Initial Home Equity Loans, or the Subsequent Transfer
Date with respect to Subsequent Home Equity Loans, assignments of the
Mortgages to "The Chase Manhattan Bank, as Indenture Trustee for the
IMC Adjustable Rate Home Equity Loan Asset Backed Notes, Series
1998-2" to be submitted for recording in the appropriate
jurisdictions; provided, however, that the Seller shall not be
required to prepare any assignment of Mortgage for a Mortgage with
respect to which the original recording information has not yet been
received from the recording office until such information is received;
provided, further, that the Seller shall not be required to record an
assignment of a Mortgage (except upon the occurrence of certain
triggers specified in the Sale and Servicing Agreement) if the Seller
furnishes to the Indenture Trustee, the Note Insurer and the Rating
Agencies, on or before the Closing Date with respect to the Initial
Home Equity Loans, or on each Subsequent Transfer Date with respect
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to the Subsequent Home Equity Loans, at the Seller's expense, an
opinion of counsel with respect to the relevant jurisdiction that such
recording is not required to perfect the Indenture Trustee's interests
in the Home Equity Loans (in form satisfactory to the Indenture
Trustee, the Note Insurer and the Rating Agencies);
(iii) deliver the title insurance policy, the original
Mortgages and such recorded assignments, together with originals or
duly certified copies of any and all prior assignments (other than
unrecorded warehouse assignments), to the Custodian on behalf of the
Indenture Trustee within 15 days of receipt thereof by the Seller (but
in any event, with respect to any Mortgage as to which original
recording information has been made available to the Seller, within
one year after the Closing Date with respect to the Initial Home
Equity Loans, or on each Subsequent Transfer Date with respect to the
Subsequent Home Equity Loans); and
(iv) furnish to the Indenture Trustee, the Note Insurer and
the Rating Agencies, at the Seller's expense, an opinion of counsel
with respect to the sale and perfection of all Subsequent Home Equity
Loans delivered to the Trust in form and substance satisfactory to the
Indenture Trustee, the Note Insurer and the Rating Agencies.
The Indenture Trustee will agree, for the benefit of the Owners, to
cause the Custodian to review each File within 45 days after the Closing Date or
Subsequent Transfer Date (or the date of receipt of any documents delivered to
the Indenture Trustee after the Closing Date or Subsequent Transfer Date) to
ascertain that all required documents (or certified copies of documents) have
been executed and received.
If the Custodian on behalf of the Indenture Trustee during such 45-day
period finds any document constituting a part of a File which is not properly
executed, has not been received, is unrelated to the Home Equity Loans or that
any Home Equity Loan does not conform in a material respect to the description
thereof as set forth in the Schedule of Home Equity Loans, the Custodian on
behalf of the Indenture Trustee will be required to promptly notify the
Depositor, the Seller, the Owners and the Note Insurer. The Seller will agree to
use reasonable efforts to remedy a material defect in a document constituting
part of a File of which it is so notified by the Custodian on behalf of the
Indenture Trustee. If, however, within 90 days after such notice to it
respecting such defect the Seller shall not have remedied the defect and the
defect materially and adversely affects the interest in the related Home Equity
Loan of the Owners, the Seller will be required on the next succeeding Monthly
Remittance Date to (or will cause an affiliate of the Seller to) (i) substitute
in lieu of such Home Equity Loan a Qualified Replacement Mortgage and deliver
the Substitution Amount to the Indenture Trustee on behalf of the Owners of the
Notes as part of the Monthly Remittance Amount remitted by the Servicer on such
Monthly Remittance Date or (ii) purchase such Home Equity Loan at a purchase
price equal to the Loan Purchase Price thereof, which purchase price shall be
delivered to the Indenture Trustee along with the Monthly Remittance Amount
remitted by the Servicer on such Monthly Remittance Date.
In addition to the foregoing, the Custodian on behalf of the Indenture
Trustee has agreed to make a review during the 12th month after the Closing Date
indicating the current status of the exceptions previously indicated on the Pool
Certification (the "Final Certification"). After delivery of the Final
Certification, the Custodian, on behalf of the Indenture Trustee and the
Servicer shall monitor no less frequently than monthly the then current status
of exceptions, until all such exceptions have been eliminated.
Servicing and Sub-Servicing
The Servicer is required to service the Home Equity Loans in
accordance with the Sale and Servicing Agreement, the terms of the respective
Home Equity Loans, and the servicing standards set forth in Fannie Mae's
Servicing Guide (the "Fannie Mae Guide"); provided, however, that to the extent
such standards, such obligations or the Fannie Mae Guide is amended by Fannie
Mae after the date of the Sale and Servicing Agreement and the effect of such
amendment would be to impose upon the Servicer any material additional costs or
other burdens relating to such servicing obligations, the Servicer may, at its
option, determine not to comply with such amendment in accordance with the
servicing standards set forth in the Indenture.
The Servicer may retain from the interest portion of each monthly
payment, the Servicing Fee. In addition, the Servicer will be entitled to retain
additional servicing compensation in the form of prepayment charges, release
fees and bad check charges, assumption fees, late payment charges, prepayment
penalties, or any other servicing-related fees and Net Liquidation Proceeds not
required to be deposited in the Principal and Interest Account.
The Servicer is required to make reasonable efforts to collect all
payments called for under the terms and provisions of the Home Equity Loans,
and, to the extent such procedures are consistent with the Sale and Servicing
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Agreement and the terms and provisions of any applicable insurance policy, to
follow collection procedures for all Home Equity Loans at least as rigorous as
those described in the Fannie Mae Guide. Consistent with the foregoing, the
Servicer may in its discretion waive or permit to be waived any late payment
charge, prepayment charge, assumption fee or any penalty interest in connection
with the prepayment of a Home Equity Loan or any other fee or charge which the
Servicer would be entitled to retain as additional servicing compensation. In
the event the Servicer consents to the deferment of the due dates for payments
due on a Note, the Servicer will nonetheless be required to make payment of any
required Delinquency Advances with respect to the interest payments so extended
to the same extent as if the interest portion of such installment were due,
owing and delinquent and had not been deferred.
The Servicer is required to create, or cause to be created, in the
name of the Indenture Trustee, at one or more depository institutions a
principal and interest account maintained as a trust account in the trust
department of such institution (the "Principal and Interest Account"). All funds
in the Principal and Interest Account are required to be held (i) uninvested, or
(ii) invested in Eligible Investments (as defined in the Indenture). Any
investment of funds in the Principal and Interest Account must mature or be
withdrawable at par on or prior to the immediately succeeding Monthly Remittance
Date. Any investment earnings on funds held in the Principal and Interest
Account are for the account of, and any losses therein are also for the account
of, and must be promptly replenished by, the Servicer.
The Servicer is required to deposit to the Principal and Interest
Account, within one business day following receipt, all principal and interest
due on the Home Equity Loans after the Cut-Off Date, including any Prepayments
received after the Cut-Off Date, the proceeds of any liquidation of a Home
Equity Loan net of expenses and unreimbursed Delinquency Advances ("Net
Liquidation Proceeds"), any income from REO Properties and Delinquency Advances,
but net of (i) Net Liquidation Proceeds to the extent that such Net Liquidation
Proceeds exceed the sum of (a) the Loan Balance of the related Home Equity Loan
immediately prior to liquidation, (b) accrued and unpaid interest on such Home
Equity Loan (net of the Servicing Fee) to the date of such liquidation and (c)
any Realized Losses during the related Remittance Period, (ii) principal
(including Prepayments) collected and interest due on the Home Equity Loans on
or prior to the Cut-Off Date, (iii) reimbursements for Delinquency Advances, and
(iv) reimbursement for amounts deposited in the Principal and Interest Account
representing payments of principal and/or interest on a Mortgage Note by a
Mortgagor which are subsequently returned by a depository institution as unpaid
(all such net amounts being referred to herein as the "Daily Collections").
The Servicer may make withdrawals for its own account from the
Principal and Interest Account in the following order and only for the following
purposes:
(i) on each Monthly Remittance Date, to pay itself the
Servicing Fee;
(ii) to withdraw investment earnings on amounts on deposit in
the Principal and Interest Account;
(iii) to withdraw amounts that have been deposited to the
Principal and Interest Account in error;
(iv) to reimburse itself for unrecovered Delinquency Advances
and for any excess interest collected from a Mortgagor; and
(v) to clear and terminate the Principal and Interest Account
following the termination of the Trust.
The Servicer will remit to the Indenture Trustee for deposit in the
Note Account the Daily Collections allocable to a Remittance Period not later
than the related Monthly Remittance Date, and Loan Purchase Prices and
Substitution Amounts two Business Days following the related repurchase or
substitution, as the case may be.
On each Monthly Remittance Date, the Servicer shall be required to
remit to the Indenture Trustee for deposit to the Note Account out of the
Servicer's own funds any Delinquent payment of interest with respect to each
Delinquent Home Equity Loan, which payment was not received on or prior to the
related Monthly Remittance Date and was not theretofore advanced by the
Servicer. Such amounts of the Servicer's own funds so deposited are "Delinquency
Advances." The Servicer may reimburse itself on any Business Day for any
Delinquency Advances paid from the Servicer's own funds, from collections on any
Home Equity Loan that are not required to be distributed on the Payment Date
occurring during the month in which such reimbursement is made (such amount to
be replaced on future dates to the extent necessary) or from the Note Account
out of Net Monthly Excess Cashflow.
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Notwithstanding the foregoing, in the event that the Servicer
determines in its reasonable business judgment in accordance with the servicing
standards of the Sale and Servicing Agreement that any proposed Delinquency
Advance if made would not be recoverable, the Servicer shall not be required to
make such Delinquency Advances with respect to such Home Equity Loan. To the
extent that the Servicer previously has made Delinquency Advances with respect
to a Home Equity Loan that the Servicer subsequently determines to be
nonrecoverable, the Servicer shall be entitled to reimbursement for such
aggregate unreimbursed Delinquency Advances as provided above. The Servicer
shall give written notice of such determination as to why such amount is or
would be nonrecoverable to the Indenture Trustee and the Note Insurer.
The Servicer will be required to pay all Aout of pocket" costs and
expenses incurred in the performance of its servicing obligations, including,
but not limited to, (i) expenditures in connection with a foreclosed Home Equity
Loan prior to the liquidation thereof, including, without limitation,
expenditures for real estate property taxes, hazard insurance premiums, property
restoration or preservation ("Preservation Expenses"), (ii) the cost of any
enforcement or judicial proceedings, including foreclosures and (iii) the cost
of the management and liquidation of Property acquired in satisfaction of the
related Mortgage, except to the extent that the Servicer in its reasonable
business judgment determines that any such proposed amount would not be
recoverable. Such costs and expenses will constitute "Servicing Advances". The
Servicer may recover a Servicing Advance to the extent permitted by the Home
Equity Loans or, if not theretofore recovered from the Mortgagor on whose behalf
such Servicing Advance was made, from Liquidation Proceeds realized upon the
liquidation of the related Home Equity Loan or from certain amounts on deposit
in the Note Account as provided in the Sale and Servicing Agreement. Except as
provided above, in no case may the Servicer recover Servicing Advances from the
principal and interest payments on any other Home Equity Loan.
A full month's interest at the related Coupon Rate will be due on the
outstanding Loan Balance of each Home Equity Loan as of the beginning of each
Remittance Period. If a prepayment in full of a Home Equity Loan or a Prepayment
of at least six times a Mortgagor's Monthly Payment occurs during any calendar
month, any difference between the interest collected from the Mortgagor in
connection with such payoff and the full month's interest at the related Coupon
Rate that would be due on the related due date for such Home Equity Loan (such
difference, the "Compensating Interest") (but not in excess of the aggregate
Servicing Fee for the related Remittance Period), will be required to be
deposited to the Principal and Interest Account (or if such difference is an
excess, the Servicer shall retain such excess) on the next succeeding Monthly
Remittance Date by the Servicer and shall be included in the Monthly Remittance
Amount to be made available to the Indenture Trustee on such Monthly Remittance
Date. The Servicer shall not be entitled to reimbursement for amounts paid as
Compensating Interest.
In accordance with the terms of the Sale and Servicing Agreement, the
Servicer will have the right and the option, but not the obligation, to purchase
for its own account any Home Equity Loan which becomes delinquent as to three
consecutive monthly installments or any Home Equity Loan as to which enforcement
proceedings have been brought by the Servicer. The purchase price for any such
Home Equity Loan is equal to the Loan Purchase Price thereof, which purchase
price shall be deposited in the Principal and Interest Account.
The Servicer is required to cause to be liquidated any Home Equity
Loan relating to a Property as to which ownership has been effected in the name
of the Servicer on behalf of the Trust and which has not been liquidated within
35 months of such effecting of ownership at such price as the Servicer deems
necessary to comply with this requirement, or within such period of time as may,
in the opinion of counsel nationally recognized in federal income tax matters,
be permitted under the Code.
The Servicer will be required to cause hazard insurance to be
maintained with respect to the related Property and to advance sums on account
of the premiums therefor if not paid by the Mortgagor if permitted by the terms
of such Home Equity Loan.
The Servicer will have the right under the Sale and Servicing
Agreement (upon receiving the consent of the Note Insurer) to accept
applications of Mortgagors for consent to (i) partial releases of Mortgages,
(ii) alterations thereof and (iii) removal, demolition or division of
Properties. No application for approval may be considered by the Servicer
unless: (a) the provisions of the related Mortgage Note and Mortgage have been
complied with; (b) the loan-to-value ratio and debt-to-income ratio after any
release do not exceed the loan-to-value ratio and debt-to-income ratio,
respectively, of such Mortgage Note on the Cut-Off Date provided that the
loan-to-value ratio shall be permitted to be increased by an amount not to
exceed 5% unless approved by the Note Insurer; and (c) the lien priority of the
related Mortgage is not affected.
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The Servicer shall not agree to any modification, waiver or amendment
of any provision of any Home Equity Loan unless, in the Servicer's good faith
judgment, such modification, waiver or amendment would minimize the loss that
might otherwise be experienced with respect to such Home Equity Loan and only in
the event of a payment default with respect to such Home Equity Loan or in the
event that a payment default with respect to such Home Equity Loan is imminent;
provided, however, that no such modification, waiver or amendment shall extend
the maturity date of such Home Equity Loan beyond the Remittance Period related
to the Final Payment Date. Notwithstanding anything set forth in the Sale and
Servicing Agreement to the contrary, the Servicer shall be permitted to modify,
waive or amend any provision of a Home Equity Loan if required by statute or a
court of competent jurisdiction to do so.
The Servicer shall provide written notice to the Indenture Trustee and
the Note Insurer, prior to the execution of any modification, waiver or
amendment of any provision of any Home Equity Loan and shall deliver to the
Custodian, on behalf of the Indenture Trustee for deposit in the related File,
an original counterpart of the agreement relating to such modification, waiver
or amendment, promptly following the execution thereof.
As noted under "The Seller and Servicer--General" herein with the
consent of the Note Insurer, the Servicer will be permitted under the Sale and
Servicing Agreement to enter into Sub-Servicing Agreements for any servicing and
administration of Home Equity Loans with any institution that (x) is in
compliance with the laws of each state necessary to enable it to perform its
obligations under such Sub-Servicing Agreement, (y) has experience servicing
home equity loans that are similar to the Home Equity Loans and (z) has equity
of not less than $5,000,000 (as determined in accordance with generally accepted
accounting principles).
No Sub-Servicing arrangements will discharge the Servicer from its
servicing obligations. Notwithstanding any Sub-Servicing Agreement, the Servicer
will not be relieved of its obligations under the Sale and Servicing Agreement
and the Servicer will be obligated to the same extent and under the same terms
and conditions as if it alone were servicing and administering the Home Equity
Loans. The Servicer shall be entitled to enter into any agreement with a
Sub-Servicer for indemnification of the Servicer by such Sub-Servicer; provided,
however, that nothing contained in such Sub-Servicing Agreement shall be deemed
to limit or modify the Sale and Servicing Agreement.
The Servicer (except the Indenture Trustee if it is required to
succeed the Servicer under the Sale and Servicing Agreement) has agreed to
indemnify and hold the Indenture Trustee, the Depositor, the Note Insurer and
each Owner harmless against any and all claims, losses, penalties, fines,
forfeitures, legal fees and related costs, judgments, and any other costs, fees
and expenses that the Indenture Trustee, the Depositor, the Note Insurer and any
Owner may sustain in any way related to the failure of the Servicer to perform
its duties and service the Home Equity Loans in compliance with the terms of the
Sale and Servicing Agreement. The Servicer shall immediately notify the
Indenture Trustee, the Depositor, the Note Insurer and each Owner if a claim is
made by a third party with respect to the Sale and Servicing Agreement, and the
Servicer shall assume the defense of any such claim and pay all expenses in
connection therewith, including reasonable counsel fees, and promptly pay,
discharge and satisfy any judgment or decree which may be entered against the
Servicer, the Indenture Trustee, the Depositor, the Note Insurer and/or Owner in
respect of such claim. The Indenture Trustee shall reimburse the Servicer from
amounts otherwise distributable on the Residual Interest for all amounts
advanced by it pursuant to the preceding sentence, except when a final
nonappealable adjudication determines that the claim relates directly to the
failure of the Servicer to perform its duties in compliance with the Sale and
Servicing Agreement. The indemnification provisions shall survive the
termination of the Sale and Servicing Agreement and the payment of the
outstanding Notes.
The Servicer will be required to deliver to the Indenture Trustee, the
Note Insurer and the Rating Agencies on or before April 30 of each year,
commencing in 1999: (i) an officers' certificate stating, as to each signer
thereof, that (a) a review of the activities of the Servicer during such
preceding calendar year and of performance under the Sale and Servicing
Agreement has been made under such officers' supervision, and (b) to the best of
such officers' knowledge, based on such review, the Servicer has fulfilled all
its obligations under the Sale and Servicing Agreement for such year, or, if
there has been a default in the fulfillment of all such obligation, specifying
each such default known to such officers and the nature and status thereof
including the steps being taken by the Servicer to remedy such default and (ii)
a letter or letters of a firm of independent, nationally recognized certified
public accountants reasonably acceptable to the Note Insurer stating that such
firm has examined the Servicer's overall servicing operations in accordance with
the requirements of the Uniform Single Attestation Program for Mortgage Bankers,
and stating such firm's conclusions relating thereto.
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Removal and Resignation of Servicer
The Note Insurer or the Indenture Trustee (with the prior written
consent of the Note Insurer) (or except as specified in the Sale and Servicing
Agreement, the Owners, with the consent of the Note Insurer) will have the
right, pursuant to the Sale and Servicing Agreement, to remove the Servicer upon
the occurrence of certain events (collectively, the "Servicer Termination
Events") including, without limitation: (a) certain acts of bankruptcy or
insolvency on the part of the Servicer; (b) certain failures on the part of the
Servicer to perform its obligations under the Sale and Servicing Agreement
(including certain performance tests related to the delinquency rate and
cumulative losses of the Home Equity Loan Pool); (c) the failure to cure
material breaches of the Servicer's representations in the Sale and Servicing
Agreement; or (d) certain mergers or other combinations of the Servicer with
another entity.
The Servicer is not permitted to resign from the obligations and
duties imposed on it under the Sale and Servicing Agreement except upon
determination that its duties thereunder are no longer permissible under
applicable law or are in material conflict by reason of applicable law with any
other activities carried on by it, the other activities of the Servicer so
causing such conflict being of a type and nature carried on by the Servicer on
the date of the Sale and Servicing Agreement. Any such determination permitting
the resignation of the Servicer is required to be evidenced by an opinion of
counsel to such effect which shall be delivered, and reasonably acceptable, to
the Indenture Trustee and the Note Insurer.
Upon removal or resignation of the Servicer, the Indenture Trustee may
(A) solicit bids for a successor servicer as described in the Sale and Servicing
Agreement and (B) until such time as a successor servicer is appointed pursuant
to the terms of the Sale and Servicing Agreement, shall serve in the capacity of
Backup Servicer. The Indenture Trustee, if it is unable to obtain a qualifying
bid and is prevented by law from acting as servicer, will be required to
appoint, or petition a court of competent jurisdiction to appoint, any housing
and home finance institution, bank or mortgage servicing institution designated
as an approved seller-servicer by FHLMC or Fannie Mae, having equity of not less
than $5,000,000, and acceptable to the Note Insurer and a majority of the Owners
of the Notes (provided that if the Note Insurer and such Owners cannot agree as
to the acceptability of such successor servicer, the decision of the Note
Insurer will control) as the successor to the Servicer in the assumption of all
or any part of the responsibilities, duties or liabilities of the Servicer.
No removal or resignation of the Servicer will become effective until
the Backup Servicer or a successor servicer shall have assumed the Servicer's
responsibilities and obligations in accordance with the Indenture.
Redemption of the Notes
The Notes will be subject to redemption in whole but not in part, at
the option of the Majority Residualholders, on or after the Redemption Date at a
price equal to the Redemption Price. The proceeds from any such purchase of the
Home Equity Loans will be used by the Issuer to redeem the Notes. Upon such
redemption, the Indenture shall be terminated. The Notes will be redeemed at the
Redemption Price and the payment of the amount set forth in clause (i) of the
definition of Redemption Price to the Owners shall be in lieu of the payment
otherwise required to be made on such Payment Date in respect of the Notes. The
"Redemption Price" is equal to the sum of (i) the then outstanding Note
Principal Balance plus all accrued and unpaid interest thereon (and any
Available Funds Cap Carry Forward Amount), (ii) any Trust Fees and Expenses due
and unpaid on such date, (iii) the payment of all amounts owed to the Note
Insurer and (iv) any unreimbursed Delinquency Advances and Servicing Advances
(as defined in the Sale and Servicing Agreement). The proceeds from such sale
will be distributed first, to the payment of any outstanding Trust Fees and
Expenses, second, to the Note Insurer, all amounts owed thereto, third, to the
Servicer for unreimbursed Servicing Advances and Delinquency Advances, fourth,
to the Owners of the Notes in an amount equal to the then outstanding Note
Principal Balance plus all accrued and unpaid interest thereon (plus any
Available Funds Cap Carry Forward Amount) and, fifth, to the holders of the
Residual Interest, the remainder. Under certain circumstances described in the
Sale and Servicing Agreement, the Note Insurer may acquire all the Home Equity
Loans from the Issuer and thereby effect a redemption of the Notes and terminate
the Indenture.
The Indenture Trustee
The Chase Manhattan Bank will be the Indenture Trustee under the
Indenture. The Indenture will provide that the Indenture Trustee is entitled to
certain fees and reimbursement of expenses.
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The Indenture also will provide that the Indenture Trustee may resign
at any time, upon notice to the Issuer, the Note Insurer, the Servicer and each
Rating Agency, in which event the Issuer (with the consent of the Note Insurer)
will be obligated to appoint a successor Indenture Trustee. The Issuer or the
Note Insurer may remove the Indenture Trustee if the Indenture Trustee ceases to
be eligible to continue as such under the Indenture Trustee and appointment of a
successor Indenture Trustee will not become effective until acceptance of the
appointment by the successor Indenture Trustee. The Indenture will provide that
the Indenture Trustee is under no obligation to exercise any of the rights or
powers vested in it by the Indenture at the request or direction of any of the
Owners, unless such Owners shall have offered to the Indenture Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which might be incurred by it in compliance with such request or direction. The
Indenture Trustee may execute any of the rights of powers granted by the
Indenture or perform any duties thereunder either directly or by or through
agents or attorneys, and the Indenture Trustee is responsible for any misconduct
or negligence on the part of any agent or attorney appointed and supervised with
due care by it thereunder. Pursuant to the Indenture, the Indenture Trustee is
not liable for any action it takes or omits to take in good faith which it
reasonably believes to be authorized by an authorized officer of any person or
within its rights or powers under the Indenture. The Indenture Trustee and any
director, officer, employee or agent of the Indenture Trustee may rely and will
be protected in acting or refraining from acting in good faith in reliance on
any certificate, notice or other document of any kind prima facie properly
executed and submitted by the authorized officer of any person respecting any
matters arising under the Indenture.
The Indenture
Pursuant to the Indenture, the Indenture Trustee shall, upon the
direction of the Note Insurer (unless a Note Insurer Default (as defined in the
Sale and Servicing Agreement) has occurred and is continuing), direct the time,
method and place of conducting any proceeding for any remedy available to the
Indenture Trustee (including acceleration of the Notes) or exercising any trust
or power conferred on the Indenture Trustee.
An "Event of Default" with respect to the Notes is defined in the
Indenture as follows: (a) a default by the Issuer in the payment of any Current
Interest or Principal Payment Amount on any Note when the same becomes due and
payable (provided that for purposes of this clause, the Available Funds Cap
Carry Forward Amount does not constitute interest due and payable); (b) a
default in the observance or performance of any covenant or agreement of the
Issuer in the Indenture, or any representation or warranty of the Issuer made in
the Indenture, the Insurance Agreement, the Sale and Servicing Agreement or in
any certificate or other writing delivered pursuant thereto proving to have been
incorrect in any material respect as of the time made, and the continuation of
any such default, or the circumstance in respect of which any representation or
warranty not having been cured, as the case may be, for a period of thirty days
after notice is given to the Issuer by the Indenture Trustee, or to the Issuer
and the Indenture Trustee by the Owners of a majority of the Percentage Interest
of the Notes and, (c) certain events of bankruptcy, insolvency, receivership or
reorganization of the Issuer.
In case an Event of Default should occur and be continuing, the
Indenture Trustee shall, but only upon receipt of the prior written consent of
the Note Insurer or, if a Note Insurer Default has occurred and is continuing,
the Owners of Notes representing not less than a majority of the Percentage
Interest of the Notes may declare all the Notes to be immediately due and
payable. Such declaration may under certain circumstances be rescinded by the
Note Insurer, or if a Note Insurer Default exists, the Owners of Notes
representing a majority of the Percentage Interest of the Notes.
If, following an Event of Default, the Notes have been declared to be
due and payable, the Indenture Trustee may, with the prior written consent of
the Note Insurer (unless a Note Insurer Default has occurred and is continuing),
in its discretion, refrain from selling such assets and continue to apply all
amounts received on such assets to payments due on the Notes in accordance with
their terms, notwithstanding the acceleration of the maturity of such Notes. In
addition, upon an Event of Default, the Indenture Trustee may, with the consent
of Owners of 100% of the Percentage Interest of the Notes, sell all or part of
the assets included in the Trust Estate, in which event the collections on, or
the proceeds from the sale of, such assets will be applied as follows: (i) to
the payment of the fees of the Indenture Trustee and the Owner Trustee which
have not been previously paid; (ii) to the Note Insurer, any premium amount then
due and unpaid; (iii) to the Servicer for the Servicing Fee then due and unpaid;
(iv) to the Owners, the amount of interest then due and unpaid on the Notes, pro
rata; (v) to the Owners, the amount of principal then due and unpaid on the
Notes, pro rata; (vi) to the payment of amounts due and owing to the Note
Insurer, to the extent not previously reimbursed; (vii) to the Owners, the
Available Funds Cap Carry Forward Amount then unpaid; and (viii) to the Trust
Paying Agent, the amounts to be distributed, pro rata, to the Owners of the
Residual Interest.
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No Owner of any Note shall have any right to institute any proceeding
with respect to the Indenture unless (i) such Owner has previously given written
notice to the Indenture Trustee of a continuing Event of Default; (ii) the
Owners of a majority of the Percentage Interest of the Notes have made written
request to the Indenture Trustee to institute proceedings in respect of such
Event of Default in its own name as Indenture Trustee; (iii) such Owner has
offered the Indenture Trustee reasonable indemnity against the costs, expenses
and liabilities to be incurred in complying with such request; (iv) the
Indenture Trustee for 60 days after its receipt of such notice, request and
offer of indemnity has failed to institute such proceeding; and (v) no direction
inconsistent with such written request has been given to the Indenture Trustee
during such 60-day period by the Owners of a majority of the Percentage Interest
of the Notes.
Voting
Unless otherwise specified in the Indenture, with respect to any
provisions of the Indenture providing for the action, consent or approval of the
Owners evidencing specified "Voting Interests", each Owner will have a Voting
Interest equal to the Percentage Interest represented by such Owner's Note. Any
Note registered in the name of the Issuer or any affiliate thereof will be
deemed not to be outstanding and the Percentage Interest evidenced thereby shall
not be taken into account in determining whether the requisite amount of Voting
Interests necessary to take any such action, or effect any such consent, has
been obtained.
Reporting Requirements
On each Payment Date the Indenture Trustee will be required to report
in writing (based on information provided to the Indenture Trustee by the
Servicer) to each Owner, the Note Insurer, the Rating Agencies and the Note
Insurer:
(i) the amount of the distribution with respect the Notes
(based on a Note in the original principal amount of $1,000);
(ii) the amount of such distributions allocable to principal
on the Home Equity Loans, separately identifying the aggregate amount
of any prepayments in full or Prepayments or other recoveries of
principal included therein and any Pre-Funded Amounts distributed as a
prepayment (based on a Note in the original principal amount of
$1,000);
(iii) the amount of such distribution allocable to interest
on the Home Equity Loans (based on a Note in the original principal
amount of $1,000);
(iv) the principal amount of the Notes (based on a Note in
the original principal amount of $1,000) which will be outstanding
after giving effect to any payment of principal on such Payment Date;
(v) the aggregate Loan Balance of all Home Equity Loans after
giving effect to any payment of principal on such Payment Date;
(vi) the amount of any Insured Payment included in the
amounts distributed to the Owners on such Payment Date;
(vii) based upon information furnished by the Seller such
information as may be required by Section 6049(d)(7)(C) of the Code
and the regulations promulgated thereunder to assist the Owners in
computing their market discount;
(viii) the weighted average Coupon Rate of the Home Equity
Loans;
(ix) such other information as the Note Insurer may
reasonably request with respect to delinquent Home Equity Loans;
(x) the amount of the Available Funds Cap Carry Forward
Amount, if any, for such Payment Date;
(xi) the total of any Substitution Amounts or Loan Purchase
Price amounts included in such distribution; and
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(xii) for Payment Dates during and immediately following the
Funding Period the total remaining Pre-Funded Amount in the
Pre-Funding Account.
Certain obligations of the Indenture Trustee to provide information to
the Owners are conditioned upon such information being received from the
Servicer.
In addition, on the Business Day preceding each Payment Date the
Indenture Trustee will be required to distribute to each Owner, the Note Insurer
and the Rating Agencies, together with the information described above, the
following information prepared by the Servicer and furnished to the Indenture
Trustee for such purpose:
(a) the number and aggregate principal balances of Home
Equity Loans (i) 30-59 days delinquent, (ii) 60-89 days delinquent,
(iii) 90 or more days delinquent, as of the close of business on the
last day of the calendar month immediately preceding the Payment Date,
(iv) the numbers and aggregate Loan Balances of all Home Equity Loans
as of such Payment Date and (v) the percentage that each of the
amounts represented by clauses (i), (ii) and (iii) represent as a
percentage of the respective amounts in clause (iv);
(b) the status and the number and dollar amounts of all Home
Equity Loans in foreclosure proceedings as of the close of business on
the last day of the calendar month immediately preceding such Payment
Date;
(c) the number of Mortgagors and the Loan Balances of (i) the
related Mortgages involved in bankruptcy proceedings as of the close
of business on the last day of the calendar month immediately
preceding such Payment Date and (ii) Home Equity Loans that are
"balloon" loans;
(d) the existence and status of any Properties as to which
title has been taken in the name of, or on behalf of the Indenture
Trustee, as of the close of business of the last day of the calendar
month immediately preceding the Payment Date;
(e) the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure as of the close
of business on the last day of the calendar month immediately
preceding the Payment Date; and
(f) the amount of cumulative Realized Losses, the current
period Realized Losses (each as defined in the Sale and Servicing
Agreement) and any other loss percentages as required by the Sale and
Servicing Agreement.
Removal of Indenture Trustee for Cause
The Indenture Trustee may be removed upon the occurrence of any one of
the following events (whatever the reason for such event and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body) on the part of the Indenture Trustee: (i)
failure to make distributions of available amounts; (ii) certain breaches of
covenants and representations by the Indenture Trustee; (iii) certain acts of
bankruptcy or insolvency on the part of the Indenture Trustee; and (iv) failure
to meet the standards of Indenture Trustee eligibility as set forth in the
Indenture.
If any such event occurs and is continuing, then and in every such
case (ii) the Note Insurer or (iii) with the prior written consent of the Note
Insurer (which is required not to be unreasonably withheld), the Issuer and the
Owners of a majority of the Percentage Interests represented by the Notes may
remove the Indenture Trustee.
Depositor's Obligations
The Depositor will have no obligation to monitor, or supervise or
enforce the performance of the obligations of the Seller, the Servicer, the
Owner Trustee or the Indenture Trustee and will not be obligated to perform any
such obligation or have any liability if the applicable entity fails to do so.
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Governing Law
The Agreements and each Note will be construed in accordance with and
governed by the laws of the State of New York applicable to agreements made and
to be performed therein.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following section discusses certain of the material anticipated
federal income tax consequences of the purchase, ownership and disposition of
the Notes. Such section must be considered only in connection with "Certain
Federal Income Tax Considerations" in the Prospectus. The discussion herein and
in the Prospectus is based upon laws, regulations, rulings and decisions now in
effect, all of which are subject to change. The discussion below and in the
Prospectus does not purport to deal with all federal tax consequences applicable
to all categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the Notes.
No election will be made to treat the Trust or the Trust Estate or any
portion thereof as a REMIC for federal income tax purposes.
Upon issuance of the Notes, Arter & Hadden LLP, special tax counsel,
will deliver its opinion that the Notes will be treated as newly originated debt
obligations and not as representing an ownership interest in the Trust Estate or
an equity interest in the Issuer or the Seller. In addition, for federal income
tax purposes, the Issuer will not be classified (i) as an association taxable as
a corporation, (ii) a taxable mortgage pool as defined in Section 7701(i) of the
Code or (iii) a "publicly traded partnership" as defined in Treasury Regulations
Section 1.7704-1. Each Owner of a Note, by its acceptance of a Note, will agree
to treat the Notes as indebtedness. It is anticipated that the Notes will be
issued without original issue discount for federal income tax purposes. However,
it is possible that the Internal Revenue Service could treat a portion of the
additional interest which would become payable on the Notes after the Redemption
Date as original issue discount. Owners are urged to consult their tax advisor
with respect to the tax consequences of holding the Notes.
The prepayment assumption that is to be used in determining whether
the Notes are issued with original issue discount and the rate of accrual of
original issue discount is a CPR of 30%. No representation is made as to the
actual rate at which the Home Equity Loans will prepay. See "Certain Federal
Income Tax Considerations - Taxation of Debt Securities" in the Prospectus.
The Notes will not represent "real estate assets" for purposes of
Section 856(c)(5)(A) of the Code or A[l]oans . . . principally secured by an
interest in real property" within the meaning of Section 7701(a)(19)(C)(v) of
the Code. The Notes will also not be treated as qualified mortgages" under
Section 860G(a)(3)(C) of the Code.
STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Certain Federal Income Tax Consequences" herein, potential investors should
consider the state income tax consequences of the acquisition, ownership, and
disposition of the Notes. State income tax law may differ substantially from the
corresponding federal tax law, and this discussion does not purport to describe
any aspect of the income tax laws of any state. Therefore, potential investors
should consult their own tax advisors with respect to the various tax
consequences of investments in the Notes.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code impose certain restrictions on (a) employee benefit
plans (as defined in Section 3(3) of ERISA) and plans described in Code section
4975(e)(1), including individual retirement accounts (the "Plans") and (b)
persons who have certain specified relationships to such Plans or who constitute
"disqualified persons" under Code section 4975(e)(2) with respect to such Plans
("parties in interest"). Certain employee benefit plans, such as governmental
plans and church plans (if no election has been made under section 410(d) of the
Code), are not subject to the restrictions of ERISA, and assets of such plans
may be invested in the Notes without regard to the ERISA considerations
described below, subject to other applicable federal and state law. However, any
such governmental or church plan which is qualified under section 401(a) of the
Code and exempt from taxation under section 501(a) of the Code is subject to the
prohibited transaction rules set forth in section 503 of the Code. Any Plan
fiduciary which proposes to cause a Plan to acquire any of the Notes should
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consult with its counsel with respect to the potential consequences under ERISA,
and the Code, of the Plan's acquisition and ownership of the Notes. See "ERISA
Considerations" in the Prospectus. Investments by Plans are also subject to
ERISA's general fiduciary requirements, including the requirement of investment
prudence and diversification and the requirement that a Plan's investments be
made in accordance with the documents governing the Plan.
Investments by Plans are subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
Section 406 of ERISA prohibits parties in interest with respect to a
Plan from engaging in certain transactions ("prohibited transactions") 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 which engage in non-exempt prohibited transactions.
The United States Department of Labor ("DOL") has issued a final
regulation (29 C.F.R. Section 2510.3-101) 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 any 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 were deemed to be equity
interests and no statutory, regulatory or administrative exemption applies, the
Issuer could be considered to hold plan assets by reason of a Plan's investment
in the Notes. Such plan assets would include an undivided interest in any assets
held by the Issuer. In such an event, the Servicer and other persons, in
providing services with respect to the Issuer's assets, may be parties in
interest with respect to such Plans, subject to fiduciary responsibility
provisions of Title I of ERISA, including the general fiduciary duties of
Section 404 of ERISA, the prohibited transaction provisions of Section 406 of
ERISA, and to 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 which has no "substantial
equity features." Although the Plan Asset Regulation is silent with respect to
the question of which law constitutes Aapplicable local law" for this purpose,
the DOL has stated that these determinations should be made under the state law
governing interpretation of the instrument in question. In the preamble to the
Plan Asset Regulation, the DOL declined to provide a precise definition of what
features are equity features or the circumstances under which such features
would be considered "substantial," noting that the question of whether a plan's
interest has substantial equity features is an inherently factual one, but that
in making a determination it would be appropriate to take into account whether
the equity features are such that a Plan's investment would be a practical
vehicle for the indirect provision of investment management services.
Without regard to whether the Notes are treated as an equity interest
under the Plan Asset Regulation, the acquisition or holding of the Notes by or
on behalf of a Plan could be considered to give rise to a prohibited transaction
if such acquisition or holding is deemed to be a prohibited loan to a party in
interest with respect to such Plan. Certain exemptions from the prohibited
transaction rules could be applicable to the purchase and holding of the Notes
by a Plan depending on the type and circumstances of the plan fiduciary making
the decision to acquire the Notes. Included among these exemptions are:
Prohibited Transaction Class Exemption ("PTCE") 90-1, regarding certain
transactions entered into by insurance company pooled separate accounts; PTCE
95-60, regarding certain transactions entered into by insurance company general
accounts; PTCE 96-23, regarding certain transactions effected by "in-house asset
managers"; PTCE 91-38, regarding certain transactions entered into by bank
collective investment funds; and PTCE 84-14, regarding certain transactions
effected by "qualified professional asset managers."
