As filed with the Securities and Exchange Commission on May 12, 1998
Registration No. 333-49015
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------------
BEAR STEARNS ASSET BACKED SECURITIES, INC.
(Depositor)
(Exact name of registrant as specified in its charter)
DELAWARE 13-3836437
(State of incorporation) (I.R.S. Employer Identification Number)
_________________________
245 PARK AVENUE
NEW YORK, NEW YORK 10167
(212) 272-4095
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
_________________________
JONATHAN LIEBERMAN
245 PARK AVENUE
NEW YORK, NEW YORK 10167
(212) 272-4094
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
_________________________
With a copy to:
STEPHEN B. ESKO, ESQ.
BROWN & WOOD LLP
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
__________________________
Approximate date of commencement of proposed sale to the public:
From time to time after the effective date of this Registration Statement, as
determined by market conditions.
__________________________
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. / /
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, other than securities offered only in connection with dividend
or interest reinvestment plans, please check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /__________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /________
If delivery of the prospectus is expected to be made pursuant to rule
434, please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE AGGREGATE PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT* OFFERING PRICE FEE
--------------------------- -------------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
Asset Backed Securities . . . . . . . . . $1,000,000,000 100% $1,000,000,000 $295,000**
</TABLE>
* Estimated for the purpose of calculating the registration fee.
** Of this amount, $295.00 has been previously paid.
___________________________
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment that specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
Information contained herein is subject to completion or amendment. A
registration statement relating to these Securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
Securities in any state in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such state.
PROSPECTUS SUPPLEMENT
(To Prospectus dated ________, 199_)
$_____________
Bear Stearns Home Equity Loan Trust 199__-__
___________
Servicer
Bear Stearns Asset Backed Securities, Inc.
Depositor
The Home Equity Loan Asset-Backed Certificates, Series 199_-_
(collectively, the "Certificates"), will consist of the Classes identified in
the chart below (the "Offered Certificates") as well as certain additional
Classes of Certificates which are not being offered for sale hereunder. The
Certificates will evidence in the aggregate the entire beneficial interest in
a trust (the "Trust") to be formed pursuant to a Pooling and Servicing
Agreement (the "Agreement") among Bear Stearns Asset Backed Securities, Inc.,
as depositor (the "Depositor"), ________________, as Servicer (the
"Servicer"), and __________, as Trustee and Back-Up Servicer (the "Trustee"
and the "Back-Up Servicer," respectively). The property of the Trust will
include assets composed of Primary Assets, which may include one or more
pools of (i) closed-end and/or revolving home equity loans (the "Home Equity
Loans"), secured generally by subordinate liens on one- to four-family
residential or mixed-use properties, (ii) home improvement installment sales
contracts and installment loan agreements (the "Home Improvement Contracts")
which are either unsecured or secured generally by subordinate liens on one-
to four-family residential or mixed-use properties, or by purchase money
security interests in the home improvements financed thereby, and (iii)
securities backed or secured by Home Equity Loans and/or Home Improvement
Contracts. The Home Equity Loans and the Home Improvement Contracts are
referred to herein as "Loan Group One" and "Loan Group Two", respectively.
The Home Equity Loans and the Home Improvement Contracts are collectively
referred to herein as the "Loans". The Trust also will include $__________
on deposit in the Pre-Funding Account which will be used to purchase
additional Home Equity Loans and Home Improvement Contracts prior to
________, 199_ as described herein and funds on deposit in the Capitalized
Interest Account.
(cover continued on next page)
SEE "RISK FACTORS" HEREIN ON PAGE S-15 AND IN THE PROSPECTUS ON PAGE 17 FOR
CERTAIN FACTORS TO BE CONSIDERED IN PURCHASING THE OFFERED CERTIFICATES.
THE CERTIFICATES DO NOT REPRESENT AN OBLIGATION OF OR INTEREST IN THE
DEPOSITOR, THE SELLER, THE SERVICER, THE TRUSTEE OR ANY OF THEIR
RESPECTIVE AFFILIATES. NEITHER THE CERTIFICATES NOR THE
UNDERLYING HOME EQUITY LOANS ARE INSURED OR GUARANTEED
BY ANY GOVERNMENTAL ENTITY, THE SELLER, THE SERVICER
OR ANY OF THEIR AFFILIATES.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------
<TABLE>
<CAPTION>
Initial
Certificate Pass-
Principal Through Price to Underwriting Proceeds to
Balance Rate Public(1) Discount Depositor(1)(2)
----------- ------- --------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Per Class A-1 Certificate $ % % % %
Per Class A-2 Certificate $ % % % %
Per Class A-3 Certificate $ (3) % % %
Total . . . . . . . . . . $ % % %
</TABLE>
__________________
(1) Plus accrued interest, if any, from ____________.
(2) Before deducting expenses, estimated to be $_________.
(3) The Class A-3 Certificates will bear interest at a variable rate which,
for any Distribution Date, will equal the lesser of (i) __% per annum
and (ii) the weighted average of the Remittance Rates (as defined
herein) of the Loans in Loan Group ___. The Certificate Rate for the
first Distribution Date is excepted to be approximately ___% per annum.
See "Description of the Certificates" herein.
----------------
The Offered Certificates are offered by Bear, Stearns & Co. Inc. (the
"Underwriter") when, as and if issued, delivered to and accepted by the
Underwriter and subject to certain other conditions. It is expected that
delivery of the Offered Certificates will be made in book entry form only,
through the Same Day Funds Settlement System of The Depository Trust Company,
on or about _________, 199_.
BEAR, STEARNS & CO. INC.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS ________, 199_.
(cover page continued)
Distributions of principal and interest on the Offered Certificates will
be made on the 25th day of each month or, if such day is not a Business Day,
then on the succeeding Business Day (each, a "Distribution Date"), beginning
in ___________, 199__ On each Distribution Date, holders of the Offered
Certificates will be entitled to receive, from and to the extent of funds
available in the related Distribution Account (as defined herein),
distributions with respect to interest and principal calculated as set forth
herein. The Offered Certificates will have the benefit of an irrevocable and
unconditional surety bond (the "Policy") issued by _____________ (the
"Certificate Insurer") pursuant to which the Certificate Insurer will
guarantee payments to the holders of the Offered Certificates as described
herein. See "Description of the Certificates" herein.
There is currently no secondary market for the Offered Certificates. The
Underwriter intends to establish a market in the Offered Certificates but is
not obligated to do so. There can be no assurance that a secondary market
for any of the Offered Certificates will develop, or if one does develop,
that it will continue or offer sufficient liquidity of investment.
The yield to investors in each Class of Offered Certificates will be
sensitive in varying degrees to the rate and timing of principal payments
(including prepayments) on the Loans in the related Loan Group, which
generally may be prepaid in full or in part at any time without penalty. The
yield to maturity of a Class of Offered Certificates purchased at a discount
or premium will be more sensitive to the rate and timing of payments thereon.
Holders of the Offered Certificates should consider, in the case of any such
certificates purchased at a discount, the risk that a slower than anticipated
rate of principal payments could result in an actual yield that is lower than
the anticipated yield and, in the case of any Offered Certificates purchased
at a premium, the risk that a faster than anticipated rate of principal
payments could result in an actual yield that is lower than the anticipated
yield. No representation is made as to the anticipated rate of prepayments
on the Loans or as to the resulting yield to maturity of any Class of Offered
Certificates.
An election will be made to treat certain assets of the Trust as a real
estate mortgage investment conduit ("REMIC") for federal income tax purposes.
As described more fully herein and in the Prospectus, the Offered
Certificates will be designated as "regular interests" in a REMIC. See
"Certain Material Federal Income Tax Considerations" in the Prospectus.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE
OFFERED CERTIFICATES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
_____________________________
The Certificates offered by this Prospectus Supplement constitute a
separate series of Securities being offered by the Depositor pursuant to its
Prospectus dated ________, of which this Prospectus Supplement is a part and
which accompanies this Prospectus Supplement. The Prospectus contains
important information regarding this offering which is not contained herein
and prospective investors are urged to read the Prospectus and this
Prospectus Supplement in full.
SUMMARY OF TERMS
The following summary of certain pertinent information is qualified in
its entirety by reference to the detailed information appearing elsewhere in
this Prospectus Supplement and in the accompanying Prospectus. Capitalized
terms used but not defined herein or in the accompanying Prospectus are
defined in the "Glossary of Terms" in the Prospectus.
Trust................. Bear Stearns Home Equity Loan Trust 199_-_ (the
"Trust") will be formed pursuant to a Pooling and
Servicing Agreement (the "Agreement"), to be dated
as of ___________ (the "Cut-Off Date"), among Bear
Stearns Asset Backed Securities, Inc. as depositor
(the "Depositor"), ___________________, as servicer
(together with any successor in such capacity, the
"Servicer"), and _________________, as trustee (the
"Trustee") and back-up servicer (the "Back-Up
Servicer"). The property of the Trust will include:
one or more pools of closed-end and/or revolving
home equity loans (the "Home Equity Loans"), secured
generally by subordinate liens on one- to four-
family residential or mixed-use properties; home
improvement installment sales contracts and
installment loan agreements (the "Home Improvement
Contracts") which are either unsecured or secured
generally by subordinate liens on one- to four-
family residential or mixed-use properties, or by
purchase money security interests in the home
improvements financed thereby; securities backed or
secured by Home Equity Loans and/or Home Improvement
Contracts. The Home Equity Loans and the Home
Improvement Contracts are individually referred to
herein as "Loan Group One" and "Loan Group Two,"
respectively, and collectively as the "Loans";
securities backed or secured by the Loans; payments
in respect of the Loans received on and after the
Cut-Off Date; property that secured a Mortgage Loan
which has been acquired by foreclosure or deed in
lieu of foreclosure; rights under certain hazard
insurance policies covering the Mortgaged
Properties; funds on deposit in the Pre-Funding
Account, the Capitalized Interest Account and the
Spread Account (each as defined below); the
Depositor's rights under the Purchase Agreement (as
defined herein); and certain other property, as
described more fully herein. In addition, the
Depositor has caused the Certificate Insurer (as
defined below) to issue an irrevocable and
unconditional surety bond (the "Policy") for the
benefit of the Holders of the Offered Certificates
pursuant to which it will guarantee payments to such
Holders as described herein.
Securities Offered... The Home Equity Loan and Home Improvement Contract
Asset-Backed Certificates, Series 199_-_ (the
"Certificates") will consist of the Class A-1, Class
A-2 and Class A-3 Certificates (collectively, the
"Offered Certificates"), the Class I Certificates
and the Class R Certificates. Only the Offered
Certificates are offered hereby. Any information
contained herein regarding the Class I or Class R
Certificates is included solely to permit a better
understanding of the Offered Certificates.
The Class A-1 and Class A-2 Certificates
(collectively, the "Fixed Rate Certificates") and
the Class I Certificates are related to Loan Group
One (Home Equity Loans) and the Class A-3
Certificates are related to Loan Group Two (Home
Improvement Contracts). Each Class of Offered
Certificates represents the right to receive
payments of interest at the per annum rate (the
"Certificate Rate") described below and payable
monthly, and payments of principal to the extent
provided below. The Offered Certificates will be
offered for purchase in minimum dollar denominations
of $25,000 and integral multiples of $1,000 in
excess thereof, provided, however, that one
Certificate of each Class of Offered Certificates
may be issued in an amount representing the
remainder, if any, of such Class. The "Percentage
Interest" evidenced by an Offered Certificate will
be equal to the percentage derived by dividing the
denomination of such Certificate by the aggregate
denomination of all Certificates of the same Class
as such Certificate.
Registration of the
Offered Certificates.. The Offered Certificates initially will be
represented by one or more certificates registered
in the name of Cede & Co., the nominee of The
Depository Trust Company ("DTC"), and will be
available only in the form of book-entries on the
records of DTC, participating members thereof
("Participants") and other entities, such as banks,
brokers, dealers and trust companies that clear
through or maintain custodial relationships with a
Participant, either directly or indirectly
("Indirect Participants"). References herein to
"holders" reflect the rights of owners of the
Offered Certificates only as they may indirectly
exercise such rights through DTC and Participants,
except as otherwise specified herein. See "Risk
Factors--Book-Entry Registration May Affect
Liquidity" and "Description of the Certificates--
Book-Entry Registration" herein.
Distribution and
Record Dates.......... Distributions will be made on the 25th day of each
month or, if such 25th day is not a Business Day, on
the succeeding Business Day (each, a "Distribution
Date"), beginning in ______________, 199__.
Distributions on a Distribution Date will be made to
Holders of record as of the last Business Day of the
month preceding the month in which such Distribution
Date occurs (each, a "Record Date").
Depositor
"Depositor"), a....... Bear Stearns Asset Backed Securities, Inc. (the
wholly-owned, special purpose subsidiary of The Bear
Stearns Companies Inc. None of The Bear Stearns
Companies Inc. nor any other affiliate of the
Depositor, the Servicer, the Trustee or the Seller
has guaranteed or is otherwise obligated with
respect to the Certificates. See "The Depositor" in
the Prospectus.
Seller................ ____________________________. All of the Loans
originally delivered to the Trust (the "Initial
Loans") were, and any Subsequent Loans (as defined
below) will be, originated by the Seller or by an
affiliate and acquired by the Seller in the ordinary
course of its business. The Loans will be acquired
by the Depositor in a privately negotiated
transaction concurrently with the delivery of such
Loans to the Trust. The Seller's corporate
headquarters are located at ______________, and its
telephone number is _____________. See "The Seller
and the Servicer" herein.
Servicer.............. ___________________________________. See "The
Seller and the Servicer" herein.
Trustee and
Back-Up Servicer...... ____________, a ______________ organized under the
laws of __________, will act as trustee and back-up
servicer (the "Trustee" and the "Back-Up Servicer,"
respectively).
Cut-Off Date.......... ____________, 199_.
Closing Date.......... On or about ___________, 199_.
The Loans............. The Loans consist of promissory notes or other
evidences of indebtedness (the "Mortgage Notes")
secured generally by mortgages, deeds of trust or
other instruments (the "Mortgages") creating
subordinate liens primarily on one- to four-family
residential or mixed use properties (the "Mortgaged
Properties"), and in the case of the Home
Improvement Contracts, by purchase money security
interests in the home improvements financed thereby.