Any Plan fiduciary considering whether to purchase any Notes 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, a
fiduciary of a Plan should make its own determination as to whether the Trust,
as obligor on the Notes, 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. Investors
should analyze whether the decision may have an impact with respect to purchases
of the Notes.
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In addition to the matters described above, purchasers of an Notes
that are insurance companies should consult with their counsel with respect to
the United States Supreme Court case interpreting the fiduciary responsibility
rules of ERISA, John Hancock Mutual Life Insurance Co. v. Harris Trust and
Savings Bank 114 S.Ct. 517 (1993). In John Hancock, the Supreme Court ruled that
assets held in an insurance company's general account may be deemed to be "plan
assets" for ERISA purposes under certain circumstances. Prospective purchasers
using insurance company general account assets should determine whether the
decision affects their ability to make purchases of the Notes.
RATINGS
It is a condition of the issuance of the Notes that the Notes receive
ratings of "Aaa" by Moody's and AAAA" by Standard & Poor's. Explanations of the
significance of such ratings may be obtained from Moody's, 99 Church Street, New
York, New York 10007 and Standard Poor's, 25 Broadway, New York, New York 10004.
Such ratings will be the views only of such rating agencies. There is no
assurance that such ratings will continue for any period of time or that such
ratings will not be revised or withdrawn. Any such revision or withdrawal of
such ratings may have an adverse effect on the market price of the Notes. A
security rating is not a recommendation to buy, sell or hold securities.
The ratings issued by Moody's and Standard & Poor's on the payment of
principal and interest on the Notes do not cover the payment of the Available
Funds Cap Carry Forward Amount. The ratings of Moody's and Standard & Poor's do
not address the possibility that, as a result of principal prepayments, Owners
of the Notes may receive a lower than anticipated yield.
The ratings of the Notes should be evaluated independently from
similar ratings on other types of securities. 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.
The Depositor has not requested a rating of the Notes offered hereby
by any rating agency other than Moody's and Standard & Poor's and the Depositor
has not provided information relating to the Notes offered hereby or the Home
Equity Loans to any rating agency other than Moody's and Standard & Poor's.
However, there can be no assurance as to whether any other rating agency will
rate the Notes offered hereby or, if another rating agency rates such Notes,
what rating would be assigned to such Notes by such rating agency. Any such
unsolicited rating assigned by another rating agency to the Notes offered hereby
may be lower than the rating assigned to such Notes by either or both of Moody's
and Standard & Poor's.
LEGAL INVESTMENT CONSIDERATIONS
The Notes will not constitute "mortgage related securities" for
purposes of SMMEA. Accordingly, many institutions with legal authority to invest
in comparably rated securities based on qualifying first home equity loans may
not be legally authorized to invest in the Notes.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement relating to the Notes (the "Underwriting Agreement"), the Underwriters
named below (the "Underwriters"), has severally agreed to purchase, the
principal amount of the Notes set forth opposite its name below:
Underwriters Principal Amount
------------ ----------------
Bear, Stearns & Co. Inc. $210,000,000
PaineWebber Incorporated 210,000,000
Deutsche Morgan Grenfell Inc. 140,000,000
J.P. Morgan Securities Inc. 140,000,000
-----------
Total $700,000,000
============
The Depositor and the Seller have agreed to indemnify the Underwriters
against certain liabilities, including civil liabilities under the Securities
Act, or to contribute to payments which the Underwriters may be required to make
in respect thereof. The Depositor is an affiliate of Bear, Stearns & Co. Inc.
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In the Underwriting Agreement, the Underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase all of the Notes
offered hereby, if any are purchased. The Seller has been advised by the
Underwriters that they propose initially to offer the Notes to the public at the
offering price set forth on the cover page hereof and to certain dealers at such
price less a concession not in excess of 0.15% (expressed as a percentage of the
Note Principal Balance). The Underwriters may allow and such dealers may reallow
a discount not in excess of 0.10%.
After the initial public offering, such prices and discounts may be
changed.
The Underwriters may engage in over-allotment, stabilizing
transactions, syndicate covering transactions and penalty bids in accordance
with Regulation M under the Securities Exchange Act of 1934 (the "Exchange
Act"). Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position. Stabilizing transactions permit bids
to purchase the underlying security so long as the stabilizing bids do not
exceed a specific maximum. Syndicate covering transactions involve purchases of
the Notes in the open market after the distribution has been completed in order
to cover syndicate short positions. Penalty bids permit the Underwriters to
reclaim a selling concession from a syndicate member when the Notes originally
sold by such syndicate member are purchased in a syndicate covering transaction
to cover syndicate short positions. Such stabilizing transactions, syndicate
covering transactions and penalty bids may cause the price of the Notes to be
higher than it would otherwise be in the absence of such transactions. These
transactions, if commenced, may be discontinued at any time.
REPORT OF EXPERTS
The consolidated balance sheets of the Note Insurer, MBIA Insurance
Corporation and Subsidiaries, as of December 31, 1996 and 1995, and the
consolidated statements of income, shareholders= equity and cash flows, for each
of the three years in the period ended December 31, 1996, incorporated by
reference into this Prospectus Supplement, have been incorporated by reference
herein in reliance on the report of Coopers & Lybrand, L.L.P., independent
accountants, given on the authority of such firm as experts in accounting and
auditing.
CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Notes and certain federal income tax matters concerning the Notes will be passed
upon for the Seller and the Servicer by Arter & Hadden LLP, Washington, D.C.
Certain legal matters relating to the validity of the issuance of the Notes will
be passed upon for the Depositor and the Underwriters by Stroock & Stroock &
Lavan LLP, New York, New York. Certain legal matters relating to the Note
Insurer and the Note Insurance Policy will be passed upon for the Note Insurer
by Kutak Rock, Omaha, Nebraska.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
$700,000,000 Adjustable Rate Home Equity Loan Asset Backed Notes, Series 1998-2,
(the "Global Securities") will be available only in book-entry form. Investors
in the Global Securities may hold such Global Securities through any of DTC,
Cedel or Euroclear. The Global Securities will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors through Cedel and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of Cedel and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Notes will be effected on a delivery-against-payment basis
through the respective Depositaries of Cedel and Euroclear (in such capacity)
and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Cedel and
Euroclear will hold positions on behalf of their participants through their
Relevant Depositary which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior home
equity loan asset-backed securities issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC, Seller and Cedel or Euroclear Participants. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Cedel Participant or a Euroclear Participant, the purchaser
will send instructions to Cedel or Euroclear through a Cedel Participant or
Euroclear Participant at least one business day prior to settlement. Cedel or
Euroclear will instruct the Relevant Depositary, as the case may be, to receive
the Global Securities against payment. Payment will include interest accrued on
the Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month,
I-1
<PAGE>
payment will include interest accrued to and excluding the first day of the
following month. Payment will then be made by the Relevant Depositary to the DTC
Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Cedel Participant's or Euroclear Participant's account.
The securities credit will appear the next day (European time) and the cash debt
will be back-valued to, and the interest on the Global Securities will accrue
from, the value date (which would be the preceding day when settlement occurred
in New York). If settlement is not completed on the intended value date (i.e.,
the trade fails), the Cedel or Euroclear cash debt will be valued instead as of
the actual settlement date.
Cedel Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedel or Euroclear. Under this
approach, they may take on credit exposure to Cedel or Euroclear until the
Global Securities are credited to their account one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit
to them, Cedel Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, Cedel Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of such overdraft charges, although the result will depend on each Cedel
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for crediting Global
Securities to the respective European Depositary for the benefit of Cedel
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Cedel Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. In these cases Cedel
or Euroclear will instruct the respective Depositary, as appropriate, to credit
the Global Securities to the DTC Participant's account against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment to and excluding the settlement date on the basis of the
actual number of days in such accrual period and a year assumed to consist to
360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
The payment will then be reflected in the account of Cedel Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
Cedel Participant's or Euroclear Participant's account would be back-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedel Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the
purchase side of the trade is reflected in their Cedel or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear account
in order to settle the sale side of the trade; or
I-2
<PAGE>
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the Cedel Participant or Euroclear
Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Cedel or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial Owners of Global
Securities that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
Exemption or reduced rate for Non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Ownership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by Note Owners or their agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Owner of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds the
security (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof or (iii) an
estate the income of which is includible in gross income for United States tax
purposes, regardless of its source or a trust if a court within the United
States is able to exercise primary supervision of the administration of the
trust and one or more United States fiduciaries have the authority to control
all substantial decisions of the trust. The term "Non-U.S. Person" means any
person who is not a U.S. Person. This summary does not deal with all aspects of
U.S. Federal income tax withholding that may be relevant to foreign holders of
the Global Securities. Investors are advised to consult their own tax advisors
for specific tax advice concerning their holding and disposing of the Global
Securities.
I-3
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Page
----
Accrual Period..............................S-4
Adjustable Rate Home Equity Loans...........S-3
Agreements..................................S-35
Appraised Values............................S-20
Available Funds Cap Carry Forward Amount....S-5
Available Funds Shortfall...................S-36
Backup Servicer.............................S-15
Beneficial Owners...........................S-10
Book-Entry Notes............................S-38
Capitalized Interest Account................S-9
Cede........................................S-10
Cedel.......................................S-10
Cedel Participants..........................S-40
Closing Date................................S-1
CMT Loans...................................S-12
Compensating Interest.......................S-51
Cooperative.................................S-40
Coupon Rate.................................S-3
CPR.........................................S-31
Current Interest............................S-4
Custodian...................................S-48
Cut-Off Date................................S-1
Daily Collections...........................S-50
Date-of-Payment Loans.......................S-30
Definitive Note.............................S-38
Delinquency Advances........................S-50
Depositor...................................S-1
DOL.........................................S-58
DTC.........................................S-10
DTC Participants............................S-40
ERISA.......................................S-57
Euroclear...................................S-10
Euroclear Operator..........................S-40
Euroclear Participants......................S-40
European Depositaries.......................S-10
Event of Default............................S-54
Excess Overcollateralization Amount.........S-46
Exchange Act................................S-60
Fannie Mae..................................S-16
FHLMC.......................................S-16
Final Certification.........................S-49
Financial Intermediary......................S-39
Fiscal Agent................................S-42
Fixed Rate Home Equity Loans................S-3
FNMA Guide..................................S-49
Formula Note Rate...........................S-5
Funding Period..............................S-9
GAAP........................................S-44
Home Equity Loans...........................S-2
Indenture...................................S-1
Indenture Trustee Fee.......................S-1
Indenture Trustee...........................S-1
Initial Home Equity Loans...................S-2
Insured Payment.............................S-8
Interest Carry Forward Amount...............S-5
Issuer......................................S-1
LIBOR Determination Date....................S-38
<PAGE>
Page
----
Loan Balance................................S-6
Loan Purchase Price.........................S-48
Loan-to-Value Ratios........................S-23
Majority Residualholders....................S-10
Maximum Collateral Amount...................S-5
Monthly Remittance Date.....................S-7
Moody's.....................................S-10
Mortgage Note...............................S-2
Mortgagor...................................S-30
Net Liquidation Proceeds....................S-50
Net Monthly Excess Cashflow.................S-36
Note Account................................S-35
Note Insurance Policy.......................S-8
Note Insurer................................S-8
Note Insurer Default........................S-8
Note Principal Balance......................S-4
Note Rate...................................S-5
Notes.......................................S-1
One-Month LIBOR.............................S-37
Original Aggregate Loan Balance.............S-5
Overcollateralization Amount................S-46
Overcollateralization Deficit...............S-47
Overcollateralization Increase Amount.......S-46
Overcollateralization Reduction Amount......S-46
Owner Trust.................................S-1
Owner Trustee Fee...........................S-1
Owners......................................S-3
Participants................................S-38
Payment Date................................S-4
Percentage Interest.........................S-35
Plan Asset Regulation.......................S-58
Plans.......................................S-57
Pool........................................S-2
Preference Amount...........................S-7
Premium Amount..............................S-7
Prepayments.................................S-12
Preservation Expenses.......................S-51
Pre-Funded Amount...........................S-9
Pre-Funding Account.........................S-2
Principal and Interest Account..............S-50
Principal Payment Amount....................S-5
Properties..................................S-2
Qualified Replacement Mortgage..............S-47
Rating Agencies.............................S-10
REMIC.......................................S-11
Realized Loss...............................S-47
Record Date.................................S-4
Redemption Date.............................S-5
Redemption Price............................S-53
Reference Banks.............................S-38
Register....................................S-35
Registrar...................................S-35
Remittance Period...........................S-7
Residual Interest...........................S-2
Riegle Act..................................S-14
Rules.......................................S-39
SAP.........................................S-44
A-1
<PAGE>
Page
----
Sale and Servicing Agreement................S-3
Securities..................................S-2
Seller......................................S-1
Servicer....................................S-1
Servicer Termination Events.................S-53
Servicing Advances..........................S-51
Servicing Fee...............................S-7
Six-Month LIBOR.............................S-12
SMMEA.......................................S-11
Specified Overcollateralization Amount......S-46
Standard & Poor's...........................S-10
Statistical Calculation Date................S-1
Subsequent Cut-Off Date.....................S-13
Subsequent Home Equity Loans................S-2
Subsequent Transfer Agreement...............S-13
Subsequent Transfer Date....................S-9
Substitution Amount.........................S-47
Sub-Servicers...............................S-15
Sub-Servicing Agreements....................S-15
Telerate Page 3750..........................S-38
Terms and Conditions........................S-40
Total Available Funds.......................S-37
Total Monthly Excess Cashflow...............S-36
Trust.......................................S-1
Trust Agreement.............................S-1
Trust Estate................................S-1
Trust Fees and Expenses.....................S-9
Underwriters................................S-59
Underwriting Agreement......................S-59
Weighted average life.......................S-31
A-2
<PAGE>
PROSPECTUS
Bear Stearns Asset Backed Securities, Inc.
(Depositor)
--------------------
Bear Stearns Asset Backed Securities, Inc. (the "Depositor") may offer from
time to time under this Prospectus and related Prospectus Supplements the
Asset-Backed Notes (the "Notes") and the Asset-Backed Certificates (the
"Certificates" and, together with the Notes, the "Securities") which may be sold
from time to time in one or more series (each, a "Series").
As specified in the related Prospectus Supplement, the Certificates of a
Series will evidence undivided interests in certain assets deposited into a
trust (each, a "Trust Fund") by the Depositor pursuant to a Pooling and Service
Agreement or a Trust Agreement, as described herein. As specified in the related
Prospectus Supplement, the Notes of a Series will be issued and secured pursuant
to an Indenture and will represent indebtedness of the related Trust Fund. The
Trust Fund for a Series of Securities will include assets purchased from the
seller or sellers specified in the related Prospectus Supplement (the "Seller")
composed of (a) Primary Assets, which may include one or more pools of (i)
closed-end home equity loans (the "Mortgage Loans"), secured by mortgages on
one- to four-family residential or mixed-use properties, (ii) home improvement
installment sales contracts and installment loan agreements (the "Home
Improvement Contracts") which are either unsecured or secured by mortgages on
one- to four-family residential or mixed-use properties, or by purchase money
security interests in the home improvements financed thereby (the "Home
Improvements") and (iii) securities backed or secured by Mortgage Loans and/or
Home Improvement Contracts, (b) all monies due thereunder net, if and as
provided in the related Prospectus Supplement, of certain amounts payable to the
servicer of the Mortgage Loans and/or Home Improvement Contracts (collectively,
the "Loans"), which servicer may also be the Seller, specified in the related
Prospectus Supplement (the "Servicer"), (c) if specified in the related
Prospectus Supplement, funds on deposit in one or more pre-funding amounts
and/or capitalized interest accounts and (d) reserve funds, letters of credit,
surety bonds, insurance policies or other forms of credit support as described
herein and in the related Prospectus Supplement. The amount initially deposited
in a pre-funding account for a Series of Securities will not exceed fifty
percent of the aggregate principal amount of such series of Securities.
Each Series of Securities will be issued in one or more classes (each, a
"Class"). Interest on and principal of the Securities of a Series will be
payable on each Distribution Date specified in the related Prospectus
Supplement, at the times, at the rates, in the amounts and in the order of
priority set forth in the related Prospectus Supplement.
(cover continued on next page)
-------------------
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF, AND CERTIFICATES OF A
SERIES EVIDENCE BENEFICIAL INTERESTS IN, THE RELATED TRUST FUND ONLY AND ARE NOT
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR BY THE DEPOSITOR, THE SELLER, THE
TRUSTEE, THE SERVICER OR BY ANY OF THEIR RESPECTIVE AFFILIATES OR, UNLESS
OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT, BY ANY OTHER PERSON OR
ENTITY. THE DEPOSITOR'S ONLY OBLIGATIONS WITH RESPECT TO ANY SERIES OF
SECURITIES WILL BE PURSUANT TO CERTAIN REPRESENTATIONS AND WARRANTIES SET FORTH
IN THE RELATED AGREEMENT AS DESCRIBED HEREIN OR IN THE RELATED PROSPECTUS
SUPPLEMENT.
See "Risk Factors" on page 15 for certain factors to be considered in
purchasing the securities.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------
The Securities offered by this Prospectus and by the related Prospectus
Supplement are offered by Bear, Stearns & Co. Inc. and the other underwriters
set forth in the related Prospectus Supplement, if any, subject to prior sale,
to withdrawal, cancellation or modification of the offer without notice, to
delivery to and acceptance by Bear, Stearns & Co. Inc. and the other
underwriters, if any, and certain further conditions. Retain this Prospectus for
future reference. This Prospectus may not be used to consummate sales of the
Securities offered hereby unless accompanied by a Prospectus Supplement.
Bear, Stearns & Co. Inc.
January 23, 1998
<PAGE>
(Continued from previous page)
If a Series includes multiple Classes, such Classes may vary with respect to
the amount, percentage and timing of distributions of principal, interest or
both and one or more Classes may be subordinated to other Classes with respect
to distributions of principal, interest or both as described herein and in the
related Prospectus Supplement. If so specified in the related Prospectus
Supplement, the Primary Assets and other assets comprising the Trust Fund may be
divided into one or more Asset Groups and each Class of the related Series will
evidence beneficial ownership of the corresponding Asset Group, as applicable.
The rate of reduction of the aggregate principal balance of each Class of a
Series may depend principally upon the rate of payment (including prepayments)
with respect to the Loans or Underlying Loans relating to the Private
Securities, as applicable. A rate of prepayment lower or higher than anticipated
will affect the yield on the Securities of a Series in the manner described
herein and in the related Prospectus Supplement. Under certain limited
circumstances described herein and in the related Prospectus Supplement, a
Series of Securities may be subject to termination or redemption under the
circumstances described herein and in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, an election may be made
to treat certain assets comprising the Trust Fund for a Series as a "real estate
mortgage investment conduit" (a "REMIC") for federal income tax purposes. See
"CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" herein.
2
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Securities to be offered
hereunder will, among other things, set forth with respect to such Series of
Securities: (i) the aggregate principal amount, interest rate, and authorized
denominations of each Class of such Securities; (ii) certain information
concerning the Primary Assets, the Seller and any Servicer; (iii) the terms of
any Enhancement with respect to such Series; (iv) the terms of any insurance
related to the Primary Assets; (v) information concerning any other assets in
the related Trust Fund, including any Reserve Fund; (vi) the Final Scheduled
Distribution Date of each Class of such Securities; (vii) the method to be used
to calculate the amount of principal required to be applied to the Securities of
each Class of such Series on each Distribution Date, the timing of the
application of principal and the order of priority of the application of such
principal to the respective Classes and the allocation of principal to be so
applied; (viii) the Distribution Dates and any Assumed Reinvestment Rate (as
defined herein); (ix) additional information with respect to the plan of
distribution of such Securities; and (x) whether a REMIC election will be made
with respect to some or all of the Trust Fund for such Series.
REPORTS TO HOLDERS
Periodic and annual reports concerning the related Trust Fund for a Series
of Securities are required under the related Agreement to be forwarded to
Holders. Unless otherwise specified in the related Prospectus Supplement, such
reports will not be examined and reported on by an independent public
accountant. If so specified in the Prospectus Supplement for a Series of
Securities, such Series or one or more Classes of such Series will be issued in
book-entry form. In such event, (i) owners of beneficial interests in such
Securities will not be considered "Holders" under the Agreements and will not
receive such reports directly from the related Trust Fund; rather, such reports
will be furnished to such owners through the participants and indirect
participants of the applicable book-entry system and (ii) references herein to
the rights of "Holders" shall refer to the rights of such owners as they may be
exercised indirectly through such participants. See "THE AGREEMENTS -- Reports
to Holders" herein.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission a
Registration Statement under the Securities Act of 1933, as amended, with
respect to the Securities. This Prospectus, which forms a part of the
Registration Statement, and the Prospectus Supplement relating to each Series of
Securities contain summaries of the material terms of the documents referred to
herein and therein, but do not contain all of the information set forth in the
Registration Statement pursuant to the Rules and Regulations of the Commission.
For further information, reference is made to such Registration Statement and
the exhibits thereto. Such Registration Statement and exhibits can be inspected
and copied at prescribed rates at the public reference facilities maintained by
the Commission at its Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its Regional Office located as follows, Midwest
Regional Office, 500 West Madison Street, Chicago, Illinois 60661; and Northeast
Regional Office, Seven World Trade Center, New York, New York 10048.
Each Trust Fund will be required to file certain reports with the Commission
pursuant to the requirements of the Securities Exchange Act of 1934, as amended.
The Depositor intends to cause each Trust Fund to suspend filing such reports if
and when such reports are no longer required under said Act.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Securities offered
hereby and thereby nor an offer of the Securities to any person in any state or
other jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus at any time does not imply that information herein is correct as of
any time subsequent to its date.
3
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the Trust Fund referred
to in the accompanying Prospectus Supplement with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), after the date of this Prospectus and prior to the
termination of any offering of the Securities issued by such Trust Fund shall be
deemed to be incorporated by reference in this Prospectus and to be a part of
this Prospectus from the date of the filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for all purposes of this
Prospectus to the extent that a statement contained herein (or in the
accompanying Prospectus Supplement) or in any other subsequently filed document
which also is or is deemed to be incorporated by reference modifies or replaces
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Depositor on behalf of any Trust Fund will provide without charge to
each person to whom this Prospectus is delivered, on the written or oral request
of such person, a copy of any or all of the documents referred to above that
have been or may be incorporated by reference in this Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
this Prospectus incorporates). Such requests should be directed to the Depositor
at 245 Park Avenue, New York, New York 10167.
4
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each Series of Securities contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of Securities of such Series. Capitalized terms used and not otherwise
defined herein or in the related Prospectus Supplement shall have the meanings
set forth in the "GLOSSARY OF TERMS" herein.
Securities Offered............... Asset-Backed Certificates (the
"Certificates") and Asset-Backed Notes (the
"Notes"). Certificates are issuable from time
to time in Series pursuant to a Pooling and
Servicing Agreement or Trust Agreement. Each
Certificate of a Series will evidence an
interest in the Trust Fund for such Series,
or in an Asset Group specified in the related
Prospectus Supplement. Notes are issuable
from time to time in Series pursuant to an
Indenture. Each Series of Securities will
consist of one or more Classes, one or more
of which may be Classes of Compound Interest
Securities, Planned Amortization Class
("PAC") Securities, Variable Interest
Securities, Zero Coupon Securities, Principal
Only Securities, Interest Only Securities,
Participating Securities, Senior Securities
or Subordinate Securities. Each Class may
differ in, among other things, the amounts
allocated to and the priority of principal
and interest payments, Final Scheduled
Distribution Dates, Distribution Dates and
interest rates. The Securities of each Class
will be issued in fully registered form in
the denominations specified in the related
Prospectus Supplement. If so specified in the
related Prospectus Supplement, the Securities
or certain Classes of such Securities offered
thereby may be available in book-entry form
only.
Depositor........................ Bear Stearns Asset Backed Securities, Inc.
(the "Depositor") was incorporated in the
State of Delaware in June 1995, and is a
wholly-owned, special purpose subsidiary of
The Bear Stearns Companies Inc. None of The
Bear Stearns Companies Inc. nor any other
affiliate of the Depositor, the Servicer, the
Trustee or the Seller has guaranteed or is
otherwise obligated with respect to the
Securities of any Series. See "THE
DEPOSITOR."
Interest Payments................ Interest payments on the Securities of a
Series entitled by their terms to receive
interest will be made on each Distribution
Date, to the extent set forth in, and at the
applicable rate specified in (or determined
in the manner set forth in), the related
Prospectus Supplement. The interest rate on
Securities of a Series may be variable or
change with changes in the rates of interest
on the related Loans or Underlying Loans
relating to the Private Securities, as
applicable and/or as prepayments occur with
respect to such Loans or Underlying Loans, as
applicable. Interest Only Securities may be
assigned a 'Notional Amount" set forth in the
related Prospectus Supplement which is used
solely for convenience in expressing the
calculation of interest and for certain other
purposes and does not represent the right to
receive any distributions allocable to
principal. Principal Only Securities may not
be entitled to receive any interest payments
or may be entitled to receive only nominal
interest payments. Interest payable on the
Securities of a Series on a Distribution Date
will include all interest accrued during the
period
5
<PAGE>
specified in the related Prospectus
Supplement. See "DESCRIPTION OF THE
SECURITIES -- Payments of Interest."
Principal Payments............... All payments of principal of a Series of
Securities will be made in an aggregate
amount determined as set forth in the related
Prospectus Supplement and will be paid at the
times and will be allocated among the Classes
of such Series in the order and amounts, and
will be applied either on a pro rata or a
random lot basis among all Securities of any
such Class, all as specified in the related
Prospectus Supplement.
Final Scheduled Distribution Date
of the Securities.............. The Final Scheduled Distribution Date with
respect to each Class of Notes is the date no
later than which principal thereof will be
fully paid and with respect to each Class of
Certificates is the date after which no
Certificates of such Class are expected to
remain outstanding, in each case calculated
on the basis of the assumptions applicable to
such Series described in the related
Prospectus Supplement. The Final Scheduled
Distribution Date of a Class may equal the
maturity date of the Primary Asset in the
related Trust Fund which has the latest
stated maturity or will be determined as
described herein and in the related
Prospectus Supplement.
The actual final Distribution Date of the
Securities of a Series will depend primarily
upon the rate of payment (including
prepayments, liquidations due to default, the
receipt of proceeds from casualty insurance
policies and repurchases) of the Loans or
Underlying Loans relating to the Private
Securities, as applicable, in the related
Trust Fund. Unless otherwise specified in the
related Prospectus Supplement, the actual
final Distribution Date of any Security is
likely to occur earlier and may occur
substantially earlier or may occur later than
its Final Scheduled Distribution Date as a
result of the application of prepayments to
the reduction of the principal balances of
the Securities and as a result of defaults on
the Primary Assets. The rate of payments on
the Loans or Underlying Loans relating to the
Private Securities, as applicable, in the
Trust Fund for a Series will depend on a
variety of factors, including certain
characteristics of such Loans or Underlying
Loans, as applicable, and the prevailing
level of interest rates from time to time, as
well as on a variety of economic,
demographic, tax, legal, social and other
factors. No assurance can be given as to the
actual prepayment experience with respect to
a Series. See "RISK FACTORS -- Yield May
Vary" and "DESCRIPTION OF THE SECURITIES --
Weighted Average Life of the Securities"
herein.
Optional Termination............. One or more Classes of Securities of any
Series may be redeemed or repurchased in
whole or in part, at the Depositor's or the
Servicer's option, at such time and under the
circumstances specified in the related
Prospectus Supplement, at the price set forth
therein. If so specified in the related
Prospectus Supplement for a Series of
Securities, the Depositor, the Servicer, or
such other entity that is specified in the
related Prospectus Supplement, may, at its
option, cause an early termination of the
related Trust Fund by repurchasing all of the
Primary Assets remaining in the Trust Fund on
or after a specified date, or on or after
such time as the aggregate principal
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<PAGE>
balance of the Securities of the Series or
the Primary Assets relating to such Series,
as specified in the related Prospectus
Supplement, is less than the amount or
percentage specified in the related
Prospectus Supplement. See "DESCRIPTION OF
THE SECURITIES -- Optional Redemption,
Purchase or Termination."
In addition, the Prospectus Supplement may
provide other circumstances under which
Holders of Securities of a Series could be
fully paid significantly earlier than would
otherwise be the case if payments or
distributions were solely based on the
activity of the related Primary Assets.
The Trust Fund................... The Trust Fund for a Series of Securities
will consist of one or more of the assets
described below, as described in the related
Prospectus Supplement.
A. Primary Assets.............. The Primary Assets for a Series may consist
of any combination of the following assets,
to the extent and as specified in the related
Prospectus Supplement. The Primary Assets
will be purchased from the Seller or may be
purchased by the Depositor in the open market
or in privately negotiated transactions,
including transactions with entities
affiliated with the Depositor.
(1) Loans.................... Primary Assets for a Series will consist, in
whole or in part, of Loans. Some Loans may be
delinquent or non-performing as specified in
the related Prospectus Supplement. Loans may
be originated by or acquired from an
affiliate of the Depositor and an affiliate
of the Depositor may be an obligor with
respect to any such Loan. The Loans will be
conventional contracts or contracts insured
by the Federal Housing Administration ("FHA")
or partially guaranteed by the Veterans
Administration ("VA"). See "The Trust Funds
-- The Loans" for a discussion of such
guarantees. To the extent provided in the
related Prospectus Supplement, additional
Loans may be periodically added to the Trust
Fund, or may be removed from time to time if
certain asset value tests are met, as
described in the related Prospectus
Supplement.
The "Loans" for a Series will consist of (i)
closed-end home equity loans (the "Mortgage
Loans") and (ii) home improvement installment
sales contracts and installment loan
agreements (the "Home Improvement
Contracts"). The Mortgage Loans and the Home
Improvement Contracts are collectively
referred to herein as the "Loans." Loans may,
as specified in the related Prospectus
Supplement, have various payment
characteristics, including balloon or other
irregular payment features, and may accrue
interest at a fixed rate or an adjustable
rate. As specified in the related Prospectus
Supplement, the Mortgage Loans will and the
Home Improvement Contracts may be secured by
mortgages and deeds of trust or other similar
security instruments creating a lien on a
Mortgaged Property, which may be subordinated
to one or more senior liens on the Mortgaged
Property, as described in the related
Prospectus Supplement. As specified in the
related Prospectus Supplement, Home
Improvement Contracts may be unsecured or
secured by purchase money security interests
in the Home Improvements financed thereby.
The Mortgaged Properties and the Home
Improvements are collectively referred to
herein as the "Properties."
7
<PAGE>
The related Prospectus Supplement will
describe certain characteristics of the Loans
for a Series, including, without limitation,
and to the extent relevant: (a) the aggregate
unpaid principal balance of the Loans (or the
aggregate unpaid principal balance included
in the Trust Fund for the related Series);
(b) the range and weighted average Loan Rate
on the Loans and in the case of adjustable
rate Loans, the range and weighted average of
the Current Loan Rates and the Lifetime Rate
Caps, if any; (c) the range and the average
outstanding principal balance of the Loans;
(d) the weighted average original and
remaining term-to-stated maturity of the
Loans and the range of original and remaining
terms-to-stated maturity, if applicable; (e)
the range and Combined Loan-to-Value Ratios
or Loan-to-Value Ratios, as applicable, of
the Loans, computed in the manner described
in the related Prospectus Supplement; (f) the
percentage (by principal balance as of the
Cut-off Date) of Loans that accrue interest
at adjustable or fixed interest rates; (g)
any enhancement relating to the Loans; (h)
the percentage (by principal balance as of
the Cut-off Date) of Loans that are secured
by Mortgaged Properties, Home Improvements or
are unsecured; (i) the geographic
distribution of any Mortgaged Properties
securing the Loans; (j) the use and type of
each Mortgaged Property securing a Loan; (k)
the lien priority of the Loans; and (l) the
delinquency status and year of origination of
the Loans.
(2) Private Securities....... Primary Assets for a Series may consist, in
whole or in part, of Private Securities which
include (a) pass-through certificates
representing beneficial interests in loans of
the type that would otherwise be eligible to
be Loans (the "Underlying Loans") or (b)
collateralized obligations secured by
Underlying Loans. Such pass-through
certificates or collateralized obligations
will have previously been (a) offered and
distributed to the public pursuant to an
effective registration statement or (b)
purchased in a transaction not involving any
public offering from a person who is not an
affiliate of the issuer of such securities at
the time of sale (nor an affiliate thereof at
any time during the three preceding months);
provided a period of three years has elapsed
since the later of the date the securities
were acquired from the issuer or an affiliate
thereof. Although individual Underlying Loans
may be insured or guaranteed by the United
States or an agency or instrumentality
thereof, they need not be, and the Private
Securities themselves will not be so insured
or guaranteed. See "THE TRUST FUNDS --
Private Securities." Unless otherwise
specified in the Prospectus Supplement
relating to a Series of Securities, payments
on the Private Securities will be distributed
directly to the Trustee as registered owner
of such Private Securities.
The related Prospectus Supplement for a
Series will specify (such disclosure may be
on an approximate basis, as described above
and will be as of the date specified in the
related Prospectus Supplement) to the extent
relevant and to the extent such information
is reasonably available to the Depositor and
the Depositor reasonably believes such
information to be reliable: (i) the aggregate
approximate principal amount and type of any
Private Securities to be included in the
Trust Fund for such Series; (ii) certain
characteristics of the Underlying Loans
including (A) the payment features of such
Underlying Loans
8
<PAGE>
(i.e., whether they are fixed rate or
adjustable rate and whether they provide for
fixed level payments, negative amortization
or other payment features), (B) the
approximate aggregate principal amount of
such Underlying Loans which are insured or
guaranteed by a governmental entity, (C) the
servicing fee or range of servicing fees with
respect to such Underlying Loans, (D) the
minimum and maximum stated maturities of such
Underlying Loans at origination, (E) the lien
priority of such Underlying Loans, and (F)
the delinquency status and year of
origination of such Underlying Loans; (iii)
the maximum original term-to-stated maturity
of the Private Securities; (iv) the weighted
average term-to-stated maturity of the
Private Securities; (v) the pass-through or
certificate rate or ranges thereof for the
Private Securities; (vi) the sponsor or
depositor of the Private Securities (the "PS
Sponsor"), the servicer of the Private
Securities (the "PS Servicer") and the
trustee of the Private Securities (the "PS
Trustee"); (vii) certain characteristics of
enhancement, if any, such as reserve funds,
insurance policies, letters of credit or
guarantees, relating to the Loans underlying
the Private Securities, or to such Private
Securities themselves; (viii) the terms on
which the Underlying Loans may, or are
required to, be repurchased prior to stated
maturity; and (ix) the terms on which
substitute Underlying Loans may be delivered
to replace those initially deposited with the
PS Trustee. See "THE TRUST FUNDS --
Additional Information" herein.
B. Collection and Distribution
Accounts..................... Unless otherwise provided in the related
Prospectus Supplement, all payments on or
with respect to the Primary Assets for a
Series will be remitted directly to an
account (the "Collection Account") to be
established for such Series with the Trustee
or the Servicer, in the name of the Trustee.
Unless otherwise provided in the related
Prospectus Supplement, the Trustee shall be
required to apply a portion of the amount in
the Collection Account, together with
reinvestment earnings from eligible
investments specified in the related
Prospectus Supplement, to the payment of
certain amounts payable to the Servicer under
the related Agreement and any other person
specified in the Prospectus Supplement, and
to deposit a portion of the amount in the
Collection Account into a separate account
(the "Distribution Account") to be
established for such Series, each in the
manner and at the times established in the
related Prospectus Supplement. All amounts
deposited in such Distribution Account will
be available, unless otherwise specified in
the related Prospectus Supplement, for (i)
application to the payment of principal of
and interest on such Series of Securities on
the next Distribution Date, (ii) the making
of adequate provision for future payments on
certain Classes of Securities and (iii) any
other purpose specified in the related
Prospectus Supplement. After applying the
funds in the Collection Account as described
above, any funds remaining in the Collection
Account may be paid over to the Servicer, the
Depositor, any provider of Enhancement with
respect to such Series (an "Enhancer") or any
other person entitled thereto in the manner
and at the times established in the related
Prospectus Supplement.
9
<PAGE>
C. Pre-Funding and Capitalized
Interest Accounts.............If specified in the related Prospectus
Supplement, a Trust Fund will include one or
more segregated trust accounts (each, a
"Pre-Funding Account") established and
maintained with the Trustee for the related
Series. If so specified, on the closing date
for such Series, a portion of the proceeds of
the sale of the Securities of such Series
(such amount, the "Pre-Funded Amount") will
be deposited in the Pre-Funding Account and
may be used to purchase additional Primary
Assets during the period of time, not to
exceed six months, specified in the related
Prospectus Supplement (the "Pre-Funding
Period"). The Primary Assets to be so
purchased will be required to have certain
characteristics specified in the related
Prospectus Supplement. If any Pre-Funded
Amount remains on deposit in the Pre-Funding
Account at the end of the Pre-Funding Period,
such amount will be applied in the manner
specified in the related Prospectus
Supplement to prepay the Notes and/or the
Certificates of the applicable Series. The
amount initially deposited in a pre-funding
account for a Series of Securities will not
exceed fifty percent of the aggregate
principal amount of such Series of
Securities.
If a Pre-Funding Account is established, one
or more segregated trust accounts (each, a
"Capitalized Interest Account") may be
established and maintained with the Trustee
for the related Series. On the closing date
for such Series, a portion of the proceeds of
the sale of the Securities of such Series
will be deposited in the Capitalized Interest
Account and used to fund the excess, if any,
of (x) the sum of (i) the amount of interest
accrued on the Securities of such Series and
(ii) if specified in the related Prospectus
Supplement, certain fees or expenses during
the Pre-Funding Period such as trustee fees
and credit enhancement fees, over (y) the
amount of interest available therefor from
the Primary Assets in the Trust Fund. Any
amounts on deposit in the Capitalized
Interest Account at the end of the Pre-
Funding Period that are not necessary for
such purposes will be distributed to the
person specified in the related Prospectus
Supplement.
Enhancement...................... If stated in the Prospectus Supplement
relating to a Series, the Depositor will
obtain an irrevocable letter of credit,
surety bond, certificate insurance policy,
insurance policy or other form of credit
support (collectively, "Enhancement") in
favor of the Trustee on behalf of the Holders
of such Series and any other person specified
in such Prospectus Supplement from an
institution acceptable to the rating agency
or agencies identified in the related
Prospectus Supplement as rating such Series
of Securities (collectively, the "Rating
Agency") for the purposes specified in such
Prospectus Supplement. The Enhancement will
support the payments on the Securities and
may be used for other purposes, to the extent
and under the conditions specified in such
Prospectus Supplement. See "ENHANCEMENT."
Enhancement for a Series may include one or
more of the following types of Enhancement,
or such other type of Enhancement specified
in the related Prospectus Supplement.
A. Subordinate Securities...... If stated in the related Prospectus
Supplement, Enhancement for a Series may
consist of one or more Classes of Subordinate
Securities. The rights of Holders of such
Subordinate Securities to receive
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<PAGE>
distributions on any Distribution Date will
be subordinate in right and priority to the
rights of holders of Senior Securities of the
Series, but only to the extent described in
the related Prospectus Supplement.
B. Insurance................... If stated in the related Prospectus
Supplement, Enhancement for a Series may
consist of special hazard insurance policies,
bankruptcy bonds and other types of insurance
supporting payments on the Securities.
C. Reserve Funds............... If stated in the Prospectus Supplement, the
Depositor may deposit cash, a letter or
letters of credit, short-term investments, or
other instruments acceptable to the Rating
Agency in one or more reserve funds to be
established in the name of the Trustee (each
a "Reserve Fund"), which will be used, as
specified in such Prospectus Supplement, by
the Trustee to make required payments of
principal of or interest on the Securities of
such Series, to make adequate provision for
future payments on such Securities or for any
other purpose specified in the Agreement,
with respect to such Series, to the extent
that funds are not otherwise available. In
the alternative or in addition to such
deposit, a Reserve Fund for a Series may be
funded through application of all or a
portion of the excess cash flow from the
Primary Assets for such Series, to the extent
described in the related Prospectus
Supplement.
D. Minimum Principal Payment
Agreement.................... If stated in the Prospectus Supplement
relating to a Series of Securities, the
Depositor will enter into a minimum principal
payment agreement (the "Minimum Principal
Payment Agreement") with an entity meeting
the criteria of the Rating Agency, pursuant
to which such entity will provide funds in
the event that aggregate principal payments
on the Primary Assets for such Series are not
sufficient to make certain payments, as
provided in the related Prospectus
Supplement. See "ENHANCEMENT -- Minimum
Principal Payment Agreement."
E. Deposit Agreement........... If stated in the Prospectus Supplement, the
Depositor and the Trustee will enter into a
guaranteed investment contract or an
investment agreement (the "Deposit
Agreement") pursuant to which all or a
portion of amounts held in the Collection
Account, the Distribution Account or in any
Reserve Fund will be invested with the entity
specified in such Prospectus Supplement. The
Trustee will be entitled to withdraw amounts
so invested, plus interest at a rate equal to
the Assumed Reinvestment Rate, in the manner
specified in the Prospectus Supplement. See
"ENHANCEMENT -- Deposit Agreement."
Servicing........................ The Servicer will be responsible for
servicing, managing and making collections on
the Loans for a Series. In addition, the
Servicer, if so specified in the related
Prospectus Supplement, will act as custodian
and will be responsible for maintaining
custody of the Loans and related
documentation on behalf of the Trustee.
Advances with respect to delinquent payments
of principal or interest on a Loan will be
made by the Servicer only to the extent
described in the related Prospectus
Supplement. Such advances will be intended to
provide liquidity only and, unless otherwise
specified in the related Prospectus
Supplement, reimbursable to the Servicer from
scheduled
11
<PAGE>
payments of principal and interest, late
collections, or from the proceeds of
liquidation of the related Loans or from
other recoveries relating to such Loans
(including any insurance proceeds or payments
from other credit support). In performing
these functions, the Servicer will exercise
the same degree of skill and care that it
customarily exercises with respect to similar
receivables or Loans owned or serviced by it.
Under certain limited circumstances, the
Servicer may resign or be removed, in which
event either the Trustee or a third-party
servicer will be appointed as successor
servicer. The Servicer will receive a
periodic fee as servicing compensation (the
"Servicing Fee") and may, as specified herein
and in the related Prospectus Supplement,
receive certain additional compensation. See
"SERVICING OF LOANS -- Servicing Compensation
and Payment of Expenses" herein.
Federal Income Tax Considerations
A. Debt Securities and REMIC
Residual Securities.......... If (i) an election is made to treat all or a
portion of a Trust Fund for a Series as a
"real estate mortgage investment conduit" (a
"REMIC") or (ii) so provided in the related
Prospectus Supplement, a Series of Securities
will include one or more Classes of taxable
debt obligations under the Internal Revenue
Code of 1986, as amended (the "Code"). Stated
interest with respect to such Classes of
Securities will be reported by a Holder in
accordance with the Holder's method of
accounting except that, in the case of
Securities constituting "regular interests"
in a REMIC ("Regular Interests"), such
interest will be required to be reported on
the accrual method regardless of a Holder's
usual method of accounting. Securities that
are Compound Interest Securities, Zero Coupon
Securities or Interest Only Securities will,
and certain other Classes of Securities may,
be issued with original issue discount that
is not de minimis. In such cases, the Holder
will be required to include original issue
discount in gross income as it accrues, which
may be prior to the receipt of cash
attributable to such income. If a Security is
issued at a premium, the Holder may be
entitled to make an election to amortize such
premium on a constant yield method.
In the case of a REMIC election, a Class of
Securities may be treated as REMIC "residual
interests" ("Residual Interest"). A Holder of
a Residual Interest will be required to
include in its income its pro rata share of
the taxable income of the REMIC. In certain
circumstances, the Holder of a Residual
Interest may have REMIC taxable income or tax
liability attributable to REMIC taxable
income for a particular period in excess of
cash distributions for such period or have an
after-tax return that is less than the
after-tax return on comparable debt
instruments. In addition, a portion (or, in
some cases, all) of the income from a
Residual Interest (i) may not be subject to
offset by losses from other activities or
investments, (ii) for a Holder that is
subject to tax under the Code on unrelated
business taxable income, may be treated as
unrelated business taxable income and (iii)
for a foreign holder, may not qualify for
exemption from or reduction of 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
12
<PAGE>
holders are subject to limitations on the
deductibility of expenses of the REMIC. See
"CERTAIN FEDERAL INCOME TAX CONSIDERATIONS."
B. Non-REMIC Pass-Through
Securities................... If so specified in the related Prospectus
Supplement, the Trust Fund for a Series will
be treated as a grantor trust and will not be
classified as an association taxable as a
corporation for federal income tax purposes
and Holders of Securities of such Series
("Pass-Through Securities") will be treated
as owning directly rights to receive certain
payments of interest or principal, or both on
the Primary Assets held in the Trust Fund for
such Series. All income with respect to a
Stripped Security (as defined herein) will be
accounted for as original issue discount and,
unless otherwise specified in the related
Prospectus Supplement, will be reported by
the Trustee on an accrual basis, which may be
prior to the receipt of cash associated with
such income.
C. Owner Trust Securities...... If so specified in the Prospectus Supplement,
the Trust Fund will be treated as a
partnership for purposes of federal and state
income tax. Each Noteholder, by the
acceptance of a Note of a given Series, will
agree to treat such Note as indebtedness, and
each Certificateholder, by the acceptance of
a Certificate of a given Series, will agree
to treat the related Trust as a partnership
in which such Certificateholder is a partner
for federal income and state tax purposes.
Alternative characterizations of such Trust
and such Certificates are possible, but would
not result in materially adverse tax
consequences to Certificateholders. See
"CERTAIN FEDERAL INCOME TAX CONSIDERATIONS."
ERISA Considerations........... A fiduciary of any employee benefit plan or
other retirement arrangement subject to the
Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or Section 4975
of the Code should carefully review with its
own legal advisors whether the purchase or
holding of Securities will cause the Trust
Fund to be considered "plan assets," thereby
subjecting the plan or arrangement to be
subject to the prohibited transaction rules
and fiduciary investment standards of ERISA
with respect to the Trust Fund, unless some
exception or exemption is applicable.
Legal Investment................ Unless otherwise specified in the related
Prospectus Supplement, Securities of each
Series offered by this Prospectus and the
related Prospectus Supplement will not
constitute "mortgage related securities"
under the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). Investors
whose investment authority is subject to
legal restrictions should consult their own
legal advisors to determine whether and to
what extent the Securities constitute legal
investments for them. See "LEGAL INVESTMENT."
Use of Proceeds.................. The Depositor will use the net proceeds from
the sale of each Series for one or more of
the following purposes: (i) to purchase the
related Primary Assets, (ii) to repay
indebtedness which has been incurred to
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
13
<PAGE>
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."
14
<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, expects to make a
secondary market in the Securities, but has no obligation to do so.
Primary Assets are Only Source of Repayment
The Depositor does not have, nor is it expected to have, any significant
assets. The Securities of a Series will be payable solely from the assets of the
Trust Fund for such Securities. There will be no recourse to the Depositor or
any other person for any default on the Notes or any failure to receive
distributions on the Certificates. Further, unless otherwise stated in the
related Prospectus Supplement, at the times set forth in the related Prospectus
Supplement, certain Primary Assets and/or any balance remaining in the
Collection Account or Distribution Account immediately after making all payments
due on the Securities of such Series and other payments specified in the related
Prospectus Supplement, may be promptly released or remitted to the Depositor,
the Servicer, the Enhancer or any other person entitled thereto and will no
longer be available for making payments to Holders. Consequently, Holders of
Securities of each Series must rely solely upon payments with respect to the
Primary Assets and the other assets constituting the Trust Fund for a Series of
Securities, including, if applicable, any amounts available pursuant to any
Enhancement for such Series, for the payment of principal of and interest on the
Securities of such Series.
Holders of Notes will be required under the Indenture to proceed only
against the Primary Assets and other assets constituting the related Trust Fund
in the case of a default with respect to such Notes and may not proceed against
any assets of the Depositor. There is no assurance that the market value of the
Primary Assets or any other assets for a Series will at any time be equal to or
greater than the aggregate principal amount of the Securities of such Series
then outstanding, plus accrued interest thereon. Moreover, upon an event of
default under the Indenture for a Series of Notes and a sale of the assets in
the Trust Fund or upon a sale of the assets of a Trust Fund for a Series of
Certificates, the Trustee, the Servicer, if any, the Enhancer and any other
service provider specified in the related Prospectus Supplement generally will
be entitled to receive the proceeds of any such sale to the extent of unpaid
fees and other amounts owing to such persons under the related Agreement prior
to distributions to Holders of Securities. Upon any such sale, the proceeds
thereof may be insufficient to pay in full the principal of and interest on the
Securities of such Series.
The only obligations, if any, of the Depositor with respect to the
Securities of any Series will be pursuant to certain representations and
warranties. See "THE AGREEMENTS -- Assignment of Primary Assets" herein. The
Depositor does not have, and is not expected in the future to have, any
significant assets with which to meet any obligation to repurchase Primary
Assets with respect to which there has been a breach of any representation or
warranty. If, for example, the Depositor were required to repurchase a Primary
Asset, its only sources of funds to make such repurchase would be from funds
obtained from the enforcement of a corresponding obligation, if any, on the part
of the originator of the Primary Assets, the Servicer or the Seller, as the case
may be, or from a Reserve Fund established to provide funds for such
repurchases.
Limited Protection Against Losses
Although any Enhancement is intended to reduce the risk of delinquent
payments or losses to holders of Securities entitled to the benefit thereof, the
amount of such Enhancement will be limited, as set forth in the related
Prospectus Supplement, and will decline and could be depleted under certain
circumstances prior to the payment in full of the related Series of Securities,
and as a result Holders may suffer losses. See "ENHANCEMENT."
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Yield may vary
The yield to maturity experienced by a Holder of Securities may be affected
by the rate of payment of principal of the Loans or Underlying Loans relating to
the Private Securities, as applicable. The timing of principal payments of the
Securities of a Series will be affected by a number of factors, including the
following: (i) the extent of prepayments of the Loans or Underlying Loans
relating to the Private Securities, as applicable, which prepayments may be
influenced by a variety of factors; (ii) the manner of allocating principal
payments among the Classes of Securities of a Series as specified in the related
Prospectus Supplement; and (iii) the exercise by the party entitled thereto of
any right of optional termination. See "DESCRIPTION OF THE SECURITIES --
Weighted Average Life of Securities." Prepayments may also result from
repurchases of Loans or Underlying Loans, as applicable, due to material
breaches of the Seller's or the Depositor's warranties.
Interest payable on the Securities of a Series on a Distribution Date will
include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues during the calendar month
prior to a Distribution Date, the effective yield to Holders will be reduced
from the yield that would otherwise be obtainable if interest payable on the
Security were to accrue through the day immediately preceding each Distribution
Date, and the effective yield (at par) to Holders will be less than the
indicated coupon rate. See "DESCRIPTION OF THE SECURITIES -- Payments of
Interest."
Property Values may be Insufficient
If the Mortgages in a Trust Fund are primarily junior liens subordinate to
the rights of the mortgagee under the related senior mortgage or mortgages, the
proceeds from any liquidation, insurance or condemnation proceedings will be
available to satisfy the outstanding balance of such junior mortgage only to the
extent that the claims of such senior mortgagees have been satisfied in full,
including any related foreclosure costs. In addition, a junior mortgagee may not
foreclose on the Property securing a junior mortgage unless it forecloses
subject to the senior mortgages, in which case it must either pay the entire
amount due on the senior mortgages to the senior mortgagees at or prior to the
foreclosure sale or undertake the obligation to make payments on the senior
mortgages in the event the mortgagor is in default thereunder. The Trust Fund
will not have any source of funds to satisfy the senior mortgages or make
payments due to the senior mortgagees.
There are several factors that could adversely affect the value of
Properties such that the outstanding balance of the related Loan, together with
any senior financing on the Properties, would equal or exceed the value of the
Properties. Among the factors that could adversely affect the value of the
Properties are an overall decline in the residential real estate market in the
areas in which the Properties are located or a decline in the general condition
of the Properties as a result of failure of borrowers to maintain adequately the
Properties or of natural disasters that are not necessarily covered by
insurance, such as earthquakes and floods. Any such decline could extinguish the
value of a junior interest in a Property before having any effect on the related
senior interest therein. If such a decline occurs, the actual rates of
delinquencies, foreclosure and losses on the junior Loans could be higher than
those currently experienced in the mortgage lending industry in general.
Pre-funding may adversely affect Investment
If a Trust Fund includes a Pre-Funding Account and the principal balance of
additional Loans delivered to the Trust Fund during the Pre-Funding Period is
less than the original Pre-Funded Amount, the Holders of the Securities of the
related Series will receive a prepayment of principal as and to the extent
described in the related Prospectus Supplement. Any such principal prepayment
may adversely affect the yield to maturity of the applicable Securities. Since
prevailing interest rates are subject to fluctuation, there can be no issuance
that investors will be able to reinvest such a prepayment at yields equaling or
exceeding the yields on the related Securities. It is possible that the yield on
any such reinvestment will be lower, and may be significantly lower, than the
yield on the related Securities.
The ability of a Trust Fund to invest in subsequent Loans during the related
Pre-Funding Period will be dependant on the ability of the Seller to originate
or acquire Loans that satisfy the requirements for transfer to the Trust Fund.
The ability of the Seller to originate or acquire such Loans will be affected by
a variety of social and economic factors, including the prevailing level of
market interest rates, unemployment levels and consumer perceptions of general
economic conditions.
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Although subsequent Loans must satisfy the characteristics described in the
related Prospectus Supplement, such Loans may have been originated more recently
than the Loans originally transferred to the Trust Fund and may be of a lesser
credit quality. As a result, the addition of subsequent Loans may adversely
affect the performance of the related Securities.
Potential Liability for Environmental Conditions
Real property pledged as security to a lender may be subject to certain
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the costs of
clean-up. In several states, such a lien has priority over the lien of an
existing mortgage or owner's interest against such property. In addition, under
the laws of some states and under the federal Comprehensive Environmental
Response, Compensation, and Liability Act of 1980 ("CERCLA"), a lender may be
liable, as an "owner" or "operator," for costs of addressing releases or
threatened releases of hazardous substances that require remedy at a property,
if agents or employees of the lender have become sufficiently involved in the
operations of the borrower, regardless of whether or not the environmental
damage or threat was caused by a prior owner. A lender also risks such liability
on foreclosure of the Mortgaged Property.
Consumer Protection Laws may Affect Loans
Applicable state laws generally regulate interest rates and other charges
and require certain disclosures. In addition, other state laws, public policy
and general principles of equity relating to the protection of consumers, unfair
and deceptive practices and debt collection practices may apply to the
origination, servicing and collection of the Loans. Depending on the provisions
of the applicable law and the specific facts and circumstances involved,
violations of these laws, policies and principles may limit the ability of the
Servicer to collect all or part of the principal of or interest on the Loans,
may entitle the borrower to a refund of amounts previously paid and, in
addition, could subject the owner of the Loan to damages and administrative
enforcement.
The Loans are also subject to Federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding the
terms of the Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public assistance
or the exercise of any right under the Consumer Credit Protection Act, in
the extension of credit; and
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience.
The Home Improvement Contracts are also subject to the Preservation of
Consumers' Claims and Defenses regulations of the Federal Trade Commission and
other similar federal and state statutes and regulations (collectively, the
"Holder in Due Course Rules"), which protect the homeowner from defective
craftsmanship or incomplete work by a contractor. These laws permit the obligor
to withhold payment if the work does not meet the quality and durability
standards agreed to by the homeowner and the contractor. The Holder in Due
Course Rules have the effect of subjecting any assignee of the seller in a
consumer credit transaction to all claims and defenses which the obligor in the
credit sale transaction could assert against the seller of the goods.
Violations of certain provisions of these Federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Loans and in addition could subject the Trust Fund to damages and
administrative enforcement. See "CERTAIN LEGAL ASPECTS OF THE LOANS."
Contracts will not be Stamped
In order to give notice of the right, title and interest of Securityholders
to the Home Improvement Contracts, the Depositor will cause a UCC-1 financing
statement to be executed by the Depositor or the Seller identifying the Trustee
as the secured party and identifying all Home Improvement Contracts as
collateral. Unless otherwise specified in the related Prospectus Supplement, the
Home Improvement Contracts will not be stamped or otherwise marked to reflect
their assignment to the Trust Fund. Therefore, if, through negligence,
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fraud or otherwise, a subsequent purchaser were able to take physical possession
of the Home Improvement Contracts without notice of such assignment, the
interest of Securityholders in the Home Improvement Contracts could be defeated.
See "CERTAIN LEGAL ASPECTS OF THE LOANS -- The Home Improvement Contracts."
Ratings are not Recommendations
It will be a condition to the issuance of a Series of Securities that they
be rated in one of the four highest rating categories by the Rating Agency
identified in the related Prospectus Supplement. Any such rating would be based
on, among other things, the adequacy of the value of the Primary Assets and any
Enhancement with respect to such Series. Such rating should not be deemed a
recommendation to purchase, hold or sell Securities, inasmuch as it does not
address market price or suitability for a particular investor. There is also no
assurance that any such rating will remain in effect for any given period of
time or may not be lowered or withdrawn entirely by the Rating Agency if in its
judgment circumstances in the future so warrant. In addition to being lowered or
withdrawn due to any erosion in the adequacy of the value of the Primary Assets,
such rating might also be lowered or withdrawn, among other reasons, because of
an adverse change in the financial or other condition of an Enhancer or a change
in the rating of such Enhancer's long term debt.
DESCRIPTION OF THE SECURITIES
General
Each Series of Notes will be issued pursuant to an indenture (the
"Indenture") between the related Trust Fund and the entity named in the related
Prospectus Supplement as trustee (the "Trustee") with respect to such Series. A
form of Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. The Certificates will also be issued in
Series pursuant to separate agreements (each, a "Pooling and Servicing
Agreement" or a "Trust Agreement") among the Depositor, the Servicer, if the
Series relates to Loans, and the Trustee. A form of Pooling and Servicing
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part. A Series may consist of both Notes and
Certificates.
The Seller may agree to reimburse the Depositor for certain fees and
expenses of the Depositor incurred in connection with the offering of the
Securities.
The following summaries describe certain provisions in the Agreements common
to each Series of Securities. The summaries do not purport to be complete and
are subject to, and are qualified in their entirety by reference to, the
provisions of the Agreements and the Prospectus Supplement relating to each
Series of Securities. Where particular provisions or terms used in the
Agreements are referred to, the actual provisions (including definitions of
terms) are incorporated herein by reference as part of such summaries.
Each Series of Securities will consist of one or more Classes of Securities,
one or more of which may be Compound Interest Securities, Variable Interest
Securities, PAC Securities, Zero Coupon Securities, Principal Only Securities,
Interest Only Securities or Participating Securities. A Series may also include
one or more Classes of Subordinate Securities. The Securities of each Series
will be issued only in fully registered form, without coupons, in the authorized
denominations for each Class specified in the related Prospectus Supplement.
Upon satisfaction of the conditions, if any, applicable to a Class of a Series,
as described in the related Prospectus Supplement, the transfer of the
Securities may be registered and the Securities may be exchanged at the office
of the Trustee specified in the Prospectus Supplement without the payment of any
service charge other than any tax or governmental charge payable in connection
with such registration of transfer or exchange. If specified in the related
Prospectus Supplement, one or more Classes of a Series may be available in
book-entry form only.
Unless otherwise provided in the related Prospectus Supplement, payments of
principal of and interest on a Series of Securities will be made on the
Distribution Dates specified in the Prospectus Supplement relating to such
Series by check mailed to Holders of such Series, registered as such at the
close of business on the record date specified in the related Prospectus
Supplement applicable to such Distribution Dates at their addresses appearing on
the security register, except that (a) payments may be made by wire transfer (at
the expense of the Holder requesting payment by wire transfer) in certain
circumstances described in the related Prospectus Supplement and (b) final
payments of principal in retirement of each Security will be made only upon
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presentation and surrender of such Security at the office of the Trustee
specified in the Prospectus Supplement. Notice of the final payment on a
Security will be mailed to the Holder of such Security before the Distribution
Date on which the final principal payment on any Security is expected to be made
to the holder of such Security.
Payments of principal of and interest on the Securities will be made by the
Trustee, or a paying agent on behalf of the Trustee, as specified in the related
Prospectus Supplement. Unless otherwise provided in the related Prospectus
Supplement, all payments with respect to the Primary Assets for a Series,
together with reinvestment income thereon, amounts withdrawn from any Reserve
Fund, and amounts available pursuant to any other Enhancement will be deposited
directly into the Collection Account. If provided in the related Prospectus
Supplement, such amounts may be net of certain amounts payable to the related
Servicer and any other person specified in the Prospectus Supplement. Such
amounts thereafter will be deposited into the Distribution Account and will be
available to make payments on the Securities of such Series on the next
Distribution Date. See "THE TRUST FUNDS -- Collection and Distribution
Accounts."
Valuation of the Primary Assets
If specified in the related Prospectus Supplement for a Series of Notes,
each Primary Asset included in the related Trust Fund for a Series will be
assigned an initial "Asset Value." Unless otherwise specified in the related
Prospectus Supplement, at any time the Asset Value of the Primary Assets will be
equal to the product of the Asset Value Percentage as set forth in the Indenture
and the lesser of (a) the stream of remaining regularly scheduled payments on
the Primary Assets, net, unless otherwise provided in the related Prospectus
Supplement, of certain amounts payable as expenses, together with income earned
on each such scheduled payment received through the day preceding the next
Distribution Date at the Assumed Reinvestment Rate, if any, discounted to
present value at the highest interest rate on the Notes of such Series over
periods equal to the interval between payments on the Notes, and (b) the then
principal balance of the Primary Assets. Unless otherwise specified in the
related Prospectus Supplement, the initial Asset Value of the Primary Assets
will be at least equal to the principal amount of the Notes of the related
Series at the date of issuance thereof.
The "Assumed Reinvestment Rate," if any, for a Series will be the highest
rate permitted by the Rating Agency or a rate insured by means of a surety bond,
guaranteed investment contract, Deposit Agreement or other arrangement
satisfactory to the Rating Agency. If the Assumed Reinvestment Rate is so
insured, the related Prospectus Supplement will set forth the terms of such
arrangement.
Payments of Interest
The Securities of each Class by their terms entitled to receive interest
will bear interest (calculated, unless otherwise specified in the related
Prospectus Supplement, on the basis of a 360 day year of twelve 30-day months)
from the date and at the rate per annum specified, or calculated in the method
described, in the related Prospectus Supplement. Interest on such Securities of
a Series will be payable on the Distribution Date specified in the related
Prospectus Supplement. The rate of interest on Securities of a Series may be
variable or may change with changes in the annual percentage rates of the Loans
or Underlying Loans relating to the Private Securities, as applicable included
in the related Trust Fund and/or as prepayments occur with respect to such Loans
or Underlying Loans, as applicable. Principal Only Securities may not be
entitled to receive any interest distributions or may be entitled to receive
only nominal interest distributions. Any interest on Zero Coupon Securities that
is not paid on the related Distribution Date will accrue and be added to the
principal thereof on such Distribution Date.
Interest payable on the Securities on a Distribution Date will include all
interest accrued during the period specified in the related Prospectus
Supplement. In the event interest accrues during the calendar month preceding a
Distribution Date, the effective yield to Holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the Securities were to
accrue through the day immediately preceding such Distribution Date.
Payments of Principal
On each Distribution Date for a Series, principal payments will be made to
the Holders of the Securities of such Series on which principal is then payable,
to the extent set forth in the related Prospectus Supplement. Such payments will
be made in an aggregate amount determined as specified in the related Prospectus
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Supplement and will be allocated among the respective Classes of a Series in the
manner, at the times and in the priority (which may, in certain cases, include
allocation by random lot) set forth in the related Prospectus Supplement.
Final Scheduled Distribution Date
The Final Scheduled Distribution Date with respect to each Class of Notes is
the date no later than which the principal thereof will be fully paid and with
respect to each Class of a Series of Certificates will be the date on which the
entire aggregate principal balance of such Class is expected to be reduced to
zero, in each case calculated on the basis of the assumptions applicable to such
Series described in the related Prospectus Supplement. The Final Scheduled
Distribution Date for each Class of a Series will be specified in the related
Prospectus Supplement. Since payments on the Primary Assets will be used to make
distributions in reduction of the outstanding principal amount of the
Securities, it is likely that the actual final Distribution Date of any such
Class will occur earlier, and may occur substantially earlier, than its Final
Scheduled Distribution Date.
Furthermore, with respect to a Series of Certificates, unless otherwise
specified in the related Prospectus Supplement, as a result of delinquencies,
defaults and liquidations of the Primary Assets in the Trust Fund, the actual
final Distribution Date of any Certificate may occur later than its Final
Scheduled Distribution Date. No assurance can be given as to the actual
prepayment experience with respect to a Series. See "Weighted Average Life of
the Securities" below.
Special Redemption
If so specified in the Prospectus Supplement relating to a Series of
Securities having other than monthly Distribution Dates, one or more Classes of
Securities of such Series may be subject to special redemption, in whole or in
part, on the day specified in the related Prospectus Supplement (a "Special
Redemption Date") if, as a consequence of prepayments on the Loans or Underlying
Loans, as applicable, relating to such Securities or low yields then available
for reinvestment the entity specified in the related Prospectus Supplement
determines, based on assumptions specified in the applicable Agreement that the
amount available for the payment of interest that will have accrued on such
Securities (the "Available Interest Amount") through the designated interest
accrual date specified in the related Prospectus Supplement is less than the
amount of interest that will have accrued on such Securities to such date. In
such event and as further described in the related Prospectus Supplement, the
Trustee will redeem a principal amount of outstanding Securities of such Series
as will cause the Available Interest Amount to equal the amount of interest that
will have accrued through such designated interest accrual date for such Series
of Securities outstanding immediately after such redemption.
Optional Redemption, Purchase or Termination
The Depositor or the Servicer may, at its option, redeem, in whole or in
part, one or more Classes of Notes or purchase one or more Classes of
Certificates of any Series, on any Distribution Date under the circumstances, if
any, specified in the Prospectus Supplement relating to such Series.
Alternatively, if so specified in the related Prospectus Supplement for a Series
of Certificates, the Depositor, the Servicer, or another entity designated in
the related Prospectus Supplement may, at its option, cause an early termination
of a Trust Fund by repurchasing all of the Primary Assets from such Trust Fund
on or after a date specified in the related Prospectus Supplement, or on or
after such time as the aggregate outstanding principal amount of the
Certificates or Primary Assets, as specified in the related Prospectus
Supplement is less than the amount or percentage specified in the related
Prospectus Supplement. Notice of such redemption, purchase or termination must
be given by the Depositor or the Trustee prior to the related date. The
redemption, purchase or repurchase price will be set forth in the related
Prospectus Supplement. If specified in the related Prospectus Supplement, in the
event that a REMIC election has been made, the Trustee shall receive a
satisfactory opinion of counsel that the optional redemption, purchase or
termination will be conducted so as to constitute a "qualified liquidation"
under Section 860F of the Code.
In addition, the Prospectus Supplement may provide other circumstances under
which Holders of Securities of a Series could be fully paid significantly
earlier than would otherwise be the case if payments or distributions were
solely based on the activity of the related Primary Assets.
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Weighted Average Life of the Securities
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of such
security will be repaid to the investor. Unless otherwise specified in the
related Prospectus Supplement, the weighted average life of the Securities of a
Class will be influenced by the rate at which the amount financed under the
Loans or Underlying Loans relating to the Private Securities, as applicable,
included in the Trust Fund for a Series is paid, which may be in the form of
scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to a
prepayment standard or model. The Prospectus Supplement for a Series of
Securities will describe the prepayment standard or model, if any, used and may
contain tables setting forth the projected weighted average life of each Class
of Securities of such Series and the percentage of the original principal amount
of each Class of Securities of such Series that would be outstanding on
specified Distribution Dates for such Series based on the assumptions stated in
such Prospectus Supplement, including assumptions that prepayments on the Loans
or Underlying Loans relating to the Private Securities, as applicable, included
in the related Trust Fund are made at rates corresponding to various percentages
of the prepayment standard or model specified in such Prospectus Supplement.
There is, however, no assurance that prepayment of the Loans or Underlying
Loans relating to the Private Securities, as applicable, included in the related
Trust Fund will conform to any level of any prepayment standard or model
specified in the related Prospectus Supplement. The rate of principal
prepayments on pools of loans may be influenced by a variety of factors,
including job related factors such as transfers, layoffs or promotions and
personal factors such as divorce, disability or prolonged illness. Economic
conditions, either generally or within a particular geographic area or industry,
also may affect the rate of principal prepayments. Demographic and social
factors may influence the rate of principal prepayments in that some borrowers
have greater financial flexibility to move or refinance than do other borrowers.
The deductibility of mortgage interest payments, servicing decisions and other
factors also affect the rate of principal prepayments. As a result, there can be
no assurance as to the rate or timing of principal prepayments of the Loans or
Underlying Loans either from time to time or over the lives of such Loans or
Underlying Loans.
The rate of prepayments of conventional housing loans and other receivables
has fluctuated significantly in recent years. In general, however, if prevailing
interest rates fall significantly below the interest rates on the Loans or
Underlying Loans relating to the Private Securities, as applicable, for a
Series, such loans are likely to prepay at rates higher than if prevailing
interest rates remain at or above the interest rates borne by such loans. In
this regard, it should be noted that the Loans or Underlying Loans, as
applicable, for a Series may have different interest rates. In addition, the
weighted average life of the Securities may be affected by the varying
maturities of the Loans or Underlying Loans relating to the Private Securities,
as applicable. If any Loans or Underlying Loans relating to the Private
Securities, as applicable, for a Series have actual terms-to-stated maturity of
less than those assumed in calculating the Final Scheduled Distribution Date of
the related Securities, one or more Classes of the Series may be fully paid
prior to their respective Final Scheduled Distribution Date, even in the absence
of prepayments and a reinvestment return higher than the Assumed Reinvestment
Rate.
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THE TRUST FUNDS
General
The Notes of each Series will be secured by the pledge of the assets of the
related Trust Fund, and the Certificates of each Series will represent interests
in the assets of the related Trust Fund. The Trust Fund of each Series will
include assets purchased from the Seller composed of (i) the Primary Assets,
(ii) amounts available from the reinvestment of payments on such Primary Assets
at the Assumed Reinvestment Rate, if any, specified in the related Prospectus
Supplement, (iii) any Enhancement, (iv) any Property that secured a Loan but
which is acquired by foreclosure or deed in lieu of foreclosure or repossession
and (v) the amount, if any, initially deposited in the Collection Account or
Distribution Account for a Series as specified in the related Prospectus
Supplement.
The Securities will be non-recourse obligations of the related Trust Fund.
The assets of the Trust Fund specified in the related Prospectus Supplement for
a Series of Securities, unless otherwise specified in the related Prospectus
Supplement, will serve as collateral only for that Series of Securities. Holders
of a Series of Notes may only proceed against such collateral securing such
Series of Notes in the case of a default with respect to such Series of Notes
and may not proceed against any assets of the Depositor or the related Trust
Fund not pledged to secure such Notes.
The Primary Assets for a Series will be sold by the Seller to the Depositor
or purchased by the Depositor in the open market or in privately negotiated
transactions, which may include transactions with affiliates and will be
transferred by the Depositor to the Trust Fund. Loans relating to a Series will
be serviced by the Servicer, which may be the Seller, specified in the related
Prospectus Supplement, pursuant to a Pooling and Servicing Agreement, with
respect to a Series of Certificates or a servicing agreement (each, a "Servicing
Agreement") between the Trust Fund and Servicer, with respect to a Series of
Notes.
As used herein, "Agreement" means, with respect to a Series of Certificates,
the Pooling and Servicing Agreement or Trust Agreement, and with respect to a
Series of Notes, the Indenture and the Servicing Agreement, as the context
requires.
If so specified in the related Prospectus Supplement, a Trust Fund relating
to a Series of Securities may be a business trust formed under the laws of the
state specified in the related Prospectus Supplement pursuant to a trust
agreement (each, a "Trust Agreement") between the Depositor and the trustee of
such Trust Fund specified in the related Prospectus Supplement.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or liabilities.
No Trust Fund is expected to engage in any activities other than acquiring,
managing and holding the related Primary Assets and other assets contemplated
herein and in the related Prospectus Supplement and the proceeds thereof,
issuing Securities and making payments and distributions thereon and certain
related activities. No Trust Fund is expected to have any source of capital
other than its assets and any related Enhancement.
Primary Assets included in the Trust Fund for a Series may consist of any
combination of Loans and Private Securities, to the extent and as specified in
the related Prospectus Supplement.
The Loans
Mortgage Loans. The Primary Assets for a Series may consist, in whole or in
part, of closed-end home equity loans (the "Mortgage Loans") secured by
mortgages primarily on Single Family Properties which may be subordinated to
other mortgages on the same Mortgaged Property. The Mortgage Loans may have
fixed interest rates or adjustable interest rates and may provide for other
payment characteristics as described below and in the related Prospectus
Supplement.
Unless otherwise described in the related Prospectus Supplement, the full
principal amount of a Mortgage Loan is advanced at origination of the loan and
generally is repayable in equal (or substantially equal) installments of an
amount sufficient to fully amortize such loan at its stated maturity. As more
fully described in the related Prospectus Supplement, interest on each Mortgage
Loan is calculated on the basis of the outstanding principal balance of such
loan multiplied by the Loan Rate thereon and further multiplied by a fraction,
the numerator of which is the number of days in the period elapsed since the
preceding payment of interest was made and the denominator is the number of days
in the annual period for which interest accrues on such loan.
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Unless otherwise described in the related Prospectus Supplement the original
terms to stated maturity of Mortgage Loans will not exceed 360 months.
The Mortgaged Properties will include Single Family Property (i.e., one-to
four-family residential housing, including Condominium Units and Cooperative
Dwellings) and mixed-use property. Mixed-use properties will consist of
structures of no more than three stories, which include one to four residential
dwelling units and space used for retail, professional or other commercial uses.
Such uses, which will not involve more than 50% of the space in the structure,
may include doctor, dentist or law offices, real estate agencies, boutiques,
newstands, convenience stores or other similar types of uses intended to cater
to individual customers as specified in the related Prospectus Supplement. The
properties may be located in suburban or metropolitan districts. Any such
non-residential use will be in compliance with local zoning laws and
regulations. The Mortgaged Properties may consist of detached individual
dwellings, individual condominiums, townhouses, duplexes, row houses, individual
units in planned unit developments and other attached dwelling units. Each
Single Family Property will be located on land owned in fee simple by the
borrower or on land leased by the borrower for a term at least ten years (unless
otherwise provided in the related Prospectus Supplement) greater than the term
of the related Loan. Attached dwellings may include owner-occupied structures
where each borrower owns the land upon which the unit is built, with the
remaining adjacent land owned in common or dwelling units subject to a
proprietary lease or occupancy agreement in a cooperatively owned apartment
building.
Unless otherwise specified in the related Prospectus Supplement, Mortgages
on Cooperative Dwellings consist of a lien on the shares issued by such
Cooperative Dwelling and the proprietary lease or occupancy agreement relating
to such Cooperative Dwelling.
The aggregate principal balance of Mortgage Loans secured by Mortgaged
Properties that are owner-occupied will be disclosed in the related Prospectus
Supplement. Unless otherwise specified in the Prospectus Supplement, the sole
basis for a representation that a given percentage of the Mortgage Loans are
secured by Single Family Property that is owner-occupied will be either (i) the
making of a representation by the Mortgagor at origination of the Mortgage Loan
either that the underlying Mortgaged Property will be used by the Mortgagor for
a period of at least six months every year or that the Mortgagor intends to use
the Mortgaged Property as a primary residence, or (ii) a finding that the
address of the underlying Mortgaged Property is the Mortgagor's mailing address
as reflected in the Servicer's records. To the extent specified in the related
Prospectus Supplement, the Mortgaged Properties may include non-owner occupied
investment properties and vacation and second homes.
Unless otherwise specified in the related Prospectus Supplement, the initial
Combined Loan-to-Value Ratio of a Loan is computed in the manner described in
the related Prospectus Supplement, taking into account the amounts of any
related senior mortgage loans.