Certain of the Home Improvement Contracts will be
unsecured. The Loans bear fixed or adjustable rates
(each, a "Loan Rate"). Interest on each fixed rate
Mortgage Loan is calculated on the "simple interest"
method ("Simple Interest Loans"), and interest on
each adjustable rate Mortgage Loan is calculated on
the "actuarial" method ("Actuarial Loans"). Monthly
payments are due on the date of the month specified
in the related Mortgage Note (each, a "Due Date").
The Due Dates for the Loans occur throughout the
month. Except for the Balloon Loans (defined
herein) in Loan Group _____, the Loans are fully
amortizing.
Loan Group............ The Loans will be divided into two Loan Groups.
One will consist of fixed rate and/or adjustable
rate Home Equity Loans ("ARMs"), and Loan Group Two
will consist of fixed rate and/or adjustable rate
(ARM) Home Improvement Contracts. The Loan Rate
borne by each ARM is subject to adjustment annually
on the date set forth in the related Mortgage Note
(each, a "Change Date") to equal the sum of (i) the
weekly average yield on U.S. Treasury securities
adjusted to a constant maturity of one year, as made
available by the Federal Reserve Board as of the
date __ days before the applicable Change Date (the
"Index") and (ii) the number of basis points set
forth in such Mortgage Note (the "Gross Margin"),
subject to rounding and to the effects of the
Periodic Cap, the applicable Lifetime Cap and the
applicable Lifetime Floor. The "Periodic Cap"
limits changes in the Loan Rate for each ARM on each
Change Date to ___ basis points. The "Lifetime Cap"
is the maximum Loan Rate that may be borne by an ARM
over its life and is equal to the sum of (i) the
initial Loan Rate for such ARM and (ii) ___ basis
points. The "Lifetime Floor" is the minimum Loan
Rate that may be borne by an ARM over its life and
is equal to the initial Loan Rate for such ARM. The
ARMs do not provide for negative amortization. None
of the ARMs has reached its initial Change Date.
The "Principal Balance" of a Mortgage Loan (other
than a Liquidated Mortgage Loan (as defined herein))
on any day is equal to its principal balance as of
the Cut-Off Date (or, with respect to a Subsequent
Mortgage Loan, its principal balance as of the
applicable Subsequent Cut-Off Date), minus all
collections credited against the Principal Balance
of such Mortgage Loan. The Principal Balance of a
Liquidated Mortgage Loan after final recovery of
related Liquidation Proceeds (as defined herein)
will be zero. With respect to any Distribution Date
and Loan Group, the "Loan Group Balance" will be
equal to the aggregate of the Principal Balances of
all Loans in such Loan Group as of the first day of
the related Due Period. See "Description of the
Loans" herein and Appendix A attached hereto.
Pre-Funding Account... On the Closing Date, an aggregate cash amount (the
"Pre-Funded Amount") not to exceed approximately
$___________ will be deposited in the Pre-Funding
Account. Of such amount, approximately $___________
will be used to purchase additional home equity
loans, home improvement installment sales contracts
and installment loan agreements secured by first or
second liens on Mortgaged Properties ("Subsequent
Loans") for deposit into the applicable Loan Group
and, if required, to make accelerated payments of
principal on the Fixed Rate Certificates and
approximately $_________ will be used to purchase
Subsequent Loans for deposit into the applicable
Loan Group and, if required, to make accelerated
payments of principal on the Class A-3 Certificates.
During the period (the "Pre-Funding Period") from
the Closing Date to the earliest to occur of (i) the
date on which the aggregate amount on deposit in the
Pre-Funding Account is less than $_______, (ii) an
Event of Default under the Agreement and (iii)
________, 199__, amounts on deposit in the Pre-
Funding Account may be withdrawn from time to time
to acquire Subsequent Loans in accordance with the
Agreement. Any net investment earnings on the Pre-
Funded Amount will be transferred to the Capitalized
Interest Account on each Distribution Date during
the Pre-Funding Period. Any Pre-Funded Amount
remaining in the Pre-Funding Account at the end of
the Pre-Funding Period will be distributed on the
Distribution Date occurring at or immediately
following the end of the Pre-Funding Period as a
prepayment of principal of the Class A-1 and Class
A-2 Certificates on a pro rata basis, or on the
Class A-3 Certificates, as applicable, based on the
remaining Pre-Funded Amount allocated to the related
Loan Group. Only fixed rate and/or adjustable
Subsequent Home Equity Loans may be added to Loan
Group One, and only fixed and/or adjustable rate
Subsequent Home Improvement Contracts may be added
to Loan Group Two.
Capitalized Interest
Account............... On the Closing Date, funds will be deposited in an
account (the "Capitalized Interest Account") created
and maintained with the Trustee. The amount so
deposited will be used by the Trustee on the
Distribution Dates during the Pre-Funding Period to
fund the excess, if any, of the Interest Remittance
Amounts for the Offered Certificates (as defined
below) and the premium due on the Policy over the
funds available therefor on such Distribution Dates.
Any funds remaining in the Capitalized Interest
Account at the end of the Pre-Funding Period will be
distributed to the Holders of the Class R
Certificates.
Final Scheduled
Distribution Date..... The Final Scheduled Distribution Dates for each of
the respective classes of Offered Certificates are
as set forth below, although it is anticipated that
the actual final Payment Date for each Class of
Offered Certificates will occur significantly
earlier than the related Final Scheduled
Distribution Date. See "Prepayment and Yield
Considerations" herein.
Final Scheduled
Distribution Date
-----------------
Class A-1 Certificates. . . . . . . . . ____
Class A-2 Certificates. . . . . . . . . ____
Class A-3 Certificates. . . . . . . . . ____
Interest.............. The Certificate Rate for each Class of Offered
Certificates will be as set forth or described on
the cover page hereof. The "Remittance Rate" for
each Mortgage Loan in Loan Group Two will be
calculated monthly, and for any Distribution Date
will equal the Loan Rate for such Mortgage Loan at
the beginning of the related Due Period (defined
below) minus the sum of (a) the Expense Fee Rate
(defined herein) and (b) the related Excess Spread
Rate. The "Excess Spread Rate" for any Mortgage
Loan in Loan Group Two will equal the excess of
(x) the Gross Margin for such Mortgage Loan less the
Expense Fee Rate over (y) _____%. Holders of the
Offered Certificates will be entitled to receive on
each Distribution Date, to the extent funds are
available therefor, interest at the applicable
Certificate Rate accrued during the related Interest
Period on the related Class Certificate Balance (as
described below under the caption "Principal").
Holders of the Class I Certificates will be entitled
to receive on each Distribution Date, to the extent
funds are available therefor and concurrently with
distributions of interest on the Fixed Rate
Certificates, interest at the rate of _____% per
annum accrued during the related Interest Period on
the Notional Balance of the Class I Certificates
which, for any Distribution Date, will equal the
Loan Group Balance of Loan Group One as of the first
day of the related Due Period. The amount of
interest (as described above) payable with respect
to a Class of Offered Certificates or the Class I
Certificates constitutes the "Interest Remittance
Amount" for such Class.
The "Interest Period" for each Distribution Date
will be the calendar month preceding the month in
which such Distribution Date occurs. Interest on
the Certificates will be calculated on the basis of
a 360-day year consisting of twelve 30-day months.
See "Description of the Certificates" herein.
Principal............. As to any Loan Group and Distribution Date, the
"Basic Principal Amount" will equal the sum of (i)
each payment of principal on a Mortgage Loan
received by the Servicer (exclusive of amounts
described in clauses (ii) and (iii) below) during
the calendar month preceding the calendar month in
which such Distribution Date occurs (with respect to
any Distribution Date, the "Due Period"); (ii)
curtailments (i.e., partial prepayments) and
prepayments in full received during the related Due
Period; (iii) all Insurance Proceeds and Net
Liquidation Proceeds allocable to recoveries of
principal of Home Equity Loans and Home Improvement
Contracts received during the related Due Period;
(iv) an amount equal to the excess, if any, of the
Principal Balance (immediately prior to liquidation)
of each Mortgage Loan liquidated during the related
Due Period over the principal portion of Net
Liquidation Proceeds received during such Due Period
(the "Unrecovered Class A Portion"); and (v) (a) the
outstanding Principal Balance of any Mortgage Loan
purchased by the Seller or the Servicer as required
or permitted by the Agreement as of the related
Determination Date and (b) with respect to any
Defective Mortgage Loan for which the Seller
substitutes an Eligible Substitute Mortgage Loan as
of the related Determination Date, any excess of the
Principal Balance of such Defective Mortgage Loan
over the Principal Balance of such Eligible
Substitute Mortgage Loan, plus the amount of any
unreimbursed Servicing Advances (defined herein)
made by the Servicer with respect to the Mortgage
Loan to the extent received.
Distributions of principal of a Class of Offered
Certificates will be measured by the Basic Principal
Amount for the related Loan Group. As to any
Distribution Date and Class of Offered Certificates,
the "Principal Remittance Amount" will equal the sum
of (i) the lesser of (x) the Basic Principal Amount
for the related Loan Group and (y) the portion of
such Basic Principal Amount required to be
distributed to increase the Overcollateralization
Amount (defined below) for the related Loan Group to
the Required Overcollateralization Amount (defined
below) for such Loan Group, (ii) the related Carry-
Forward Amount (defined below), and (iii) on the
Distribution Date at or immediately following the
end of the Pre-Funding Period, the amount, if any,
allocable to the related Loan Group remaining in the
Pre-Funding Account (exclusive of any investment
earnings included therein). Distributions of
principal will be allocated among the Classes of
Offered Certificates as described herein under
"Description of the Certificates--Priority of
Distributions." As described below, Holders of a
Class of Offered Certificates also may receive
distributions of Additional Principal (defined
below) on a Distribution Date.
The Interest Remittance Amount, the Principal
Remittance Amount and the Additional Principal, if
any, for a Class of Offered Certificates together
constitute the "Class Remittance Amount" for such
Class and each Distribution Date.
An amount to cover any loss on a liquidated Mortgage
Loan (i.e., the Unrecovered Class A Portion) may or
may not be distributed to the Holders of the related
Class of Offered Certificates on the Distribution
Date which immediately follows the event of loss.
However, the Holders of such Certificates are
entitled to receive ultimate recovery of 100% of the
original Class Certificate Balance of the applicable
Class of Certificates.
The "Class Certificate Balance" of a Class of
Offered Certificates on any date is equal to the
Class Certificate Balance of such Class on the
Closing Date (the "Original Class Certificate
Balance") minus the aggregate of amounts actually
distributed as principal to the Holders of such
Class of Offered Certificates.
The "Carry-Forward Amount" of a Class of Offered
Certificates on any Distribution Date will equal the
sum of (a) the excess of the aggregate of the Class
Remittance Amounts as of each preceding Distribution
Date over the amount of the actual distributions to
the Holders of such Class of Offered Certificates
made on any such Distribution Date and not
subsequently distributed, and (b) interest on the
amount, if any, of the interest component of the
amount described in clause (a) at one-twelfth of the
applicable Certificate Rate. See "Description of
the Certificates" herein.
Overcollateralization and
Crosscollateralization. On any Distribution Date on which the
Overcollateralization Amount for a Loan Group
is less than the Required Overcollateralization
Amount for such Loan Group, the Remaining Net
Excess Spread for such Loan Group plus the
Available Transfer Cashflow and the Net Excess
Principal, if any, will be used to make
additional distributions of principal of the
related Class or Classes of Offered
Certificates ("Additional Principal") until
such Overcollateralization Amount equals the
related Required Overcollateralization Amount.
As to any Loan Group and Distribution Date, the
"Overcollateralization Amount" will equal the sum of
(a) the excess, if any, of (i) the sum of the Loan
Group Balance and the amount on deposit in the Pre-
Funding Account allocated to such Loan Group
(exclusive of any investment earnings included
therein) as of the close of business on the last day
of the related Due Period, over (ii) the Class
Certificate Balance of the related Class or Classes
of Offered Certificates, after giving effect to the
distributions of the related Principal Remittance
Amount on such Distribution Date, and (b) the
amount, if any, on deposit in the Spread Account
allocated to the related Class or Classes of Offered
Certificates.
The Agreement provides that, subject to certain
floors, caps and triggers, the required level of
overcollateralization (the "Required
Overcollateralization Amount") may (i) increase or
decrease over time based on the delinquency and
default experience on the Loans in the Trust,
(ii) be increased by the Certificate Insurer at the
end of the Pre-Funding Period, (iii) step down based
on the passage of time and the amortization of the
Loans in the Trust or (iv) be reduced or eliminated
by the Certificate Insurer so long as a Certificate
Insurer Default (as defined herein) has not
occurred.
As to any Distribution Date and Loan Group: (a) the
"Excess Spread" will equal interest collected or
advanced on the Loans in such Loan Group (including
amounts allocated to the related Class or Classes of
Offered Certificates in the Capitalized Interest
Account) minus the sum of (i) the Interest
Remittance Amount for the related Class or Classes
of Offered Certificates and, in the case of Loan
Group One, the Interest Remittance Amount for the
Class I Certificates, (ii) the Servicing Fee, (iii)
the Back-Up Servicing Fee, (iv) the Trustee Fee and
(v) the Premium Fee (the sum of clauses (ii) through
(v), the "Expense Fees"); (b) the "Net Excess
Spread" will equal the Excess Spread remaining after
the application thereof to cover an Available Funds
Shortfall with respect to the related Loan Group;
(c) "Remaining Net Excess Spread" will equal the Net
Excess Spread remaining after the application
thereof to cover an Available Funds Shortfall with
respect to the other Loan Group and will be used to
make payments of Additional Principal to the Class
or Classes of Offered Certificates related to such
original Loan Group; (d) the "Available Transfer
Cashflow" will equal the Remaining Net Excess Spread
for the other Loan Group after the application
thereof to the payment of Additional Principal to
the Class or Classes of Offered Certificates related
to such other Loan Group; (e) the "Excess Principal"
will equal the lesser of (i) the portion of the
Basic Principal Amount for such Loan Group which is
not required to be included in the Principal
Remittance Amount for the related Class or Classes
of Offered Certificates on such Distribution Date
and (ii) the amount of such portion remaining after
the application of the related Available Remittance
Amount to the Required Payments for such Loan Group;
(f) the "Net Excess Principal" will equal the Excess
Principal remaining after the application thereof to
cover an Available Funds Shortfall in the other Loan
Group; (g) an "Available Funds Shortfall" is the
amount by which the Available Remittance Amount for
a Loan Group is less than the related Required
Payments, and (h) the "Required Payments" equal the
sum of the related Expense Fees (other than the
Servicing Fee), the Interest Remittance Amount(s),
the Principal Remittance Amount and reimbursement of
amounts due the Certificate Insurer with respect to
such Loan Group.