Home Improvement Contracts. The Primary Assets for a Series may consist, in
whole or part, of home improvement installment sales contracts and installment
loan agreements (the "Home Improvement Contracts") originated by a home
improvement contractor in the ordinary course of business. As specified in the
related Prospectus Supplement, the Home Improvement Contracts will either be
unsecured or secured by the Mortgages primarily on Single Family Properties
which are generally subordinate to other mortgages on the same Mortgaged
Property or by purchase money security interests in the Home Improvements
financed thereby. Unless otherwise specified in the applicable Prospectus
Supplement, the Home Improvement Contracts will be fully amortizing and may have
fixed interest rates or adjustable interest rates and may provide for other
payment characteristics as described below and in the related Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement, the home
improvements (the "Home Improvements") securing the Home Improvement Contracts
include, but are not limited to, replacement windows, house siding, new roofs,
swimming pools, satellite dishes, kitchen and bathroom remodeling goods and
solar heating panels. The initial Loan-to-Value Ratio of a Home Improvement
Contract will be computed in the manner described in the related Prospectus
Supplement.
Additional Information. The selection criteria which will apply with respect
to the Loans, including, but not limited to, the Combined Loan-to-Value Ratios
or Loan-to-Value Ratios, as applicable, original terms to maturity and
delinquency information, will be specified in the related Prospectus Supplement.
The Loans for a Series may include Loans that do not amortize their entire
principal balance by their stated maturity in accordance with their terms and
require a balloon payment of the remaining principal balance at
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maturity, as specified in the related Prospectus Supplement. As further
described in the related Prospectus Supplement, the Loans for a Series may
include Loans that do not have a specified stated maturity.
The Loans will be conventional contracts or contracts insured by the Federal
Housing Administration ("FHA") or partially guaranteed by the Veterans
Administration ("VA"). Loans designated in the related Prospectus Supplement as
insured by the FHA will be insured by the FHA as authorized under the United
States Housing Act of 1937, as amended. Such Loans will be insured under various
FHA programs. These programs generally limit the principal amount and interest
rates of the mortgage loans insured. Loans insured by the FHA generally require
a minimum down payment of approximately 5% of the original principal amount of
the loan. No FHA-insured Loans relating to a Series may have an interest rate or
original principal amount exceeding the applicable FHA limits at the time of
origination of such loan.
The insurance premiums for Loans insured by the FHA are collected by lenders
approved by the Department of Housing and Urban Development ("HUD") and are paid
to the FHA. The regulations governing FHA single-family mortgage insurance
programs provide that insurance benefits are payable either upon foreclosure (or
other acquisition of possession) and conveyance of the mortgaged premises to HUD
or upon assignment of the defaulted Loan to HUD. With respect to a defaulted
FHA-insured Loan, the Servicer is limited in its ability to initiate foreclosure
proceedings. When it is determined, either by the Servicer or HUD, that default
was caused by circumstances beyond the mortgagor's control, the Servicer is
expected to make an effort to avoid foreclosure by entering, if feasible, into
one of a number of available forms of forbearance plans with the mortgagor. Such
plans may involve the reduction or suspension of regular mortgage payments for a
specified period, with such payments to be made upon or before the maturity date
of the mortgage, or the recasting of payments due under the mortgage up to or
beyond the maturity date. In addition, when a default caused by such
circumstances is accompanied by certain other criteria, HUD may provide relief
by making payments to the Servicer in partial or full satisfaction of amounts
due under the Loan (which payments are to be repaid by the mortgagor to HUD) or
by accepting assignment of the loan from the Servicer. With certain exceptions,
at least three full monthly installments must be due and unpaid under the Loan
and HUD must have rejected any request for relief from the mortgagor before the
Servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The Servicer of each FHA-insured Loan will be obligated
to purchase any such debenture issued in satisfaction of such Loan upon default
for an amount equal to the principal amount of any such debenture.
The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal amount of the defaulted Loan adjusted to reimburse the
Servicer for certain costs and expenses and to deduct certain amounts received
or retained by the Servicer after default. When entitlement to insurance
benefits results from foreclosure (or other acquisition of possession) and
conveyance to HUD, the Servicer is compensated for no more than two-thirds of
its foreclosure costs, and is compensated for interest accrued and unpaid prior
to such date but in general only to the extent it was allowed pursuant to a
forbearance plan approved by HUD. When entitlement to insurance benefits results
from assignment of the Loan to HUD, the insurance payment includes full
compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA-insured Loan, bears
interest from a date 30 days after the mortgagor's first uncorrected failure to
perform any obligation to make any payment due under the Loan and, upon
assignment, from the date of assignment to the date of payment of the claim, in
each case at the same interest rate as the applicable HUD debenture interest
rate as described above.
Loans designated in the related Prospectus Supplement as guaranteed by the
VA will be partially guaranteed by the VA under the Serviceman's Readjustment
Act of 1944, as amended (a "VA Guaranty"). The Serviceman's Readjustment Act of
1944, as amended, permits a veteran (or in certain instances the spouse of a
veteran) to obtain a mortgage loan guaranty by the VA covering mortgage
financing of the purchase of a one- to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires no
down payment from the purchaser and permits the guarantee of mortgage loans of
up to 30 years' duration.
The maximum guaranty that may be issued by the VA under a VA guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 1803(a), as amended. The
liability on the guaranty is reduced or increased pro rata with any reduction or
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increase in the amount of indebtedness, but in no event will the amount payable
on the guaranty exceed the amount of the original guaranty. The VA may, at its
option and without regard to the guaranty, make full payment to a mortgage
holder of unsatisfied indebtedness on a mortgage upon its assignment to the VA.
With respect to a defaulted VA guaranteed Loan, the Servicer is, absent
exceptional circumstances, authorized to announce its intention to foreclose
only when the default has continued for three months. Generally, a claim for the
guaranty is submitted after liquidation of the Mortgaged Property.
The amount payable under the guaranty will be the percentage of the
VA-insured Loan originally guaranteed applied to indebtedness outstanding as of
the applicable date of computation specified in the VA regulations. Payments
under the guaranty will be equal to the unpaid principal amount of the loan,
interest accrued on the unpaid balance of the loan to the appropriate date of
computation and limited expenses of the mortgagee, but in each case only to the
extent that such amounts have not been recovered through liquidation of the
Mortgaged Property. The amount payable under the guaranty may in no event exceed
the amount of the original guaranty.
The related Prospectus Supplement for each Series will provide information
with respect to the Loans that are Primary Assets as of the Cut-off Date,
including, among other things, and to the extent relevant: (a) the aggregate
unpaid principal balance of the Loans; (b) the range and weighted average Loan
Rate on the Loans, and, in the case of adjustable rate Loans, the range and
weighted average of the current Loan Rates and the Lifetime Rate Caps, if any;
(c) the range and average outstanding principal balance of the Loans; (d) the
weighted average original and remaining term-to-stated maturity of the Loans and
the range of original and remaining terms-to-stated maturity, if applicable; (e)
the range and weighted average of Combined Loan-to-Value Ratios or Loan-to-Value
Ratios for the Loans, as applicable; (f) the percentage (by outstanding
principal balance as of the Cut-off Date) of Loans that accrue interest at
adjustable or fixed interest rates; (g) any special hazard insurance policy or
bankruptcy bond or other enhancement relating to the Loans; (h) the percentage
(by principal balance as of the Cut-off Date) of Loans that are secured by
Mortgaged Properties, Home Improvements or are unsecured; (i) the geographic
distribution of any Mortgaged Properties securing the Loans; (j) the percentage
of Loans (by principal balance as of the Cut-off Date) that are secured by
Single Family Properties, shares relating to Cooperative Dwellings, Condominium
Units, investment property and vacation or second homes; (k) the lien priority
of the Loans; and (l) the delinquency status and year of origination of the
Loans. The related Prospectus Supplement will also specify any other limitations
on the types or characteristics of Loans for a Series.
If information of the nature described above respecting the Loans is not
known to the Depositor at the time the Securities are initially offered,
approximate or more general information of the nature described above will be
provided in the Prospectus Supplement and additional information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related Series and to be filed with the Commission within 15
days after the initial issuance of such Securities.
Private Securities
General. Primary Assets for a Series may consist, in whole or in part, of
Private Securities which include pass-through certificates representing
beneficial interests in loans of the type that would otherwise be eligible to be
Loans (the "Underlying Loans") or (b) collateralized obligations secured by
Underlying Loans. Such pass-through certificates or collateralized obligations
will have previously been (a) offered and distributed to the public pursuant to
an effective registration statement or (b) purchased in a transaction not
involving any public offering from a person who is not an affiliate of the
issuer of such securities at the time of sale (nor an affiliate thereof at any
time during the three preceding months); provided a period of three years
elapsed since the later of the date the securities were acquired from the issuer
or an affiliate thereof. Although individual Underlying Loans may be insured or
guaranteed by the United States or an agency or instrumentality thereof, they
need not be, and Private Securities themselves will not be so insured or
guaranteed.
Private Securities will have been issued pursuant to a pooling and servicing
agreement, a trust agreement or similar agreement (a "PS Agreement"). The
seller/servicer of the Underlying Loans will have entered into the PS Agreement
with the trustee under such PS Agreement (the "PS Trustee"). The PS Trustee or
its agent, or a custodian, will possess the Underlying Loans. Underlying Loans
will be serviced by a servicer (the
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"PS Servicer") directly or by one or more sub-servicers who may be subject to
the supervision of the PS Servicer.
The sponsor of the Private Securities (the "PS Sponsor") will be a financial
institution or other entity engaged generally in the business of lending; a
public agency or instrumentality of a state, local or federal government; or a
limited purpose corporation organized for the purpose of, among other things,
establishing trusts and acquiring and selling loans to such trusts, and selling
beneficial interests in such trusts. If so specified in the Prospectus
Supplement, the PS Sponsor may be an affiliate of the Depositor. The obligations
of the PS Sponsor will generally be limited to certain representations and
warranties with respect to the assets conveyed by it to the related trust.
Unless otherwise specified in the related Prospectus Supplement, the PS Sponsor
will not have guaranteed any of the assets conveyed to the related trust or any
of the Private Securities issued under the PS Agreement. Additionally, although
the Underlying Loans may be guaranteed by an agency or instrumentality of the
United States, the Private Securities themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Securities on the dates specified in the related Prospectus Supplement. The
Private Securities may be entitled to receive nominal or no principal
distributions or nominal or no interest distributions. Principal and interest
distributions will be made on the Private Securities by the PS Trustee or the PS
Servicer. The PS Sponsor or the PS Servicer may have the right to repurchase the
Underlying Loans after a certain date or under other circumstances specified in
the related Prospectus Supplement.
The Underlying Loans may be fixed rate, level payment, fully amortizing
loans or adjustable rate loans or loans having balloon or other irregular
payment features. Such Underlying Loans will be secured by mortgages on
Mortgaged Properties.
Credit Support Relating to Private Securities. Credit support in the form of
Reserve Funds, subordination of other private securities issued under the PS
Agreement, guarantees, letters of credit, cash collateral accounts, insurance
policies or other types of credit support may be provided with respect to the
Underlying Loans or with respect to the Private Securities themselves. The type,
characteristics and amount of credit support will be a function of certain
characteristics of the Underlying Loans and other factors and will have been
established for the Private Securities on the basis of requirements of the
nationally recognized statistical rating organization that rated the Private
Securities.
Additional Information. The Prospectus Supplement for a Series for which the
Primary Assets include Private Securities will specify (such disclosure may be
on an approximate basis and will be as of the date specified in the related
Prospectus Supplement), to the extent relevant and to the extent such
information is reasonably available to the Depositor and the Depositor
reasonably believes such information to be reliable: (i) the aggregate
approximate principal amount and type of the Private Securities to be included
in the Trust Fund for such Series; (ii) certain characteristics of the
Underlying Loans including (A) the payment features of such Underlying Loans
(i.e., whether they are fixed rate or adjustable rate and whether they provide
for fixed level payments or other payment features), (B) the approximate
aggregate principal balance, if known, of such Underlying Loans insured or
guaranteed by a governmental entity, (C) the servicing fee or range of servicing
fees with respect to the Underlying Loans, (D) the minimum and maximum stated
maturities of such Underlying Loans at origination, (E) the lien priority of
such Underlying Loans, and (F) the delinquency status and year of origination of
such Underlying Loans; (iii) the maximum original term-to-stated maturity of the
Private Securities; (iv) the weighted average term-to-stated maturity of the
Private Securities; (v) the pass-through or certificate rate or ranges thereof
for the Private Securities; (vi) the PS Sponsor, the PS Servicer (if other than
the PS Sponsor) and the PS Trustee for such Private Securities; (vii) certain
characteristics of credit support if any, such as Reserve Funds, insurance
policies, letters of credit or guarantees relating to such Loans underlying the
Private Securities or to such Private Securities themselves; (viii) the terms on
which Underlying Loans may, or are required to, be purchased prior to their
stated maturity or the stated maturity of the Private Securities; and (ix) the
terms on which Underlying Loans may be substituted for those originally
underlying the Private Securities.
If information of the nature described above representing the Private
Securities is not known to the Depositor at the time the Securities are
initially offered, approximate or more general information of the nature
described above will be provided in the Prospectus Supplement and the additional
information, if available, will be set forth in a Current Report on Form 8-K to
be available to investors on the date of issuance of the related Series and to
be filed with the Commission within 15 days of the initial issuance of such
Securities.
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Collection and Distribution Accounts
A separate Collection Account will be established by the Trustee or the
Servicer, in the name of the Trustee, for each Series of Securities for receipt
of the amount of cash, if any, specified in the related Prospectus Supplement to
be initially deposited therein by the Depositor, all amounts received on or with
respect to the Primary Assets and, unless otherwise specified in the related
Prospectus Supplement, income earned thereon. Certain amounts on deposit in such
Collection Account and certain amounts available pursuant to any Enhancement, as
provided in the related Prospectus Supplement, will be deposited in a related
Distribution Account, which will also be established by the Trustee for each
such Series of Securities, for distribution to the related Holders. Unless
otherwise specified in the related Prospectus Supplement, the Trustee will
invest the funds in the Collection and Distribution Accounts in Eligible
Investments maturing, with certain exceptions, not later, in the case of funds
in the Collection Account, than the day preceding the date such funds are due to
be deposited in the Distribution Account or otherwise distributed and, in the
case of funds in the Distribution Account, than the day preceding the next
Distribution Date for the related Series of Securities. Eligible Investments
include, among other investments, obligations of the United States and certain
agencies thereof, federal funds, certificates of deposit, commercial paper,
demand and time deposits and banker's acceptances, certain repurchase agreements
of United States government securities and certain guaranteed investment
contracts, in each case, acceptable to the Rating Agency.
Notwithstanding any of the foregoing, amounts may be deposited and withdrawn
pursuant to any Deposit Agreement or Minimum Principal Payment Agreement as
specified in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, a Trust Fund will include
one or more segregated trust accounts (each, a "Pre-Funding Account")
established and maintained with the Trustee for the related Series. If so
specified, on the closing date for such Series, a portion of the proceeds of the
sale of the Securities of such Series (such amount, the "Pre-Funded Amount")
will be deposited in the Pre-Funding Account and may be used to purchase
additional Primary Assets during the period of time specified in the related
Prospectus Supplement (the "Pre-Funding Period"). The Primary Assets to be so
purchased will be required to have certain characteristics specified in the
related Prospectus Supplement. If any Pre-Funded Amount remains on deposit in
the Pre-Funding Account at the end of the Pre-Funding Period, such amount will
be applied in the manner specified in the related Prospectus Supplement to
prepay the Notes and/or the Certificates of the applicable Series.
If a Pre-Funding Account is established, one or more segregated trust
accounts (each, a "Capitalized Interest Account") may be established and
maintained with the Trustee for the related Series. On the closing date for such
Series, a portion of the proceeds of the sale of the Securities of such Series
will be deposited in the Capitalized Interest Account and used to fund the
excess, if any, of the sum of (i) the amount of interest accrued on the
Securities of such Series and (ii) if specified in the related Prospectus
Supplement, certain fees or expenses during the Pre-Funding Period, over the
amount of interest available therefor from the Primary Assets in the Trust Fund.
Any amounts on deposit in the Capitalized Interest Account at the end of the
Pre-Funding Period that are not necessary for such purposes will be distributed
to the person specified in the related Prospectus Supplement.
ENHANCEMENT
If stated in the Prospectus Supplement relating to a Series of Securities,
simultaneously with the Depositor's assignment of the Primary Assets to the
Trustee, the Depositor will obtain an irrevocable letter of credit, surety bond
or insurance policy, issue Subordinate Securities or obtain any other form of
enhancement or combination thereof (collectively, "Enhancement") in favor of the
Trustee on behalf of the Holders of the related Series or designated Classes of
such Series from an institution or by other means acceptable to the Rating
Agency. The Enhancement will support the payment of principal and interest on
the Securities, and may be applied for certain other purposes to the extent and
under the conditions set forth in such Prospectus Supplement. Enhancement for a
Series may include one or more of the following forms, or such other form as may
be specified in the related Prospectus Supplement. If so specified in the
related Prospectus Supplement, any of such Enhancement may be structured so as
to protect against losses relating to more than one Trust Fund, in the manner
described therein.
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Subordinate Securities
If specified in the related Prospectus Supplement, Enhancement for a Series
may consist of one or more Classes of Subordinate Securities. The rights of
holders of such Subordinate Securities to receive distributions on any
Distribution Date will be subordinate in right and priority to the rights of
Holders of Senior Securities of the Series, but only to the extent described in
the related Prospectus Supplement.
Insurance
If stated in the related Prospectus Supplement, Enhancement for a Series may
consist of special hazard insurance policies, bankruptcy bonds and other types
of insurance relating to the Primary Assets, as described below and in the
related Prospectus Supplement.
Pool Insurance Policy. If so specified in the Prospectus Supplement relating
to a Series of Securities, the Depositor will obtain a pool insurance policy for
the Loans in the related Trust Fund. The pool insurance policy will cover any
loss (subject to the limitations described in a related Prospectus Supplement)
by reason of default. but will not cover the portion of the principal balance of
any Loan that is required to be covered by any primary mortgage insurance
policy. The amount and terms of any such coverage will be set forth in the
related Prospectus Supplement.
Special Hazard Insurance Policy. Although the terms of such policies vary to
some degree, a special hazard insurance policy typically provides that, where
there has been damage to Property securing a defaulted or foreclosed Loan (title
to which has been acquired by the insured) and to the extent such damage is not
covered by the standard hazard insurance policy or any flood insurance policy,
if applicable, required to be maintained with respect to such Property, or in
connection with partial loss resulting from the application of the coinsurance
clause in a standard hazard insurance policy, the special hazard insurer will
pay the lesser of (i) the cost of repair or replacement of such Property or (ii)
upon transfer of such Property to the special hazard insurer, the unpaid
principal balance of such Loan at the time of acquisition of such Property by
foreclosure or deed in lieu of foreclosure, plus accrued interest to the date of
claim settlement and certain expenses incurred by the Servicer with respect to
such Property. If the unpaid principal balance plus accrued interest and certain
expenses is paid by the special hazard insurer, the amount of further coverage
under the special hazard insurance policy will be reduced by such amount less
any net proceeds from the sale of such Property. Any amount paid as the cost of
repair of such Property will reduce coverage by such amount. Special hazard
insurance policies typically do not cover losses occasioned by war, civil
insurrection, certain governmental actions, errors in design, faulty workmanship
or materials (except under certain circumstances), nuclear reaction, flood (if
the mortgaged property is in a federally designated flood area), chemical
contamination and certain other risks.
Restoration of the Property with the proceeds described under (i) above is
expected to satisfy the condition under any pool insurance policy that such
Property be restored before a claim under such pool insurance policy may be
validly presented with respect to the defaulted Loan secured by such Property.
The payment described under (ii) above will render unnecessary presentation of a
claim in respect of such Loan under any pool insurance policy. Therefore, so
long as such pool insurance policy remains in effect, the payment by the special
hazard insurer of the cost of repair or of the unpaid principal balance of the
related Loan plus accrued interest and certain expenses will not affect the
total insurance proceeds paid to Holders of the Securities, but will affect the
relative amounts of coverage remaining under the special hazard insurance policy
and pool insurance policy.
Bankruptcy Bond. In the event of a bankruptcy of a borrower, the bankruptcy
court may establish the value of the Property securing the related Loan at an
amount less than the then-outstanding principal balance of such Loan. The amount
of the secured debt could be reduced to such value, and the holder of such Loan
thus would become an unsecured creditor to the extent the outstanding principal
balance of such Loan exceeds the value so assigned to the Property by the
bankruptcy court. In addition, certain other modifications of the terms of a
Loan can result from a bankruptcy proceeding. See "CERTAIN LEGAL ASPECTS OF
LOANS." If so provided in the related Prospectus Supplement, the Depositor or
other entity specified in the related Prospectus Supplement will obtain a
bankruptcy bond or similar insurance contract (the "bankruptcy bond") covering
losses resulting from proceedings with respect to borrowers under the Bankruptcy
Code. The bankruptcy bond will cover certain losses resulting from a reduction
by a bankruptcy court of scheduled payments of principal of and interest on a
Loan or a reduction by such court of the principal amount of a Loan and will
cover certain unpaid interest on the amount of such a principal reduction from
the date of the filing of a bankruptcy petition.
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The bankruptcy bond will provide coverage in the aggregate amount specified
in the related Prospectus Supplement for all Loans in the Trust Fund for such
Series. Such amount will be reduced by payments made under such bankruptcy bond
in respect of such Loans, unless otherwise specified in the related Prospectus
Supplement, and will not be restored.
Reserve Funds
If so specified in the Prospectus Supplement relating to a Series of
Securities, the Depositor will deposit into one or more funds to be established
with the Trustee as part of the Trust Fund for such Series or for the benefit of
any Enhancer with respect to such Series (the "Reserve Funds") cash, a letter or
letters of credit, cash collateral accounts, Eligible Investments, or other
instruments meeting the criteria of the Rating Agency rating any Series of the
Securities in the amount specified in such Prospectus Supplement. In the
alternative or in addition to such deposit, a Reserve Fund for a Series may be
funded over time through application of all or a portion of the excess cash flow
from the Primary Assets for such Series, to the extent described in the related
Prospectus Supplement. If applicable, the initial amount of the Reserve Fund and
the Reserve Fund maintenance requirements for a Series of Securities will be
described in the related Prospectus Supplement.
Amounts withdrawn from any Reserve Fund will be applied by the Trustee to
make payments on the Securities of a Series, to pay expenses, to reimburse any
Enhancer or for any other purpose, in the manner and to the extent specified in
the related Prospectus Supplement.
Amounts deposited in a Reserve Fund will be invested by the Trustee, in
Eligible Investments maturing no later than the day specified in the related
Prospectus Supplement.
Minimum Principal Payment Agreement
If stated in the Prospectus Supplement relating to a Series of Securities,
the Depositor will enter into a Minimum Principal Payment Agreement with an
entity meeting the criteria of the Rating Agency pursuant to which such entity
will provide certain payments on the Securities of such Series in the event that
aggregate scheduled principal payments and/or prepayments on the Primary Assets
for such Series are not sufficient to make certain payments on the Securities of
such Series, as provided in the Prospectus Supplement.
Deposit Agreement
If specified in a Prospectus Supplement, the Depositor and the Trustee for
such Series of Securities will enter into a Deposit Agreement with the entity
specified in such Prospectus Supplement on or before the sale of such Series of
Securities. The purpose of a Deposit Agreement would be to accumulate available
cash for investment so that such cash, together with income thereon, can be
applied to future distributions on one or more Classes of Securities. The
Prospectus Supplement for a Series of Securities pursuant to which a Deposit
Agreement is used will contain a description of the terms of such Deposit
Agreement.
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SERVICING OF LOANS
General
Customary servicing functions with respect to Loans comprising the Primary
Assets in the Trust Fund will be provided by the Servicer directly pursuant to
the related Servicing Agreement or Pooling and Servicing Agreement, as the case
may be, with respect to a Series of Securities.
Collection Procedures; Escrow Accounts
The Servicer will make reasonable efforts to collect all payments required
to be made under the Loans and will, consistent with the terms of the related
Agreement for a Series and any applicable Enhancement, follow such collection
procedures as it follows with respect to comparable loans held in its own
portfolio. Consistent with the above, the Servicer may, in its discretion, (i)
waive any assumption fee, late payment charge, or other charge in connection
with a Loan and (ii) to the extent provided in the related Agreement arrange
with an obligor a schedule for the liquidation of delinquencies by extending the
Due Dates for Scheduled Payments on such Loan.
If specified in the related Prospectus Supplement, the Servicer, to the
extent permitted by law, will establish and maintain escrow or impound accounts
("Escrow Accounts") with respect to Loans in which payments by obligors to pay
taxes, assessments, mortgage and hazard insurance premiums, and other comparable
items will be deposited. Loans may not require such payments under the loan
related documents, in which case the Servicer would not be required to establish
any Escrow Account with respect to such Loans. Withdrawals from the Escrow
Accounts are to be made to effect timely payment of taxes, assessments and
mortgage and hazard insurance, to refund to obligors amounts determined to be
overages, to pay interest to obligors on balances in the Escrow Account to the
extent required by law, to repair or otherwise protect the property securing the
related Loan and to clear and terminate such Escrow Account. The Servicer will
be responsible for the administration of the Escrow Accounts and generally will
make advances to such accounts when a deficiency exists therein.
Deposits to and Withdrawals from the Collection Account
Unless otherwise specified in the related Prospectus Supplement, the Trustee
or the Servicer will establish a separate account (the "Collection Account") in
the name of the Trustee. Unless otherwise indicated in the related Prospectus
Supplement, the Collection Account will be an account maintained (i) at a
depository institution, the long-term unsecured debt obligations of which at the
time of any deposit therein are rated by each Rating Agency rating the
Securities of such Series at levels satisfactory to each Rating Agency or (ii)
in an account or accounts the deposits in which are insured to the maximum
extent available by the FDIC or which are secured in a manner meeting
requirements established by each Rating Agency.
Unless otherwise specified in the related Prospectus Supplement, the funds
held in the Collection Account may be invested, pending remittance to the
Trustee, in Eligible Investments. If so specified in the related Prospectus
Supplement, the Servicer will be entitled to receive as additional compensation
any interest or other income earned on funds in the Collection Account.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer, the Depositor, the Trustee or the Seller, as appropriate, will deposit
into the Collection Account for each Series on the Business Day following the
Closing Date any amounts representing Scheduled Payments due after the related
Cut-off Date but received by the Servicer on or before the Closing Date, and
thereafter, within two business days after the date of receipt thereof, the
following payments and collections received or made by it (other than, unless
otherwise provided in the related Prospectus Supplement, in respect of principal
of and interest on the related Primary Assets due on or before such Cut-off
Date):
(i) All payments on account of principal, including prepayments, on
such Primary Assets;
(ii) All payments on account of interest on such Primary Assets after
deducting therefrom, at the discretion of the Servicer but only to the
extent of the amount permitted to be withdrawn or withheld from the
Collection Account in accordance with the related Agreement, the Servicing
Fee in respect of such Primary Assets;
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(iii) All amounts received by the Servicer in connection with the
liquidation of Primary Assets or property acquired in respect thereof,
whether through foreclosure sale, repossession or otherwise, including
payments in connection with such Primary Assets received from the obligor,
other than amounts required to be paid or refunded to the obligor pursuant
to the terms of the applicable loan documents or otherwise pursuant to law
("Liquidation Proceeds"), exclusive of, in the discretion of the Servicer,
but only to the extent of the amount permitted to be withdrawn from the
Collection Account in accordance with the related Agreement, the Servicing
Fee, if any, in respect of the related Primary Asset;
(iv) All proceeds under any title insurance, hazard insurance or other
insurance policy covering any such Primary Asset, other than proceeds to be
applied to the restoration or repair of the related Property or released to
the obligor in accordance with the related Agreement;
(v) All amounts required to be deposited therein from any applicable
Reserve Fund for such Series pursuant to the related Agreement;
(vi) All Advances made by the Servicer required pursuant to the related
Agreement; and
(vii) All repurchase prices of any such Primary Assets repurchased by
the Depositor, the Servicer or the Seller pursuant to the related Agreement.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer is permitted, from time to time, to make withdrawals from the
Collection Account for each Series for the following purposes:
(i) to reimburse itself for Advances for such Series made by it pursuant
to the related Agreement; the Servicer's right to reimburse itself is
limited to amounts received on or in respect of particular Loans (including,
for this purpose, Liquidation Proceeds and amounts representing proceeds of
insurance policies covering the related Property) which represent late
recoveries of Scheduled Payments respecting which any such Advance was made;
(ii) to the extent provided in the related Agreement, to reimburse
itself for any Advances for such Series that the Servicer determines in good
faith it will be unable to recover from amounts representing late recoveries
of Scheduled Payments respecting which such Advance was made or from
Liquidation Proceeds or the proceeds of insurance policies;
(iii) to reimburse itself from Liquidation Proceeds for liquidation
expenses and for amounts expended by it in good faith in connection with the
restoration of damaged Property and, in the event deposited in the
Collection Account and not previously withheld, and to the extent that
Liquidation Proceeds after such reimbursement exceed the outstanding
principal balance of the related Loan, together with accrued and unpaid
interest thereon to the Due Date for such Loan next succeeding the date of
its receipt of such Liquidation Proceeds, to pay to itself out of such
excess the amount of any unpaid Servicing Fee and any assumption fees, late
payment charges, or other charges on the related Loan;
(iv) in the event it has elected not to pay itself the Servicing Fee out
of the interest component of any Scheduled Payment, late payment or other
recovery with respect to a particular Loan prior to the deposit of such
Scheduled Payment, late payment or recovery into the Collection Account, to
pay to itself the Servicing Fee, as adjusted pursuant to the related
Agreement, from any such Scheduled Payment, late payment or such other
recovery, to the extent permitted by the related Agreement;
(v) to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it pursuant to the related Agreement;
(vi) to pay to the applicable person with respect to each Primary Asset
or REO Property acquired in respect thereof that has been repurchased or
removed from the Trust Fund by the Depositor, the Servicer or the Seller
pursuant to the related Agreement, all amounts received thereon and not
distributed as of the date on which the related repurchase price was
determined;
(vii) to make payments to the Trustee of such Series for deposit into
the Distribution Account, if any, or for remittance to the Holders of such
Series in the amounts and in the manner provided for in the related
Agreement; and
(viii) to clear and terminate the Collection Account pursuant to the
related Agreement.
In addition, if the Servicer deposits in the Collection Account for a Series
any amount not required to be deposited therein, it may, at any time, withdraw
such amount from such Collection Account.
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Advances and Limitations Thereon
The related Prospectus Supplement will describe the circumstances, if any,
under which the Servicer will make Advances with respect to delinquent payments
on Loans. If specified in the related Prospectus Supplement, the Servicer will
be obligated to make Advances, and such obligation may be limited in amount, or
may not be activated until a certain portion of a specified Reserve Fund is
depleted. Advances are intended to provide liquidity and, except to the extent
specified in the related Prospectus Supplement, not to guarantee or insure
against losses. Accordingly, any funds advanced are recoverable by the Servicer
out of amounts received on particular Loans which represent late recoveries of
principal or interest, proceeds of insurance policies or Liquidation Proceeds
respecting which any such Advance was made. If an Advance is made and
subsequently determined to be nonrecoverable from late collections, proceeds of
insurance policies, or Liquidation Proceeds from the related Loan, the Servicer
may be entitled to reimbursement from other funds in the Collection Account or
Distribution Account, as the case may be, or from a specified Reserve Fund as
applicable, to the extent specified in the related Prospectus Supplement.
Maintenance of Insurance Policies and Other Servicing Procedures
Standard Hazard Insurance; Flood Insurance. Except as otherwise specified in
the related Prospectus Supplement, the Servicer will be required to maintain or
to cause the obligor on each Loan to maintain a standard hazard insurance policy
providing coverage of the standard form of fire insurance with extended coverage
for certain other hazards as is customary in the state in which the related
Property is located. The standard hazard insurance policies will provide for
coverage at least equal to the applicable state standard form of fire insurance
policy with extended coverage for property of the type securing the related
Loans. In general, the standard form of fire and extended coverage policy will
cover physical damage to or destruction of, the related Property caused by fire,
lightning, explosion, smoke, windstorm, hail, riot, strike and civil commotion,
subject to the conditions and exclusions particularized in each policy. Because
the standard hazard insurance policies relating to the Loans will be
underwritten by different hazard insurers and will cover Properties located in
various states, such policies will not contain identical terms and conditions.
The basic terms, however, generally will be determined by state law and
generally will be similar. Most such policies typically will not cover any
physical damage resulting from war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides
and mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all inclusive. Uninsured risks not covered by a special hazard insurance policy
or other form of Enhancement will adversely affect distributions to Holders.
When a Property securing a Loan is located in a flood area identified by HUD
pursuant to the Flood Disaster Protection Act of 1973, as amended, the Servicer
will be required to cause flood insurance to be maintained with respect to such
Property, to the extent available.
The standard hazard insurance policies covering Properties securing Loans
typically will contain a "coinsurance" clause which, in effect, will require the
insured at all times to carry hazard insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the Property, including
the improvements on any Property, in order to recover the full amount of any
partial loss. If the insured's coverage falls below this specified percentage,
such clause will provide that the hazard insurer's liability in the event of
partial loss will not exceed the greater of (i) the actual cash value (the
replacement cost less physical depreciation) of the Property, including the
improvements, if any, damaged or destroyed or (ii) such proportion of the loss,
without deduction for depreciation, as the amount of insurance carried bears to
the specified percentage of the full replacement cost of such Property and
improvements. Since the amount of hazard insurance to be maintained on the
improvements securing the Loans declines as the principal balances owing thereon
decrease, and since the value of the Properties will fluctuate in value over
time, the effect of this requirement in the event of partial loss may be that
hazard insurance proceeds will be insufficient to restore fully the damage to
the affected Property.
Unless otherwise specified in the related Prospectus Supplement, coverage
will be in an amount at least equal to the greater of (i) the amount necessary
to avoid the enforcement of any co-insurance clause contained in the policy or
(ii) the outstanding principal balance of the related Loan. Unless otherwise
specified in the related Prospectus Supplement, the Servicer will also maintain
on REO Property that secured a defaulted Loan and that has been acquired upon
foreclosure, deed in lieu of foreclosure, or repossession, a standard hazard
insurance
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policy in an amount that is at least equal to the maximum insurable value of
such REO Property. No earthquake or other additional insurance will be required
of any obligor or will be maintained on REO Property acquired in respect of a
defaulted Loan, other than pursuant to such applicable laws and regulations as
shall at any time be in force and shall require such additional insurance.
Any amounts collected by the Servicer under any such policies of insurance
(other than amounts to be applied to the restoration or repair of the Property,
released to the obligor in accordance with normal servicing procedures or used
to reimburse the Servicer for amounts to which it is entitled to reimbursement)
will be deposited in the Collection Account. In the event that the Servicer
obtains and maintains a blanket policy insuring against hazard losses on all of
the Loans, written by an insurer then acceptable to each Rating Agency which
assigns a rating to such Series, it will conclusively be deemed to have
satisfied its obligations to cause to be maintained a standard hazard insurance
policy for each Loan or related REO Property. This blanket policy may contain a
deductible clause, in which case the Servicer will be required, in the event
that there has been a loss that would have been covered by such policy absent
such deductible clause, to deposit in the Collection Account the amount not
otherwise payable under the blanket policy because of the application of such
deductible clause.
Realization upon Defaulted Loans
The Servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the Properties
securing the related Loans as come into and continue in default and as to which
no satisfactory arrangements can be made for collection of delinquent payments.
In connection with such foreclosure or other conversion, the Servicer will
follow such practices and procedures as it deems necessary or advisable and as
are normal and usual in its servicing activities with respect to comparable
loans serviced by it. However, the Servicer will not be required to expend its
own funds in connection with any foreclosure or towards the restoration of the
Property unless it determines that (i) such restoration or foreclosure will
increase the Liquidation Proceeds in respect of the related Loan available to
the Holders after reimbursement to itself for such expenses and (ii) such
expenses will be recoverable by it either through Liquidation Proceeds or the
proceeds of insurance. Notwithstanding anything to the contrary herein, in the
case of a Trust Fund for which a REMIC election has been made, the Servicer will
be required to liquidate any Property acquired through foreclosure within two
years after the acquisition of the beneficial ownership of such Property. While
the holder of a Property acquired through foreclosure can often maximize its
recovery by providing financing to a new purchaser, the Trust Fund, if
applicable, will have no ability to do so and neither the Servicer nor the
Depositor will be required to do so.
The Servicer may arrange with the obligor on a defaulted Loan a modification
of such Loan (a "Modification") to the extent provided in the related Prospectus
Supplement. Such Modifications may only be entered into if they meet the
underwriting policies and procedures employed by the Servicer in servicing
receivables for its own account and meet the other conditions set forth in the
related Prospectus Supplement.
Enforcement of Due-on-Sale Clauses
Unless otherwise specified in the related Prospectus Supplement for a
Series, when any Property is about to be conveyed by the obligor, the Servicer
will, to the extent it has knowledge of such prospective conveyance and prior to
the time of the consummation of such conveyance, exercise its rights to
accelerate the maturity of the related Loan under the applicable "due-on-sale"
clause, if any, unless it reasonably believes that such clause is not
enforceable under applicable law or if the enforcement of such clause would
result in loss of coverage under any primary mortgage insurance policy. In such
event, the Servicer is authorized to accept from or enter into an assumption
agreement with the person to whom such property has been or is about to be
conveyed, pursuant to which such person becomes liable under the Loan and
pursuant to which the original obligor is released from liability and such
person is substituted as the obligor and becomes liable under the Loan. Any fee
collected in connection with an assumption will be retained by the Servicer as
additional servicing compensation. The terms of a Loan may not be changed in
connection with an assumption.
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Servicing Compensation and Payment of Expenses
Except as otherwise provided in the related Prospectus Supplement, the
Servicer will be entitled to a periodic fee as servicing compensation (the
"Servicing Fee") in an amount to be determined as specified in the related
Prospectus Supplement. The Servicing Fee may be fixed or variable, as specified
in the related Prospectus Supplement. In addition, unless otherwise specified in
the related Prospectus Supplement, the Servicer will be entitled to servicing
compensation in the form of assumption fees, late payment charges and similar
items, or excess proceeds following disposition of Property in connection with
defaulted Loans.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will pay certain expenses incurred in connection with the servicing of
the Loans, including, without limitation, the payment of the fees and expenses
of the Trustee and independent accountants, payment of insurance policy premiums
and the cost of credit support, if any, and payment of expenses incurred in
preparation of reports to Holders.