Spread Account........ On the Closing Date the Trustee will establish and
thereafter maintain an account (the "Spread
Account"). If required by the Certificate Insurer,
the holder of the Class R Certificates will deliver
to the Trustee for deposit in the Spread Account the
amount required by the Certificate Insurer. Funds
on deposit in the Spread Account, if any, will be
available for withdrawal to fund any shortfalls
between the available funds for distribution to
Holders of the Offered Certificates and the related
Interest Remittance Amounts or Principal Remittance
Amounts.
The Certificate
Insurer................ _____________ (the "Certificate Insurer") is a
______________ engaged only in the business of
writing financial guaranty and surety insurance.
The Certificate Insurer insures structured asset-
backed, corporate, municipal and other financial
obligations in the domestic and foreign capital
markets. The Certificate Insurer's claims-paying
ability is rated AAA by Standard & Poor's, a
division of The McGraw-Hill Companies, Inc., and Aaa
by Moody's Investors Service, Inc. ("Moody's"). See
"The Policy and the Certificate Insurer" herein.
Pursuant to the Insurance and Reimbursement
Agreement, dated as of the Cut-Off Date (the
"Insurance Agreement"), among the Certificate
Insurer, the Depositor, the Seller and the Servicer,
the Certificate Insurer will issue a financial
guaranty insurance policy (the "Policy") pursuant to
which it will irrevocably and unconditionally
guaranty, among other things, payment on each
Distribution Date to the Trustee for the benefit of
the Holders of each Class of Offered Certificates of
the Guaranteed Interest Payment Amount and the
Guaranteed Principal Payment Amount. The terms of
the Offered Certificates and the Agreement may not
be amended unless the Certificate Insurer has given
its prior written consent.
So long as there does not exist a failure by the
Certificate Insurer to make a required payment under
the Policy (such event, a "Certificate Insurer
Default"), the Certificate Insurer will have the
right to exercise all rights of the Holders of the
Offered Certificates under the Agreement without any
consent of such Holders, and such Holders may
exercise such rights only with the prior written
consent of the Certificate Insurer except as
provided in the Agreement.
Servicing............. The Servicer will be responsible for servicing,
managing and making collections on the Loans. The
Servicer will deposit all collections in respect of
the Home Equity Loans and/or Home Improvement
Contracts in a Loan Group into the related
Collection Account as described herein. Not later
than the 18th day of the month (or if such 18th day
is not a Business Day, the preceding Business Day)
of each Distribution Date (the "Determination
Date"), the Trustee will calculate the amounts to be
paid, as described herein, to the Certificateholders
on such Distribution Date. See "Description of the
Certificates--Priority of Distributions" herein.
With respect to each Due Period, the Servicer will
receive from payments in respect of interest on the
Loans actually received, a portion of such payments
as a monthly servicing fee (the "Servicing Fee") in
the amount of ___% per annum (the "Servicing Fee
Rate") on the Principal Balance of each Mortgage
Loan as of the first day of each such Due Period.
See "Description of the Certificates--Servicing
Compensation and Payment of Expenses" herein. In
certain limited circumstances, the Servicer may
resign or be removed, in which event either the
Back-Up Servicer or a third-party servicer will be
appointed as a successor Servicer. See "Description
of the Certificates--Certain Matters Regarding the
Servicer" herein.
Monthly Advances...... The Servicer is required to remit to the Trustee no
later than the close of business on the second
Business Day preceding a Distribution Date for
deposit in the applicable Collection Account an
amount equal to the sum of (a) interest accrued on
each Mortgage Loan through the date on which the
related monthly payment was due (the "Due Date") but
not received by the Servicer as of the close of
business on the related Determination Date, net of
the Servicing Fee and (b) with respect to each REO
Property which was acquired during or prior to the
related Due Period and as to which a final
disposition thereof did not occur during the related
Due Period, an amount equal to the excess, if any,
of interest for the most recently ended Due Period
on the Principal Balance of the Mortgage Loan
related to such REO Property at the related Loan
Rate, net of the Servicing Fee, over the net income
from the REO Property transferred to such Collection
Account for such Distribution Date pursuant to the
Agreement (the "Monthly Advance"). The Servicer is
not required to make any Monthly Advances which it
determines would be nonrecoverable. Such Monthly
Advances by the Servicer are reimbursable to the
Servicer subject to certain conditions and
restrictions. See "Description of the Certificates--
Advances" herein.
Prepayment Interest
Shortfalls............ Not later than the second Business Day prior to the
related Distribution Date, the Servicer is required
to remit to the Trustee, up to the amount otherwise
payable to the Servicer as its aggregate Servicing
Fee for the related Due Period, without any right of
reimbursement, an amount equal to, with respect to
each Mortgage Loan as to which a principal
prepayment in full was received from the Mortgagor
during the related Due Period, the excess, if any,
of 30 days' interest on the Principal Balance of
such Mortgage Loan at the Loan Rate (or at such
lower rate as may be in effect for such Mortgage
Loan because of application of the Soldiers' and
Sailors' Civil Relief Act of 1940, as amended (the
"Civil Relief Act"), or as a result of any reduction
of the monthly payment due on such Mortgage Loan as
a result of a bankruptcy proceeding (a "Debt Service
Reduction")) minus the Servicing Fee for such
Mortgage Loan over the amount of interest actually
paid by the related Mortgagor in connection with
such principal prepayment (with respect to all such
Home Equity Loans and Home Improvement Contracts,
the "Prepayment Interest Shortfall").
Optional Termination by
the Servicer........... On any Distribution Date on which the aggregate of
the Loan Group Balances (the "Pool Balance") is less
than ___ of the sum of (i) the Pool Balance as of
the Cut-Off Date and (ii) the Principal Balance of
the Subsequent Loans as of their respective
Subsequent Cut-Off Dates, the Servicer will have the
option to purchase, in whole, the Home Equity Loans,
the Home Improvement Contracts and the related REO
Property, if any, remaining in the Trust. See
"Description of the Certificates--Termination;
Retirement of the Certificates" herein.
Optional Purchase of
Defaulted Loans....... The Servicer has the option, but is not obligated,
to purchase from the Trust any Loan ___ days or more
delinquent at a purchase price equal to the
outstanding Principal Balance as of the date of
purchase, plus the greater of (i) all accrued and
unpaid interest on such Principal Balance and (ii)
30 days' interest on such Principal Balance,
computed at the Loan Rate, plus all unreimbursed
amounts owing to the Certificate Insurer with
interest thereon at the rate referred to in the
Insurance Agreement. See "Description of the
Certificates--Optional Purchase of Defaulted Loans"
herein.
Certain Federal
Income Tax
Considerations........ For federal income tax purposes, an election will be
made to treat certain assets of the Trust as a "real
estate mortgage investment conduit" (the "REMIC").
The Offered Certificates will constitute "regular
interests" in a REMIC and will be treated as debt
instruments of the REMIC and as interests of the
Trust for federal income tax purposes with payment
terms equivalent to the terms of such Certificates.
The Holders of the Offered Certificates will be
required to include in income interest on such
Certificates in accordance with the accrual method
of accounting, and the Offered Certificates may,
depending on their issue price, be treated as having
been issued with original issue discount for federal
income tax purposes. For further information
regarding the federal income tax consequences of
investing in the Offered Certificates, see "Certain
Federal Income Tax Considerations" in the
Prospectus.
ERISA Considerations.. Fiduciaries of employee benefit plans subject to
Title I of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), should consider
the ERISA fiduciary investment standards before
authorizing an investment by a plan in the Offered
Certificates. In addition, fiduciaries of: (i)
employee benefit plans subject to Title I of ERISA,
(ii) employee benefit plans or other retirement
arrangements (including individual retirement
accounts and certain Keogh plans) which are not
subject to ERISA, but which are subject to Section
4975 of the Internal Revenue Code of 1986, as
amended (the "Code"), or (iii) any entity whose
underlying assets are deemed to include plan assets
by reason of a plan or account investing in such
entity (collectively, "Plan(s)"), should consult
with their legal counsel to determine whether an
investment in the Offered Certificates will cause
the assets of the Trust ("Trust Assets") to be
considered plan assets pursuant to the plan asset
regulations set forth in 29 C.F.R. Section 2510.3-
101, thereby subjecting the Plan to the prohibited
transaction rules with respect to the Trust Assets
and the Trustee and Servicer to the fiduciary
investment standards of ERISA, or cause the excise
tax provisions of Section 4975 of the Code to apply
to the Trust Assets, unless some exemption granted
by the Department of Labor applies to the purchase,
sale, transfer or holding of the Offered
Certificates. One such exemption is Prohibited
Transaction Exemption 90-30, subject to the
satisfaction of the requirements thereof. See
"Erisa Considerations" in the Prospectus.
Legal Investment
Considerations........ The Offered Certificates will not constitute
"mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984,
as amended ("SMMEA"). Accordingly, many
institutions with legal authority to invest in
comparably rated securities may not be legally
authorized to invest in the Offered Certificates.
See "Legal Investment" in the Prospectus.
Certificate Rating.... It is a condition to the issuance of each Class of
Offered Certificates that they be rated not lower
than _____ by Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. ("S&P"), and _______
by Moody's Investors Service, Inc. (each, a "Rating
Agency"). A security rating is not a recommendation
to buy, sell or hold securities and may be subject
to revision or withdrawal at any time by the
assigning rating agency. In addition, a security
rating does not address or assess the frequency or
likelihood of prepayments on the Loans or the degree
to which such prepayments might differ from those
originally anticipated. A rating also does not
address the possibility that holders of the Offered
Certificates might suffer a lower than anticipated
yield. See "Ratings" and "Risk Factors--Certificate
Rating Is Not a Recommendation" herein.
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Offered Certificates.
Trust Is Only Source of Payment. The Offered Certificates do not
represent an interest in, or the obligation of, the Depositor, the Seller,
the Servicer, the Trustee or any of their respective affiliates. The Offered
Certificates will be payable solely from the Trust. There will be no
recourse to the Depositor, the Seller, the Servicer, the Trustee or any other
person for any failure to receive distributions on the Offered Certificates.
Consequently, Holders of the Offered Certificates must rely solely upon
payments with respect to the Loans and the other assets constituting the
Trust, including any amounts available pursuant to the Policy, for the
payment of principal of and interest on such Certificates. Neither the
Offered Certificates nor the Loans are insured or guaranteed by any
government agency or instrumentality.
Second Mortgages Include Additional Risks. Approximately __% of the
Home Equity Loans and approximately __% of the Home Improvement Contracts by
aggregate principal balance are secured by second mortgages, which are
subordinate to the rights of the mortgagee under the senior mortgage or
mortgages encumbering the related Mortgaged Property ("First Liens"), the
proceeds from any foreclosure, liquidation, insurance or condemnation
proceedings will be available to satisfy the outstanding balance of such
junior mortgage only to the extent that the claims of the mortgagees under
such First Liens have been satisfied in full, including any related
foreclosure costs. In addition, a junior mortgagee may not foreclose on the
Mortgaged Property securing a junior mortgage unless it forecloses subject to
the First Liens, in which case it must either pay the entire amount due on
the First Liens to the mortgagees thereof at or prior to the foreclosure sale
or undertake the obligation to make payments on the First Liens in the event
the mortgagor is in default thereunder. The Trust will not have any source
of funds to satisfy the First Liens or make payments due to the mortgagees
thereof. In addition, approximately __% of the Home Improvement Contracts
are secured by purchase money security interests and approximately __% of the
Home Improvement Contracts are unsecured.
Liquidation expenses with respect to defaulted mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time
of default. Therefore, assuming that a servicer took the same steps in
realizing upon a defaulted home equity loan or home improvement contract
having a small remaining principal balance as it would in the case of a
defaulted mortgage loan having a larger principal balance, the amount
realized after expenses of liquidation would be smaller as a percentage of
the outstanding principal balance of the smaller mortgage loan than would be
the case with a larger loan. Because the average outstanding principal
balances of the Loans are small relative to the size of the loans in a
typical pool of conventional first mortgages, realizations net of liquidation
expenses on defaulted Loans may also be smaller as a percentage of the
principal amount of the Loans than would be the case with respect to a
typical pool of conventional first mortgage loans.
There are several factors that could adversely affect the value of
Mortgaged Properties such that the outstanding balance of the related
Mortgage Loan, together with any senior financing on the Mortgaged
Properties, would equal or exceed the value of the Mortgaged Properties.
Among the factors that could adversely affect the value of the Mortgaged
Properties are an overall decline in the residential real estate market in
the areas in which the Mortgaged Properties are located or a decline in the
general condition of the Mortgaged Properties as a result of failure of
borrowers to maintain adequately the Mortgaged Properties or of natural
disasters that are not necessarily covered by insurance, such as earthquakes
and floods. Any such decline could extinguish the value of a junior interest
in Mortgaged Property before having any effect on the related senior interest
therein. If such a decline occurs, the actual rates of delinquencies,
foreclosure and losses on the junior Loans could be higher than those
currently experienced in the mortgage lending industry in general.
Prepayments May Fluctuate. All of the Loans may be prepaid in whole or
in part at any time without penalty. Home equity loans and home improvement
contracts, such as the Home Equity Loans and the Home Improvement Contracts
have been originated in significant volume only during the past few years and
the Depositor is not aware of any publicly available studies or statistics on
the rate of prepayment of such loans. Generally, home equity loans and home
improvement contracts are not viewed by borrowers as permanent financing.
Accordingly, the Home Equity Loans and the Home Improvement Contracts may
experience a higher rate of prepayment than traditional loans. The
prepayment experience of the Trust may be affected by a wide variety of
factors, including general economic conditions, interest rates, the
availability of alternative financing and homeowner mobility. In addition,
all of the Loans contain due-on-sale provisions and the Servicer is obligated
to enforce such provisions unless such enforcement is not permitted by
applicable law.
The rate of prepayments of conventional housing loans and other
receivables has fluctuated significantly in recent years. In general,
however, if prevailing interest rates fall significantly below the interest
rates on the Loans, such loans are likely to prepay at rates higher than if
prevailing interest rates remain at or above the interest rates borne by such
loans.
Payments on the Loans May Vary. When a principal prepayment in full is
made on a Mortgage Loan, the Mortgagor is charged interest only up to the
date of such prepayment, instead of for a full month. In addition, all of
the fixed rate Loans are Simple Interest Loans pursuant to which interest is
computed and charged to the Mortgagor on the outstanding principal balance of
the related Mortgage Loan based on the number of days elapsed between the
date through which interest was last paid on the Mortgage Loan to receipt of
the Mortgagor's most current payment, and the portions of each monthly
payment that are allocated to interest and principal are adjusted based on
the actual amount of interest charged on such basis. Consequently, if less
than a full month has elapsed between the interest paid to date and the next
payment on a Simple Interest Loan, the amount of interest actually paid by
the Mortgagor will be less than a full month's interest on the principal
balance of such Mortgage Loan. Conversely, if more than a full month has
elapsed between payments on a Simple Interest Loan, the amount of interest
actually paid by the Mortgagor will be greater than a full month's interest
on the principal balance of such Mortgage Loan.
Each ARM will be serviced as an Actuarial Loan. Actuarial Loans provide
that interest is charged to each related Mortgagor, and payments are due
therefrom, as of a scheduled day in each month that is fixed at the time of
origination. Scheduled monthly payments by a Mortgagor on an Actuarial Loan
either earlier or later than the scheduled due date therefor will not affect
the amortization schedule or the relative application of such payment to
principal and interest.
Balloon Loans May Adversely Affect Distributions. Approximately _____%
by aggregate Principal Balance as of the Cutoff Date of the Initial Home
Equity Loans in Loan Group One and approximately __% of the Initial Home
Improvement Contracts in Loan Group Two have original terms to stated
maturity of up to ___ years and amortization schedules of up to ___ years
("Balloon Loans"), leaving a substantial payment due at the stated maturity
(each, a "Balloon Payment"). The ability of a Mortgagor/Borrower to repay a
Balloon Loan at maturity frequently will depend on such
Mortgagor's/Borrower's ability to refinance the Mortgage Loan. The ability
of a Mortgagor/Borrower to refinance such a Mortgage Loan will be affected by
a number of factors, including the level of available mortgage rates at the
time, the value of the related Mortgaged Property, the Mortgagor's/Borrower's
equity in the related Mortgaged Property, the financial condition of the
Mortgagor/Borrower, the tax laws and general economic conditions at the time.
Although a low interest rate environment may facilitate the refinancing
of a Balloon Payment, the receipt and reinvestment by Certificateholders of
the proceeds in such an environment may produce a lower return than that
previously received in respect of the related Mortgage Loan. Conversely, a
high interest rate environment may make it more difficult for the
Mortgagor/Borrower to accomplish a refinancing and may result in
delinquencies or defaults. None of the Depositor, the Seller, the Servicer
or the Trustee will be obligated to provide funds to refinance any Mortgage
Loan.
The Pre-Funding May Adversely Affect Investment. If the principal
amount of eligible Loans available during the Pre-Funding Period is less than
_____% of the original Pre-Funded Amount, the Depositor will have
insufficient Loans to sell to the Trust on the Subsequent Transfer Dates,
thereby resulting in prepayments of principal to Holders of one or more
Classes of Offered Certificates as described herein.
Each Subsequent Mortgage Loan must satisfy the eligibility criteria set
forth in the Agreement. However, Subsequent Loans may be originated or
purchased by the Seller using credit criteria different from those which were
applied to the Initial Loans and may be of a different credit quality.
Therefore, following the transfer of Subsequent Loans to a Loan Group, the
aggregate characteristics of the Loans then held by the Trust as part of such
Loan Group may vary from those of the Initial Loans in such Loan Group.
The ability of the Trust to invest in Subsequent Loans is largely
dependent upon whether the Seller is able to originate or purchase home
equity loans, home improvement installment sales contracts or installment
loan agreements which meet the requirements for transfer to the Trust under
the Agreement. The ability of the Seller to originate or purchase such
mortgage loans is affected by a variety of social and economic factors.
Economic factors include interest rates, unemployment levels, the rate of
inflation and consumer perception of economic conditions generally.
Underwriting Standards May Affect Performance. As described herein,
_____________'s underwriting standards generally are less stringent than
those of FNMA or FHLMC with respect to a borrower's credit history and in
certain other respects. A borrower's past credit history may not preclude
__________ from making a loan; however, it will reduce the size (and
consequently the Combined Loan-to-Value Ratio) of the loan that ___________
is willing to make. As a result of this approach to underwriting, the Loans
in the Trust may experience higher rates of delinquencies, defaults and
foreclosures than mortgage loans underwritten in a more traditional manner.
Geographic Concentration May Adversely Affect Performance. Approximately
_____% and _____% (by Principal Balance as of the Cutoff Date) of the Initial
Home Equity Loans in Loan Group One and the Initial Home Improvement
Contracts in Loan Group Two, respectively, are secured by Mortgaged
Properties located in ___________. To the extent that the region has
experienced or may experience in the future weaker economic conditions or
greater rates of decline in real estate values than the United States
generally, such a concentration of the Loans may be expected to exacerbate
the foregoing risks. The Depositor can neither quantify the impact of any
recent property value declines on the Loans nor predict whether, to what
extent or for how long such declines may continue.
Book-Entry Registration May Affect Liquidity. Issuance of the Offered
Certificates in book-entry form may reduce the liquidity of such Certificates
in the secondary trading market since investors may be unwilling to purchase
Offered Certificates for which they cannot obtain physical certificates.
Since transactions in the Offered Certificates will, in most cases, be
able to be effected only through Participants, Indirect Participants and
certain banks, the ability of a Certificate Owner to pledge an Offered
Certificate to persons or entities that do not participate in the DTC system,
or otherwise to take actions in respect of such certificate, may be limited
due to lack of a physical certificate representing the Certificates.
Certificate Owners may experience some delay in their receipt of
distributions of interest on and principal of the Offered Certificates since
distributions may be required to be forwarded by the Trustee to DTC and, in
such a case, DTC will be required to credit such distributions to the
accounts of its Participants which thereafter will be required to credit them
to the accounts of the applicable Class of owners either directly or
indirectly through Indirect Participants. See "Description of the
Certificates--Book-Entry Registration" herein.
Certificate Rating Is Not A Recommendation. The rating of the Offered
Certificates will depend primarily on an assessment by the Rating Agencies of
the Home Equity Loans and Home Improvement Contracts and upon the
claims-paying ability of the Certificate Insurer. Any reduction in a rating
assigned to the claims-paying ability of the Certificate Insurer below the
rating initially given to the Offered Certificates may result in a reduction
in the rating of such Certificates. The rating by the Rating Agencies of the
Offered Certificates is not a recommendation to purchase, hold or sell the
Offered Certificates, inasmuch as such rating does not comment as to the
market price or suitability for a particular investor. There is no assurance
that the ratings will remain in place for any given period of time or that
the ratings will not be lowered or withdrawn by the Rating Agencies.
DESCRIPTION OF THE LOANS
GENERAL
The Initial Loans were, and any Subsequent Loans will be, originated by
the Seller or an affiliate in accordance with the policies set forth under
"Home Equity and Home Improvement Loan Program." All of the Initial Loans
are, and all Subsequent Loans will be, home equity loans bearing fixed or
adjustable interest rates (the "Loan Rates") and evidenced by promissory
notes (the "Mortgage Notes") secured by deeds of trust, security deeds or
mortgages on Mortgaged Properties.
The Loans are secured by either first or second mortgages or deeds of
trust on Mortgaged Properties located in _____ states. The Mortgaged
Properties securing the Loans consist primarily of one- to four-family
residential or mixed-use properties including townhouses and individual units
in condominiums and planned unit developments. The Mortgaged Properties may
be owner-occupied (which includes second and vacation homes) and non-owner
occupied investment properties. Certain of the Home Improvement Contracts
are unsecured or secured by purchase money security interests in the home
improvements financed thereby.
Certain Mortgage Loans (including Subsequent Loans, if any) will be a
Simple Interest Loan bearing interest at a fixed rate. Certain of the Loans
will have original terms to stated maturity of up to __ years and
amortization schedules of up to __ years ("Balloon Loans"), leaving a
substantial payment due at the stated maturity (each, a "Balloon Payment").
Certain other Mortgage Loans (including Subsequent Loans, if any) will
bear interest at an adjustable rate and will be serviced as an Actuarial
Loan. The Loan Rate borne by each ARM is subject to adjustment on the date
set forth in the related Mortgage Note (each, a "Change Date") to equal the
sum of (i) the weekly average yield on U.S. Treasury securities adjusted to a
constant maturity of one year, as made available by the Federal Reserve Board
as of the date __ days before the applicable Change Date (the "Index") and
(ii) the number of basis points set forth in such Mortgage Note (the "Gross
Margin"), subject to rounding and to the effects of the Periodic Cap, the
applicable Lifetime Cap and the applicable Lifetime Floor. The "Periodic
Cap" limits changes in the Loan Rate for each ARM on each Change Date to ___
basis points. The "Lifetime Cap" is the maximum Loan Rate that may be borne
by an ARM over its life and is equal to the sum of (i) the initial Loan Rate
for such ARM and (ii) ___ basis points. The "Lifetime Floor" is the minimum
Loan Rate that may be borne by an ARM over its life and is equal to the
initial Loan Rate for such ARM. The ARMs do not provide for negative
amortization.
STATISTICAL INFORMATION
Set forth below is certain summary statistical information regarding the
Initial Loans expected to be included in their respective Loan Groups as of
the Closing Date. All such information is approximate and is given as of the
Cutoff Date. More detailed statistical information is set forth in Appendix
A. Prior to the Closing Date, Loans may be removed from their respective
Loan Groups and other Loans may be substituted therefor. In addition,
regularly scheduled payments on the Loans will affect the balances and
percentages set forth below and in Appendix A, and Loans may be prepaid at
any time. As a result, certain characteristics of the Loans in one or both
Loan Groups may vary from the characteristics set forth below and in Appendix
A as of the Cutoff Date.
Home Equity Loans -- Loan Group One. With respect to the Initial Group
One Home Equity Loans as of the Cutoff Date: the Principal Balances ranged
from $________ to $____________; the average Principal Balance was
$__________; the Loan Rates ranged from ____% to ____%; the weighted average
Loan Rate was ______%; the original Combined Loan-to-Value Ratios ranged from
___% to ___%; the weighted average original Combined Loan-to-Value Ratio was
______%; the remaining terms to stated maturity of the Balloon Loans ranged
from ___ months to ____ months; the weighted average remaining term to stated
maturity of the Balloon Loans was _______ months; the remaining terms to
stated maturity of the non-Balloon Loans ranged from ___ months to ___
months; the weighted average remaining term to stated maturity of the non-
Balloon Loans was ____ months; approximately _____% of the Group One Home
Equity Loans are Balloon Loans; the number of months since funding ranged
from __ months to ___ months; the weighted average number of months since
funding was ____ months; and no more than ____% of the Initial Group One Home
Equity Loans will be secured by Mortgaged Properties located in any one
postal zip code area.
Home Improvement Contracts -- Loan Group Two. With respect to the
Initial Group Two Home Improvement Contracts as of the Cutoff Date: the
Principal Balances ranged from $_________ to $________; the average Principal
Balance was $________; the current Loan Rates ranged from ______% to
_______%; the weighted average current Loan Rate was ______%; the original
Combined Loan-to-Value Ratios ranged from ____% to ____%; the weighted
average original Combined Loan-to-Value Ratio was ___%; the remaining terms
to stated maturity ranged from ___ months to ___ months; the weighted average
remaining term to stated maturity was _____ months; the number of months
since funding ranged from __ months to __ months; the weighted average number
of months since funding was ___ months; the Gross Margins ranged from ____%
to ______%; the weighted average Gross Margin was ______%; the Lifetime
Floors ranged from ____% to ______%; the weighted average Lifetime Floor was
______%; the Lifetime Caps ranged from ______% to ________%; the weighted
average Lifetime Cap was _____%; the weighted average number of months to the
next Change Date was ______ months; and no more than ____% of the Initial
Group Two Home Improvement Contracts are secured by Mortgaged Properties
located in any one postal zip code area.
SUBSEQUENT LOANS
The Depositor expects to sell Subsequent Loans to the Trust during the
Pre-Funding Period for inclusion in the applicable Loan Group. The purchase
price for each Subsequent Mortgage Loan will equal the outstanding principal
balance thereof as of the opening of business on the first day of the month
in which such Subsequent Mortgage Loan is transferred to the Trust (each, a
"Subsequent Cut-Off Date") and will be paid by withdrawal of funds on deposit
in the Pre-Funding Account allocated to the applicable Loan Group. The
Subsequent Loans will have been originated more recently than, and may have
other characteristics which differ from, the Loans initially included in the
respective Loan Groups. As a result, following any sale of Subsequent Loans
to the Trust, the description of the Loan Groups set forth above and in
Appendix A may not accurately reflect the characteristics of all of the Loans
and Subsequent Loans in such Loan Groups. However, the Subsequent Loans must
conform to the representations and warranties set forth in the Agreement.
Following the end of the Pre-Funding Period, the Depositor expects that the
Loans (including Subsequent Loans) in Loan Group One and Loan Group Two will
have the following approximate characteristics.