When an obligor makes a principal prepayment in full between Due Dates on
the related Loan, the obligor will generally be required to pay interest on the
amount prepaid only to the date of prepayment. If and to the extent provided in
the related Prospectus Supplement in order that one or more Classes of the
Holders of a Series will not be adversely affected by any resulting shortfall in
interest, the amount of the Servicing Fee may be reduced to the extent necessary
to include in the Servicer's remittance to the Trustee for deposit into the
Distribution Account an amount equal to one month's interest on the related Loan
(less the Servicing Fee). If the aggregate amount of such shortfalls in a month
exceeds the Servicing Fee for such month, a shortfall to Holders may occur.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will be entitled to reimbursement for certain expenses incurred by it
in connection with the liquidation of defaulted Loans. The related Holders will
suffer no loss by reason of such expenses to the extent expenses are covered
under related insurance policies or from excess Liquidation Proceeds. If claims
are either not made or paid under the applicable insurance policies or if
coverage thereunder has been exhausted, the related Holders will suffer a loss
to the extent that Liquidation Proceeds, after reimbursement of the Servicer's
expenses, are less than the outstanding principal balance of and unpaid interest
on the related Loan which would be distributable to Holders. In addition, the
Servicer will be entitled to reimbursement of expenditures incurred by it in
connection with the restoration of property securing a defaulted Loan, such
right of reimbursement being prior to the rights of the Holders to receive any
related proceeds of insurance policies, Liquidation Proceeds or amounts derived
from other Enhancement. The Servicer is generally also entitled to reimbursement
from the Collection Account for Advances.
Unless otherwise specified in the related Prospectus Supplement, the rights
of the Servicer to receive funds from the Collection Account for a Series,
whether as the Servicing Fee or other compensation, or for the reimbursement of
Advances, expenses or otherwise, are not subordinate to the rights of Holders of
such Series.
Evidence as to Compliance
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will provide that each year, a firm of independent
public accountants will furnish a statement to the Trustee to the effect that
such firm has examined certain documents and records relating to the servicing
of the Loans by the Servicer and that, on the basis of such examination, such
firm is of the opinion that the servicing has been conducted in compliance with
such Agreement, except for (i) such exceptions as such firm believes to be
immaterial and (ii) such other exceptions as are set forth in such statement.
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will also provide for delivery to the Trustee for such
Series of an annual statement signed by an officer of the Servicer to the effect
that the Servicer has fulfilled its obligations under such Agreement throughout
the preceding calendar year.
Certain Matters Regarding the Servicer
The Servicer for each Series will be identified in the related Prospectus
Supplement. The Servicer may be an affiliate of the Depositor and may have other
business relationships with the Depositor and its affiliates.
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If an Event of Default occurs under either a Servicing Agreement or a
Pooling and Servicing Agreement, the Servicer may be replaced by the Trustee or
a successor Servicer. Unless otherwise specified in the related Prospectus
Supplement, such Events of Default and the rights of the Trustee upon such a
default under the Agreement for the related Series will be substantially similar
to those described under "THE AGREEMENTS -- Events of Default; Rights Upon
Events of Default -- Pooling and Servicing Agreement; Servicing Agreement"
herein.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer does not have the right to assign its rights and delegate its duties
and obligations under the related Agreement for each Series unless the successor
Servicer accepting such assignment or delegation (i) services similar loans in
the ordinary course of its business, (ii) is reasonably satisfactory to the
Trustee for the related Series, (iii) has a net worth of not less than the
amount specified in the related Prospectus Supplement, (iv) would not cause any
Rating Agency's rating of the Securities for such Series in effect immediately
prior to such assignment, sale or transfer to be qualified, downgraded or
withdrawn as a result of such assignment, sale or transfer and (v) executes and
delivers to the Trustee an agreement, in form and substance reasonably
satisfactory to the Trustee, which contains an assumption by such Servicer of
the due and punctual performance and observance of each covenant and condition
to be performed or observed by the Servicer under the related Agreement from and
after the date of such agreement. No such assignment will become effective until
the Trustee or a successor Servicer has assumed the servicer's obligations and
duties under the related Agreement. To the extent that the Servicer transfers
its obligations to a wholly-owned subsidiary or affiliate, such subsidiary or
affiliate need not satisfy the criteria set forth above; however, in such
instance, the assigning Servicer will remain liable for the servicing
obligations under the related Agreement. Any entity into which the Servicer is
merged or consolidated or any successor corporation resulting from any merger,
conversion or consolidation will succeed to the Servicer's obligations under the
related Agreement provided that such successor or surviving entity meets the
requirements for a successor Servicer set forth above.
Except to the extent otherwise provided therein, each Agreement will provide
that neither the Servicer, nor any director, officer, employee or agent of the
Servicer, will be under any liability to the related Trust Fund, the Depositor
or the Holders for any action taken or for failing to take any action in good
faith pursuant to the related Agreement, or for errors in judgment; provided,
however, that neither the Servicer nor any such person will be protected against
any breach of warranty or representations made under such Agreement or the
failure to perform its obligations in compliance with any standard of care set
forth in such Agreement, or liability which would otherwise be imposed by reason
of willful misfeasance, bad faith or negligence in the performance of their
duties or by reason of reckless disregard of their obligations and duties
thereunder. Each Agreement will further provide that the Servicer and any
director, officer, employee or agent of the Servicer is entitled to
indemnification from the related Trust Fund and will be held harmless against
any loss, liability or expense incurred in connection with any legal action
relating to the Agreement or the Securities, other than any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or negligence in
the performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. In addition, the related Agreement will
provide that the Servicer is not under any obligation to appear in, prosecute or
defend any legal action which is not incidental to its servicing
responsibilities under such Agreement which, in its opinion, may involve it in
any expense or liability. The Servicer may, in its discretion, undertake any
such action which it may deem necessary or desirable with respect to the related
Agreement and the rights and duties of the parties thereto and the interests of
the Holders thereunder. In such event the legal expenses and costs of such
action and any liability resulting therefrom may be expenses, costs, and
liabilities of the Trust Fund and the Servicer may be entitled to be reimbursed
therefor out of the Collection Account.
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THE AGREEMENTS
The following summaries describe certain provisions of the Agreements. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Agreements. Where
particular provisions or terms used in the Agreements are referred to, such
provisions or terms are as specified in the related Agreements.
Assignment of Primary Assets
General. At the time of issuance of the Securities of a Series, the
Depositor will transfer, convey and assign to the Trust Fund all right, title
and interest of the Depositor in the Primary Assets and other property to be
transferred to the Trust Fund for a Series. Such assignment will include all
principal and interest due on or with respect to the Primary Assets after the
Cut-off Date specified in the related Prospectus Supplement (except for any
Retained Interests). The Trustee will, concurrently with such assignment,
execute and deliver the Securities.
Assignment of Loans. Unless otherwise specified in the related Prospectus
Supplement, the Depositor will, as to each Loan, deliver or cause to be
delivered to the Trustee, or, as specified in the related Prospectus Supplement
a custodian on behalf of the Trustee (the "Custodian"), the Mortgage Note
endorsed without recourse to the order of the Trustee or in blank, the original
Mortgage with evidence of recording indicated thereon (except for any Mortgage
not returned from the public recording office, in which case a copy of such
Mortgage will be delivered, together with a certificate that the original of
such Mortgage was delivered to such recording office) and an assignment of the
Mortgage in recordable form. The Trustee, or, if so specified in the related
Prospectus Supplement, the Custodian, will hold such documents in trust for the
benefit of the Holders.
Unless otherwise specified in the related Prospectus Supplement, the
Depositor will as to each Home Improvement Contract deliver or cause to be
delivered to the Trustee (or the Custodian) the original Home Improvement
Contract and copies of documents and instruments related to each Home
Improvement Contract and, other than in the case of unsecured Home Improvement
Contracts, the security interest in the property securing such Home Improvement
Contract. In order to give notice of the right, title and interest of
Securityholders to the Home Improvement Contracts, the Depositor will cause a
UCC-1 financing statement to be executed by the Depositor or the Seller
identifying the Trustee as the secured party and identifying all Home
Improvement Contracts as collateral. Unless otherwise specified in the related
Prospectus Supplement, the Home Improvement Contracts will not be stamped or
otherwise marked to reflect their assignment to the Trust. Therefore, if,
through negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the Home Improvement Contracts without notice of such
assignment, the interest of Securityholders in the Home Improvement Contracts
could be defeated. See "CERTAIN LEGAL ASPECTS OF THE LOANS -- The Home
Improvement Contracts."
With respect to Loans secured by Mortgages, if so specified in the related
Prospectus Supplement, the Depositor will, at the time of issuance of the
Securities, cause assignments to the Trustee of the Mortgages relating to the
Loans for a Series to be recorded in the appropriate public office for real
property records, except in states where, in the opinion of counsel acceptable
to the Trustee, such recording is not required to protect the Trustee's interest
in the related Loans. If specified in the related Prospectus Supplement, the
Depositor will cause such assignments to be so recorded within the time after
issuance of the Securities as is specified in the related Prospectus Supplement,
in which event, the Agreement may, as specified in the related Prospectus
Supplement, require the Depositor to repurchase from the Trustee any Loan the
related Mortgage of which is not recorded within such time, at the price
described below with respect to repurchases by reason of defective
documentation. Unless otherwise provided in the related Prospectus Supplement,
the enforcement of the repurchase obligation would constitute the sole remedy
available to the Holders or the Trustee for the failure of a Mortgage to be
recorded.
Each Loan will be identified in a schedule appearing as an exhibit to the
related Agreement (the "Loan Schedule"). Such Loan Schedule will specify with
respect to each Loan: the original principal amount and unpaid principal balance
as of the Cut-off Date; the current interest rate; the current Scheduled Payment
of principal and interest; the maturity date, if any, of the related Mortgage
Note; if the Loan is an adjustable rate Loan, the Lifetime Rate Cap, if any, and
the current index.
Assignment of Private Securities. The Depositor will cause Private
Securities to be registered in the name of the Trustee (or its nominee or
correspondent). The Trustee (or its nominee or correspondent) will have
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possession of any certificated Private Securities. Unless otherwise specified in
the related Prospectus Supplement, the Trustee will not be in possession of or
be assignee of record of any underlying assets for a Private Security. See "THE
TRUST FUNDS -- Private Securities" herein. Each Private Security will be
identified in a schedule appearing as an exhibit to the related Agreement (the
"Certificate Schedule"), which will specify the original principal amount,
outstanding principal balance as of the Cut-off Date, annual pass-through rate
or interest rate and maturity date for each Private Security conveyed to the
Trust Fund. In the Agreement, the Depositor will represent and warrant to the
Trustee regarding the Private Securities: (i) that the information contained in
the Certificate Schedule is true and correct in all material respects; (ii)
that, immediately prior to the conveyance of the Private Securities, the
Depositor had good title thereto, and was the sole owner thereof (subject to any
Retained Interest); (iii) that there has been no other sale by it of such
Private Securities; and (iv) that there is no existing lien, charge, security
interest or other encumbrance (other than any Retained Interest) on such Private
Securities.
Repurchase and Substitution of Non-Conforming Primary Assets. Unless
otherwise provided in the related Prospectus Supplement, if any document in the
file relating to the Primary Assets delivered by the Depositor to the Trustee
(or Custodian) is found by the Trustee within 90 days of the execution of the
related Agreement (or promptly after the Trustee's receipt of any document
permitted to be delivered after the Closing Date) to be defective in any
material respect and the Depositor or Seller does not cure such defect within 90
days, or within such other period specified in the related Prospectus
Supplement, the Depositor or Seller will, not later than 90 days or within such
other period specified in the related Prospectus Supplement, after the Trustee's
notice to the Depositor or the Seller, as the case may be, of the defect,
repurchase the related Primary Asset or any property acquired in respect thereof
from the Trustee at a price equal to, unless otherwise specified in the related
Prospectus Supplement, (a) the lesser of (i) the outstanding principal balance
of such Primary Asset and (ii) the Trust Fund's federal income tax basis in the
Primary Asset and (b) accrued and unpaid interest to the date of the next
scheduled payment on such Primary Asset at the rate set forth in the related
Agreement, provided, however, the purchase price shall not be limited in (i)
above to the Trust Fund's federal income tax basis if the repurchase at a price
equal to the outstanding principal balance of such Primary Asset will not result
in any prohibited transaction tax under Section 860F(a) of the Code.
If provided in the related Prospectus Supplement, the Depositor or Seller,
as the case may be, may, rather than repurchase the Primary Asset as described
above, remove such Primary Asset from the Trust Fund (the "Deleted Primary
Asset") and substitute in its place one or more other Primary Assets (each, a
"Qualifying Substitute Primary Asset") provided, however, that (i) with respect
to a Trust Fund for which no REMIC election is made, such substitution must be
effected within 120 days of the date of initial issuance of the Securities and
(ii) with respect to a Trust Fund for which a REMIC election is made, after a
specified time period, the Trustee must have received a satisfactory opinion of
counsel that such substitution will not cause the Trust Fund to lose its status
as a REMIC or otherwise subject the Trust Fund to a prohibited transaction tax.
Unless otherwise specified in the related Prospectus Supplement, any
Qualifying Substitute Primary Asset will have, on the date of substitution, (i)
an outstanding principal balance, after deduction of all Scheduled Payments due
in the month of substitution, not in excess of the outstanding principal balance
of the Deleted Primary Asset (the amount of any shortfall to be deposited to the
Collection Account in the month of substitution for distribution to Holders),
(ii) an interest rate not less than (and not more than 2% greater than) the
interest rate of the Deleted Primary Asset, (iii) a remaining term-to-stated
maturity not greater than (and not more than two years less than) that of the
Deleted Primary Asset, and will comply with all of the representations and
warranties set forth in the applicable Agreement as of the date of substitution.
Unless otherwise provided in the related Prospectus Supplement, the
above-described cure, repurchase or substitution obligations constitute the sole
remedies available to the Holders or the Trustee for a material defect in a
document for a Primary Asset.
The Depositor or another entity will make representations and warranties
with respect to Primary Assets for a Series. If the Depositor or such entity
cannot cure a breach of any such representations and warranties in all material
respects within the time period specified in the related Prospectus Supplement
after notification by the Trustee of such breach, and if such breach is of a
nature that materially and adversely affects the value of such Primary Asset,
the Depositor or such entity is obligated to repurchase the affected Primary
Asset or, if provided in the related Prospectus Supplement, provide a Qualifying
Substitute Primary Asset therefor, subject to the same conditions and
limitations on purchases and substitutions as described above.
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The Depositor's only source of funds to effect any cure, repurchase or
substitution will be through the enforcement of the corresponding obligations,
if any, of the responsible originator or Seller of such Primary Assets. See
"SPECIAL CONSIDERATIONS -- Limited Assets."
No Holder of Securities of a Series, solely by virtue of such Holder's
status as a Holder, will have any right under the applicable Agreement for such
Series to institute any proceeding with respect to such Agreement, unless such
Holder previously has given to the Trustee for such Series written notice of
default and unless the Holders of Securities evidencing not less than 51% of the
aggregate voting rights of the Securities for such Series have made written
request upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity, and the Trustee
for 60 days has neglected or refused to institute any such proceeding.
Reports to Holders
The Trustee or other entity specified in the related Prospectus Supplement
will prepare and forward to each Holder on each Distribution Date, or as soon
thereafter as is practicable, a statement setting forth, to the extent
applicable to any Series, among other things:
(i) the amount of principal distributed to Holders of the related
Securities and the outstanding principal balance of such Securities
following such distribution;
(ii) the amount of interest distributed to Holders of the related
Securities and the current interest on such Securities;
(iii) the amounts of (a) any overdue accrued interest included in such
distribution, (b) any remaining overdue accrued interest with respect to
such Securities or (c) any current shortfall in amounts to be distributed as
accrued interest to Holders of such Securities;
(iv) the amounts of (a) any overdue payments of scheduled principal
included in such distribution, (b) any remaining overdue principal amounts
with respect to such Securities, (c) any current shortfall in receipt of
scheduled principal payments on the related Primary Assets or (d) any
realized losses or Liquidation Proceeds to be allocated as reductions in the
outstanding principal balances of such Securities;
(v) the amount received under any related Enhancement, and the remaining
amount available under such Enhancement;
(vi) the amount of any delinquencies with respect to payments on the
related Primary Assets;
(vii) the book value of any REO Property acquired by the related Trust
Fund; and
(viii) such other information as specified in the related Agreement.
In addition, within a reasonable period of time after the end of each
calendar year the Trustee, unless otherwise specified in the related Prospectus
Supplement, will furnish to each Holder of record at any time during such
calendar year (a) the aggregate of amounts reported pursuant to (i), (ii), and
(iv)(d) above for such calendar year and (b) such information specified in the
related Agreement to enable Holders to prepare their tax returns including,
without limitation, the amount of original issue discount accrued on the
Securities, if applicable. Information in the Distribution Date and annual
statements provided to the Holders will not have been examined and reported upon
by an independent public accountant. However, the Servicer will provide to the
Trustee a report by independent public accountants with respect to the
Servicer's servicing of the Loans. See "SERVICING OF LOANS -- Evidence as to
Compliance" herein.
If so specified in the Prospectus Supplement for a Series of Securities,
such Series or one or more Classes of such Series will be issued in book-entry
form. In such event, owners of beneficial interests in such Securities will not
be considered Holders and will not receive such reports directly from the
Trustee. The Trustee will forward such reports only to the entity or its nominee
which is the registered holder of the global certificate which evidences such
book-entry securities. Beneficial owners will receive such reports from the
participants and indirect participants of the applicable book-entry system in
accordance with the practices and procedures of such entities.
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Events of Default; Rights Upon Event of Default
Pooling and Servicing Agreement; Servicing Agreement. Unless otherwise
specified in the related Prospectus Supplement, Events of Default under the
Pooling and Servicing Agreement for each Series of Certificates relating to
Loans include (i) any failure by the Servicer to deposit amounts in the
Collection Account and Distribution Account to enable the Trustee to distribute
to Holders of such Series any required payment, which failure continues
unremedied for the number of days specified in the related Prospectus Supplement
after the giving of written notice of such failure to the Servicer by the
Trustee for such Series, or to the Servicer and the Trustee by the Holders of
such Series evidencing not less than 25% of the aggregate voting rights of the
Securities for such Series, (ii) any failure by the Servicer duly to observe or
perform in any material respect any other of its covenants or agreements in the
applicable Agreement which continues unremedied for the number of days specified
in the related Prospectus Supplement after the giving of written notice of such
failure to the Servicer by the Trustee, or to the Servicer and the Trustee by
the Holders of such Series evidencing not less than 25% of the aggregate voting
rights of the Securities for such Series, and (iii) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings and certain actions by the Servicer indicating its
insolvency, reorganization or inability to pay its obligations.
So long as an Event of Default remains unremedied under the applicable
Agreement for a Series of Securities relating to the servicing of Loans, unless
otherwise specified in the related Prospectus Supplement, the Trustee for such
Series or Holders of Securities of such Series evidencing not less than 51% of
the aggregate voting rights of the Securities for such Series may terminate all
of the rights and obligations of the Servicer as servicer under the applicable
Agreement (other than its right to recovery of other expenses and amounts
advanced pursuant to the terms of such Agreement which rights the Servicer will
retain under all circumstances), whereupon the Trustee will succeed to all the
responsibilities, duties and liabilities of the Servicer under such Agreement
and will be entitled to reasonable servicing compensation not to exceed the
applicable servicing fee, together with other servicing compensation in the form
of assumption fees, late payment charges or otherwise as provided in such
Agreement.
In the event that the Trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a finance
institution, bank or loan servicing institution with a net worth specified in
the related Prospectus Supplement to act as successor Servicer under the
provisions of the applicable Agreement. The successor Servicer would be entitled
to reasonable servicing compensation in an amount not to exceed the Servicing
Fee as set forth in the related Prospectus Supplement, together with the other
servicing compensation in the form of assumption fees, late payment charges or
otherwise, as provided in such Agreement.
During the continuance of any Event of Default of a Servicer under an
Agreement for a Series of Securities, the Trustee for such Series will have the
right to take action to enforce its rights and remedies and to protect and
enforce the rights and remedies of the Holders of such Series, and, unless
otherwise specified in the related Prospectus Supplement, Holders of Securities
evidencing not less than 51% of the aggregate voting rights of the Securities
for such Series may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred upon that Trustee. However, the Trustee will not be under any
obligation to pursue any such remedy or to exercise any of such trusts or powers
unless such Holders have offered the Trustee reasonable security or indemnity
against the cost, expenses and liabilities which may be incurred by the Trustee
therein or thereby. The Trustee may decline to follow any such direction if the
Trustee determines that the action or proceeding so directed may not lawfully be
taken or would involve it in personal liability or be unjustly prejudicial to
the nonassenting Holders.
Indenture. Unless otherwise specified in the related Prospectus Supplement,
Events of Default under the Indenture for each Series of Notes include: (i) a
default for thirty (30) days or more in the payment of any principal of or
interest on any Note of such Series; (ii) failure to perform any other covenant
of the Depositor or the Trust Fund in the Indenture which continues for a period
of sixty (60) days after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement; (iii) any
representation or warranty made by the Depositor or the Trust Fund in the
Indenture or in any certificate or other writing delivered pursuant thereto or
in connection therewith with respect to or affecting such Series having been
incorrect in a material respect as of the time made, and such breach is not
cured within sixty (60) days after notice thereof is given in accordance with
the procedures described in the related Prospectus Supplement; (iv) certain
events of bankruptcy, insolvency, receivership or liquidation of the Depositor
or the Trust Fund; or (v) any other Event of Default provided with respect to
Notes of that Series.
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If an Event of Default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, either the Trustee or the Holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may declare the principal amount (or, if the Notes of that Series are Zero
Coupon Securities, such portion of the principal amount as may be specified in
the terms of that Series, as provided in the related Prospectus Supplement) of
all the Notes of such Series to be due and payable immediately. Such declaration
may, under certain circumstances, be rescinded and annulled by the Holders of a
majority in aggregate outstanding amount of the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Trustee may,
in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default other than a default in the payment of
any principal or interest on any Note of such Series for thirty (30) days or
more, unless (a) the Holders of 100% of the then aggregate outstanding amount of
the Notes of such Series consent to such sale, (b) the proceeds of such sale or
liquidation are sufficient to pay in full the principal of and accrued interest
due and unpaid on the outstanding Notes of such Series at the date of such sale
or (c) the Trustee determines that such collateral would not be sufficient on an
ongoing basis to make all payments on such Notes as such payments would have
become due if such Notes had not been declared due and payable, and the Trustee
obtains the consent of the Holders of 66 2/3% of the then aggregate outstanding
amount of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default involving a default for thirty (30) days or more in the
payment of principal of or interest on the Notes of a Series, the Indenture
provides that the Trustee will have a prior lien on the proceeds of any such
liquidation for unpaid fees and expenses. As a result, upon the occurrence of
such an Event of Default, the amount available for distribution to the
Noteholders may be less than would otherwise be the case. However, the Trustee
may not institute a proceeding for the enforcement of its lien except in
connection with a proceeding for the enforcement of the lien of the Indenture
for the benefit of the Noteholders after the occurrence of such an Event of
Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a Series is declared due and payable, as
described above, the Holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with respect
to a Series of Notes, the Trustee will be under no obligation to exercise any of
the rights or powers under the Indenture at the request or direction of any of
the Holders of Notes of such Series, unless such Holders offered to the Trustee
security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with such request or
direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the Holders of a majority of the then
aggregate outstanding amount of the Notes of such Series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Notes of such Series, and the Holders of a majority
of the then aggregate outstanding amount of the Notes of such Series may, in
certain cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the Holders of the outstanding Notes of such Series affected thereby.
The Trustee
The identity of the commercial bank, savings and loan association or trust
company named as the Trustee for each Series of Securities will be set forth in
the related Prospectus Supplement. The entity serving as Trustee may have normal
banking relationships with the Depositor or the Servicer. In addition, for the
purpose of meeting the legal requirements of certain local jurisdictions, the
Trustee will have the power to appoint co-trustees or separate trustees of all
or any part of the Trust Fund relating to a Series of Securities. In the event
of such appointment, all rights, powers, duties and obligations conferred or
imposed upon the Trustee by the
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Agreement relating to such Series will be conferred or imposed upon the Trustee
and each such separate trustee or co-trustee jointly, or, in any jurisdiction in
which the Trustee shall be incompetent or unqualified to perform certain acts,
singly upon such separate trustee or co-trustee who will exercise and perform
such rights, powers, duties and obligations solely at the direction of the
Trustee. The Trustee may also appoint agents to perform any of the
responsibilities of the Trustee, which agents will have any or all of the
rights, powers, duties and obligations of the Trustee conferred on them by such
appointment; provided that the Trustee will continue to be responsible for its
duties and obligations under the Agreement.
Duties of the Trustee
The Trustee will not make any representations as to the validity or
sufficiency of the Agreement, the Securities or of any Primary Asset or related
documents. If no Event of Default (as defined in the related Agreement) has
occurred, the Trustee is required to perform only those duties specifically
required of it under the Agreement. Upon receipt of the various certificates,
statements, reports or other instruments required to be furnished to it, the
Trustee is required to examine them to determine whether they are in the form
required by the related Agreement. However, the Trustee will not be responsible
for the accuracy or content of any such documents furnished to it by the Holders
or the Servicer under the Agreement.
The Trustee may be held liable for its own negligent action or failure to
act, or for its own misconduct; provided, however, that the Trustee will not be
personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the Holders in an
Event of Default. The Trustee is not required to expend or risk its own funds or
otherwise incur any financial liability in the performance of any of its duties
under the Agreement, or in the exercise of any of its rights or powers, if it
has reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
Resignation of Trustee
The Trustee may, upon written notice to the Depositor, resign at any time,
in which event the Depositor will be obligated to use its best efforts to
appoint a successor Trustee. If no successor Trustee has been appointed and has
accepted the appointment within 30 days after the giving of such notice of
resignation, the resigning Trustee may petition any court of competent
jurisdiction for appointment of a successor Trustee. The Trustee may also be
removed at any time (i) if the Trustee ceases to be eligible to continue as such
under the Agreement, (ii) if the Trustee becomes insolvent or (iii) by the
Holders of Securities evidencing over 50% of the aggregate voting rights of the
Securities in the Trust Fund upon written notice to the Trustee and to the
Depositor. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the appointment
by the successor Trustee.
Amendment of Agreement
Unless otherwise specified in the Prospectus Supplement, the Agreement for
each Series of Securities may be amended by the Depositor, the Servicer (with
respect to a Series relating to Loans), and the Trustee with respect to such
Series, without notice to or consent of the Holders (i) to cure any ambiguity,
(ii) to correct any defective provisions or to correct or supplement any
provision therein, (iii) to add to the duties of the Depositor, the Trust Fund
or Servicer, (iv) to add any other provisions with respect to matters or
questions arising under such Agreement or related Enhancement, (v) to add or
amend any provisions of such Agreement as required by a Rating Agency in order
to maintain or improve the rating of the Securities (it being understood that
none of the Depositor, the Seller, the Servicer or Trustee is obligated to
maintain or improve such rating), or (vi) to comply with any requirements
imposed by the Code; provided that any such amendment except pursuant to clause
(vi) above will not adversely affect in any material respect the interests of
any Holders of such Series, as evidenced by an opinion of counsel. Any such
amendment except pursuant to clause (vi) of the preceding sentence shall be
deemed not to adversely affect in any material respect the interests of any
Holder if the Trustee receives written confirmation from each Rating Agency
rating such Securities that such amendment will not cause such Rating Agency to
reduce the then current rating thereof. Unless otherwise specified in the
Prospectus Supplement, the Agreement for each Series may also be amended by the
Trustee, the Servicer, if applicable, and the Depositor with respect to such
Series with the consent of the Holders possessing not less than 66 2/3% of the
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aggregate outstanding principal amount of the Securities of such Series or, if
only certain Classes of such Series are affected by such amendment, 66 2/3% of
the aggregate outstanding principal amount of the Securities of each Class of
such Series affected thereby, for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of such Agreement or
modifying in any manner the rights of Holders of such Series; provided, however,
that no such amendment may (a) reduce the amount or delay the timing of payments
on any Security without the consent of the Holder of such Security; or (b)
reduce the aforesaid percentage of the aggregate outstanding principal amount of
Securities of each Class, the Holders of which are required to consent to any
such amendment without the consent of the Holders of 100% of the aggregate
outstanding principal amount of each Class of Securities affected thereby.
Voting Rights
The related Prospectus Supplement will set forth the method of determining
allocation of voting rights with respect to a Series.
List of Holders
Upon written request of three or more Holders of record of a Series for
purposes of communicating with other Holders with respect to their rights under
the Agreement, which request is accompanied by a copy of the communication which
such Holders propose to transmit, the Trustee will afford such Holders access
during business hours to the most recent list of Holders of that Series held by
the Trustee.
No Agreement will provide for the holding of any annual or other meeting of
Holders.
Book-Entry Securities
If specified in the Prospectus Supplement for a Series of Securities, such
Series or one or more Classes of such Series may be issued in book-entry form.
In such event, beneficial owners of such Securities will not be considered
"Holders" under the Agreements and may exercise the rights of Holders only
indirectly through the participants in the applicable book-entry system.
REMIC Administrator
For any Series with respect to which a REMIC election is made, preparation
of certain reports and certain other administrative duties with respect to the
Trust Fund may be performed by a REMIC administrator, who may be an affiliate of
the Depositor.
Termination
Pooling and Servicing Agreement; Trust Agreement. The obligations created by
the Pooling and Servicing Agreement or Trust Agreement for a Series will
terminate upon the distribution to Holders of all amounts distributable to them
pursuant to such Agreement after the earlier of (i) the later of (a) the final
payment or other liquidation of the last Primary Asset remaining in the Trust
Fund for such Series and (b) the disposition of all property acquired upon
foreclosure or deed in lieu of foreclosure or repossession in respect of any
Primary Asset or (ii) the repurchase, as described below, by the Servicer or
other entity specified in the related Prospectus Supplement from the Trustee for
such Series of all Primary Assets and other property at that time subject to
such Agreement. The Agreement for each Series permits, but does not require, the
Servicer or other entity specified in the related Prospectus Supplement to
purchase from the Trust Fund for such Series all remaining Primary Assets at a
price equal to, unless otherwise specified in the related Prospectus Supplement,
100% of the aggregate Principal Balance of such Primary Assets plus, with
respect to any property acquired in respect of a Primary Asset, if any, the
outstanding Principal Balance of the related Primary Asset at the time of
foreclosure, less, in either case, related unreimbursed Advances (in the case of
the Primary Assets, only to the extent not already reflected in the computation
of the aggregate Principal Balance of such Primary Assets) and unreimbursed
expenses (that are reimbursable pursuant to the terms of the Pooling and
Servicing Agreement) plus, in either case, accrued interest thereon at the
weighted average rate on the related Primary Assets through the last day of the
Due Period in which such repurchase occurs; provided, however, that if an
election is made for treatment as a REMIC under the Code, the repurchase price
may equal the greater of (a) 100% of the
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aggregate Principal Balance of such Primary Assets, plus accrued interest
thereon at the applicable net rates on the Primary Assets through the last day
of the month of such repurchase and (b) the aggregate fair market value of such
Primary Assets plus the fair market value of any property acquired in respect of
a Primary Asset and remaining in the Trust Fund. The exercise of such right will
effect early retirement of the Securities of such Series, but such entity's
right to so purchase is subject to the aggregate Principal Balance of the
Primary Assets at the time of repurchase being less than a fixed percentage, to
be set forth in the related Prospectus Supplement, of the aggregate Principal
Balance of the Primary Assets as of the Cut-off Date. In no event, however, will
the trust created by the Agreement continue beyond the expiration of 21 years
from the death of the last survivor of certain persons identified therein. For
each Series, the Servicer or the Trustee, as applicable, will give written
notice of termination of the Agreement to each Holder, and the final
distribution will be made only upon surrender and cancellation of the Securities
at an office or agency specified in the notice of termination. If so provided in
the related Prospectus Supplement for a Series, the Depositor or another entity
may effect an optional termination of the Trust Fund under the circumstances
described in such Prospectus Supplement. See "DESCRIPTION OF THE SECURITIES --
Optional Redemption, Purchase or Termination" herein.
Indenture. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes of
such Series or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which, through the
payment of interest and principal in respect thereof in accordance with their
terms, will provide money in an amount sufficient to pay the principal of and
each installment of interest on the Notes of such Series on the Final Scheduled
Distribution Date for such Notes and any installment of interest on such Notes
in accordance with the terms of the Indenture and the Notes of such Series. In
the event of any such defeasance and discharge of Notes of such Series, holders
of Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
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CERTAIN LEGAL ASPECTS OF LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans, home improvement installment sales contracts and home
improvement installment loan agreements which are general in nature. Because
certain of such legal aspects are governed by applicable state law (which laws
may differ substantially), the summaries do not purport to be complete nor
reflect the laws of any particular state, nor encompass the laws of all states
in which the properties securing the Loans are situated.
Mortgages
The Loans for a Series will, and certain Home Improvement Contracts for a
Series may, be secured by either mortgages or deeds of trust or deeds to secure
debt (such Mortgage Loans and Home Improvement Contracts are hereinafter
referred to in this section as "mortgage loans"), depending upon the prevailing
practice in the state in which the property subject to a mortgage loan is
located. The filing of a mortgage, deed of trust or deed to secure debt creates
a lien or title interest upon the real property covered by such instrument and
represents the security for the repayment of an obligation that is customarily
evidenced by a promissory note. It is not prior to the lien for real estate
taxes and assessments or other charges imposed under governmental police powers
and may also be subject to other liens pursuant to the laws of the jurisdiction
in which the Mortgaged Property is located. Priority with respect to such
instruments depends on their terms, the knowledge of the parties to the mortgage
and generally on the order of recording with the applicable state, county or
municipal office. There are two parties to a mortgage, the mortgagor, who is the
borrower/property owner or the land trustee (as described below), and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the borrower/property owner is the
beneficiary; at origination of a mortgage loan, the borrower executes a separate
undertaking to make payments on the mortgage note. A deed of trust transaction
normally has three parties: the trustor, who is the borrower/property owner; the
beneficiary, who is the lender; and the trustee, a third-party grantee. Under a
deed of trust, the trustor grants the property, irrevocably until the debt is
paid, in trust, generally with a power of sale, to the trustee to secure payment
of the obligation. The mortgagee's authority under a mortgage and the trustee's
authority under a deed of trust are governed by the law of the state in which
the real property is located, the express provisions of the mortgage or deed of
trust, and, in some cases, in deed of trust transactions, the directions of the
beneficiary.
Foreclosure on Mortgages
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming and expensive. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a receiver
or other officer to conduct the sale of the property. In some states, mortgages
may also be foreclosed by advertisement, pursuant to a power of sale provided in
the mortgage. Foreclosure of a mortgage by advertisement is essentially similar
to foreclosure of a deed of trust by nonjudicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a nonjudicial
trustee's sale under a specific provision in the deed of trust which authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In certain states, such foreclosure also may
be accomplished by judicial action in the manner provided for foreclosure of
mortgages. In some states, the trustee must record a notice of default and send
a copy to the borrower-trustor and to any person who has recorded a request for
a copy of a notice of default and notice of sale. In addition, the trustee in
some states must provide notice to any other individual having an interest in
the real property, including any junior lienholders. If the deed of trust is not
reinstated within any applicable cure period, a notice of sale must be posted in
a public place and, in most states, published for a specified period of time in
one or more newspapers. In addition, some state laws require that a copy of the
notice of sale be posted on the property and sent to all parties having an
interest of record in the property. The trustor, borrower, or any person having
a junior encumbrance on the real estate, may, during a reinstatement period,
cure the default by paying the entire amount in arrears plus the costs and
expenses
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incurred in enforcing the obligation. Generally, state law controls the amount
of foreclosure expenses and costs, including attorney's fees, which may be
recovered by a lender. If the deed of trust is not reinstated, a notice of sale
must be posted in a public place and, in most states, published for a specified
period of time in one or more newspapers. In addition, some state laws require
that a copy of the notice of sale be posted on the property, recorded and sent
to all parties having an interest in the real property.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith,
or oppressive or unconscionable conduct such as to warrant a court of equity to
refuse affirmative relief to the mortgagee. Under certain circumstances a court
of equity may relieve the mortgagor from an entirely technical default where
such default was not willful.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses or counterclaims are interposed, sometimes requiring up to
several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and such sale occurred while the mortgagor was insolvent and
within one year (or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law) of the
filing of bankruptcy. Similarly, a suit against the debtor on the related
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty potential third party purchasers at the
sale have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for an amount which may be equal to the unpaid
principal amount of the mortgage note secured by the mortgage or deed of trust
plus accrued and unpaid interest and the expenses of foreclosure, in which event
the mortgagor's debt will be extinguished or the lender may purchase for a
lesser amount in order to preserve its right against a borrower to seek a
deficiency judgment in states where such a judgment is available. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burdens of ownership,
including obtaining hazard insurance, paying taxes and making such repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Any loss may be reduced by the
receipt of any mortgage guaranty insurance proceeds.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. The
right of redemption should be distinguished from the equity of redemption, which
is a non-statutory right that must be exercised prior to the foreclosure sale.
In some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a portion
of the sums due. The effect of a statutory right of redemption is to diminish
the ability of the lender to sell the foreclosed property. The exercise of a
right of redemption would defeat the title of any purchaser at a foreclosure
sale, or of any purchaser from the lender subsequent to foreclosure or sale
under a deed of trust. Consequently the practical effect of a right of
redemption is to force the lender to retain the property and pay the expenses of
ownership until the redemption period has run. In some states, there is no right
to redeem property after a trustee's sale under a deed of trust.