LOAN GROUP ONE
<TABLE>
<CAPTION>
<S> <C>
Average Unpaid Principal Balance . . . . . . . . . . . . . . . . . . at least $______
Weighted Average Loan Rate . . . . . . . . . . . . . . . . . . . . _____% - _____%
Weighted Average Remaining Term to Stated Maturity . . . . . . . . __ months - __ months
Weighted Average Original Combined Loan-to-Value Ratio . . . . . . not more than __%
Weighted Average Loan Age . . . . . . . . . . . . . . . . . . . . . 0 month - __ month
Loans Secured by Primary Residences . . . . . . . . . . . . . . . . at least __%
Single Family Detached . . . . . . . . . . . . . . . . . . . . . . at least __%
State Distribution
________ . . . . . . . . . . . . . . . . . . . . . . . . . . . . not more than __%
________ . . . . . . . . . . . . . . . . . . . . . . . . . . . . not more than __%
________ . . . . . . . . . . . . . . . . . . . . . . . . . . . . not more than __%
Any other individual state . . . . . . . . . . . . . . . . . . . not more than __%
</TABLE>
LOAN GROUP TWO
<TABLE>
<S> <C>
Average Unpaid Principal Balance . . . . . . . . . . . . . . . . . . at least $______
Weighted Average Initial Loan Rate . . . . . . . . . . . . . . . . _____% - _____%
Weighted Average Remaining Term to Stated Maturity . . . . . . . . __ months - __ months
Weighted Average Original Combined Loan-to-Value Ratio . . . . . . not more than __%
Weighted Average Loan Age . . . . . . . . . . . . . . . . . . . . . 0 month - __ months
Weighted Average Gross Martin . . . . . . . . . . . . . . . . . . . at least __%
Loans Secured by Primary Residences . . . . . . . . . . . . . . . . at least __%
Single Family Detached . . . . . . . . . . . . . . . . . . . . . . at least __%
State Distribution
________ . . . . . . . . . . . . . . . . . . . . . . . . . . . . not more than __%
________ . . . . . . . . . . . . . . . . . . . . . . . . . . . . not more than __%
Any other individual state . . . . . . . . . . . . . . . . . . . not more than __%
</TABLE>
THE SELLER AND THE SERVICER
_____________ (the "Seller") is a ____________ which originates home
equity loans, home improvement installment sales contracts and installment
loan agreements secured by subordinate liens primarily on one- to four-family
residential and mixed use properties, including townhouses and individual
units in condominiums and planned unit developments. The Seller conducts its
business directly and through ____ affiliated companies.
For the three fiscal years ended ______________, the Seller funded $____
million, $___ million and $____ million, respectively, of mortgage loans.
For the three months ended ___________, the Seller funded approximately $____
million of mortgage loans.
As of _________, the Seller had approximately ___ employees. The
principal offices of the Seller are located at __________________________.
Its telephone number is ____________.
HOME EQUITY AND HOME IMPROVEMENT LOAN PROGRAM
GENERAL
One of the Seller's products is a closed end, fixed rate, fully
amortizing mortgage loan with an original term to maturity of ___ years. The
Seller also offers fixed-rate fully-amortizing mortgage loans with original
terms to maturity of ___________ and __ years and fixed rate mortgage loans
with original terms to maturity of __ or __ years and an amortization
schedule of up to __ years or an original term to maturity of up to __ years
and an amortization schedule of up to __ years. The Seller also offers
closed end, adjustable rate, fully-amortizing mortgage loans with original
terms to maturity of either __ or __ years. Each adjustable rate mortgage
loan provides for annual adjustments based on changes in the level of the
Index, subject to rounding, the Periodic Cap and the applicable Lifetime Cap
and the applicable Lifetime Floor.
In most instances, the Seller's mortgage loans are non-purchase money
mortgages secured by first or second liens on owner-occupied one- to four-
family residential and mixed-use properties, including townhouses and
individual units in condominiums and planned unit developments. In the
fiscal year ended ____________ and the three months ended _____________,
approximately ____% and _____%, respectively, of the mortgage loans
originated by the Seller were secured by owner occupied residences. The
Seller also makes mortgage loans secured by first or second liens on
residential rental properties or vacation properties.
(All of the Seller's fixed rate mortgage loans are Simple Interest
Loans.) A Simple Interest Loan provides for a series of substantially equal
monthly payments which, if paid when due, will fully amortize the amount
financed by the scheduled maturity date. Each monthly payment includes an
installment of interest which is calculated on the basis of the outstanding
principal balance of the mortgage loan multiplied by the stated Loan Rate and
further multiplied by a fraction, the numerator of which is the number of
days in the period elapsed since the preceding payment of interest was made
and the denominator of which is the number of days in the annual period for
which interest accrues on such loan. As payments are received under a Simple
Interest Loan, the amount received is applied first to interest accrued to
the date of payment and the balance is applied to reduce the unpaid principal
balance. Accordingly, if a borrower pays a fixed monthly installment on a
Simple Interest Loan before its scheduled due date, the portion of the
payment allocable to interest for the period since the preceding payment was
made will be less than it would have been had the payment been made as
scheduled, and the portion of the payment applied to reduce the unpaid
principal balance will be correspondingly greater. Conversely, if a borrower
pays the fixed monthly installment after the scheduled due date, the portion
of the payment allocable to interest will be greater, and the amortization of
the unpaid principal balance will be correspondingly less.
All of the Seller's mortgage loans may be prepaid by the borrowers in
whole or in part at any time without penalty. Late charges are assessed on
loans for which payments are made after applicable grace periods established
by federal and state laws. None of the Seller's mortgage loans are insured
or guaranteed by any governmental agency or instrumentality, and none are
covered by primary mortgage guaranty insurance policies.
UNDERWRITING PROCEDURES
The following is a description of the underwriting procedures
customarily employed by the Seller with respect to fixed rate and adjustable
rate mortgage loans, home improvement installment sales contracts and
installment loan agreements secured by first or second liens on one- to four-
family residential properties, including townhouses and individual units in
condominiums and planned unit developments. The Seller's underwriting
process, which is centralized at its corporate headquarters, is intended to
assess the applicant's credit standing and repayment ability and the value
and adequacy of the real property security as collateral for the proposed
loan. The Seller considers itself to be a credit lender as opposed to an
equity lender, focusing primarily on the borrower's ability and willingness
to repay, and only secondarily on the potential value of the collateral upon
foreclosure, in determining whether or not to make a mortgage or home
improvement loan. As of ___________, the Seller employed ____ loan officers
and ___ underwriters. Underwriters are primarily promoted from within the
Seller on a selective basis in order to maintain the quality and integrity of
the Seller's business philosophy. All underwriters receive fixed annual
salaries which are not based on underwriting volume.
The application process generally is conducted by telephone. Each
applicant for a mortgage or home improvement loan is required to supply the
information necessary to complete an application which lists the applicant's
liabilities, income, credit and employment history and other demographic and
personal information. If the information in the loan application
demonstrates that the applicant has sufficient income and that there is
sufficient equity in the real property to justify making a mortgage loan, the
loan officer will conduct a further credit investigation of the applicant.
This investigation includes obtaining and reviewing an independent credit
bureau report on the credit history of the applicant in order to evaluate the
applicant's ability to repay. The credit report typically contains
information relating to such matters as credit history with local merchants
and lenders, installment debt payments and any record of defaults,
bankruptcy, collateral repossessions, suits or judgments. Any adverse
information contained in the credit report must be acceptable (and if
requested, explained) to the loan officer.
Based on the information obtained from the applicant, the loan officer
advises the applicant of the loan program for which the applicant qualifies.
Upon gaining the agreement of the applicant, the loan officer submits the
application to the underwriting department for further review. An
underwriter will then evaluate the submission in accordance with certain
established guidelines. The underwriter will either approve, reject, or
amend the loan request based on the information submitted in the application.
If the applicant accepts the amendment, the underwriter will approve the
amended loan application.
The application is then further processed to verify the accuracy of the
information therein. Verification may take the form of written or verbal
communication with the applicant's employer or recent pay stubs and current
W-2 forms supplied by the applicant. Income tax returns also may be obtained
and reviewed. Self-employed borrowers generally are required to have been in
business for at least two years and must provide signed federal income tax
returns, including all schedules thereto, for the past two tax years, and may
be required to furnish personal and business financial statements if deemed
necessary by the underwriter.
In certain circumstances, the Seller may not be able to verify the
income claimed on the application but is able to document adequate cashflow
to support the loan for which the application was made. In such
circumstances, the permitted combined loan-to-value ratio will be less than
otherwise would be the case. Approximately ____% (by Principal Balance as of
the Statistical Calculation Date) of the Initial Home Equity Loans in Loan
Group One and approximately __% (by Principal Balance as of the Statistical
Calculation Date) of the Initial Home Improvement Contracts in Loan Group Two
were underwritten using such alternative approach to income verification.
If there is a senior mortgage on the property to be used as security for
the mortgage or home improvement loan, the loan officer also evaluates the
type and outstanding balance of the senior mortgage loan and its payment
history. The Seller obtains a credit reference on the senior mortgage by
using either credit bureau information, telephone verification, the year-end
senior mortgage statement, canceled checks or written verification from the
senior mortgagee.
In every instance, the property securing a loan made by the Seller is
appraised and title insurance acquired before the loan is closed. The Seller
requires appraisals on all properties that will secure its mortgage and home
improvement loans. Such appraisals are conducted by approved, independent
third-party appraisers who are paid a fee by the applicant, regardless of
whether the application for a loan is approved. All appraisals are required
to be on forms approved by FNMA or FHLMC. The Seller obtains a lender's
title insurance policy or binder, or other assurance of title customary in
the relevant jurisdiction. Homeowners' insurance coverage is required on
every property securing a home equity loan or home improvement loan
originated by the Seller. Necessary coverage and mortgagee clause
endorsements are acquired and monitored by the loan servicing department.
Forced-placed policies are acquired for properties in which the borrower has
allowed coverage to lapse.
After obtaining all applicable employment, credit and property
information, the Seller determines whether sufficient unencumbered equity in
the property exists and whether the prospective borrower has sufficient
monthly income available to support the payments of principal and interest on
the mortgage loan and/or home improvement loan in addition to any senior
mortgage loan payments (including any escrows for property taxes and hazard
insurance premiums) and other monthly credit obligations. The Seller applies
the "debt-to-gross income ratio" which is the ratio of the borrower's total
monthly payments on all outstanding debt (including the new loan) to the
borrower's gross verifiable monthly income. The debt-to-gross income ratio
generally may not exceed __%. For ARMs, such ratios generally are calculated
using the "fully indexed" rate (i.e., the sum of the applicable Index and the
related Gross Margin). In addition, the maximum Combined Loan-to-Value Ratio
of any mortgage loan may not exceed __% and may be reduced depending on a
number of factors, including the applicant's credit history and employment
status.
Any exceptions to the underwriting policies may be approved by the
manager of the underwriting department. The factors considered when
determining if an exception to the general underwriting standards should be
made include: the quality of the property, how long the borrower has owned
the property, the amount of disposable income, the type and length of
employment, the credit history, the current and pending debt obligations, the
payment habits and the status of past and currently existing mortgages.
When an application is approved, a mortgage and/or home improvement loan
is completed by signing the applicable loan documents, including a promissory
note and mortgage. All loans are closed by approved attorneys. Following
the three business day rescission period required by the federal Truth-in-
Lending Act, a loan is fully funded. Scheduled repayment of principal and
interest on such loan generally begins one month from the date interest
starts to accrue. After a mortgage or home improvement loan is underwritten,
approved and funded, the loan package is reviewed by an employee.
REFINANCING POLICY
Where the Seller believes that borrowers having existing loans with the
Seller are likely to refinance such loans due to interest rate changes or
other reasons, the Seller actively attempts to retain such borrowers through
solicitations of such borrowers to refinance with the Seller. Such
refinancings generate fee and servicing income for the Seller. Since the
solicited borrowers may refinance their existing loans in any case, the
Seller believes that this practice will be unlikely to affect the prepayment
experience of the mortgage loans in a material respect. The Seller also has
solicited its borrowers who are in good standing to apply for additional
loans, consistent with its origination standards where deemed appropriate.
SERVICING OF HOME EQUITY AND HOME IMPROVEMENT LOANS
The Servicer has established standard policies for the servicing and
collection of the mortgage and home improvement loans. Servicing includes,
but is not limited to, post-origination loan processing, customer service,
collections, remittance processing and liquidations.
The Servicer sends a monthly statement to each of its borrowers.
Collection procedures vary somewhat depending on whether a late payment is
the first payment due under the loan. If the first payment is not received
on or prior to the due date, an initial phone call is made on the first
business day after the due date. Phone calls continue on a daily basis until
contact is made. A "Friendly Reminder Letter" is sent on the second business
day after the due date. If no contact is made with the borrower by the _____
day after the due date, a "Pre-foreclosure Letter" is sent, and a qualified
outside agency is used to inspect the property. On the _____ day after a
first payment default a Notice of Default is sent to the borrower. This
letter indicates an intent to accelerate the loan if satisfactory
arrangements are not made within ten days.
If the delinquency relates to a due date other than the first due date,
a Friendly Reminder Letter is sent on the second business day after the due
date. On the _____ day after the due date, telephone calls to the borrower
begin and telephone calls continue on a daily basis until payment is received
or contact is made. In addition, a series of mailings is made depending on
the customer's payment history. On the _____ day of delinquency a Notice of
Default is sent. A qualified outside agency is used to conduct an interview
with the borrower and the property is inspected.
Accounts which are __ days past due without a specific arrangement for
repayment will be sent a Notice of Intent to Foreclosure which gives the
customer _____ days in which to respond. On the _____ day of delinquency, a
determination whether to foreclose is made. If the Servicer decides to
foreclose, the necessary documentation is sent to an approved attorney who
then sends the borrower an acceleration letter allowing the borrower __ days
to reinstate the mortgage. When foreclosure proceedings are initiated, a
third party appraiser completes a drive-by evaluation of the property and
obtains comparable sales prices and listings in the area. In addition,
homeowner's insurance is verified and the status of senior mortgages and
property taxes is checked. Subject to applicable state law, all legal
expenses are assessed to the account and become the responsibility of the
borrower.
Regulations and practices regarding the liquidation of properties (e.g.,
foreclosure) and the rights of the borrower in default vary greatly from
state to state. The Servicer will decide that liquidation is the appropriate
course of action only if a delinquency cannot otherwise be cured. If the
Servicer determines that purchasing a property securing a mortgage or home
improvement loan will minimize the loss associated with such defaulted loan,
the Servicer may bid at the foreclosure sale for such property or accept a
deed in lieu of foreclosure.
Servicing and collection practices may change over time in accordance
with, among other things, the Servicer's business judgment, changes in the
portfolio and applicable laws and regulations. Any realization from the sale
of foreclosed property is taken as recovery. After the Servicer acquires
title to a mortgaged property by foreclosure or deed in lieu of foreclosure,
an approved realtor is selected to list and advertise the property.
The Servicer may not foreclose on the property securing a junior
mortgage or home improvement loan unless it forecloses subject to all senior
mortgages. If any senior mortgage loan is in default after the Servicer has
initiated its foreclosure actions, the Servicer may advance funds to keep
such senior mortgage loan current until such time as the Servicer satisfies
such senior mortgage loan. Such amounts are added to the balance of the
mortgage or home improvement loan. In the event that foreclosure proceedings
have been instituted on any senior mortgage prior to the initiation of the
Servicer's foreclosure action, the Servicer will either satisfy the senior
mortgage loan at the time of the foreclosure sale or take other action to
protect its interest in the related property.
DELINQUENCY AND LOSS EXPERIENCE
The following tables set forth the delinquency and loss experience for
each of the periods shown for the Servicer's portfolio of home equity and
home improvement lines of credit. The Servicer believes that there have been
no material trends or anomalies in the historical delinquency and loss
experience as represented in the following tables. The information in the
tables below has not been adjusted to eliminate the effect of the growth in
the size of the Servicer's portfolio during the periods shown. Accordingly,
loss and delinquency as percentages of aggregate principal balance of such
loans for each period may be higher than those shown if a group of such loans
were artificially isolated at a point in time and the information showed the
activity only in that isolated group. The data presented in the following
tables are for illustrative purposes only, and there is no assurance that the
delinquency and loss experience of the Loans will be similar to that set
forth below.
DELINQUENCY EXPERIENCE (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
As of As of December 31,
, (1)
----------- --- -------------------------------------------------------------
--- --- ---
----------------- ----------------- ----------------- -------------------
Number Amount Number Amount Number Amount Number Amount
of of of of
Loans Loans Loans Loans
----- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio Principal $ $ $ $
Outstanding at
Period End.........
Delinquency(1) $ $ $ $
30-59 Days.........
60-89 Days.........
90 or More Days(2). _____ _____ _____ _____ _____ _____ _____ _____
Total Delinquencies.. $ $ $ $
Total Delinquencies % % % % % % % %
as a Percentage
of the Portfolio
at Period End......
</TABLE>
- ------------------
(1) The period of delinquency is based on the number of days payments are
contractually past due for all loans other than mortgage loans
previously charged off.
(2) Includes mortgage loans in foreclosure and not charged off.
<TABLE>
<CAPTION>
LOSS EXPERIENCE (DOLLARS IN THOUSANDS)
As of As of December 31,
, (1)
----------- --- -------------------------------------------------------------
--- --- ---
----------------- ----------------- ----------------- -------------------
Number Amount Number Amount Number Amount Number Amount
of of of of
Loans Loans Loans Loans
----- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio Principal $ $ $ $
Outstanding at
Period End.........
Gross Losses......... $ $ $ $
Recoveries........... $ $ $ $
Net Losses........... $ $ $ $
Net Losses as a $ $ $ $
Percentage of
Portfolio at
Period End.........
</TABLE>
- ------------------
(1) Net Losses equal total principal charged off less recoveries. The
customary policy is to charge off mortgage and home improvement loans in
full that are 120 days past due unless foreclosure proceedings are
planned or there are indications that the account will be brought
current. An account that is not charged off because there are
indications that payment is imminent generally will be charged off after
an additional 60 to 90 days if such payment is not forthcoming.
(2) This percentage represents the ___-month period ended ___________, 1995
annualized and is not necessarily indicative of the results which may
occur for the full year.
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The rate of principal payments on a Class of Offered Certificates, the
aggregate amount of distributions on such Certificates and the yield to
maturity of such Certificates will be related to the rate and timing of
payments of principal on the Loans and in the related Loan Group. The rate
of principal payments on the Loans will in turn be affected by the
amortization schedules of the Loans (including, in the case of ARMs, changes
thereto to accommodate changes in the Loan Rate) and by the rate of principal
prepayments (including for this purpose prepayments resulting from
refinancing, liquidations of the Loans due to defaults, casualties,
condemnations and repurchases by the Seller or purchases by the Servicer).
The Loans may be prepaid by the Mortgagors at any time without a prepayment
penalty.
Prepayments, liquidations and purchases of the Loans (including any
optional purchase by the Servicer of a defaulted Mortgage Loan and any
optional purchase of the remaining Loans in connection with the termination
of the Trust, in each case as described herein) will result in distributions
on the related Class or Classes of Offered Certificates of principal amounts
which would otherwise be distributed over the remaining terms of the Loans.
In addition, any Pre-Funded Amount allocated to a Loan Group remaining at the
end of the Pre-Funding Period will be distributed as a prepayment of the
related Class or Classes of Offered Certificates. Since the rate of payment
of principal of the Loans will depend on future events and a variety of
factors, no assurance can be given as to such rate or the rate of principal
prepayments. The extent to which the yield to maturity of an Offered
Certificate may vary from the anticipated yield will depend upon the degree
to which such Certificate is purchased at a discount or premium.
The prepayment experience on non-conventional home equity loans and home
improvement loans may differ from that on conventional first mortgage loans,
primarily due to the credit quality of the typical borrower. Because the
credit histories of many home equity and home improvement borrowers may
preclude them from other traditional sources of financing, such borrowers may
be less likely to refinance due to a decline in market interest rates. Non-
conventional home equity loans and home improvement loans may experience more
prepayments in a rising interest rate environment as the borrowers' finances
are stressed to the point of default.
The rate of prepayment on the Loans cannot be predicted. Home equity
loans and home improvement loans such as the Home Equity Loans and the Home
Improvement Contracts, respectively, have been originated in significant
volume only during the past few years and the Seller is not aware of any
publicly available studies or statistics on the rate of prepayment of such
Loans. Generally, home equity loans and home improvement loans are not
viewed by borrowers as permanent financing. Accordingly, the Loans may
experience a higher rate of prepayment than traditional first mortgage loans.
The prepayment experience of the Trust with respect to the Loans may be
affected by a wide variety of factors, including economic conditions,
prevailing interest rate levels, the availability of alternative financing
and homeowner mobility and changes affecting the deductibility for Federal
income tax purposes of interest payments on home equity loans and/or home
improvement contracts. All of the Home Equity Loans (and Home Improvement
Contracts) contain "due-on-sale" provisions, and the Servicer is required by
the Agreement to enforce such provisions, unless such enforcement is not
permitted by applicable law. The enforcement of a "due-on-sale" provision
will have the same effect as a prepayment of the related Mortgage Loan. See
"Certain Legal Aspects of Loans--Due-on-Sale Clauses in Loans" in the
Prospectus. No assurance can be given as to the level of prepayments that
will be experienced by the Trust and it can be expected that a portion of
borrowers will not prepay their Loans to any significant degree.
OVERCOLLATERALIZATION
The overcollateralization and cross collateralization features described
herein will affect the rate and timing of principal distributions on the
Offered Certificates, and consequently the average life and yield to
maturity. On any Distribution Date on which the Overcollateralization Amount
for a Loan Group is less than the related Required Overcollateralization
Amount, the Remaining Net Excess Spread for such Loan Group, the Available
Transfer Cashflow and the Net Excess Principal will be used to reduce the
Class Certificate Balance of the related Class or Classes of Offered
Certificates through the distribution of Additional Principal. Until such
time, if any, that the Overcollateralization Amount for a Loan Group equals
the related Required Overcollateralization Amount, there will be no Available
Transfer Cashflow or Net Excess Principal to accelerate the amortization of
the other Class or Classes of Offered Certificates. Loans with higher Loan
Rates contribute more interest to the Excess Spread than do Loans with
relatively lower Loan Rates. If Loans with higher Loan Rates were to prepay,
the amount of Net Excess Spread could be reduced thereby slowing the
amortization of the Class Certificate Balance of the related Class or Classes
of Offered Certificates from the distribution of Additional Principal.
Because the Excess Spread for a Loan Group is available to cover an
Available Funds Shortfall with respect to both the related Loan Group and the
other Loan Group, there may be no Remaining Net Excess Spread with which to
make payments of Additional Principal. Similarly, any Excess Principal for a
Loan Group will be applied to cover an Available Funds Shortfall in the other
Loan Group prior to being applied to the payment of Additional Principal for
the Class or Classes of Offered Certificates related to such other Loan
Group. Thus, the amount and timing of any distributions in respect of
Additional Principal on a Class of Offered Certificates will depend, in part,
on the prepayment and loss experience of the Loans in the Loan Group related
to the other Class or Classes of Offered Certificates.
The application of Remaining Net Excess Spread, Available Transfer
Cashflow and Net Excess Principal to payments of Additional Principal is
intended to create overcollateralization to provide a source of additional
cashflow to cover losses on the Loans in each Loan Group. If the amount of
losses in a particular Due Period exceeds the amount of Excess Spread for the
related Loan Group and the Net Excess Spread and Excess Principal for the
other Loan Group for the related Distribution Date, the amount in respect of
principal distributed to the related Class or Classes of Offered Certificates
will be reduced. A draw on the Policy in respect of principal will not be
made until the Loan Group Balance is less than the aggregate Class
Certificate Balance of the related Class or Classes of Offered Certificates,
i.e., the related Class or Classes of Offered Certificates are
undercollateralized.
If a Required Overcollateralization Amount is allowed to step down, the
amount of Remaining Net Excess Spread and Net Excess Principal available to
the other Loan Group may be increased, and the amount of principal
distributed to the Class or Classes of Offered Certificates for which the
step down occurred will be decreased.
As a result of the interaction of the foregoing features, there may be
Distribution Dates on which Holders of the Offered Certificates receive
little or no distributions in respect of principal. Either
Overcollateralization Amount may or may not equal the related Required
Overcollateralization Amount on any Distribution Date. There can be no
assurance as to whether or when either Overcollateralization Amount may equal
the related Required Overcollateralization Amount.
ARMS
As is the case with fixed rate Home Equity Loans and Home Improvement
Contracts, the ARMs may be subject to a greater rate of principal prepayments
in a low interest rate environment. For example, if prevailing interest
rates were to fall, Mortgagors with ARMs may be inclined to refinance their
ARMs with a fixed rate loan to "lock in" a lower interest rate. The
existence of the Periodic Cap, Lifetime Cap and Lifetime Floor also may
affect the likelihood of prepayments resulting from refinancings. In
addition, the delinquency and loss experience on the ARMs may differ from
that on the fixed rate Loans because the amount of the monthly payments on
the ARMs is subject to adjustment on each Change Date. If such different
experience were to occur, the prepayment experience on the Class A-3
Certificates may differ from that on the Fixed Rate Certificates.
Certain of the ARMs were originated with initial Loan Rates that were
based on competitive conditions and did not equal the sum of the applicable
Index and the related Gross Margin. In addition, none of the ARMs has
reached its initial Change Date. As a result, the Loan Rates on such ARMs
are more likely to adjust on their first, and possibly subsequent Change
Dates, subject to the effects of the applicable Periodic Cap and Lifetime
Cap. Because the Certificate Rate for the Class A-3 Certificates is a
function of the weighted average Remittance Rate of the ARMs, limits on
changes in the Loan Rates of the ARMs may limit changes in the Certificate
Rate for the Class A-3 Certificates.
Disproportionate principal payments on ARMs having Loan Rates higher
than the current Certificate Rate will also affect the yield on the Class A-3
Certificates. The yield to maturity of the Class A-3 Certificates will be
lower than otherwise would be the case if disproportionate principal payments
(including prepayments) are made on ARMs having Loan Rates that exceed the
related Certificate Rate.
FINAL SCHEDULED DISTRIBUTION DATE
The Final Scheduled Distribution Date for each Class of Offered
Certificates is set forth in "Summary of Terms--Final Scheduled Distribution
Date herein". The Final Scheduled Distribution Date for the Class A-1
Certificates was determined based on the Structuring Assumptions (defined
below) and the assumption that there are no prepayments. The Final Scheduled
Distribution Dates for the Class A-2 and Class A-3 Certificates were set to
equal the Distribution Date in the 25th month following the month of the
latest possible scheduled maturity date for any of the Loans in the related
Loan Group. Since the rate of distributions in reduction of the Class
Certificate Balance of each Class of Offered Certificates will depend on the
rate of payment (including prepayments) of the Loans, the Class Certificate
Balance of any such Class could be reduced to zero significantly earlier or
later than the applicable Final Scheduled Distribution Date. The rate of
payments on the Loans will depend on their particular characteristics, as
well as on prevailing interest rates from time to time and other economic
factors, and no assurance can be given as to the actual payment experience of
the Loans.
STRUCTURING ASSUMPTIONS
The information in the decrement tables has been prepared on the basis
of the following assumed characteristics of the Home Equity Loans and Home
Improvement Contracts and the following additional assumptions (collectively,
the "Structuring Assumptions"): (i) the Loans prepay at the specified
percentages of the Prepayment Ramp or CPR (each as defined below), (ii) no
defaults or delinquencies in the payment by Mortgagors of principal of and
interest on the Loans are experienced, (iii) the initial Class Certificate
Balance of each Class of Offered Certificates is as set forth on the cover
page hereof, (iv) interest accrues on each Class of Offered Certificates in
each period at the applicable Certificate Rate or initial Certificate Rate
described herein, (v) distributions in respect of the Offered Certificates
are received in cash on the 25th day of each month commencing in ___________,
(vi) the Servicer does not exercise its option to purchase the Loans
described herein under "Description of the Certificates--Termination;
Retirement of Certificates" and "--Optional Purchase of Defaulted Loans"
herein, (vii) the Offered Certificates are purchased on ________,
(viii) scheduled payments on the Loans are received on the first day of each
month commencing in the calendar month following the Closing Date and are
computed prior to giving effect to prepayments received on the last day of
the prior month, (ix) prepayments represent prepayments in full of individual
Loans and are received on the last day of each month and include 30 days'
interest thereon, commencing in the calendar month of the Closing Date,
(x) the scheduled monthly payment for each (Mortgage Loan) has been
calculated based on the assumed (Mortgage Loan) characteristics set forth in
the following table such that each Mortgage Loan will amortize in amounts
sufficient to repay the balance of such Mortgage Loan by its indicated
remaining term to maturity, (xi) all of the indicated Subsequent Loans
purchased with funds from the Pre-Funding Account are purchased during
______, (xii) the Trust consists of __ Loans with the characteristics set
forth in the following table, (xiii) the level of the Index remains constant
at ______% and (xiv) (the Mortgage Rate for each Mortgage Loan in Loan Group
Two) is adjusted on its next Change Date (and on subsequent Change Dates, if
necessary) to equal the sum of (a) the assumed level of the Index and (b) the
Gross Margin (such sum being subject to the Periodic Rate Cap). While it is
assumed that each of the Loans prepays at the specified percentages of the
Prepayment Ramp or CPR, as applicable, this is not likely to be the case.