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Junior Mortgages; Rights of Senior Mortgages
The mortgage loans comprising or underlying the Primary Assets included in
the Trust Fund for a Series will be secured by mortgages or deeds of trust which
may be second or more junior mortgages to other mortgages held by other lenders
or institutional investors. The rights of the Trust Fund (and therefore the
Holders), as mortgagee under a junior mortgage, are subordinate to those of the
mortgagee under the senior mortgage, including the prior rights of the senior
mortgagee to receive hazard insurance and condemnation proceeds and to cause the
property securing the mortgage loan to be sold upon default of the mortgagor,
thereby extinguishing the junior mortgagee's lien unless the junior mortgagee
asserts its subordinate interest in the property in foreclosure litigation and,
possibly, satisfies the defaulted senior mortgage. A junior mortgagee may
satisfy a defaulted senior loan in full and, in some states, may cure such
default and bring the senior loan current, in either event adding the amounts
expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders confers
on the mortgagee the right both to receive all proceeds collected under any
hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the mortgagor. All sums so expended by
the mortgagee become part of the indebtedness secured by the mortgage.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower. In
certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower following a foreclosure sale to
the excess of the outstanding debt over the fair market value of the property at
the time of the public sale. The purpose of these statutes is generally to
prevent a beneficiary or a mortgagee from obtaining a large deficiency judgment
against the former borrower as a result of low or no bids at the foreclosure
sale.
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In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws, the Federal
Soldiers' and Sailors' Relief Act and state laws affording relief to debtors,
may interfere with or affect the ability of the secured lender to realize upon
collateral and/or enforce a deficiency judgment. For example, with respect to
federal bankruptcy law, the filing of a petition acts as a stay against the
enforcement of remedies for collection of a debt. Moreover, a court with federal
bankruptcy jurisdiction may permit a debtor through a Chapter 13 Bankruptcy Code
rehabilitative plan to cure a monetary default with respect to a loan on a
debtor's residence by paying arrearages within a reasonable time period and
reinstating the original loan payment schedule even though the lender
accelerated the loan and the lender has taken all steps to realize upon his
security (provided no sale of the property has yet occurred) prior to the filing
of the debtor's Chapter 13 petition. Some courts with federal bankruptcy
jurisdiction have approved plans, based on the particular facts of the
reorganization case, that effected the curing of a loan default by permitting
the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan may be modified if the borrower has filed a petition
under Chapter 13. These courts have suggested that such modifications may
include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Federal bankruptcy law and limited case law
indicate that the foregoing modifications could not be applied to the terms of a
loan secured by property that is the principal residence of the debtor. In all
cases, the secured creditor is entitled to the value of its security plus
post-petition interest, attorney's fees and costs to the extent the value of the
security exceeds the debt.
In a Chapter 11 case under the Bankruptcy Code, the lender is precluded from
foreclosing without authorization from the bankruptcy court. The lender's lien
may be transferred to other collateral and/or be limited in amount to the value
of the lender's interest in the collateral as of the date of the bankruptcy. The
loan term may be extended, the interest rate may be adjusted to market rates and
the priority of the loan may be subordinated to bankruptcy court-approved
financing. The bankruptcy court can, in effect, invalidate due-on-sale clauses
through confirmed Chapter 11 plans of reorganization.
The Bankruptcy Code provides priority to certain tax liens over the lender's
security. This may delay or interfere with the enforcement of rights in respect
of a defaulted Loan. In addition, substantive requirements are imposed upon
lenders in connection with the origination and the servicing of mortgage loans
by numerous federal and some state consumer protection laws. The laws include
the federal Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and
related statutes and regulations. These federal laws impose specific statutory
liabilities upon lenders who originate loans and who fail to comply with the
provisions of the law. In some cases, this liability may affect assignees of the
loans.
Due-on-Sale Clauses in Mortgage Loans
Due-on-sale clauses permit the lender to accelerate the maturity of the loan
if the borrower sells or transfers, whether voluntarily or involuntarily, all or
part of the real property securing the loan without the lender's prior written
consent. The enforceability of these clauses has been the subject of legislation
or litigation in many states, and in some cases, typically involving single
family residential mortgage transactions, their enforceability has been limited
or denied. In any event, the Garn-St. Germain Depository Institutions Act of
1982 (the "Garn-St. Germain Act") preempts state constitutional, statutory and
case law that prohibits the enforcement of due-on-sale clauses and permits
lenders to enforce these clauses in accordance with their terms, subject to
certain exceptions. As a result, due-on-sale clauses have become generally
enforceable except in those states whose legislatures exercised their authority
to regulate the enforceability of such clauses with respect to mortgage loans
that were (i) originated or assumed during the "window period" under the
Garn-St. Germain Act which ended in all cases not later than October 15, 1982,
and (ii) originated by lenders other than national banks, federal savings
institutions and federal credit unions. FHLMC has taken the position in its
published mortgage servicing standards that, out of a total of eleven "window
period states," five states (Arizona, Michigan, Minnesota, New Mexico and Utah)
have enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of window
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period loans. Also, the Garn-St. Germain Act does "encourage" lenders to permit
assumption of loans at the original rate of interest or at some other rate less
than the average of the original rate and the market rate.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from such bankruptcy proceeding.
Enforceability of Prepayment and Late Payment Fees
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations, upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
Equitable Limitations on Remedies
In connection with lenders' attempts to realize upon their security, courts
have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his defaults
under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon his
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in cases involving the
sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full or in
part without penalty. The regulations of the Office of Thrift Supervision (the
"OTS") prohibit the imposition of a prepayment penalty or equivalent fee for or
in connection with the acceleration of a loan by exercise of a due-on-sale
clause. A mortgagee to whom a prepayment in full has been tendered may be
compelled to give either a release of the mortgage or an instrument assigning
the existing mortgage. The absence of a restraint on prepayment, particularly
with respect to mortgage loans having higher mortgage rates, may increase the
likelihood of refinancing or other early retirements of such mortgage loans.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. Similar federal statutes
were in effect with respect to mortgage loans made during the first three months
of 1980. The OTS, as successor to the Federal Home Loan Bank Board, is
authorized to issue rules and regulations and to publish interpretations
governing implementation of Title V. Title V authorizes any state to reimpose
interest rate limits by adopting, before April 1, 1983, a state law, or by
certifying that the voters of such state have voted in favor of any provision,
constitutional or otherwise, which expressly rejects an application of the
federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V.
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The Home Improvement Contracts
General. The Home Improvement Contracts, other than those Home Improvement
Contracts that are unsecured or secured by mortgages on real estate (such Home
Improvement Contracts are hereinafter referred to in this section as
"contracts") generally are "chattel paper" or constitute "purchase money
security interests" each as defined in the Uniform Commercial Code (the "UCC").
Pursuant to the UCC, the sale of chattel paper is treated in a manner similar to
perfection of a security interest in chattel paper. Under the related Agreement,
the Depositor will transfer physical possession of the contracts to the Trustee
or a designated custodian or may retain possession of the contracts as custodian
for the Trustee. In addition, the Depositor will make an appropriate filing of a
UCC-1 financing statement in the appropriate states to give notice of the
Trustee's ownership of the contracts. Unless otherwise specified in the related
Prospectus Supplement, the contracts will not be stamped or otherwise marked to
reflect their assignment from the Depositor to the Trustee. Therefore, if
through negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the contracts without notice of such assignment, the
Trustee's interest in the contracts could be defeated.
Security Interests in Home Improvements. The contracts that are secured by
the Home Improvements financed thereby grant to the originator of such contracts
a purchase money security interest in such Home Improvements to secure all or
part of the purchase price of such Home Improvements and related services. A
financing statement generally is not required to be filed to perfect a purchase
money security interest in consumer goods. Such purchase money security
interests are assignable. In general, a purchase money security interest grants
to the holder a security interest that has priority over a conflicting security
interest in the same collateral and the proceeds of such collateral. However, to
the extent that the collateral subject to a purchase money security interest
becomes a fixture, in order for the related purchase money security interest to
take priority over a conflicting interest in the fixture, the holder's interest
in such Home Improvement must generally be perfected by a timely fixture filing.
In general, under the UCC, a security interest does not exist under the UCC in
ordinary building material incorporated into an improvement on land. Home
Improvement Contracts that finance lumber, bricks, other types of ordinary
building material or other goods that are deemed to lose such characterization,
upon incorporation of such materials into the related property, will not be
secured by a purchase money security interest in the Home Improvement being
financed.
Enforcement of Security Interest in Home Improvements. So long as the Home
Improvement has not become subject to the real estate law, a creditor can
repossess a Home Improvement securing a contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a contract must give the
debtor a number of days' notice, which varies from 10 to 30 days depending on
the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit that the debtor may redeem
it at or before such resale.
Under the laws applicable in most states, a creditor is entitled to obtain a
deficiency judgement from a debtor for any deficiency on repossession and resale
of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgements, and in many cases the
defaulting borrower would have no assets with which to pay a judgement.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgement.
Consumer Protection Laws. The so-called "Holder-in-Due-Course" rule of the
Federal Trade Commission is intended to defeat the ability of the transferor of
a consumer credit contract which is the seller of goods which gave rise to the
transaction (and certain related lenders and assignees) to transfer such
contract free of notice of claims by the debtor thereunder. The effect of this
rule is to subject the assignee of such a contract to all claims and defenses
which the debtor could assert against the seller of goods. Liability under this
rule is limited to amounts paid under a contract; however, the obligor also may
be able to assert the rule to set off remaining amounts due as a defense against
a claim brought by the Trustee against such obligor. Numerous other federal and
state consumer protection laws impose requirements applicable to the origination
and lending pursuant to the contracts, including the Truth in Lending Act, the
Federal Trade Commission Act, the Fair Credit Billing Act, the Fair Credit
Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection
Practices Act and
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the Uniform Consumer Credit Code. In the case of some of these laws, the
failure to comply with their provisions may affect the enforceability of the
related contract.
Applicability of Usury Laws. Title V provides that, subject to the following
conditions, state usury limitations shall not apply to any contract which is
secured by a first lien on certain kinds of consumer goods. The contracts would
be covered if they satisfy certain conditions, among other things, governing the
terms of any prepayments, late charges and deferral fees and requiring a 30-day
notice period prior to instituting any action leading to repossession of the
related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
Installment Sales Contracts
The Loans may also consist of installment sales contracts. Under an
installment sales contract ("Installment Sales Contract") the seller
(hereinafter referred to in this section as the "lender") retains legal title to
the property and enters into an agreement with the purchaser (hereinafter
referred to in this section as the "borrower") for the payment of the purchase
price, plus interest, over the term of such contract. Only after full
performance by the borrower of the contract is the lender obligated to convey
title to the property to the purchaser. As with mortgage or deed of trust
financing, during the effective period of the Installment Sales Contract, the
borrower is generally responsible for maintaining the property in good condition
and for paying real estate taxes, assessments and hazard insurance premiums
associated with the property.
The method of enforcing the rights of the lender under an Installment Sales
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to the terms. The terms of Installment Sales
Contracts generally provide that upon a default by the borrower, the borrower
loses his or her right to occupy the property, the entire indebtedness is
accelerated, and the buyer's equitable interest in the property is forfeited.
The lender in such a situation does not have to foreclose in order to obtain
title to the property, although in some cases a quiet title action is in order
if the borrower has filed the Installment Sales Contract in local land records
and an ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
Installment Sales Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Sales Contracts from the harsh consequences of
forfeiture. Under such statutes, a judicial or nonjudicial foreclosure may be
required, the lender may be required to give notice of default and the borrower
may be granted some grace period during which the Installment Sales Contract may
be reinstated upon full payment of the default amount and the borrower may have
a post-foreclosure statutory redemption right. In other states, courts in equity
may permit a borrower with significant investment in the property under an
Installment Sales Contract for the sale of real estate to share in the proceeds
of sale of the property after the indebtedness is repaid or may otherwise refuse
to enforce the forfeiture clause. Nevertheless, generally speaking, the lender's
procedures for obtaining possession and clear title under an Installment Sales
Contract in a given state are simpler and less time-consuming and costly than
are the procedures for foreclosing and obtaining clear title to a property
subject to one or more liens.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service, (i) are entitled to have interest rates reduced and capped at
6% per annum, on obligations (including Loans) incurred prior to the
commencement of military service for the duration of military service, (ii) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on such obligations entered into prior to
military service for the duration of military service and (iii) may have the
maturity of such obligations incurred prior to military service extended, the
payments lowered and the payment schedule readjusted for a period of time after
the completion of military service. However, the benefits of (i), (ii), or (iii)
above are subject to challenge by
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creditors and if, in the opinion of the court, the ability of a person to comply
with such obligations is not materially impaired by military service, the court
may apply equitable principles accordingly. If a borrower's obligation to repay
amounts otherwise due on a Loan included in a Trust Fund for a Series is
relieved pursuant to the Soldiers' and Sailors' Civil Relief Act of 1940, none
of the Trust Fund, the Servicer, the Depositor nor the Trustee will be required
to advance such amounts, and any loss in respect thereof may reduce the amounts
available to be paid to the Holders of the Securities of such Series. Unless
otherwise specified in the related Prospectus Supplement, any shortfalls in
interest collections on Loans or Underlying Loans relating to the Private
Securities, as applicable, included in a Trust Fund for a Series resulting from
application of the Soldiers' and Sailors' Civil Relief Act of 1940 will be
allocated to each Class of Securities of such Series that is entitled to receive
interest in respect of such Loans or Underlying Loans in proportion to the
interest that each such Class of Securities would have otherwise been entitled
to receive in respect of such Loans or Underlying Loans had such interest
shortfall not occurred.
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THE DEPOSITOR
General
The Depositor was incorporated in the State of Delaware in June 1995, and is
a wholly-owned subsidiary of The Bear Stearns Companies Inc. The Depositor's
principal executive offices are located at 245 Park Avenue, New York, New York
10167. Its telephone number is (212) 272-4095.
The Depositor will not engage in any activities other than to authorize,
issue, sell, deliver, purchase and invest in (and enter into agreements in
connection with), and/or to engage in the establishment of one or more trusts
which will issue and sell, bonds, notes, debt or equity securities, obligations
and other securities and instruments ("Depositor Securities") collateralized or
otherwise secured or backed by, or otherwise representing an interest in, among
other things, receivables or pass-through certificates, or participations or
certificates of participation or beneficial ownership in one or more pools of
receivables, and the proceeds of the foregoing, that arise in connection with
loans secured by certain first or junior mortgages on real estate or
manufactured housing and any and all other commercial transactions and
commercial, sovereign, student or consumer loans or indebtedness and, in
connection therewith or otherwise, purchasing, acquiring, owning, holding,
transferring, conveying, servicing, selling, pledging, assigning, financing and
otherwise dealing with such receivables, pass-through certificates, or
participations or certificates of participation or beneficial ownership. Article
Third of the Depositor's Certificate of Incorporation limits the Depositor's
activities to the above activities and certain related activities, such as
credit enhancement with respect to such Depositor Securities, and to any
activities incidental to and necessary or convenient for the accomplishment of
such purposes.
USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds from
the sale of each Series of Securities for one or more of the following purposes:
(i) to purchase the related Primary Assets, (ii) to repay indebtedness which has
been incurred to obtain funds to acquire such Primary Assets, (iii) to establish
any Reserve Funds described in the related Prospectus Supplement and (iv) to pay
costs of structuring and issuing such Securities, including the costs of
obtaining Enhancement, if any. If so specified in the related Prospectus
Supplement, the purchase of the Primary Assets for a Series may be effected by
an exchange of Securities with the Seller of such Primary Assets.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
General
The following summary is based on the opinion of Stroock & Stroock & Lavan
LLP, special counsel to the Depositor ("Federal Tax Counsel") as to the
anticipated material federal income tax consequences of the purchase, ownership
and disposition of Securities. The summary does not purport to deal with all
aspects of federal income taxation that may affect particular investors in light
of their individual circumstances, nor with certain types of investors subject
to special treatment under the federal income tax laws. This summary focuses
primarily upon investors who will hold Securities as "capital assets"
(generally, property held for investment) within the meaning of Section1221 of
the Code, but much of the discussion is applicable to other investors as well.
Prospective investors are advised to consult their own tax advisers concerning
the federal, state, local and any other tax consequences to them of the
purchase, ownership and disposition of the Securities.
The summary is based upon the provisions of the Code, the regulations
promulgated thereunder, including, where applicable, proposed regulations, and
the judicial and administrative rulings and decisions now in effect, all of
which are subject to change or possible differing interpretations. The statutory
provisions, regulations, and interpretations on which this interpretation is
based are subject to change, and such a change could apply retroactively.
The federal income tax consequences to Holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness; (ii) an
election is made to treat the Trust Fund relating to a particular Series of
Securities as a real estate mortgage investment conduit ("REMIC") under the
Internal Revenue Code of 1986, as amended (the "Code"); (iii) the Securities
represent an ownership interest in some or all of the assets included in the
Trust Fund for a Series; or (iv) an election is made to treat the Trust Fund
relating to a particular Series of Certificates as a partnership or a division
of a single holder of all of the equity Securities of a Series.
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The Prospectus Supplement for each Series of Securities will specify how the
Securities will be treated for federal income tax purposes and will discuss
whether a REMIC election, if any, will be made with respect to such Series.
Taxation of Debt Securities
Status of Regular Interest Securities as Real Property Loans. The regular
interests in a REMIC ("Regular Interest Securities") will be "real estate
assets" for purposes of Section 856(c)(4)(A) of the Code and assets described in
Section 7701(a)(19)(C) of the Code (assets qualifying under one or both of those
sections, applying each section separately, "qualifying assets") to the extent
that the REMIC's assets are qualifying assets. For purposes of this rule, if at
least 95 percent of the REMIC's assets are qualifying assets, then 100 percent
of the Regular Interest Securities will be qualifying assets. Similarly, income
on the Regular Interest Securities will be treated as 'interest on obligations
secured by mortgages on real property" within the meaning of Section856(c)(3)(B)
of the Code, subject to the limitations of the preceding two sentences. In
addition to Loans, the REMIC's assets will include payments on Loans held
pending distribution to holders of Regular Interest Securities, amounts in
reserve accounts (if any), other credit enhancements (if any) and possibly
buydown funds ("Buydown Funds"). The Loans generally will be qualifying assets
under both of the foregoing sections of the Code. However, Loans that are not
secured by residential real property or real property used primarily for church
purposes may not constitute qualifying assets under Section7701(a)(19)(c)(v) of
the Code. In addition, to the extent that the principal amount of a Loan exceeds
the value of the property securing the Loan, it is unclear and Federal Tax
Counsel is unable to opine whether the Loans will be qualifying assets. The
regulations under Sections 80A through 860G of the Code (the "REMIC
Regulations") treat credit enhancements as part of the mortgage or pool of
mortgages to which they relate, and therefore credit enhancements generally
should be qualifying assets. Regulations issued in conjunction with the REMIC
Regulations provide that amounts paid on Loans and held pending distribution to
holders of Regular Interest Securities ("cash flow investments") will be treated
as qualifying assets. It is unclear whether reserve funds or Buydown Funds would
also constitute qualifying assets under any of those provisions.
Interest and Acquisition Discount. Securities representing Regular Interest
Securities are generally taxable to Holders in the same manner as evidences of
indebtedness issued by the REMIC. Stated interest on the Regular Interest
Securities will be taxable as ordinary income and taken into account using the
accrual method of accounting, regardless of the Holder's normal accounting
method. Interest (other than original issue discount) on Securities (other than
Regular Interest Securities) that are characterized as indebtedness for federal
income tax purposes will be includible in income by Holders thereof in
accordance with their usual methods of accounting. Securities characterized as
debt for federal income tax purposes and Regular Interest Securities will be
referred to hereinafter collectively as "Debt Securities."
Debt Securities that are Compound Interest Securities will, and certain of
the other Debt Securities may, be issued with "original issue discount" ("OID").
The following discussion is based in part on the rules governing OID which are
set forth in Sections 1271-1275 of the Code and the Treasury regulations issued
thereunder on February 2, 1994, as amended June 11, 1996 (the "OID
Regulations"). A Holder should be aware, however, that the OID Regulations do
not adequately address certain issues relevant to prepayable securities, such as
the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. A Holder of
a Debt Security must include such OID in gross income as ordinary interest
income as it accrues under a method taking into account an economic accrual of
the discount. In general, OID must be included in income in advance of the
receipt of the cash representing that income. The amount of OID on a Debt
Security will be considered to be zero if it is less than a de minimis amount
determined under the Code.
The issue price of a Debt Security is the first price at which a substantial
amount of Debt Securities of that class are sold to the public (excluding bond
houses, brokers, underwriters or wholesalers). If less than a substantial amount
of a particular class of Debt Securities is sold for cash on or prior to the
Closing Date, the issue price for such class will be treated as the fair market
value of such class on the Closing Date. The issue price of a Debt Security also
includes the amount paid by an initial Debt Security Holder for accrued interest
that relates to a period prior to the issue date of the Debt Security. The
stated redemption price at maturity of a
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Debt Security includes the original principal amount of the Debt Security, but
generally will not include distributions of interest if such distributions
constitute "qualified stated interest."
Under the OID Regulations, interest payments will not qualify as qualified
stated interest unless the interest payments are "unconditionally payable." The
OID Regulations state that interest is unconditionally payable if reasonable
legal remedies exist to compel timely payment, or the debt instrument otherwise
provides terms and conditions that make the likelihood of late payment (other
than a late payment that occurs within a reasonable grace period) or nonpayment
of interest a remote contingency, as defined in the OID Regulations. It is
unclear whether the terms and conditions of the Loans underlying the Debt
Securities or the terms and conditions of the Debt Securities are considered
when determining whether the likelihood of late payment or nonpayment of
interest is a remote contingency. Any terms or conditions that do not reflect
arm's length dealing or that the holder does not intend to enforce are not
considered.
Certain Debt Securities will provide for distributions of interest based on
a period that is the same length as the interval between Distribution Dates but
ends prior to each Distribution Date. Any interest that accrues prior to the
Closing Date may be treated under the OID Regulations either (i) as part of the
issue price and the stated redemption price at maturity of the Debt Securities
or (ii) as not included in the issue price or stated redemption price. The OID
Regulations provide a special application of the de minimis rule for debt
instruments with long first accrual periods where the interest payable for the
first period is at a rate which is effectively less than that which applies in
all other periods. In such cases, for the sole purpose of determining whether
original issue discount is de minimis, the OID Regulations provide that the
stated redemption price is equal to the instrument's issue price plus the
greater of the amount of foregone interest or the excess (if any) of the
instrument's stated principal amount over its issue price.
Under the de minimis rule, OID on a Debt Security will be considered to be
zero if such OID is less than 0.25% of the stated redemption price at maturity
of the Debt Security multiplied by the weighted average maturity of the Debt
Security. For this purpose, the weighted average maturity of the Debt Security
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the Debt Security and the
denominator of which is the stated redemption price at maturity of the Debt
Security. Holders generally must report de minimis OID pro rata as principal
payments are received, and such income will be capital gain if the Debt Security
is held as a capital asset. However, accrual method Holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
The Holder of a Debt Security issued with OID must include in gross income,
for all days during its taxable year on which it holds such Debt Security, the
sum of the "daily portions" of such original issue discount. The amount of OID
includible in income by a Holder will be computed by allocating to each day
during a taxable year a pro rata portion of the original issue discount that
accrued during the relevant accrual period. In the case of a Debt Security that
is not a Regular Interest Security and the principal payments on which are not
subject to acceleration resulting from prepayments on the Loans, the amount of
OID includible in income of a Holder for an accrual period (generally the period
over which interest accrues on the debt instrument) will equal the product of
the yield to maturity of the Debt Security and the adjusted issue price of the
Debt Security, reduced by any payments of qualified stated interest. The
adjusted issue price is the sum of its issue price plus prior accruals of OID,
reduced by the total payments made with respect to such Debt Security in all
prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a Holder of a debt instrument,
such as certain Classes of the Debt Securities, that is subject to acceleration
due to prepayments on other debt obligations securing such instruments (a
"Pay-Through Security"), is computed by taking into account the anticipated rate
of prepayments assumed in pricing the debt instrument (the "Prepayment
Assumption"). The amount of OID that will accrue during an accrual period on a
Pay-Through Security is the excess (if any) of the sum of (a) the present value
of all payments remaining to be made on the Pay-Through Security as of the close
of the accrual period and (b) the payments during the accrual period of amounts
included in the stated redemption price of the Pay-Through Security, over the
adjusted issue price of the Pay-Through Security at the beginning of the accrual
period. The present value of the remaining payments is to be determined on the
basis of three factors: (i) the original yield to maturity of the Pay-Through
Security (determined on the basis of compounding at the end of each accrual
period and properly adjusted for the length of the accrual period), (ii) events
which have occurred before the end
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of the accrual period and (iii) the assumption that the remaining payments will
be made in accordance with the original Prepayment Assumption. The effect of
this method is to increase the portions of OID required to be included in income
by a Holder to take into account prepayments with respect to the Loans at a rate
that exceeds the Prepayment Assumption, and to decrease (but not below zero for
any period) the portions of OID required to be included in income by a Holder of
a Pay-Through Security to take into account prepayments with respect to the
Loans at a rate that is slower than the Prepayment Assumption. Although OID will
be reported to Holders of Pay-Through Securities based on the Prepayment
Assumption, no representation is made to Holders that Loans will be prepaid at
that rate or at any other rate.
The Depositor may adjust the accrual of OID on a Class of Regular Interest
Securities (or other regular interests in a REMIC) in a manner that it believes
to be appropriate, to take account of realized losses on the Loans, although the
OID Regulations do not provide for such adjustments. If the Internal Revenue
Service were to require that OID be accrued without such adjustments, the rate
of accrual of OID for a Class of Regular Interest Securities could increase.
Certain classes of Regular Interest Securities may represent more than one
class of REMIC regular interests. Unless the applicable Prospectus Supplement
specifies otherwise, the Trustee intends, based on the OID Regulations, to
calculate OID on such Securities as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
A subsequent Holder of a Debt Security will also be required to include OID
in gross income, but such a Holder who purchases such Debt Security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial Holder who pays more than a Debt Security's issue price) to offset such
OID by comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. Holders will be required to report
income with respect to the related Securities under an accrual method without
giving effect to delays and reductions in distributions attributable to a
default or delinquency on the Loans, except possibly to the extent that it can
be established that such amounts are uncollectible. As a result, the amount of
income (including OID) reported by a Holder of such a Security in any period
could significantly exceed the amount of cash distributed to such Holder in that
period. The Holder will eventually be allowed a loss (or will be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the Securities is reduced as a result of a Loan default.
However, the timing and character of such losses or reductions in income are
uncertain and, accordingly, Holders of Securities should consult their own tax
advisors on this point.
Interest-Only Debt Securities. The Trust Fund intends to report income from
interest-only classes of Debt Securities to the Internal Revenue Service and to
holders of interest-only Debt Securities based on the assumption that the stated
redemption price at maturity is equal to the sum of all payments determined
under the applicable prepayment assumption. As a result, such interest-only Debt
Securities Certificates will be treated as having original issue discount.
Variable Rate Debt Securities. Under the OID Regulations, Debt Securities
paying interest at a variable rate (a "Variable Rate Debt Security") are subject
to special rules. A Variable Rate Debt Security will qualify as a "variable rate
debt instrument" if (i) its issue price does not exceed the total noncontingent
principal payments due under the Variable Rate Debt Security by more than a
specified de minimis amount, (ii) it provides for stated interest, paid or
compounded at least annually, at (a) one or more qualified floating rates, (b) a
single fixed rate and one or more qualified floating rates, (c) a single
objective rate or (d) a single fixed rate and a single objective rate that is a
qualified inverse floating rate and (iii) it does not provide for any principal
payments that are contingent, as defined in the OID Regulations, except as
provided in (i), above. Because the OID Regulations relating to contingent
payment debt instruments do not apply to REMIC regular interests, principal
payments on the REMIC Regular Certificates should not be considered contingent
for this purpose.
A "qualified floating rate" is any variable rate where variations in the
value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate Debt Security is denominated. A multiple of a qualified floating
rate will generally not itself constitute a qualified floating rate for purposes
of the OID Regulations. However, a variable rate equal to (i) the product of a
qualified floating rate and a fixed multiple that is greater than 0.65 but not
more than 1.35 or (ii) the product of a qualified floating rate and a fixed
multiple that is greater than 0.65 but not more than 1.35, increased or
decreased by a fixed rate will constitute a qualified floating rate for purposes
of the OID
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Regulations. In addition, under the OID Regulations, two or more qualified
floating rates that can reasonably be expected to have approximately the same
values throughout the term of the Variable Rate Debt Security will be treated as
a single qualified floating rate (a "Presumed Single Qualified Floating Rate").
Two or more qualified floating rates with values within 25 basis points of each
other as determined on the Variable Rate Debt Security's issue date will be
conclusively presumed to be a Presumed Single Qualified Floating Rate.
Notwithstanding the foregoing, a variable rate that would otherwise constitute a
qualified floating rate but which is subject to one or more restrictions such as
a cap or floor, will not be a qualified floating rate for purposes of the OID
Regulations unless the restriction is fixed throughout the term of the Variable
Rate Debt Security or the restriction will not significantly affect the yield of
the Variable Rate Debt Security.
An "objective rate" is a rate that is not itself a qualified floating rate
but which is determined using a single fixed formula and which is based upon
objective financial or economic information. The OID Regulations also provide
that other variable rates may be treated as objective rates if so designated by
the Internal Revenue Service in the future. An interest rate on a REMIC Regular
Certificate that is the weighted average of the interest rates on some or all of
the qualified mortgages held by the REMIC should constitute an objective rate.
Despite the foregoing, a variable rate of interest on a Variable Rate Debt
Security will not constitute an objective rate if it is reasonably expected that
the average value of such rate during the first half of the Variable Rate Debt
Security's term will be either significantly less than or significantly greater
than the average value of the rate during the final half of the Variable Rate
Debt Security's term. Further, an objective rate does not include a rate that is
based on information that is within the control of the issuer (or a party
related to the issuer) or that is unique to the circumstances of the issuer (or
a party related to the issuer). An objective rate will qualify as a "qualified
inverse floating rate" if such rate is equal to a fixed rate minus a qualified
floating rate and variations in the rate can reasonably be expected to inversely
reflect contemporaneous variations in the qualified floating rate. The OID
Regulations also provide that if a Variable Rate Debt Security provides for
stated interest at a fixed rate for an initial period of less than one year
followed by a variable rate that is either a qualified floating rate or an
objective rate and if the variable rate on the Variable Rate Debt Security's
issue date is intended to approximate the fixed rate, then the fixed rate and
the variable rate together will constitute either a single qualified floating
rate or objective rate, as the case may be (a "Presumed Single Variable Rate").
If the value of the variable rate and the initial fixed rate are within 25 basis
points of each other as determined on the Variable Rate Debt Security's issue
date, the variable rate will be conclusively presumed to approximate the fixed
rate.
For Variable Rate Debt Securities that qualify as a "variable rate debt
instrument" under the OID Regulations and provide for interest at either a
single qualified floating rate, a single objective rate, a Presumed Single
Qualified Floating Rate or a Presumed Single Variable Rate throughout the term
(a "Single Variable Rate Debt Security"), original issue discount is computed as
described above based on the following: (i) stated interest on the Single
Variable Rate Debt Security which is unconditionally payable in cash or property
(other than debt instruments of the issuer) at least annually will constitute
qualified stated interest, (ii) by assuming that the variable rate on the Single
Variable Debt Security is a fixed rate equal to: (a) in the case of a Single
Variable Rate Debt Security with a qualified floating rate or a qualified
inverse floating rate, the value of, as of the issue date, of the qualified
floating rate or the qualified inverse floating rate or (b) in the case of a
Single Variable Rate Debt Security with an objective rate (other than a
qualified inverse floating rate), a fixed rate which reflects the reasonably
expected yield for such Single Variable Debt Security and (iii) the qualified
stated interest allocable to an accrual period is increased (or decreased) if
the interest actually paid during an accrual period exceeds (or is less than)
the interest assumed to be paid under the assumed fixed rate described in (ii),
above.
In general, any Variable Rate Debt Security other than a Single Variable
Rate Debt Security (a "Multiple Variable Rate Debt Security") that qualifies as
a "variable rate debt instrument" will be converted into an "equivalent" fixed
rate debt instrument for purposes of determining the amount and accrual of
original issue discount and qualified stated interest on the Multiple Variable
Rate Debt Security. The OID Regulations generally require that such a Multiple
Variable Rate Debt Security be converted into an "equivalent" fixed rate debt
instrument by substituting any qualified floating rate or qualified inverse
floating rate provided for under the terms of the Multiple Variable Rate Debt
Security with a fixed rate equal to the value of the qualified floating rate or
qualified inverse floating rate, as the case may be, as of the Multiple Variable
Rate Debt Security's issue date. Any objective rate (other than a qualified
inverse floating rate) provided for under the terms of the Multiple Variable
Rate Debt Security is converted into a fixed rate that reflects the yield that
is reasonably expected for the Multiple Variable Rate Debt Security. In the case
of a Multiple Variable Rate Debt Security that qualifies as a "variable rate
debt instrument" and provides for stated interest at a fixed rate in addition to
either one or more
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qualified floating rates or a qualified inverse floating rate, the fixed rate is
initially converted into a qualified floating rate (or a qualified inverse
floating rate, if the Multiple Variable Rate Debt Security provides for a
qualified inverse floating rate). Under such circumstances, the qualified
floating rate or qualified inverse floating rate that replaces the fixed rate
must be such that the fair market value of the Multiple Variable Rate Debt
Security as of the Multiple Variable Rate Debt Security's issue date is
approximately the same as the fair market value of an otherwise identical debt
instrument that provides for either the qualified floating rate or qualified
inverse floating rate rather than the fixed rate. Subsequent to converting the
fixed rate into either a qualified floating rate or a qualified inverse floating
rate, the Multiple Variable Rate Debt Security is then converted into an
"equivalent" fixed rate debt instrument in the manner described above.
Once the Multiple Variable Rate Debt Security is converted into an
"equivalent" fixed rate debt instrument pursuant to the foregoing rules, the
amount of original issue discount and qualified stated interest, if any, are
determined for the "equivalent" fixed rate debt instrument by applying the
original issue discount rules to the "equivalent" fixed rate debt instrument in
the manner described above. A Holder of the Multiple Variable Rate Debt Security
will account for such original issue discount and qualified stated interest as
if the Holder held the "equivalent" fixed rate debt instrument. Each accrual
period appropriate adjustments will be made to the amount of qualified stated
interest or original issue discount assumed to have been accrued or paid with
respect to the "equivalent" fixed rate debt instrument in the event that such
amounts differ from the accrual amount of interest accrued or paid on the
Multiple Variable Rate Debt Security during the accrual period.
If a Variable Rate Debt Security does not qualify as a "variable rate debt
instrument" under the OID Regulations, then the Variable Rate Debt Security
would be treated as a contingent payment debt obligation. It is not clear under
current law how a Variable Rate Debt Security would be taxed if such Debt
Security were treated as a contingent payment debt obligation since the OID
Regulations relating to contingent payment debt obligations do not apply to
REMIC regular interests.
Market Discount. A purchaser of a Security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A Holder that acquires a Debt
Security with more than a prescribed de minimis amount of "market discount"
(generally, the excess of the principal amount of the Debt Security over the
purchaser's purchase price) will be required to include accrued market discount
in income as ordinary income in each month, but limited to an amount not
exceeding the principal payments on the Debt Security received in that month
and, if the Securities are sold, the gain realized. Such market discount would
accrue in a manner to be provided in Treasury regulations but, until such
regulations are issued, such market discount would in general accrue either (i)
on the basis of a constant yield (in the case of a Pay-Through Security, taking
into account a prepayment assumption) or (ii) in the ratio of (a) in the case of
Securities (or in the case of a Pass-Through Security, as set forth below, the
Loans underlying such Security) not originally issued with original issue
discount, stated interest payable in the relevant period to total stated
interest remaining to be paid at the beginning of the period or (b) in the case
of Securities (or, in the case of a Pass-Through Security, as described below,
the Loans underlying such Security) originally issued at a discount, OID in the
relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the Debt Security (or, in the case of a Pass-Through Security, the Loans),
the excess of interest paid or accrued to purchase or carry a Security (or, in
the case of a Pass-Through Security, as described below, the underlying Loans)
with market discount over interest received on such Security is allowed as a
current deduction only to the extent such excess is greater than the market
discount that accrued during the taxable year in which such interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon the
sale, disposition, or repayment of the Security (or in the case of a
Pass-Through Security, an underlying Loan). A Holder may elect to include market
discount in income currently as it accrues, on all market discount obligations
acquired by such Holder during the taxable year such election is made and
thereafter, in which case the interest deferral rule will not apply.
Premium. A Holder who purchases a Debt Security (other than an Interest
Weighted Security to the extent described above) at a cost greater than its
stated redemption price at maturity, generally will be considered to have
purchased the Security at a premium, which it may elect to amortize as an offset
to interest income on such Security (and not as a separate deduction item) on a
constant yield method. Although no regulations addressing the computation of
premium accrual on securities similar to the Securities have been issued, the
legislative history of the 1986 Act indicates that premium is to be accrued in
the same manner as market discount.
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Accordingly, it appears that the accrual of premium on a Class of Pay-Through
Securities will be calculated using the prepayment assumption used in pricing
such Class. If a Holder makes an election to amortize premium on a Debt
Security, such election will apply to all taxable debt instruments (including
all REMIC regular interests and all pass-through certificates representing
ownership interests in a trust holding debt obligations) held by the Holder at
the beginning of the taxable year in which the election is made, and to all
taxable debt instruments acquired thereafter by such Holder, and will be
irrevocable without the consent of the Internal Revenue Service. Purchasers who
pay a premium for the Securities should consult their tax advisers regarding the
election to amortize premium and the method to be employed.
Election to Treat all Interest as Original Issue Discount. The OID
Regulations permit a Holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method for Debt Securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a Debt Security with market discount, the Holder of the Debt Security
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount that
such Holder of the Debt Security acquires during the year of the election or
thereafter. Similarly, a Holder of a Debt Security that makes this election for
a Debt Security that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Holder owns or acquires. The election to
accrue interest, discount and premium on a constant yield method with respect to
a Debt Security is irrevocable.
Taxation of the REMIC and its Holders
General. In the opinion of Federal Tax Counsel, if a REMIC election is made
with respect to a Series of Securities, then the arrangement by which the
Securities of that Series are issued will be treated as a REMIC as long as all
of the provisions of the applicable Agreement are complied with and the
statutory and regulatory requirements are satisfied. Securities will be
designated as "Regular Interests" or "Residual Interests" in a REMIC, as
specified in the related Prospectus Supplement.
Except to the extent specified otherwise in a Prospectus Supplement, if a
REMIC election is made with respect to a Series of Securities, (i) Securities
held by a domestic building and loan association will constitute "a regular or a
residual interest in a REMIC" within the meaning of Code Section
7701(a)(19)(C)(xi) (assuming that at least 95% of the REMIC's assets consist of
cash, government saturates, "loans secured by an interest in real property," and
other types of assets described in Code Section 7701(a)(19)(C)); and (ii)
Securities held by a real estate investment trust will constitute "real estate
assets" within the meaning of Code Section 856(c)(6)(B), and income with respect
to the Securities will be considered "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of Code Section 856(c)(3)(B) (assuming, for both purposes, that at least 95% of
the REMIC's assets are qualifying assets). If less than 95% of the REMIC's
assets consist of assets described in (i) or (ii) above, then a Security will
qualify for the tax treatment described in (i) or (ii) in the proportion that
such REMIC assets are qualifying assets.
REMIC Expenses; Single Class REMICs
As a general rule, all of the expenses of a REMIC will be taken into account
by Holders of the Residual Interest Securities. In the case of a "single class
REMIC," however, the expenses will be allocated, under Treasury regulations,
among the Holders of the Regular Interest Securities and the Holders of the
Residual Interest Securities on a daily basis in proportion to the relative
amounts of income accruing to each Holder on that day. In the case of a Holder
of a Regular Interest Security who is an individual or a "pass-through interest
holder" (including certain pass-through entities but not including real estate
investment trusts), such expenses will be deductible only to the extent that
such expenses, plus other "miscellaneous itemized deductions" of the Holder,
exceed 2% of such Holder's adjusted gross income. In addition, for taxable years
beginning after December 31, 1990, the amount of itemized deductions otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds the applicable amount (which amount will be adjusted for inflation for
taxable years beginning after 1990) will be reduced by the lesser of (i) 3% of
the excess of adjusted gross income over the applicable amount, or (ii) 80% of
the amount of itemized deductions otherwise allowable for such taxable year. For
taxable years beginning after December 31, 1997, in the case of a partnership
that has 100 or more partners and elects to be treated as an "electing large
partnership," 70 percent of such partnership's
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miscellaneous itemized deductions will be disallowed, although the remaining
deductions will generally be allowed at the partnership level and will not be
subject to the 2 percent floor that would otherwise be applicable to individual
partners. The reduction or disallowance of this deduction may have a significant
impact on the yield of the Regular Interest Security to such a Holder. In
general terms, a single class REMIC is one that either (i) would qualify, under
existing Treasury regulations, as a grantor trust if it were not a REMIC
(treating all interests as ownership interests, even if they would be classified
as debt for federal income tax purposes) or (ii) is similar to such a trust and
which is structured with the principal purpose of avoiding the single class
REMIC rules. Unless otherwise stated in the applicable Prospectus Supplement,
the expenses of the REMIC will be allocated to Holders of the related Residual
Interest Securities.
Taxation of the REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
Tiered REMIC Structures. For certain Series of Securities, two or more
separate elections may be held to treat designated portions of the related Trust
Fund as REMICs ("Tiered REMICs") for federal income tax purposes. Upon the
issuance of any such Series of Securities, Federal Tax Counsel will deliver its
opinion generally to the effect that, assuming compliance with all provisions of
the related Pooling and Servicing Agreement, the Tiered REMICs will each qualify
as a REMIC and the REMIC Certificates issued by the Tiered REMICs, respectively,
will be considered to evidence ownership of Regular Certificates or Residual
Certificates in the related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code, and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Calculation of REMIC Income. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between (i) the gross income produced
by the REMIC's assets, including stated interest and any original issue discount
or market discount on loans and other assets, and (ii) deductions, including
stated interest and original issue discount accrued on Regular Interest
Securities, amortization of any premium with respect to Loans, and servicing
fees and other expenses of the REMIC. A Holder of a Residual Interest Security
that is an individual or a "pass-through interest holder" (including certain
pass-through entities, but not including real estate investment trusts) will be
unable to deduct servicing fees payable on the Loans or other administrative
expenses of the REMIC for a given taxable year, to the extent that such
expenses, when aggregated with such Holder's other miscellaneous itemized
deductions for that year, do not exceed two percent of such Holder's adjusted
gross income. For taxable years beginning after December 31, 1997, in the case
of a partnership that has 100 or more partners and elects to be treated as an
"electing large partnership," 70 percent of such partnership's miscellaneous
itemized deductions will be disallowed, although the remaining deductions will
generally be allowed at the partnership level and will not be subject to the 2
percent floor that would otherwise be applicable to individual partners.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the Startup
Day (generally, the day that the interests are issued). Such aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which Holders of Pay-Through Securities
accrue original issue discount (i.e., under the constant yield method taking
into account the Prepayment Assumption). The REMIC will deduct OID on the
Regular Interest Securities in the same manner that the Holders of the Regular
Interest ecurities include such discount in income, but without regard to the de
minimis rules. See "Taxation of Debt Securities" above. However, a
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REMIC that acquires loans at a market discount must include such market discount
in income currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before such date, it is possible that
such premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be subject to
a 100% tax on any net income derived from a "prohibited transaction." For this
purpose, net income will be calculated without taking into account any losses
from prohibited transactions or any deductions attributable to any prohibited
transaction that resulted in a loss. In general, prohibited transactions
include: (i) subject to limited exceptions, the sale or other disposition of any
qualified mortgage transferred to the REMIC; (ii) subject to a limited
exception, the sale or other disposition of a cash flow investment; (iii) the
receipt of any income from assets not permitted to be held by the REMIC pursuant
to the Code; or (iv) the receipt of any fees or other compensation for services
rendered by the REMIC. It is anticipated that a REMIC will not engage in any
prohibited transactions in which it would recognize a material amount of net
income. In addition, subject to a number of exceptions, a tax is imposed at the
rate of 100% on amounts contributed to a REMIC after the close of the
three-month period beginning on the Startup Day. The Holders of Residual
Interest Securities will generally be responsible for the payment of any such
taxes imposed on the REMIC. To the extent not paid by such Holders or otherwise,
however, such taxes will be paid out of the Trust Fund and will be allocated pro
rata to all outstanding Classes of Securities of such REMIC.
Taxation of Holders of Residual Interest Securities
The Holder of a Security representing a residual interest (a "Residual
Interest Security") will take into account the "daily portion" of the taxable
income or net loss of the REMIC for each day during the taxable year on which
such Holder held the Residual Interest Security. The daily portion is determined
by allocating to each day in any calendar quarter its ratable portion of the
taxable income or net loss of the REMIC for such quarter, and by allocating that
amount among the Holders (on such day) of the Residual Interest Securities in
proportion to their respective holdings on such day.
The Holder of a Residual Interest Security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to such income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in certain REMIC issues in which the loans held by the REMIC were issued or
acquired at a discount, since mortgage prepayments cause recognition of discount
income, while the corresponding portion of the prepayment could be used in whole
or in part to make principal payments on REMIC Regular Interests issued without
any discount or at an insubstantial discount. (If this occurs, it is likely that
cash distributions will exceed taxable income in later years.) Taxable income
may also be greater in earlier years of certain REMIC issues as a result of the
fact that interest expense deductions, as a percentage of outstanding principal
on REMIC Regular Interest Securities, will typically increase over time as lower
yielding Securities are paid, whereas interest income with respect to loans will
generally remain constant over time as a percentage of loan principal.
In any event, because the holder of a residual interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
Limitation on Losses. The amount of the REMIC's net loss that a Holder may
take into account currently is limited to the Holder's adjusted basis at the end
of the calendar quarter in which such loss arises. A Holder's basis in a
Residual Interest Security will initially equal such Holder's purchase price,
and will subsequently be increased by the amount of the REMIC's taxable income
allocated to the Holder, and decreased (but not below zero) by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
Holder. Any disallowed loss may be carried forward indefinitely, but may be used
only to offset income of the REMIC
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generated by the same REMIC. The ability of Holders of Residual Interest
Securities to deduct net losses may be subject to additional limitations under
the Code, as to which such Holders should consult their tax advisers.
Distributions. Distributions on a Residual Interest Security (whether at
their scheduled times or as a result of prepayments) will generally not result
in any additional taxable income or loss to a Holder of a Residual Interest
Security. If the amount of such payment exceeds a holder's adjusted basis in the
Residual Interest Security, however, the Holder will recognize gain (treated as
gain from the sale of the Residual Interest Security) to the extent of such
excess.
Sale or Exchange. A Holder of a Residual Interest Security will recognize
gain or loss on the sale or exchange of a Residual Interest Security equal to
the difference, if any, between the amount realized and such Holder's adjusted
basis in the Residual Interest Security at the time of such sale or exchange.
Except to the extent provided in regulations, which have not yet been issued,
any loss upon disposition of a Residual Interest Security will be disallowed if
the selling Holder acquires any residual interest in a REMIC or similar mortgage
pool within six months before or after such disposition.
Excess Inclusions. The portion of the REMIC taxable income of a Holder of a
Residual Interest Security consisting of "excess inclusion" income may not be
offset by other deductions or losses, including net operating losses, on such
Holder's federal income tax return. Further, if the Holder of a Residual
Interest Security is an organization subject to the tax on unrelated business
income imposed by Code Section 511, such Holder's excess inclusion income will
be treated as unrelated business taxable income of such Holder. In addition,
under Treasury regulations yet to be issued, if a real estate investment trust,
a regulated investment company, a common trust fund, or certain cooperatives
were to own a Residual Interest Security, a portion of dividends (or other
distributions) paid by the real estate investment trust (or other entity) would
be treated as excess inclusion income. If a Residual Security is owned by a
foreign person, excess inclusion income is subject to tax at a rate of 30% which
may not be reduced by treaty, is not eligible for treatment as "portfolio
interest" and is subject to certain additional limitations. See "Tax Treatment
of Foreign Investors."
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Security, over the daily accruals for such quarterly period of
(i) 120% of the long term applicable federal rate on the Startup Date multiplied
by (ii) the adjusted issue price of such Residual Interest Security at the
beginning of such quarterly period. The adjusted issue price of a Residual
Interest Security at the beginning of each calendar quarter will equal its issue
price (calculated in a manner analogous to the determination of the issue price
of a Regular Interest Security), increased by the aggregate of the daily
accruals for prior calendar quarters, and decreased (but not below zero) by the
amount of loss allocated to a Holder and the amount of distributions made on the
Residual Interest Security before the beginning of the quarter. The long-term
federal rate, which is announced monthly by the Treasury Department, is an
interest rate that is based on the average market yield of outstanding
marketable obligations of the United States government having remaining
maturities in excess of nine years.
Provisions governing the relationship between excess inclusions and the
alternative minimum tax provide that (i) the alternative minimum taxable income
of a taxpayer is based on the taxpayer's regular taxable income computed without
regard to the rule that taxable income cannot be less than the amount of excess
inclusions, (ii) the alternative minimum taxable income of a taxpayer for a
taxable year cannot be less than the amount of excess inclusions for that year,
and (iii) the amount of any alternative minimum tax net operating loss is
computed without regard to any excess inclusions. While these provisions are
generally effective for tax years beginning after December 31, 1986, a taxpayer
may elect to have these provisions apply only with respect to tax years
beginning after August 20, 1996.
The Code provides that to the extent provided in regulations, as an
exception to the general rule described above, the entire amount of income
accruing on a Residual Interest Security will be treated as an excess inclusion
if the Residual Interest Securities in the aggregate are considered not to have
"significant value." The Treasury Department has not yet provided regulations in
this respect.
Under the REMIC Regulations, in certain circumstances, transfers of Residual
Interest Securities may be disregarded. See "-- Restrictions on Ownership and
Transfer of Residual Interest Securities" and "-- Tax Treatment of Foreign
Investors" below.
Restrictions on Ownership and Transfer of Residual Interest Securities. As
a condition to qualification as a REMIC, reasonable arrangements must be made
to prevent the ownership of a REMIC residual interest by any
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"Disqualified Organization." Disqualified Organizations include the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of any of the
foregoing, a rural electric or telephone cooperative described in Section
1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by Sections
1399 of the Code, if such entity is not subject to tax on its unrelated business
income. Accordingly, the applicable Pooling and Servicing Agreement will
prohibit Disqualified Organizations from owning a Residual Interest Security. In
addition, no transfer of a Residual Interest Security will be permitted unless
the proposed transferee shall have furnished to the Trustee an affidavit
representing and warranting that it is neither a Disqualified Organization nor
an agent or nominee acing on behalf of a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
Interest Security at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
Residual Interest Security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the REMIC.
For taxable years beginning after December 31, 1997, all partners of certain
electing partnerships having 100 or more partners ("electing large
partnerships") will be treated as disqualified organizations for purposes of the
tax imposed on pass-through entities if such electing large partnerships hold
residual interests in a REMIC. However, the electing large partnership would be
entitled to exclude the excess inclusion income from gross income for purposes
of determining the taxable income of the partners.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all federal
tax purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. A Residual Interest Security is a "noneconomic
residual interest" unless, at the time of the transfer (i) the present value of
the expected future distributions on the Residual Interest Security at least
equals the product of the present value of the anticipated excess inclusions and
the highest rate of tax for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes. If a
transfer of a Residual Interest Security is disregarded, the transferor would be
liable for any federal income tax imposed upon taxable income derived by the
transferee from the REMIC. The REMIC Regulations provide no guidance as to how
to determine if a significant purpose of a transfer is to impede the assessment
or collection of tax. A similar type of limitation exists with respect to
certain transfers of residual interests by foreign persons to United States
persons. See "-- Tax Treatment of Foreign Investors."
Mark to Market Rules. Prospective purchasers of a Residual Interest Security
should be aware of Internal Revenue Service regulations (the "Mark to Market
Regulations") relating to the requirement that a securities dealer
mark-to-market securities held for sale to customers. This mark-to-market
requirement applies to all securities of a dealer, except to the extent that the
dealer has specifically identified a security as held for investment. The Mark
to Market Regulations provide that for purposes of this mark-to-market
requirement, a "negative value" Residual Interest Security is not treated as a
security and thus may not be marked to market. In addition, a dealer is not
required to identify such Residual Interest Security as held for investment. In
general, a Residual Interest Security has negative value if, as of the date a
taxpayer acquires the Residual Interest Security, the present value of the tax
liabilities associated with holding the Residual Interest Security exceeds the
sum of (i) the present value of the expected future distributions on the
Residual Interest Security, and (ii) the present value of the anticipated tax
savings associated with holding the Residual Interest Security as the REMIC
generates losses. The amounts and present values of the anticipated tax
liabilities, expected future distributions and anticipated tax savings are all
to be determined using (i) the prepayment and reinvestment assumptions adopted
under Section 1272(a)(6), or that would have been adopted had the REMIC's
regular interests been issued with OID, (ii) any required or permitted clean up
calls, or required qualified liquidation provided for in the REMIC's
organizational documents and (iii) a discount rate equal to the "applicable
Federal rate" (as specified in Section 1274(d)(1)) that would apply to a debt
instrument issued on the date of acquisition of the Residual Interest Security.
Furthermore, the Temporary Mark to Market Regulations provide the IRS with the
authority to treat any Residual Interest Security having substantially the same
economic effect as a "negative value" residual interest as a "negative value"
residual interest.
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The Mark-to-Market Regulations provide that any REMIC Residual Interest
acquired after January 3, 1995 cannot be marked to market, regardless of the
value of such REMIC residual interest. However, holders of positive value REMIC
Residual Interests acquired on or prior to January 3, 1995 may continue to mark
such residual interests to market for the entire economic life of such
interests.
Administrative Matters
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction, or credit, by the IRS in a unified
administrative proceeding.
Tax Status as a Grantor Trust
General. As specified in the related Prospectus Supplement if a REMIC or
partnership election is not made and the Trust Fund is not treated as a division
of a sole owner in the opinion of Federal Tax Counsel, the Trust Fund relating
to a Series of Securities will be classified for federal income tax purposes as
a grantor trust under Subpart E, Part 1 of Subchapter J of Chapter 1 of Subtitle
A of the Code and not as an association taxable as a corporation (the Securities
of such Series, "Pass-Through Securities"). In some Series there will be no
separation of the principal and interest payments on the Loans. In such
circumstances, a Holder will be considered to have purchased a pro rata
undivided interest in each of the Loans. In other cases ("Stripped Securities"),
sale of the Securities will produce a separation in the ownership of all or a
portion of the principal payments from all or a portion of the interest payments
on the Loans.
Each Holder must report on its federal income tax return its share of the
gross income derived from the Loans (not reduced by the amount payable as fees
to the Trustee and the Servicer and similar fees (collectively, the "Servicing
Fees")), at the same time and in the same manner as such items would have been
reported under the Holder's tax accounting method had it held its interest in
the Loans directly, received directly its share of the amounts received with
respect to the Loans, and paid directly its share of the Servicing Fees. In the
case of Pass-Through Securities other than Stripped Securities, such income will
consist of a pro rata share of all of the income derived from all of the Loans
and, in the case of Stripped Securities, such income will consist of a pro rata
share of the income derived from each stripped bond or stripped coupon in which
the Holder owns an interest. The Holder of a Security will generally be entitled
to deduct such Servicing Fees under Section 162 or Section 212 of the Code to
the extent that such Servicing Fees represent "reasonable" compensation for the
services rendered by the Trustee and the Servicer (or third parties that are
compensated for the performance of services). In the case of a noncorporate
Holder, however, Servicing Fees (to the extent not otherwise disallowed, e.g.,
because they exceed reasonable compensation) will be deductible in computing
such Holder's regular tax liability only to the extent that such fees, when
added to other miscellaneous itemized deductions, exceed 2% of adjusted gross
income and may not be deducible to any extent in computing such Holder's
alternative minimum tax liability. In addition, for taxable years beginning
after December 31, 1990, the amount of itemized deductions otherwise allowable
for the taxable year for an individual whose adjusted gross income exceeds the
applicable amount (which amount will be adjusted for inflation in taxable years
beginning after 1990) will be reduced by the lesser of (i) 3% of the excess of
adjusted gross income over the applicable amount or (ii) 80% of the amount of
itemized deductions otherwise allowable for such taxable year. For taxable years
beginning after December 31, 1997, in the case of a partnership that has 100 or
more partners and elects to be treated as an "electing large partnership," 70
percent of such partnership's miscellaneous itemized deductions will be
disallowed, although the remaining deductions will generally be allowed at the
partnership level and will not be subject to the 2 percent floor that would
otherwise be applicable to individual partners.
Discount or Premium on Pass-Through Securities. The Holder's purchase price
of a Pass-Through Security is to be allocated among the Loans in proportion to
their fair market values, determined as of the time of purchase of the
Securities. In the typical case, the Trustee (to the extent necessary to fulfill
its reporting obligations) will treat each Loan as having a fair market value
proportional to the share of the aggregate principal balances of all of the
Loans that it represents, since the Securities, unless otherwise specified in
the applicable Prospectus Supplement, will have a relatively uniform interest
rate and other common characteristics. To the extent that the portion of the
purchase price of a Pass-Through Security allocated to a Loan (other than to a
right to receive any accrued interest thereon and any undistributed principal
payments) is less than or greater
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than the portion of the principal balance of the Loan allocable to the Security,
the interest in the Loan allocable to the Pass-Through Security will be deemed
to have been acquired at a discount or premium, respectively.
The treatment of any discount will depend on whether the discount represents
OID or market discount. In the case of a Loan with OID in excess of a prescribed
de minimis amount or a Stripped Security, a Holder of a Security will be
required to report as interest income in each taxable year its share of the
amount of OID that accrues during that year in the manner described above. OID
with respect to a Loan could arise, for example, by virtue of the financing of
points by the originator of the Loan, or by virtue of the charging of points by
the originator of the Loan in an amount greater than a statutory de minimis
exception, in circumstances under which the points are not currently deductible
pursuant to applicable Code provisions. Any market discount or premium on a Loan
will be includible in income, generally in the manner described above, except
that in the case of Pass-Through Securities, market discount is calculated with
respect to the Loans underlying the Security, rather than with respect to the
Security. A Holder that acquires an interest in a Loan originated after July 18,
1984 with more than a de minimis amount of market discount (generally, the
excess of the principal amount of the Loan over the purchaser's allocable
purchase price) will be required to include accrued market discount in income in
the manner set forth above. See "-- Taxation of Debt Securities; Market
Discount" and "-- Premium" above.
In the case of market discount on a Pass-Through Security attributable to
Loans originated on or before July 18, 1984, the Holder generally will be
required to allocate the portion of such discount that is allocable to a Loan
among the principal payments on the Loan and to include the discount allocable
to each principal payment in ordinary income at the time such principal payment
is made. Such treatment would generally result in discount being included in
income at a slower rate than discount would be required to be included in income
using the method described in the preceding paragraph.
Stripped Securities. A Stripped Security may represent a right to receive
only a portion of the interest payments on the Loans, a right to receive only
principal payments on the Loans, or a right to receive certain payments of both
interest and principal. Certain Stripped Securities ("Ratio Strip Securities")
may represent a right to receive differing percentages of both the interest and
principal on each Loan. Pursuant to Section 1286 of the Code, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from ownership of the right to receive some or all of the principal
payments results in the creation of "stripped bonds" with respect to principal
payments and "stripped coupons" with respect to interest payments. Section 1286
of the Code applies the OID rules to stripped bonds and stripped coupons. For
purposes of computing original issue discount, a stripped bond or a stripped
coupon is treated as a debt instrument issued on the date that such stripped
interest is purchased with an issue price equal to its purchase price or, if
more than one stripped interest is purchased, the ratable share of the purchase
price allocable to such stripped interest.
Servicing Fees in excess of reasonable servicing fees ("excess servicing")
will be treated under the stripped bond rules. If the excess servicing fee is
less than 100 basis points (i.e. 1% interest on the Loan principal balance) or
the Securities are initially sold with a de minimis discount (assuming no
prepayment assumption is required), any non-de minimis discount arising from a
subsequent transfer of the Securities should be treated as market discount. The
IRS appears to require that reasonable servicing fees be calculated on a Loan by
Loan basis, which could result in some Loans being treated as having more than
100 basis points of interest stripped off.
The Code, OID Regulations and judicial decisions provide no direct guidance
as to how the interest and original issue discount rules are to apply to
Stripped Securities and other Pass-Through Securities. Under the method
described above for Pay-Through Securities (the "Cash Flow Bond Method"), a
prepayment assumption is used and periodic recalculations are made which take
into account with respect to each accrual period the effect of prepayments
during such period. However, the 1986 Act does not, absent Treasury regulations,
appear specifically to cover instruments such as the Stripped Securities which
technically represent ownership interests in the underlying Loans, rather than
being debt instruments "secured by" those Loans. Nevertheless, it is believed
that the Cash Flow Bond Method is a reasonable method of reporting income for
such Securities, and it is expected that OID will be reported on that basis
unless otherwise specified in the related Prospectus Supplement. In applying the
calculation to Pass-Through Securities, the Trustee will treat all payments to
be received by a Holder with respect to the underlying Loans as payments on a
single installment obligation. The IRS could, however, assert that original
issue discount must be calculated separately for each Loan underlying a
Security.
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Under certain circumstances, if the Loans prepay at a rate faster than the
Prepayment Assumption, the use of the Cash Flow Bond Method may accelerate a
Holder's recognition of income. If, however, the Loans prepay at a rate slower
than the Prepayment Assumption, in some circumstances the use of this method may
decelerate a Holder's recognition of income.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the Internal Revenue
Service could contend that (i) in certain Series, each Security is composed of
an unstripped undivided ownership interest in Loans and an installment
obligation consisting of stripped principal payments; (ii) the Securities are
subject to the contingent payment provisions of the Proposed Regulations; or
(iii) each Stripped Security the payments on which consist primarily or solely
of a specified portion of the interest payments on Loans is composed of an
unstripped undivided ownership interest in Loans and an installment obligation
consisting of stripped interest payments.
Given the variety of alternatives for treatment of the Stripped Securities
and the different federal income tax consequences that result from each
alternative, potential purchasers are urged to consult their own tax advisers
regarding the proper treatment of the Securities for federal income tax
purposes.
Character as Qualifying Loans. In the case of Stripped Securities there is
no specific legal authority existing regarding whether the character of the
Securities, for federal income tax purposes, will be the same as the Loans. The
IRS could take the position that the Loans' character is not carried over to the
Securities in such circumstances. To the extent the Trust Fund's assets are
qualifying assets, Pass-Through Securities will be, and, although the matter is
not free from doubt, Stripped Securities should be considered to represent "real
estate assets" within the meaning of Section 856(c)(6)(B) of the Code, and
"loans secured by an interest in real property" within the meaning of Section
7701(a)(19)(C)(v) of the Code; and interest income attributable to the
Securities should be considered to represent "interest on obligations secured by
mortgages on real property or on interests in real property" with the meaning of
Section 856(c)(3)(B) of the Code. Reserves or funds underlying the Securities
may cause a proportionate reduction in the above-described qualifying status
categories of Securities.
Sale or Exchange
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, a Holder's tax basis in its Security is the price
such Holder pays for a Security, plus amounts of original issue or market
discount included in income and reduced by any payments received (other than
qualified stated interest payments) and any amortized premium. Gain or loss
recognized on a sale, exchange, or redemption of a Security, measured by the
difference between the amount realized and the Security's basis as so adjusted,
will generally be capital gain or loss, assuming that the Security is held as a
capital asset. In the case of a Security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or loss realized
on the sale or exchange of a Regular Interest Security will be taxable as
ordinary income or loss. In addition, gain from the disposition of a Regular
Interest Security that might otherwise be capital gain will be treated as
ordinary income to the extent of the excess, if any, of (i) the amount that
would have been includible in the Holder's income if the yield on such Regular
Interest Security had equaled 110% of the applicable federal rate as of the
beginning of such Holder's holding period, over the amount of ordinary income
actually recognized by the Holder with respect to such Regular Interest
Security.
Miscellaneous Tax Aspects
Backup Withholding. Subject to the discussion below with respect to Trust
Funds as to which a partnership election is made, a Holder, other than a Holder
of a Residual Interest Security, may, under certain circumstances, be subject to
"backup withholding" at a rate of 31% with respect to distributions or the
proceeds of a sale of certificates to or through brokers that represent interest
or original issue discount on the Securities. This withholding generally applies
if the Holder of a Security (i) fails to furnish the Trustee with its taxpayer
identification number ("TIN"); (ii) furnishes the Trustee an incorrect TIN;
(iii) fails to report properly interest, dividends or other "reportable
payments" as defined in the Code; or (iv) under certain circumstances, fails to
provide the Trustee or such Holder's securities broker with a certified
statement, signed under penalty of perjury, that the TIN provided is its correct
number and that the Holder is not subject to backup withholding. Backup
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withholding will not apply, however, with respect to certain payments made to
Holders, including payments to certain exempt recipients (such as exempt
organizations) and to certain Nonresidents (as defined below). Holders should
consult their tax advisers as to their qualification for exemption from backup
withholding and the procedure for obtaining the exemption.
The Trustee will report to the Holders and to the Servicer for each calendar
year the amount of any "reportable payments" during such year and the amount of
tax withheld, if any, with respect to payments on the Securities.
Tax Treatment of Foreign Investors
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, under the Code, unless interest (including OID)
paid on a Security (other than a Residual Interest Security) is considered to be
"effectively connected" with a trade or business conducted in the United States
by a Holder who is not a United States person, as defined below,
("Nonresidents"), such interest will normally qualify as portfolio interest
(except where (i) the recipient is a holder, directly or by attribution, of 10%
or more of the capital or profits interest in the issuer, or (ii) the recipient
is a controlled foreign corporation to which the issuer is a related person) and
will be exempt from federal income tax. Upon receipt of appropriate ownership
statements, the issuer normally will be relieved of obligations to withhold tax
from such interest payments. These provisions supersede the generally applicable
provisions of United States law that would otherwise require the issuer to
withhold at a 30% rate (unless such rate were reduced or eliminated by an
applicable tax treaty) on, among other things, interest and other fixed or
determinable, annual or periodic income paid to Nonresidents. Holders of
Pass-Through Securities and Stripped Securities, including Ratio Strip
Securities, however, may be subject to withholding to the extent that the Loans
were originated on or before July 18, 1984. For these purposes, the term "United
States person" means (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, (iii) an estate
whose income is includable in gross income for United States federal income
taxation regardless of its source, and (iv) a trust for which one or more United
States fiduciaries have the authority to control all substantial decisions and
for which a court of the United States can exercise primary supervision over the
trust's administration. For years beginning before January 1, 1997, the term
"United States person" shall include a trust whose income in includible in gross
income for United States federal income taxation regardless of source, in lieu
of trusts described in (iv) above, unless the trust elects to have its United
States status determined under the criteria set forth in (iv) above for tax year
ending after August 20, 1996. Recently issued Treasury regulations (the "Final
Withholding Regulations"), which are generally effective with respect to
payments made after December 31, 1998, consolidate and modify the current
certification requirements and means by which a Holder may claim exemption from
United States federal income tax withholding and provide certain presumptions
regarding the status of Holders when payments to the Holders cannot be reliably
associated with appropriate documentation provided to the payor. All Holders
should consult their tax advisers regarding the application of the Final
Withholding Regulations.
Interest and OID of Holders who are Nonresidents are not subject to
withholding if they are effectively connected with a United States business
conducted by the Holder. They will, however, generally be subject to the regular
United States income tax.
Payments to Holders of Residual Interest Securities who are Nonresidents
will generally be treated as interest for purposes of the 30% (or lower treaty
rate) United States withholding tax. Nonresidents should assume that such income
does not qualify for exemption from United States withholding tax as "portfolio
interest." It is clear that, to the extent that a payment represents a portion
of REMIC taxable income that constitutes excess inclusion income, a Holder of a
Residual Interest Security will not be entitled to an exemption from or
reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed
(or when the Residual Interest Security is disposed of). The Treasury has
statutory authority, however, to promulgate regulations which would require such
amounts to be taken into account at an earlier time in order to prevent the
avoidance of tax. Such regulations could, for example, require withholding prior
to the distribution of cash in the case of Residual Interest Securities that do
not have significant value. Under the REMIC Regulations, if a Residual Interest
Security has tax avoidance potential, a transfer of a Residual Interest Security
to a Nonresident will be disregarded for all federal tax purposes. A Residual
Interest Security has tax
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avoidance potential unless, at the time of the transfer the transferor
reasonably expects that the REMIC will distribute to the transferee residual
interest holder amounts that will equal at least 30% of each excess inclusion,
and that such amounts will be distributed at or after the time at which the
excess inclusions accrue and not later than the calendar year following the
calendar year of accrual. If a Nonresident transfers a Residual Interest
Security to a United States person, and if the transfer has the effect of
allowing the transferor to avoid tax on accrued excess inclusions, then the
transfer is disregarded and the transferor continues to be treated as the owner
of the Residual Interest Security for purposes of the withholding tax provisions
of the Code. See "-- Excess Inclusions."
Tax Characterization of the Trust as a Partnership
Federal Tax Counsel will deliver its opinion that a Trust Fund for which a
partnership election is made will not be an association (or publicly traded
partnership) taxable as a corporation for federal income tax purposes assuming
that no action will be taken that is inconsistent with the treatment of the
Trust as a partnership (such as an election to treat the Trust as a corporation
for federal income tax purposes ("Corporation Election")). If, however, the
Trust has a single owner for federal income tax purposes, it will be treated as
a division of its owner and as such will be disregarded as an entity separate
from its owner for federal income tax purposes, assuming that no Corporation
Election is made. This opinion will be based on the assumption that the terms of
the Trust Agreement and related documents will be complied with, and on
counsel's conclusions that (1) the Trust Fund will not have certain
characteristics necessary for a business trust to be classified as an
association taxable as a corporation and (2) the nature of the income of the
Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the Certificates has
been structured as a private placement under an IRS safe harbor, so that the
Trust Fund will not be characterized as a publicly traded partnership taxable as
a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its taxable
income. The Trust Fund's taxable income would include all its income, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates, and Certificateholders could be liable for
any such tax that is unpaid by the Trust Fund.
Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Except as otherwise provided in the related
Prospectus Supplement, Federal Tax Counsel will advise the Depositor that the
Notes will be classified as debt for federal income tax purposes. The discussion
below assumes this characterization of the Notes is correct.
OID, Indexed Securities, etc. The discussion below assumes that all payments
on the Notes are denominated in U.S. dollars, and that the Notes are not Indexed
Securities or Strip Notes. Moreover, the discussion assumes that the interest
formula for the Notes meets the requirements for "qualified stated interest"
under the OID regulations, and that any OID on the Notes (i.e., any excess of
the principal amount of the Notes over their issue price) does not exceed a de
minimis amount (i.e., 0.25% of their principal amount multiplied by the number
of full years included in their term), all within the meaning of the OID
regulations. If these conditions are not satisfied with respect to any given
Series of Notes, additional tax considerations with respect to such Notes will
be disclosed in the applicable Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID regulations, a Holder of a
Note issued with a de minimis amount of OID must include such OID in income, on
a pro rata basis, as principal payments are made on the Note. It is believed
that any prepayment premium paid as a result of a mandatory redemption will be
taxable as contingent interest when it becomes fixed and unconditionally
payable. A purchaser who buys a Note for more or less than its principal amount
will generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
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A holder of a Note that has a fixed maturity date of not more than one year
from the issue date of such Note (a "Short-Term Note") may be subject to special
rules. An accrual basis Holder of a Short-Term Note (and certain cash method
Holders, including regulated investment companies, as set forth in Section 1281
of the Code) generally would be required to report interest income as interest
accrues on a straight-line basis over the term of each interest period. Other
cash basis Holders of a Short-Term Note would, in general, be required to report
interest income as interest is paid (or, if earlier, upon the taxable
disposition of the Short-Term Note). However, a cash basis Holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
Sale or Other Disposition. If a Noteholder sells a Note, the Holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the Holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the Holder's
cost for the Note, increased by any market discount, acquisition discount, OID
and gain previously included by such Noteholder in income with respect to the
Note and decreased by the amount of bond premium (if any) previously amortized
and by the amount of principal payments previously received by such Noteholder
with respect to such Note. Any such gain or loss will be capital gain or loss if
the Note was held as a capital asset, except for gain representing accrued
interest and accrued market discount not previously included in income. Capital
losses generally may be used only to offset capital gains.
Foreign Holders. Interest payments made (or accrued) to a Noteholder who is
a Holder other than a United States Person, as defined below, (a "foreign
person") generally will be considered "portfolio interest", and generally will
not be subject to United States federal income tax and withholding tax, if the
interest is not effectively connected with the conduct of a trade or business
within the United States by the foreign person and the foreign person (i) is not
actually or constructively a "10 percent shareholder" of the Trust or the Seller
(including a Holder of 10% of the outstanding Certificates) or a "controlled
foreign corporation" with respect to which the Trust or the Seller is a "related
person" within the meaning of the Code and (ii) provides the Owner Trustee or
other person who is otherwise required to withhold U.S. tax with respect to the
Notes with an appropriate statement (on Form W-8 or a similar form), signed
under penalties of perjury, certifying that the beneficial owner of the Note is
a foreign person and providing the foreign person's name and address. If a Note
is held through a securities clearing organization or certain other financial
institutions, the organization or institution may provide the relevant signed
statement to the withholding agent; in that case, however, the signed statement
must be accompanied by a Form W-8 or substitute form provided by the foreign
person that owns the Note. If such interest is not portfolio interest, then it
will be subject to United States federal income and withholding tax at a rate of
30 percent, unless reduced or eliminated pursuant to an applicable tax treaty.
For these purposes, the term "United States person" means (i) a citizen or
resident of the United States, (ii) a corporation or partnership (including an
entity treated as a corporation or partnership for U.S. federal income tax
purposes) created or organized in or under the laws of the United States or any
State thereof or the District of Columbia (unless, in the case of a partnership,
Treasury regulations are adopted that provide otherwise), (iii) an estate whose
income is includable in gross income for United States federal income taxation
regardless of its source, and (iv) a trust for which one or more United States
persons have the authority to control all substantial decisions and for which a
court of the United States can exercise primary supervision over the trust's
administration. In addition, certain trusts that would otherwise not qualify as
U.S. Persons under the foregoing definition can elect to be treated as U.S.
Persons. Recently adopted Treasury regulations make certain modifications to the
withholding, backup withholding, and information reporting rules described in
the prospectus. These new regulations attempt to unify certification
requirements and modify reliance standards and are generally effective for
payments made after December 31, 1998. Prospective investors are urged to
consult their own tax advisors regarding the affect these regulations may have
on their particular circumstances.
The Final Withholding Regulations consolidate and modify the current
certification requirements and means by which a Non-Resident may claim exemption
from United States federal income tax withholding. All Non-Residents should
consult their tax advisors regarding the application of the Final Withholding
Regulations, which are generally effective with respect to payments made after
December 31, 1998.
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Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each Holder of a Note (other than an exempt Holder such
as a corporation, tax-exempt organization, qualified pension and profit-sharing
trust, individual retirement account or nonresident alien who provides
certification as to status as a nonresident) will be required to provide, under
penalties of perjury, a certificate containing the Holder's name, address,
correct federal taxpayer identification number and a statement that the holder
is not subject to backup withholding. Should a nonexempt Noteholder fail to
provide the required certification, the Trust Fund will be required to withhold
31 percent of the amount otherwise payable to the Holder, and remit the withheld
amount to the IRS as a credit against the Holder's federal income tax liability.
Possible Alternative Treatments of the Notes. If, contrary to the opinion of
Federal Tax Counsel, the IRS successfully asserted that one or more of the Notes
did not represent debt for federal income tax purposes, the Notes might be
treated as equity interests in the Trust Fund. If so treated, the Trust Fund
might be taxable as a corporation with the adverse consequences described above
(and the taxable corporation would not be able to reduce its taxable income by
deductions for interest expense on Notes recharacterized as equity).
Alternatively, and most likely in the view of Federal Tax Counsel, the Trust
Fund might be treated as a publicly traded partnership that would not be taxable
as a corporation because it would meet certain qualifying income tests.
Nonetheless, treatment of the Notes as equity interests in such a publicly
traded partnership could have adverse tax consequences to certain Holders. For
example, income to certain tax-exempt entities (including pension funds) would
be "unrelated business taxable income," income to foreign holders generally
would be subject to U.S. tax and U.S. tax return filing and withholding
requirements, and individual Holders might be subject to certain limitations on
their ability to deduct their share of the Trust Fund's expenses.
Tax Consequences to Holders of the Certificates
Treatment of the Trust Fund as a Partnership. The Trust Fund and the
Depositor will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust Fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
Trust Fund, the partners of the partnership being the Certificateholders, and
the Notes being debt of the partnership. However, the proper characterization of
the arrangement involving the Trust Fund, the Certificates, the Notes, the Trust
Fund and the Servicer is not clear because there is no authority on transactions
closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all payments
on the Certificates are denominated in U.S. dollars, none of the Certificates
are Indexed Securities or Strip Certificates, and that a Series of Securities
includes a single Class of Certificates. If these conditions are not satisfied
with respect to any given Series of Certificates, additional tax considerations
with respect to such Certificates will be disclosed in the applicable Prospectus
Supplement.