Moreover, discrepancies will exist between the characteristics of the actual
Loans which will be delivered to the Trustee (including Subsequent Loans) and
characteristics of the Loans assumed in preparing the tables herein.
Prepayments of home equity loans, home improvement installment sales
contracts and installment loan agreements are commonly measured relative to a
prepayment standard or model. The model used with respect to the Fixed Rate
Certificates (the "Prepayment Ramp") assumes that the Home Equity Loans in
Loan Group One prepay at a rate of ___% CPR in the first month after
origination, and an additional ___% each month thereafter until the __ month.
Beginning in the __ month and each month thereafter, the Prepayment Ramp
assumes a prepayment rate of __% CPR. For the Class A-3 Certificates, it was
assumed that the Home Improvement Contracts in Loan Group Two prepay at a
rate of ___% CPR. The Constant Prepayment Rate ("CPR") represents an assumed
constant rate of prepayment each month, expressed as an annual rate, relative
to the then outstanding principal balance of a pool of home improvement
contracts for the life of such loans. Neither model purports to be either an
historical description of the prepayment experience of any pool of loans or a
prediction of the anticipated rate of prepayment of any home equity loans or
home improvement agreements, including the Home Equity Loans and the Home
Improvement Contracts to be included in the Loan Groups.
<TABLE>
<CAPTION>
Original Remaining
Term to Term to Months to
Principal Current Loan Maturity Maturity Gross Next Change
Balance($) Rate (%) (months)(6) (months)(7) Margin(%) Date(8)
---------- ------------ ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Loan Group One . . .
</TABLE>
DECREMENT TABLES
The following tables indicate, based on the Structuring Assumptions, the
percentages of the initial Class Certificate Balances of the Classes of
Offered Certificates that would be outstanding after each of the dates shown
at various percentages of the Prepayment Ramp or CPR and the corresponding
weighted average lives of such Classes. It is not likely that (i) all of the
Loans will have the characteristics assumed, (ii) the Loans will prepay at
the specified percentages of the Prepayment Ramp or CPR or at any other
constant percentage or (iii) the level of the Index will remain constant at
the level assumed or at any other level. Moreover, the diverse remaining
terms to maturity of the Loans could produce slower or faster principal
distributions than indicated in the tables at the specified percentages of
the Prepayment Ramp or CPR, even if the weighted average remaining term to
maturity of the Loans is consistent with the remaining terms to maturity of
the Loans specified in the Structuring Assumptions.
PERCENT OF INITIAL CLASS CERTIFICATE
BALANCES OUTSTANDING*
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2
DISTRIBUTION DATE PERCENTAGE OF CPR PERCENTAGE OF CPR
- ------------------------- -------------------------------------------------------
<S> <C> <C>
Initial Percent . . . . .
February 1998 . . . . . .
February 1999 . . . . . .
February 2000 . . . . . .
February 2001 . . . . . .
February 2002 . . . . . .
February 2003 . . . . . .
February 2004 . . . . . .
February 2005 . . . . . .
February 2006 . . . . . .
February 2007 . . . . . .
February 2008 . . . . . .
February 2009 . . . . . .
February 2010 . . . . . .
February 2011 . . . . . .
February 2012 . . . . . .
February 2013 . . . . . .
February 2014 . . . . . .
February 2015 . . . . . .
February 2016 . . . . . .
February 2017 . . . . . .
February 2018 . . . . . .
February 2019 . . . . . .
February 2020 . . . . . .
February 2021 . . . . . .
February 2022 . . . . . .
February 2023 . . . . . .
February 2024 . . . . . .
February 2025 . . . . . .
February 2026 . . . . . .
Weighted Average
Life (years)** . . . .
</TABLE>
_________________________
* Rounded to the nearest whole percentage.
** The weighted average life of an Offered Certificate is determined by (a)
multiplying the amount of the reduction, if any, of the Class
Certificate Balance of such Certificate on each Distribution Date by the
number of years from the date of issuance to such Distribution Date, (b)
summing the results and (c) dividing the sum by the aggregate amount of
the reductions in Class Certificate Balance of such Certificate referred
to in clause (a).
PERCENT OF INITIAL CLASS CERTIFICATE
BALANCES OUTSTANDING*
CLASS A-3
DISTRIBUTION DATE PERCENTAGE OF CPR
- ------------------------- -----------------
Initial Percent . . . . .
February 1998 . . . . . .
February 1999 . . . . . .
February 2000 . . . . . .
February 2001 . . . . . .
February 2002 . . . . . .
February 2003 . . . . . .
February 2004 . . . . . .
February 2005 . . . . . .
February 2006 . . . . . .
February 2007 . . . . . .
February 2008 . . . . . .
February 2009 . . . . . .
February 2010 . . . . . .
February 2011 . . . . . .
February 2012 . . . . . .
February 2013 . . . . . .
February 2014 . . . . . .
February 2015 . . . . . .
February 2016 . . . . . .
February 2017 . . . . . .
February 2018 . . . . . .
February 2019 . . . . . .
February 2020 . . . . . .
February 2021 . . . . . .
February 2022 . . . . . .
February 2023 . . . . . .
February 2024 . . . . . .
February 2025 . . . . . .
February 2026 . . . . . .
Weighted Average Life
(years)** . . . . . . .
_________________________
* Rounded to the nearest whole percentage.
** The weighted average life of an Offered Certificate is determined by (a)
multiplying the amount of the reduction, if any, of the Class
Certificate Balance of such Certificate on each Distribution Date by the
number of years from the date of issuance to such Distribution Date, (b)
summing the results and (c) dividing the sum by the aggregate amount of
the reductions in Class Certificate Balance of such Certificate referred
to in clause (a).
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement. The
following summaries describe certain provisions of the Agreement. The
summaries do not purport to be complete and are subject to, and are qualified
in their entirety by reference to, all of the provisions of the Agreement.
Wherever particular sections or defined terms of the Agreement are referred
to, such sections or defined terms are hereby incorporated herein by
reference.
GENERAL
Each Class of Offered Certificates will evidence specified undivided
interests in the Trust. The property of the Trust will consist of, to the
extent provided in the Agreement: (i) the Home Equity Loans in Loan Group
One; (ii) payments on the Home Equity Loans received on and after the Cut-Off
Date; (iii) the Home Improvement Contracts in Loan Group Two; (iv) payments
on the Home Improvement Contracts received on or after the Cut-Off Date; (v)
Mortgaged Properties relating to the Home Equity Loans and Home Improvement
Contracts that are acquired by foreclosure or deed in lieu of foreclosure;
(vi) each Collection Account and Distribution Account; (vii) the Capitalized
Interest Account; (viii) the Pre-Funding Account; (ix) the Policy; (x)
certain hazard insurance policies maintained by the borrowers of the Loans,
or the Servicer in respect thereof; and (xi) the Depositor's rights under the
Purchase Agreement (defined below).
BOOK-ENTRY REGISTRATION
The Offered Certificates initially will be registered in the name of
Cede & Co. ("Cede"), the nominee of the Depository Trust Company ("DTC").
DTC has advised the Depositor as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code ("UCC") and a "clearing agency" registered pursuant
to the provisions of Section 17A of the Exchange Act. DTC was created to
hold securities for its participating organizations ("Participants") and
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entry changes in their accounts, thereby
eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers, banks, trust companies and clearing
corporations and may include certain other organizations. Indirect access to
the DTC system also is available to others such as brokers, dealers, banks
and trust companies that clear through or maintain a custodial relationship
with a Participant, either directly or indirectly ("Indirect Participant").
Under a book-entry format, beneficial owners of the Offered Certificates
("Certificates Owners") that are not Participants or Indirect Participants
but desire to purchase, sell or otherwise transfer ownership of Offered
Certificates registered in the name of Cede, as nominee of DTC, may do so
only through Participants and Indirect Participants. In addition, such
Certificate Owners will receive all distributions of principal of and
interest on the Offered Certificates from the Trustee through DTC and its
Participants. Under a book-entry format, Certificate Owners will receive
payments after the related Distribution Date because, while payments are
required to be forwarded to Cede, as nominee for DTC, on each such date, DTC
will forward such payments to its Participants which thereafter will be
required to forward them to Indirect Participants or Certificate Owners.
Under a book entry format, it is anticipated that the only Certificateholder
will be Cede, as nominee of DTC, and that the Certificate Owners will not be
recognized by the Trustee as Certificateholders under the Agreement. The
Certificate Owners will only be permitted to exercise the rights of
Certificateholders under the Agreement indirectly through DTC and its
Participants who in turn will exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Offered Certificates
and is required to receive and transmit payments of principal of and interest
on the Offered Certificates. Participants and Indirect Participants with
which Certificate Owners have accounts with respect to the Offered
Certificates similarly are required to make book-entry transfers and receive
and transmit such payments on behalf of their respective Certificate Owners.
Accordingly, although Certificate Owners will not possess certificates, the
rules provide a mechanism by which Certificate Owners will receive
distributions and will be able to transfer their interests.
Certificate Owners who are not Participants may transfer ownership of
the Offered Certificates only through Participants by instructing such
Participants to transfer the Offered Certificates, by book-entry transfer,
through DTC for the account of the purchasers of such Certificates, which
account is maintained with their respective Participants. Under the rules
and in accordance with DTC's normal procedures, transfers of ownership of
Offered Certificates will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
respective Participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Certificate Owners.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of Certificate
Owners to pledge the Offered Certificates to persons or entities that do not
participant in the DTC system, or otherwise take actions in respect of such
Certificates may be limited due to the lack of a physical certificate for
such Certificates.
DTC in general advises that it will take any action permitted to be
taken by a Certificate Owner under the Agreement only at the direction of one
or more Participants to whose account with DTC the Offered Certificates are
credited. Additionally, DTC in general advises that it will take such
actions with respect to specified percentages of the Certificate Owners only
at the direction of and on behalf of Participants whose holdings include
current principal amounts of outstanding Offered Certificates that satisfy
such specified percentages. DTC may take conflicting actions with respect to
other current principal amounts of outstanding Offered Certificates to the
extent that such actions are taken on behalf of Participants whose holdings
include such current principal amounts of outstanding Offered Certificates.
Any Offered Certificates initially registered in the name of Cede, as
nominee of DTC, will be issued in fully registered, certificated form to
Certificate Owners or their nominees ("Definitive Certificates"), rather than
to DTC or its nominee only under the following circumstances: (i) the
Depositor advises the Trustee in writing that DTC is no longer willing or
able to properly discharge its responsibilities as Depository with respect to
the Offered Certificates, and the Trustee or the Depositor is unable to
locate a qualified successor, (ii) the Depositor, at its option, elects to
terminate the book-entry system through DTC, or (iii) after the occurrence of
an Event of Default (defined herein), Certificate Owners representing not
less than 50% of the aggregate Certificate Principal Balance of the Offered
Certificates advise the Trustee and DTC through Participants in writing that
the continuation of a book-entry system through DTC (or a successor thereto)
is no longer in the best interest of the Certificate Owners. Upon the
occurrence of any of such events, DTC will be required to notify all
Participants of the availability through DTC of Definitive Certificates.
Upon surrender by DTC of the certificates representing the Offered
Certificates and instruction for re-registration, the Trustee will issue the
Offered Certificates in the form of Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
Certificateholders. Thereafter, payments of principal of and interest on the
Offered Certificates will be made by the Trustee directly to
Certificateholders in accordance with the procedures set forth in the
Agreement. The final distribution of any Offered Certificate (whether
Definitive Certificates or Offered Certificates registered in the name of
Cede), however, will be made only upon presentation and surrender of such
Certificates on the final Distribution Date at such office or agency as is
specified in the notice of final payment to Certificateholders.
Although DTC has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Offered Certificates among
Participants, it is under no obligation to perform or continue to perform
such procedures, and such procedures may be discontinued at any time. None
of the Depositor, the Seller, the Servicer or the Trustee will have any
responsibility for the performance by DTC or its Participants or Indirect
Participants of their respective obligations under the rules and procedures
governing their operations.
ASSIGNMENT OF LOANS
The Loans will be acquired by the Depositor from the Seller pursuant to
the Mortgage Loan Purchase Agreement, dated the Closing Date (the "Purchase
Agreement"), between the Seller and the Depositor. At the time of issuance
of the Certificates, the Depositor will transfer to the Trust all of its
right, title and interest in and to each Mortgage Loan, the related mortgage
note, mortgage and other related documents (collectively, the "Related
Documents"), including all payments received on or with respect to each such
Mortgage Loan on or after the Cut-Off Date (exclusive of payments in respect
of accrued interest on the Loans through the related Due Date in the month
preceding the month of the Cut-Off Date). The Depositor also will assign to
the Trustee all of the Depositor's rights under the Purchase Agreement. The
Trustee, concurrently with such transfer, will deliver the Certificates to
the Seller. Each Mortgage Loan transferred to the Trust will be identified
on a schedule (the "Mortgage Loan Schedule") delivered to the Trustee
pursuant to the Agreement. Such schedule will include information as to the
Principal Balance of each Mortgage Loan as of the Cut-Off Date, as well as
information with respect to the current Loan Rate.
The Agreement will require that, within the time period specified
therein, the Depositor will deliver or cause to be delivered to the Trustee
(or a custodian, as the Trustee's agent for such purpose) the Home Equity
Loans and Home Improvement Contracts endorsed to the Trustee and the Related
Documents. In lieu of delivery of original mortgages, the Depositor may
deliver or cause to be delivered true and correct copies thereof which have
been certified as to authenticity by the appropriate county recording office
where such mortgage is recorded.
Under the terms of the Purchase Agreement, the Seller will have 30 days
after the Closing Date to prepare and submit for recording assignments of the
mortgages related to each Mortgage Loan in favor of the Trustee (unless
opinions of counsel satisfactory to the Rating Agencies and the Certificate
Insurer are delivered to the Trustee and the Certificate Insurer to the
effect that recordation of such assignments is not required in the relevant
jurisdictions to protect the interests of the Trustee in the Loans). If the
recording information with respect to any assignment of Mortgage is
unavailable within 30 days of the Closing Date, such assignment will be
prepared and recorded promptly after receipt of such information, but in no
event later than one year after the Closing Date.