Partnership Taxation. As a partnership, the Trust Fund will not be subject
to federal income tax. Rather, each Certificateholder will be required to
separately take into account such Holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Loans (including
appropriate adjustments for market discount, OID and bond premium) and any gain
upon collection or disposition of Loans. The Trust Fund's deductions will
consist primarily of interest accruing with respect to the Notes, servicing and
other fees, and losses or deductions upon collection or disposition of Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). Except as
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disclosed in the related Prospectus Supplement, the Trust Agreement will
provide, in general, that the Certificateholders will be allocated taxable
income of the Trust Fund for each month equal to the sum of (i) the interest
that accrues on the Certificates in accordance with their terms for such month,
including interest accruing at the Pass-Through Rate for such month and interest
on amounts previously due on the Certificates but not yet distributed; (ii) any
Trust Fund income attributable to discount on the Loans that corresponds to any
excess of the principal amount of the Certificates over their initial issue
price; (iii) prepayment premium payable to the Certificateholders for such
month; and (iv) any other amounts of income payable to the Certificateholders
for such month. Such allocation will be reduced by any amortization by the Trust
Fund of premium on Loans that corresponds to any excess of the issue price of
Certificates over their principal amount. All remaining taxable income of the
Trust Fund will be allocated to the Depositor. Based on the economic arrangement
of the parties, this approach for allocating Trust Fund income should be
permissible under applicable Treasury regulations, although no assurance can be
given that the IRS would not require a greater amount of income to be allocated
to Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire Pass-Through Rate
plus the other items described above even though the Trust Fund might not have
sufficient cash to make current cash distributions of such amount. Thus, cash
basis Holders will in effect be required to report income from the Certificates
on the accrual basis and Certificateholders may become liable for taxes on Trust
Fund income even if they have not received cash from the Trust Fund to pay such
taxes. In addition, because tax allocations and tax reporting will be done on a
uniform basis for all Certificateholders but Certificateholders may be
purchasing Certificates at different times and at different prices,
Certificateholders may be required to report on their tax returns taxable income
that is greater or less than the amount reported to them by the Trust Fund.
A Certificateholder that is a pension, profit sharing or employee benefit
plan or other tax-exempt entity (including an individual retirement account)
will realize from a Certificate "unrelated business taxable income" as a result
of the "Debt Financed Income" rules under the Code.
An individual taxpayer's share of expenses of the Trust Fund (including fees
to the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or in
part and might result in such Holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such Holder over the life of
the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Loan, the Trust Fund
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Loans were not issued with OID
and, therefore, the Trust should not have OID income. However, the purchase
price paid by the Trust Fund for the Loans may be greater or less than the
remaining principal balance of the Loans at the time of purchase. If so, the
Loan will have been acquired at a premium or discount, as the case may be. (As
indicated above, the Trust Fund will make this calculation on an aggregate
basis, but might be required to recompute it on a Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium, the
Trust Fund will elect to include any such discount in income currently as it
accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust Fund will
be deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust Fund are sold or exchanged within a
12-month period. If such a termination occurs, the Trust Fund will be considered
to contribute its assets to a new partnership in exchange for partnership
interests therein, and then dissolve and distribute the new partnership
interests to the partners. The Trust Fund will not comply with certain technical
requirements that might apply when such a constructive termination occurs. As a
result, the Trust Fund may be subject to certain tax penalties and may incur
additional expenses if it is required to comply with those requirements.
Furthermore, the Trust Fund might not be able to comply due to lack of data.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
Holder's cost increased by the Holder's share of Trust Fund income (includible
in income) and decreased by any distributions received with respect to
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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 Owner Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust Fund will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust Fund and will report each Certificateholder's allocable share of items of
Trust Fund income and expense to Holders and the IRS on Schedule K-1. The Trust
Fund will provide the Schedule K-1 information to nominees that fail to provide
the Trust Fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
Certificates. Generally, Holders must file tax returns that are consistent with
the information return filed by the Trust Fund or be subject to penalties unless
the Holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund information
as to themselves and their ownership of Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such
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information statement to the Trust Fund. The information referred to above for
any calendar year must be furnished to the Trust Fund on or before the following
January 31. Nominees, brokers and financial institutions that fail to provide
the Trust Fund with the information described above may be subject to penalties.
The Depositor will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the Certificateholders, and,
under certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the Trust Fund. An
adjustment could also result in an audit of a Certificateholder's returns and
adjustments of items not related to the income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether the
Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to foreign
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a failure
to withhold. The Trust Fund expects to withhold on the portion of its taxable
income that is allocable to a Certificateholder which is a foreign person
pursuant to Section 1446 of the Code, as if such income were effectively
connected to a U.S. trade or business, at a rate of 35% for Holders which are
foreign persons that are taxable as corporations and 39.6% for all other Holders
which are foreign persons. Subsequent adoption of Treasury regulations or the
issuance of other administrative pronouncements may require the Trust Fund to
change its withholding procedures. In determining a Holder's withholding status,
the Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the Holder's
certification of nonforeign status signed under penalties of perjury.
Each Certificateholder which is a foreign person might be required to file a
U.S. individual or corporate income tax return (including, in the case of a
corporation, the branch profits tax) on its share of the Trust Fund's income.
Each Certificateholder which is a foreign person must obtain a taxpayer
identification number from the IRS and submit that number to the Trust Fund on
Form W-8 in order to assure appropriate crediting of the taxes withheld. A
Certificateholder which is a foreign person generally would be entitled to file
with the IRS a claim for refund with respect to taxes withheld by the Trust Fund
taking the position that no taxes were due because the Trust Fund was not
engaged in a U.S. trade or business. However, interest payments made (or
accrued) to a Certificateholder who is a foreign person generally will be
considered guaranteed payments to the extent such payments are determined
without regard to the income of the Trust Fund. As a result, Certificateholders
which are foreign persons will be subject to United States federal income tax
and withholding tax at a rate of 30%, unless reduced or eliminated pursuant to
an applicable treaty. In such case, a Certificateholder which is a foreign
person would only be entitled to claim a refund for that portion of the taxes in
excess of the taxes that should be withheld with respect to the guaranteed
payments.
The Final Withholding Regulations consolidate and modify the current
certification requirements and means by which a Non-Resident may claim exemption
from United States federal income tax withholding. All Non-Residents should
consult their tax advisors regarding the application of the Final Withholding
Regulations, which are generally effective with respect to payments made after
December 31, 1998.
Backup Withholding. Distributions made on the Certificates and proceeds from
the sale of the Certificates will be subject to a "backup" withholding tax of
31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the Holder is an exempt recipient under
applicable provisions of the Code.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Considerations," potential investors should consider the
state and local income tax consequences of the acquisition, ownership, and
disposition of the Securities. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in the
Securities.
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ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and the Code impose certain restrictions on employee benefit plans subject to
ERISA and on plans and other arrangements subject to Section 4975 of the Code
and on persons who are parties in interest or disqualified persons ("parties in
interest") with respect to such plans or arrangements. Certain employee benefit
plans, such as governmental plans and church plans (if no election has been made
under Section 410(d) of the Code), are not subject to the restrictions of ERISA,
and assets of such plans may be invested in the Securities without regard to the
ERISA considerations described below, subject to other applicable federal and
state law. However, any such governmental or church plan which is qualified
under Section 401(a) of the Code and exempt from taxation under Section 501(a)
of the Code is subject to the prohibited transaction rules set forth in Section
503 of the Code.
A fiduciary of an employee benefit plan subject to Title I of ERISA should
consider the fiduciary standards under ERISA in the context of the plan's
particular circumstances before authorizing an investment of a portion of such
plan's assets in the Securities. Accordingly, among other factors, such
fiduciary should consider (i) whether the investment is for the exclusive
benefit of plan participants and their beneficiaries; (ii) whether the
investment satisfies the diversification requirements of Section 404 of ERISA;
(iii) whether the investment is in accordance with the documents and instruments
governing the plan and (iv) whether the investment is prudent, considering the
nature of the investment. Fiduciaries of such plans also should consider ERISA's
prohibition on improper delegation of control over, or responsibility for, plan
assets.
In addition, fiduciaries of employee benefit plans subject to Title I of
ERISA, as well as certain plans or other retirement arrangements not subject to
ERISA but which are subject to Section 4975 of the Code (such as individual
retirement accounts and Keogh plans covering only a sole proprietor or partners)
or any entity, including an insurance company general account whose underlying
assets include plan assets by reason of a plan or account investing in such
entity, (collectively, "Plans(s)"), should consult with their legal counsel to
determine whether an investment in the Securities will cause the assets of the
Trust Fund to be considered plan assets pursuant to the plan asset regulations
set forth at 29 CFR 2510.3-101 (the "Regulation"), thereby subjecting the Plan
to the prohibited transaction rules with respect to the Trust Fund and the
Trustee, or any entities providing services with respect to the operation of the
Trust, to the fiduciary investment standards of ERISA, or cause the excise tax
provisions of Section 4975 of the Code to apply to the Trust Fund, unless a
statutory or regulatory exception or an administrative exemption granted by the
Department of Labor ("DOL") applies to the purchase, sale, transfer or holding
of the Securities.
The Regulation contains rules for determining what constitutes the assets of
a Plan. The Regulation provides that, as a general rule, the underlying assets
and properties of corporations, partnerships, trusts and certain other entities
in which a Plan makes an investment in an "equity interest" will be deemed for
purposes of ERISA to be assets of the Plan unless certain exceptions apply.
Under the terms of the Regulation, the Trust Fund may be deemed to hold plan
assets by reason of a Plan's investment in a Security; such plan assets would
include an undivided interest in the Primary Assets and any other assets held by
the Trust Fund. In such an event, persons providing services with respect to the
operation of the Trust Fund may be parties in interest, subject to the fiduciary
responsibility provisions of Title I of ERISA, including the prohibited
transaction provisions of Section 406 of ERISA and of Section 4975 of the Code,
with respect to transactions involving such assets unless such transactions are
subject to a statutory or regulatory exception or an administrative exemption.
One such exception applies if the interest described is treated as
indebtedness under applicable local law and which has no substantial equity
features. Generally, a profits interest in a partnership, an undivided ownership
interest in property and a beneficial ownership interest in a trust are deemed
to be "equity interests" under the final regulation. If Notes of a particular
Series were deemed to be indebtedness under applicable local law without any
substantial equity features, an investing Plan's assets would include such
Notes, but not, by reason of such purchase, the underlying assets of the Trust
Fund. However, without regard to whether the Notes are treated as an equity
interest for such purposes, the purchase, holding or transfer of Notes by or on
behalf of a Plan could be considered a prohibited transaction if the Depositor
or the Trustee or any of their respective affiliates is, or becomes, a party in
interest or disqualified person with respect to such Plan.
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Another such exception applies if the class of equity interests in question
is: (i) "widely held" (held by 100 or more investors who are independent of the
Depositor and each other); (ii) freely transferable; and (iii) sold as part of
an offering pursuant to (A) an effective registration statement under the
Securities Act of 1933, and then subsequently registered under the Securities
Exchange Act of 1934 or (B) an effective registration statement under Section
12(b) or 12(g) of the Securities Exchange Act of 1934 ("Publicly Offered
Securities"). In addition, the regulation provides that if at all times more
than 75% of the value of all classes of equity interests in the Depositor or the
Trust Fund are held by investors other than benefit plan investors (which is
defined as including both Plans and government plans), the investing Plan's
assets will not include any of the underlying assets of the Depositor or the
Trust Fund.
An additional exemption may also be available to the purchase, holding and
transfer of the Securities. The DOL granted to Bear, Stearns & Co. Inc., an
administrative exemption, Prohibited Transaction Exemption 90-30 (Application
No. D-8207, 55 Fed. Reg. 21461) (1990) (the "Exemption"), from certain of the
prohibited transaction rules of ERISA with respect to the initial purchase, the
holding and the subsequent resale by Plans of securities representing interests
in asset-backed pass-through trusts that consist of certain receivables, loans
and other obligations that meet the conditions and requirements of the
Exemption, wherever Bear, Stearns & Co. Inc. or its affiliate is the sole
underwriter, manager or co-manager of an underwriting syndicate or is the
selling or placement agent. The obligations covered by the Exemption include
obligations such as the Primary Assets (other than Private Securities which are
not insured or guaranteed by the United States or an agency or instrumentality
thereof, or Home Improvement Contracts that are unsecured). The Exemption will
apply to the acquisition, holding and transfer of the Securities by a Plan,
provided that certain conditions (certain of which are described below) are met.
Among the conditions which must be satisfied for the Exemption to apply are
the following:
(i) The acquisition of the Securities by a Plan is on terms (including
the price for the Securities) that are at least as favorable to the Plan as
they would be in an arm's-length transaction with an unrelated party;
(ii) The rights and interests evidenced by the Securities acquired by
the Plan are not subordinated to the rights and interests evidenced by other
securities of the trust;
(iii) The Securities acquired by the Plan have received a rating at
the time of such acquisition that is in one of the three highest generic
rating categories from either Standard & Poor's Ratings Group ("Standard &
Poor's"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Inc.
("D&P") or Fitch Investors Service, Inc. ("Fitch");
(iv) The sum of all payments made to the underwriter in connection with
the distribution of the Securities represents not more than reasonable
compensation for underwriting the Securities. The sum of all payments made
to and retained by the seller pursuant to the sale of the obligations to the
trust represents not more than the fair market value of such obligations.
The sum of all payments made to and retained by the servicer represents not
more than reasonable compensation for the servicer's services under the
related servicing agreement and reimbursement of the servicer's reasonable
expenses in connection therewith;
(v) The Trustee must not be an affiliate of any other member of the
Restricted Group (as defined below); and
(vi) The Plan investing in the Securities is an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933. The Depositor assumes that only
Plans which are accredited investors under the federal securities laws will
be permitted to purchase the Securities.
The trust also must meet the following requirements:
(i) the corpus of the trust must consist solely of assets of the type
which have been included in other investment pools;
(ii) securities in such other investment pools must have been rated in
one of the three highest generic rating categories of Standard & Poor's,
Moody's, D&P or Fitch for at least one year prior to the Plan's acquisition
of securities; and
(iii) securities evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one year
prior to any Plan's acquisition of Securities.
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Moreover, the Exemption provides relief from certain self dealing/conflict
of interest prohibited transactions that may occur when the Plan fiduciary
causes a Plan to acquire securities in a trust in which the fiduciary (or its
affiliate) is an obligor on the receivables held in the trust provided that,
among other requirements: (i) in the case of an acquisition in connection with
the initial issuance of Securities, at least fifty (50) percent of each Class of
Securities in which Plans have invested is acquired by persons independent of
the Restricted Group and at least fifty (50) percent of the aggregate interest
in the trust is acquired by persons independent of the Restricted Group; (ii)
such fiduciary (or its affiliate) is an obligor with respect to five (5) percent
or less of the fair market value of the obligations contained in the trust;
(iii) the Plan's investment in Securities does not exceed twenty-five (25)
percent of all of the Securities outstanding after the acquisition; and (iv) no
more than twenty-five (25) percent of the assets of the Plan are invested in
securities representing an interest in one or more trusts containing assets sold
or serviced by the same entity. The Exemption does not apply to Plans sponsored
by the Depositor, the underwriters of the Securities, the Trustee, the Servicer,
any obligor with respect to obligations included in a Trust Fund constituting
more than five (5) percent of the aggregate unamortized principal balance of the
assets in a Trust Fund, or any affiliate of such parties (the "Restricted
Group").
On July 21, 1997, the DOL published in the Federal Register a final
amendment to the Exemption which extends exemptive relief to certain
mortgage-backed securities transactions using pre-funding accounts for trusts
issuing pass-through Securities. With respect to the Securities, the amendment
generally allows a portion of the mortgages ("Loans") supporting payments to
Securityholders and having a principal amount equal to no more than 25% of the
total principal amount of the Securities to be transferred to the Trust within a
90-day or three-month period following the Closing Date ("Pre-Funding Period"),
instead of requiring that all such Loans be either identified or transferred on
or before the Closing Date. The relief is effective for transactions occurring
on or after May 23, 1997, provided that the following conditions are met:
(1) The ratio of the amount allocated to the Pre-Funding Account to the
total principal amount of the Securities being offered ("Pre-Funding Limit")
must not exceed twenty-five percent (25%).
(2) All Loans transferred after the Closing Date ("Additional Loans")
must meet the same terms and conditions for eligibility as the original
Loans used to create the Trust, which terms and conditions have been
approved by the Rating Agency.
(3) The transfer of such Additional Loans to the Trust during the
Pre-Funding Period must not result in the Securities receiving a lower
credit rating from the Rating Agency upon termination of the Pre-Funding
Period than the rating that was obtained at the time of the initial issuance
of the Securities by the Trust.
(4) Solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate (the "average interest rate") for all of the
Loans in the Trust at the end of the Pre-Funding Period must not be more
than 100 basis points lower than the average interest rate for the Loans
which were transferred to the Trust on the Closing Date.
(5) Either: (i) the characteristics of the Additional Loans must be
monitored by an insurer or other credit support provider which is
independent of the Depositor; or (ii) an independent accountant retained by
the Depositor must provide the Depositor with a letter (with copies provided
to the Rating Agency, the Underwriter and the Trustee) stating whether or
not the characteristics of the Additional Loans conform to the
characteristics described in the Prospectus and Prospectus Supplement
("Offering Documents") and/or Pooling and Servicing Agreement or Sale and
Servicing Agreement ("Pooling Agreement"). In preparing such letter, the
independent accountant must use the same type of procedures as were
applicable to the Loans which were transferred as of the Closing Date.
(6) The Pre-Funding Period must end no later than three months or 90
days after the Closing Date or earlier, in certain circumstances, if the
amount on deposit in the Pre-Funding Account is reduced below the minimum
level specified in the Pooling Agreement or an event of default occurs under
the Pooling Agreement.
(7) Amounts transferred to any Pre-Funding Account and/or Capitalized
Interest Account used in connection with the pre-funding may be invested
only in investments which are permitted by the Rating Agency and (i) are
direct obligations of, or obligations fully guaranteed as to timely payment
of principal and interest by, the United States or any agency or
instrumentality thereof (provided that such obligations
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are backed by the full faith and credit of the United States); or (ii) have
been rated (or the obligor has been rated) in one of the three highest
generic rating categories by the Rating Agency ("Permitted Investments").
(8) The Offering Documents must describe: (i) any Pre-Funding Account
and/or Capitalized Interest Account used in connection with a Pre-Funding
Account; (ii) the duration of the Pre-Funding Period; (iii) the percentage
and/or dollar amount of the Pre-Funding Limit for the Trust; and (iv) that
the amounts remaining in the Pre-Funding Account at the end of the
Pre-Funding Period will be remitted to Securityholders as repayments of
principal.
(9) The Pooling and Servicing Agreement must describe the Permitted
Investments for the Pre-Funding Account and Capitalized Interest Account
and, if not disclosed in the Offering Documents, the terms and conditions
for eligibility of the Additional Loans.
In the event that the Exemption is not applicable, some other prohibited
transaction class exemption issued by the DOL, including PTCE 96-23
(relating to investments by in-house asset managers), PTCE 95-60 (relating
to insurance company general accounts), PTCE 91-38 (relating to bank
collective funds), PTCE 90-1 (relating to insurance company pooled separate
accounts) and PTCE 84-14 (relating to investments by qualified plan asset
managers) may apply, depending on the circumstances.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the potential application of
the Exemption to the purchase and holding of the Securities and the
potential consequences to their specific circumstances, prior to making an
investment in the Securities. Moreover, each Plan fiduciary should determine
whether under the general fiduciary standards of investment procedure and
diversification an investment in the Securities is appropriate for the Plan,
taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
LEGAL INVESTMENT
Unless otherwise specified in the related Prospectus Supplement, the
Securities will not constitute "mortgage-related securities" within the meaning
of SMMEA. Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and to
what extent the Securities constitute legal investments for them.
PLAN OF DISTRIBUTION
The Depositor may offer each Series of Securities through Bear, Stearns &
Co. Inc. ("Bear Stearns") or one or more other firms that may be designated at
the time of each offering of such Securities. The participation of Bear Stearns
in any offering will comply with Schedule E to the By-Laws of the National
Association of Securities Dealers, Inc. The Prospectus Supplement relating to
each Series of Securities will set forth the specific terms of the offering of
such Series of Securities and of each Class within such Series, the names of the
underwriters, the purchase price of the Securities, the proceeds to the
Depositor from such sale, any securities exchange on which the Securities may be
listed, and, if applicable, the initial public offering prices, the discounts
and commissions to the underwriters and any discounts and concessions allowed or
reallowed to certain dealers. The place and time of delivery of each Series of
Securities will also be set forth in the Prospectus Supplement relating to such
Series. Bear Stearns is an affiliate of the Depositor.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain
legal matters in connection with the Securities will be passed upon for the
Depositor by Stroock & Stroock & Lavan LLP, New York, New York.
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GLOSSARY OF TERMS
The following are abbreviated definitions of certain capitalized terms used
in this Prospectus. Unless otherwise provided in a "Supplemental Glossary" in
the Prospectus Supplement for a Series, such definitions shall apply to
capitalized terms used in such Prospectus Supplement. The definitions may vary
from those in the related Agreement for a Series and the related Agreement for a
Series generally provides a more complete definition of certain of the terms.
Reference should be made to the related Agreement for a Series for a more
compete definition of such terms.
"Accrual Termination Date" means, with respect to a Class of Compound
Interest Securities, the Distribution Date specified in the related Prospectus
Supplement.
"Advance" means cash advanced by the Servicer in respect of delinquent
payments of principal of and interest on a Loan, and for any other purposes
specified in the related Prospectus Supplement.
"Agreement" means, with respect to a Series of Certificates, the Pooling and
Servicing Agreement or Trust Agreement, and, with respect to a Series of Notes,
the Indenture and the Servicing Agreement, as the context requires.
"Appraised Value" means, with respect to property securing a Loan, the
lesser of the appraised value determined in an appraisal obtained at origination
of the Loan or sales price of such property at such time.
"Asset Group" means, with respect to the Primary Assets and other assets
comprising the Trust Fund of a Series, a group of such Primary Assets and other
assets having the characteristics described in the related Prospectus
Supplement.
"Assumed Reinvestment Rate" means, with respect to a Series, the per annum
rate or rates specified in the related Prospectus Supplement for a particular
period or periods as the "Assumed Reinvestment Rate" for funds held in any fund
or account for the Series.
"Available Distribution Amount" means the amount in the Distribution Account
(including amounts deposited therein from any reserve fund or other fund or
account) eligible for distribution to Holders on a Distribution Date.
"Bankruptcy Code" means the federal bankruptcy code, 11 United States Code
101 et seq., and related rules and regulations promulgated thereunder.
"Business Day" means a day that, in the City of New York or in the city or
cities in which the corporate trust office of the Trustee are located, is
neither a legal holiday nor a day on which banking institutions are authorized
or obligated by law, regulations or executive order to be closed.
"Certificate" means the Asset-Backed Certificates.
"Class" means a Class of Securities of a Series.
"Closing Date" means, with respect to a Series, the date specified in the
related Prospectus Supplement as the date on which Securities of such Series are
first issued.
"Code" means the Internal Revenue Code of 1986, as amended, and regulations
(including proposed regulations) or other pronouncements of the Internal Revenue
Service promulgated thereunder.
"Collection Account" means, with respect to a Series, the account
established in the name of the Servicer for the deposit by the Servicer of
payments received from the Primary Assets.
"Combined Loan-to-Value Ratio" means, with respect to a Loan, the ratio
determined as set forth in the related Prospectus Supplement taking into account
the amounts of any related senior mortgage loans on the related Mortgaged
Property.
"Commission" means the Securities and Exchange Commission.
"Compound Interest Security" means any Security of a Series on which all or
a portion of the interest accrued thereon is added to the principal balance of
such Security on each Distribution Date, through the Accrual Termination Date,
and with respect to which no interest shall be payable until such Accrual
Termination Date, after which interest payments will be made on the Compound
Value thereof.
"Compound Value" means, with respect to a Class of Compound Interest
Securities, the original principal balance of such Class, plus all accrued and
unpaid interest, if any, previously added to the principal balance
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thereof and reduced by any payments of principal previously made on such Class
of Compound Interest Securities.
"Condominium" means a form of ownership of real property wherein each owner
is entitled to the exclusive ownership and possession of his or her individual
Condominium Unit and also owns a proportionate undivided interest in all parts
of the Condominium Building (other than the individual Condominium Units) and
all areas or facilities, if any, for the common use of the Condominium Units.
"Condominium Association" means the person(s) appointed or elected by the
Condominium Unit owners to govern the affairs of the Condominium.
"Condominium Building" means a multi-unit building or buildings, or a group
of buildings whether or not attached to each other, located on property subject
to Condominium ownership.
"Condominium Loan" means a Loan secured by a Mortgage on a Condominium Unit
(together with its appurtenant interest in the common elements).
"Condominium Unit" means an individual housing unit in a Condominium
Building.
"Cooperative" means a corporation owned by tenant-stockholders who, through
the ownership of stock, shares or membership securities in the corporation,
receive proprietary leases or occupancy agreements which confer exclusive rights
to occupy specific units and which is described in Section 216 of the Code.
"Cooperative Dwelling" means an individual housing unit in a building
owned by a Cooperative.
"Cooperative Loan" means a housing loan made with respect to a Cooperative
Dwelling and secured by an assignment by the borrower (tenant-stockholder) or
security interest in shares issued by the applicable Cooperative.
"Cut-off Date" means the date designated as such in the related Prospectus
Supplement for a Series.
"Debt Securities" means Securities characterized as indebtedness for federal
income tax purposes, and Regular Interest Securities.
"Deferred Interest" means the excess of the interest accrued on the
outstanding principal balance of a Loan during a specified period over the
amount of interest required to be paid by an obligor on such Loan on the related
Due Date.
"Deposit Agreement" means a guaranteed investment contract or reinvestment
agreement providing for the investment of funds held in a fund or account,
guaranteeing a minimum or a fixed rate of return on the investment of moneys
deposited therein.
"Depositor" means Bear Stearns Asset Backed Securities, Inc.
"Disqualified Organization" means the United States, any State or political
subdivision thereof, any possession of the United States, any foreign
government, any international organization, or any agency or instrumentality of
any of the foregoing, a rural electric or telephone cooperative described in
section 1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income.
"Distribution Account" means, with respect to a Series, the account
established in the name of the Trustee for the deposit of remittances received
from the Servicer with respect to the Primary Assets.
"Distribution Date" means, with respect to a Series or Class of Securities,
each date specified as a distribution date for such Series or Class in the
related Prospectus Supplement.
"Due Date" means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest is due
and payable by the obligor on any Primary Asset pursuant to the terms thereof.
"Eligible Investments" means any one or more of the obligations or
securities described as such in the related Agreement.
"Enhancement" means the enhancement for a Series, if any, specified in the
related Prospectus Supplement.
"Enhancer" means the provider of the Enhancement for a Series specified in
the related Prospectus Supplement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
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"Escrow Account" means an account, established and maintained by the
Servicer for a Loan, into which payments by borrowers to pay taxes, assessments,
mortgage and hazard insurance premiums and other comparable items required to be
paid to the mortgagee are deposited.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"Final Scheduled Distribution Date" means, with respect to a Class of Notes
of a Series, the date no later than which principal thereof will be fully paid
and with respect to a Class of Certificates of a Series, the date after which no
Certificates of such Class will remain outstanding, in each case based on the
assumptions set forth in the related Prospectus Supplement.
"FNMA" means the Federal National Mortgage Association.
"Holder" means the person or entity in whose name a Security is
registered.
"Home Improvements" means the home improvements financed by a Home
Improvement Contract.
"Home Improvement Contract" means any home improvement installment sales
contracts and installment loan agreement which may be unsecured or secured by
purchase money security interest in the Home Improvement financed thereby.
"HUD" means the United States Department of Housing and Urban Development.
"Indenture" means the indenture relating to a Series of Notes between the
Trust Fund and the Trustee.
"Insurance Policies" means certain mortgage insurance, hazard insurance and
other insurance policies required to be maintained with respect to Loans.
"Insurance Proceeds" means amount paid by the insurer under any of the
Insurance Policies covering any Loan or Mortgaged Property.
"Interest Only Securities" means a Class of Securities entitled solely or
primarily to distributions of interest and which is identified as such in the
related Prospectus Supplement.
"IRS" means the Internal Revenue Service.
"Lifetime Rate Cap" means the lifetime limit if any, on the Loan Rate during
the life of each adjustable rate Loan.
"Liquidation Proceeds" means amounts received by the Servicer in connection
with the liquidation of a Loan, net of liquidation expenses.
"Loan Rate" means, unless otherwise indicated herein or in the Prospectus
Supplement, the interest rate borne by a Loan.
"Loans" mean Mortgage Loans and/or Home Improvement Contracts,
collectively. A Loan refers to a specific Mortgage Loan or Home Improvement
Contract, as the context requires.
"Loan-to-Value Ratio" means, with respect to a Loan, the ratio determined as
set forth in the related Prospectus Supplement.
"Minimum Rate" means the lifetime minimum Loan Rate during the life of each
adjustable rate Loan.
"Minimum Principal Payment Agreement" means a minimum principal payment
agreement with an entity meeting the criteria of the Rating Agencies.
"Modification" means a change in any term of a Loan.
"Mortgage" means the mortgage, deed of trust or other similar security
instrument securing a Mortgage Note.
"Mortgage Loan" means a closed-end home equity loan secured by a Mortgaged
Property.
"Mortgage Note" means the note or other evidence of indebtedness of a
Mortgagor under the Loan.
"Mortgagor" means the obligor on a Mortgage Note.
"1986 Act" means the Tax Reform Act of 1986.
"Notes" means the Asset-Backed Notes.
"Notional Amount" means the amount set forth in the related Prospectus
Supplement for a Class of Interest Only Securities.
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"PAC" ("Planned Amortization Class Securities") means a Class of Securities
of a Series on which payments of principal are made in accordance with a
schedule specified in the related Prospectus Supplement, based on certain
assumptions stated therein.
"Participating Securities" means Securities entitled to receive payments of
principal and interest and an additional return on investment as described in
the related Prospectus Supplement.
"Pass-Through Security" means a security representing an undivided
beneficial interest in a pool of assets, including the right to receive a
portion of all principal and interest payments relating to those assets.
"Pay Through Security" means Regular Interest Securities and certain Debt
Securities that are subject to acceleration due to prepayment on the underlying
Primary Assets.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust (including any beneficiary thereof),
unincorporated organization, or government or any agency or political
subdivision thereof.
"Pooling and Servicing Agreement" means the pooling and servicing agreement
relating to a Series of Certificates among the Depositor, the Servicer (if such
Series relates to Loans) and the Trustee.
"Primary Assets" means the Private Securities and/or Loans, as the case may
be, which are included in the Trust Fund for such Series. A Primary Asset refers
to a specific Private Security or Loan, as the case may be.
"Principal Balance" means, with respect to a Primary Asset and as of a Due
Date, the original principal amount of the Primary Asset, plus the amount of any
Deferred Interest added to such principal amount, reduced by all payments, both
scheduled or otherwise, received on such Primary Asset prior to such Due Date
and applied to principal in accordance with the terms of the Primary Asset.
"Principal Only Securities" means a Class of Securities entitled solely or
primarily to distributions of principal and identified as such in the Prospectus
Supplement.
"Private Security" means a participation or pass-through certificate
representing a fractional, undivided interest in Underlying Loans or
collateralized obligations secured by Underlying Loans.
"Property" means either a Home Improvement or a Mortgaged Property securing
a Loan, as the context requires.
"PS Agreement" means the pooling and servicing agreement, indenture, trust
agreement or similar agreement pursuant to which a Private Security is issued.
"PS Servicer" means the servicer of the Underlying Loans.
"PS Sponsor" means, with respect to Private Securities, the sponsor or
depositor under a PS Agreement.
"PS Trustee" means the trustee designated under a PS Agreement.
"Qualified Insurer" means a mortgage guarantee or insurance company duly
qualified as such under the laws of the states in which the Mortgaged Properties
are located duly authorized and licensed in such states to transact the
applicable insurance business and to write the insurance provided.
"Rating Agency" means the nationally recognized statistical rating
organization (or organizations) which was (or were) requested by the Depositor
to rate the Securities upon the original issuance thereof.
"Regular Interest" means a regular interest in a REMIC.
"REMIC" means a real estate mortgage investment conduit.
"REMIC Administrator" means the Person, if any, specified in the related
Prospectus Supplement for a Series for which a REMIC election is made, to serve
as administrator of the Series.
"REMIC Provisions" means the provisions of the federal income tax law
relating to real estate mortgage investment conduits, which appear at sections
860A through 860G of Subchapter M of Chapter 1 of the Code, and related
provisions, and regulations, including proposed regulations and rulings, and
administrative pronouncements promulgated thereunder, as the foregoing may be in
effect from time to time.
"REO Property" means real property which secured a defaulted Loan,
beneficial ownership of which has been acquired upon foreclosure, deed in lieu
of foreclosure, repossession or otherwise.
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"Reserve Fund" means, with respect to a Series, any Reserve Fund established
pursuant to the related Agreement.
"Residual Interest" means a residual interest in a REMIC.
"Retained Interest" means, with respect to a Primary Asset, the amount or
percentaged specified in the related Prospectus Supplement which is not included
in the Trust Fund for the related Series.
"Scheduled Payments" means the scheduled payments of principal and interest
to be made by the borrower on a Primary Asset.
"Securities" means the Notes or the Certificates.
"Seller" means the seller of the Primary Assets to the Depositor identified
in the related Prospectus Supplement for a Series.
"Senior Securityholder" means a holder of a Senior Security.
"Senior Securities" means a Class of Securities as to which the holders'
rights to receive distributions of principal and interest are senior to the
rights of holders of Subordinate Securities, to the extent specified in the
related Prospectus Supplement.
"Series" means a separate series of Securities sold pursuant to this
Prospectus and the related Prospectus Supplement.
"Servicer" means, with respect to a Series relating to Loans, the Person if
any, designated in the related Prospectus Supplement to service Loans for that
Series, or the successors or assigns of such Person.
"Single Family Property" means property securing a Loan consisting of one to
four-family attached or detached residential housing, including Cooperative
Dwellings.
"Stripped Securities" means Pass-Through Securities representing interests
in Primary Assets with respect to which all or a portion of the principal
payments have been separated from all or a portion of the interest payments.
"Subordinate Securityholder" means a Holder of a Subordinate Security.
"Subordinated Securities" means a Class of Securities as to which the rights
of holders to receive distributions of principal, interest or both is
subordinated to the rights of holders of Senior Securities, and may be allocated
losses and shorfalls prior to the allocation thereof to other Classes of
Securities, to the extent and under the circumstances specified in the related
Prospectus Supplement.
"Trustee" means the trustee under the applicable Agreement and its
successors.
"Trust Fund" means, with respect to any Series of Securities, the trust
holding all money, instruments, securities and other property, including all
proceeds thereof, which are, with respect to a Series of Certificates, held for
the benefit of the Holders by the Trustee under the Pooling and Servicing
Agreement or Trust Agreement or, with respect to a Series of Notes, pledged to
the Trustee under the Indenture as a security for such Notes, including, without
limitation, the Primary Assets (except any Retained Interests), all amounts in
the Distribution Account Collection Account or Reserve Funds, distributions on
the Primary Assets (net of servicing fees), and reinvestment earnings on such
net distributions and any Enhancement and all other property and interest held
by or pledged to the Trustee pursuant to the related Agreement for such Series.
"UCC" means the Uniform Commercial Code.
"Underlying Loans" means loans of the type eligible to be Loans underlying
or securing Private Securities.
"Variable Interest Security" means a Security on which interest accrues at a
rate that is adjusted, based upon a predetermined index, at fixed periodic
intervals, all as set forth in the related Prospectus Supplement.
"Zero Coupon Security" means a Security entitled to receive payments of
principal only.
81
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NO DEALER, SALESPERSON 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 BY THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE DEPOSITOR SINCE SUCH DATE.
------------------
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT
Summary of Terms............................... S-1
Risk Factors................................... S-12
The Seller and Servicer........................ S-14
The Issuer..................................... S-19
The Depositor.................................. S-19
Use of Proceeds................................ S-19
The Home Equity Loan Pool...................... S-19
Prepayment and Yield Considerations............ S-30
Additional Information......................... S-35
Description of the Notes....................... S-35
The Note Insurer............................... S-42
Credit Enhancement............................. S-46
Administration................................. S-47
Certain Federal Income Tax Consequences........ S-57
State Tax Consequences......................... S-57
ERISA Considerations........................... S-57
Ratings........................................ S-59
Legal Investment Considerations................ S-59
Underwriting................................... S-59
Report of Experts.............................. S-60
Certain Legal Matters.......................... S-60
Global Clearance, Settlement and Tax
Documentation Procedures..................... I-1
Index to Location of Principal Defined Terms... A-1
PROSPECTUS
Prospectus Supplement.......................... 3
Reports to Holders............................. 3
Available Information.......................... 3
Summary of Terms............................... 5
Risk Factors................................... 15
Description of the Securities.................. 18
The Trust Funds................................ 22
Enhancement.................................... 27
Servicing of Loans............................. 30
The Agreements................................. 36
Certain Legal Aspects of Loans................. 44
The Depositor.................................. 52
Use of Proceeds................................ 52
Certain Federal Income Tax Considerations...... 52
State Tax Considerations....................... 72
ERISA Considerations........................... 73
Legal Investment............................... 76
Plan of Distibution............................ 76
Legal Matters.................................. 76
Glossary of Terms.............................. 77
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IMC HOME EQUITY LOAN
OWNER TRUST 1998-2
$700,000,000 ADJUSTABLE RATE
HOME EQUITY LOAN
ASSET BACKED NOTES, SERIES 1998-2
DUE APRIL 20, 2029
[LOGO]
IMC MORTGAGE COMPANY
Seller and Servicer
BEAR STEARNS ASSET BACKED
SECURITIES, INC.
DEPOSITOR
------------------------
PROSPECTUS SUPPLEMENT
------------------------
BEAR, STEARNS & CO. INC.
PAINEWEBBER INCORPORATED
DEUTSCHE MORGAN GRENFELL
J.P. MORGAN & CO.
MARCH 20, 1998
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