Within 90 days of the Closing Date, the Trustee will review the Loans
and the Related Documents pursuant to the Agreement and if any Mortgage Loan
or Related Document is found to be defective in any material respect and such
defect is not cured within 90 days following notification thereof to the
Seller and the Depositor by the Trustee, the Seller will be obligated to
either (i) substitute for such Mortgage Loan an Eligible Substitute Mortgage
Loan; however, such substitution is permitted only within two years of the
Closing Date, and may not be made unless an opinion of counsel is provided to
the effect that such substitution will not disqualify the Trust as a REMIC
for federal income tax purposes or result in a prohibited transaction tax
under the Code or (ii) purchase such Mortgage Loan at a price (the "Purchase
Price") equal to the outstanding Principal Balance of such Mortgage Loan as
of the date of purchase, plus the greater of (i) all accrued and unpaid
interest thereon and (ii) 30 days' interest thereon, computed at the Loan
Rate, net of the Servicing Fee with respect to such Mortgage Loan if the
Seller or an affiliate is the Servicer, plus the amount of any unreimbursed
Servicing Advances made by the Servicer with respect to such Mortgage Loan.
The Purchase Price will be deposited in the applicable Collection Account on
or prior to the next succeeding Determination Date after such obligation
arises. The obligation of the Seller to repurchase or substitute for a
Defective Mortgage Loan is the sole remedy regarding any defects in the Loans
and Related Documents available to the Trustee or the Certificateholders.
In connection with the substitution of an Eligible Substitute Mortgage
Loan, the Seller will be required to deposit in the applicable Collection
Account on or prior to the next succeeding Determination Date after such
obligation arises an amount (the "Substitution Adjustment") equal to the sum
of (i) the excess of the Principal Balance of the related Defective Mortgage
Loan over the Principal Balance of such Eligible Substitute Mortgage Loan,
(ii) 30 days' interest on such excess computed at the Loan Rate, net of the
Servicing Fee if the Seller or an affiliate is the Servicer, and (iii) the
amount of any unreimbursed Servicing Advances and Monthly Advances made by
the Servicer with respect to such Defective Mortgage Loan if the Servicer is
not an affiliate of the Seller. The Servicer will be deemed to have been
reimbursed for any Servicing Advances and Monthly Advances that are not paid
pursuant to clause (iii).
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted by
the Seller for a Defective Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Defective Mortgage Loan, an
aggregate Principal Balance), not in excess of, and not more than 5% less
than, the Principal Balance of the Defective Mortgage Loan; (ii) have a Loan
Rate not less than the Loan Rate of the Defective Mortgage Loan and not more
than 1% in excess of the Loan Rate of such Defective Mortgage Loan; (iii)
have a mortgage of the same or higher level of lien priority as the mortgage
relating to the Defective Mortgage Loan; (iv) have a remaining term to
maturity not more than six months earlier and not later than the remaining
term to maturity of the Defective Mortgage Loan; (v) comply with each
representation and warranty as to the Loans set forth in the Purchase
Agreement (deemed to be made as of the date of substitution); (vi) have a
Combined Loan-to-Value Ratio not greater than that of the Defective Mortgage
Loan.; (vii) bear a fixed or adjustable Loan Rate if the Deleted Mortgage
Loan was in Loan Group One or Loan Group Two, respectively; and (viii) if the
Mortgage Loan is an ARM, have a Gross Margin and Lifetime Cap no less than,
the same interval between the Change Dates as, and a Loan Rate based on the
same Index as, that of the Defective Mortgage Loan.
In the Purchase Agreement, the Seller will make certain representations
and warranties with respect to the Home Equity Loans and Home Improvement
Contracts including, among others: (i) The information with respect to each
Mortgage Loan set forth in the Mortgage Loan Schedule is true and correct in
all material respects as of the Cut-Off Date; (ii) Each Mortgage is a valid
and subsisting first or second lien of record on the Mortgaged Property
subject, in the case of any second Mortgage Loan, only to a First Lien on
such Mortgaged Property and subject in all cases to the exceptions to title
set forth in the title insurance policy with respect to the related Mortgage
Loan, which exceptions are generally acceptable to mortgage lending
companies, and such other exceptions to which similar properties are commonly
subject and which do not individually, or in the aggregate, materially and
adversely affect the benefits of the security intended to be provided by such
Mortgage; (iii) Except with respect to liens released immediately prior to
the transfer contemplated in the Purchase Agreement, each Mortgage Note and
the related Mortgage have not been assigned or pledged and immediately prior
to the transfer and assignment herein contemplated, the Seller held good,
marketable and indefeasible title to, and was the sole owner and holder of,
each Mortgage Loan subject to no liens, charges, mortgages, claims,
participation interests, equities, pledges or security interests of any
nature, encumbrances or rights of others (collectively, a "Lien"); and
immediately upon the completion of the transfers and assignments contemplated
in the Agreement, the Trustee will hold good, marketable and indefeasible
title, to, and be the sole owner of, each Mortgage Loan subject to no Liens;
(iv) No Mortgage Loan was 30 or more days delinquent as of the Cut-Off Date,
as measured at the end of the month; and (v) Each Mortgage Loan at the time
it was made complied in all material respects with applicable state and
federal laws and regulations, including, without limitation, usury, equal
credit opportunity, consumer credit, truth-in-lending, real estate settlement
procedures and disclosure laws.
Upon discovery of a breach of any such representation and warranty which
materially and adversely affects the interests of the Certificateholders or
the Certificate Insurer in the related Mortgage Loan, the Seller will have a
period of 60 days after discovery or notice of the breach to effect a cure.
If the breach cannot be cured within the 60-day period, the Seller will be
obligated to (i) substitute for such Defective Mortgage Loan an Eligible
Substitute Mortgage Loan or (ii) purchase such Defective Mortgage Loan from
the Trust. The same procedure and limitations that are set forth above for
the substitution or purchase of Defective Loans as a result of deficient
documentation relating thereto will apply to the substitution or purchase of
a Defective Mortgage Loan as a result of a breach of a representation or
warranty that materially and adversely affects the interests of the
Certificateholders or the Certificate Insurer. The obligation of the Seller
to repurchase or substitute for a Defective Mortgage Loan is the sole remedy
regarding any breach of a representation or warranty with respect thereto
available to the Trustee or the Certificateholders.
The Depositor will make no representations or warranties with respect to
the Loans and will have no obligation (other than to assign to the Trustee
the Depositor's rights under the Purchase Agreement) or liability with
respect to breaches of the Seller's representations or warranties or its
obligations to cure, purchase or substitute for any Defective Loan.
PAYMENTS ON LOANS; DEPOSITS TO COLLECTION ACCOUNTS AND DISTRIBUTION ACCOUNT
The Trustee will establish and maintain a separate account (each, a
"Collection Account") for each Loan Group. Each Collection Account will be
an Eligible Account (as defined herein). Subject to the investment provision
described in the following paragraphs, upon receipt by the Servicer of
amounts in respect of the Loans (excluding amounts representing the Servicing
Fee, reimbursement for previous related Monthly Advances or Servicing
Advances, administrative charges, taxes, assessments, credit insurance
charges, insurance proceeds to be applied to the restoration or repair of a
Mortgaged Property or similar items), the Servicer will deposit such amounts
in the Collection Account for the applicable Loan Group. Amounts so
deposited may be invested in Eligible Investments (as described in the
Agreement) maturing no later than one Business Day prior to the date on which
the amount on deposit therein is required to be deposited in the Distribution
Account or on such Distribution Date if approved by the Rating Agencies and
the Certificate Insurer.
The Trustee will establish a separate account (each, a "Distribution
Account") for each Loan Group into which will be deposited amounts withdrawn
from the related Collection Account for distribution to Certificateholders on
a Distribution Date. Each Distribution Account will be an Eligible Account.
Amounts on deposit therein may be invested in Eligible Investments maturing
on or before the Business Day prior to the related Distribution Date.
An "Eligible Account" is an account that is (i) maintained with a
depository institution the deposits in which are insured by the FDIC to the
limits established by the FDIC and the short-term debt obligations of which
(or in the case of a depository institution that is the principal subsidiary
of a holding company, the short-term debt obligations of which) are rated in
the highest short-term rating category by each Rating Agency and the long-
term debt obligations of which are rated at least Aa3 by Moody's, (ii) a
trust account or accounts maintained with the trust department of a federal
or a state chartered depository institution or trust company the long-term
debt obligations of which are rated at least Baa3 by Moody's, acting in a
fiduciary capacity or (iii) an account or accounts otherwise acceptable to
each Rating Agency and the Certificate Insurer.
Eligible Investments are specified in the Agreement and are limited to
investments which meet the criteria of the Rating Agencies from time to time
as being consistent with their then current ratings of the Certificates.
PRE-FUNDING ACCOUNT
On the Closing Date, an aggregate cash amount (the "Pre-Funded Amount")
not to exceed approximately $_________ will be deposited in the Pre-Funding
Account. Of such amount, approximately $__________ will be used to purchase
Subsequent Home Equity Loans for deposit into Loan Group One and, if
required, to make accelerated payments of principal on the Fixed Rate
Certificates and approximately $__________ will be used to purchase
Subsequent Home Improvement Contracts for deposit into Loan Group Two and, if
required, to make accelerated payments of principal on the Class A-3
Certificates. During the period (the "Pre-Funding Period") from the Closing
Date to the earliest to occur of (a) the date on which the amount on deposit
in the Pre-Funding Account is less than $_____, (b) an Event of Default under
the Agreement and (c) __________, amounts on deposit in the Pre-Funding
Account may be withdrawn from time to time to acquire Subsequent Loans in
accordance with the Agreement. Any net investment earnings on the Pre-Funded
Amount will be transferred to the Capitalized Interest Account on each
Distribution Date during the Pre-Funding Period. Any Pre-Funded Amount
remaining in the Pre-Funding Account at the end of the Pre-Funding Period
will be distributed on the Distribution Date occurring at or immediately
following the end of the Pre-Funding Period as a prepayment of principal of
the Class A-1 and Class A-2 Certificates, on a pro rata basis, or the Class
A-3 Certificates, as applicable, based on the remaining Pre-Funded Amount
allocated to the related Loan Group. (Only fixed-rate Subsequent Home Equity
Loans may be added to Loan Group One, and only adjustable-rate Subsequent
Home Improvement Contracts may be added to Loan Group Two.)
CAPITALIZED INTEREST ACCOUNT
On the Closing Date, funds will be deposited in an account (the
"Capitalized Interest Account") created and maintained with the Trustee. The
amount so deposited will be used by the Trustee on the Distribution Dates in
the Pre-Funding Period to fund the excess, if any, of the Interest Remittance
Amounts for the Offered Certificates and the premium due for the Policy over
the funds available therefor on such Distribution Dates. Any funds remaining
in the Capitalized Interest Account at the end of the Pre-Funding Period will
be distributed to the Holders of the Class R Certificates.
ADVANCES
Not later than the close of business on the second Business Day prior to
the related Distribution Date, the Servicer will be required to remit to the
Trustee for deposit in the applicable Collection Account an amount, to be
distributed on the related Distribution Date, equal to the sum of the
interest accrued on each Mortgage Loan through the related Due Date but not
received by the Servicer as of the close of business on the related
Determination Date (net of the Servicing Fee with respect to such Mortgage
Loan), plus, with respect to each REO Property which was acquired during or
prior to the related Due Period and as to which a final disposition thereof
did not occur in the related Due Period, an amount equal to the excess, if
any, of interest for the most recently ended Due Period on the Principal
Balance of the Mortgage Loan relating to such REO Property at the related
Loan Rate (net of the Servicing Fee with respect to such Mortgage Loan) over
the net income from the REO Property transferred to the related Collection
Account for such Distribution Date pursuant to the Agreement (the "Monthly
Advance"). The Servicer may fund all or a portion of any Monthly Advance
from funds on deposit in the applicable Collection Account that are not
required to be distributed on the related Distribution Date. Any funds so
used must be replaced on or before the Distribution Date on which such funds
will be required to be distributed.
In the course of performing its servicing obligations, the Servicer will
pay all reasonable and customary "out-of-pocket" costs and expenses incurred
in the performance of its servicing obligations, including, but not limited
to, the cost of (i) the preservation, restoration and protection of the
Mortgaged Properties; (ii) any enforcement or judicial proceedings, including
foreclosures, and (iii) the management and liquidation of Mortgaged
Properties acquired in satisfaction of the related Mortgage. Each such
expenditure will constitute a "Servicing Advance."
The Servicer's right to reimbursement for unreimbursed Servicing
Advances is limited to late collections on the related Mortgage Loan,
including Liquidation Proceeds, released Mortgaged Property proceeds,
Insurance Proceeds and such other amounts as may be collected by the Servicer
from the related Mortgagor or otherwise relating to the Mortgage Loan in
respect of which such unreimbursed amounts are owed. The Servicer's right to
such reimbursement is prior to the rights of Certificateholders. The
Servicer's right to reimbursement for unreimbursed Monthly Advances is
limited to late collections of interest on any Mortgage Loan and to
Liquidation Proceeds and Insurance Proceeds on the related Mortgage Loan (as
to which it will have priority over Certificateholders) unless such amounts
are insufficient. In such event (a "Nonrecoverable Advance"), the Servicer
will be reimbursed for such Nonrecoverable Advance from funds on deposit in
the applicable Distribution Account.
The Servicer is not required to make any Monthly Advance or Servicing
Advance which it determines would be nonrecoverable from amounts received in
respect of the related Mortgage Loan.
COMPENSATING INTEREST
The Agreement provides that not later than the close of business on the
second Business Day prior to the related Distribution Date, the Servicer will
remit to the Trustee for deposit to the applicable Collection Account an
amount equal to the lesser of (i) the aggregate of the Prepayment Interest
Shortfalls for the related Distribution Date resulting from principal
prepayments by Mortgagors during the related Due Period and (ii) the amount
otherwise payable to the Servicer as its aggregate Servicing Fee for such Due
Period. The Servicer will not have the right to reimbursement for any such
amounts deposited to either Collection Account.
SPREAD ACCOUNT
The Trustee will establish on the Closing Date the Spread Account into
which it will deposit upon receipt from the holder of the Class R Certificate
an amount specified by the Certificate Insurer (the "Initial Spread Account
Deposit"). Amounts on deposit in the Spread Account will be available for
withdrawal to fund any shortfall between the available funds for distribution
to Holders of a Class of Offered Certificates and the related Interest
Remittance Amount and Principal Remittance Amount. If the Initial Spread
Account Deposit is available to fund any such shortfall on each Distribution
Date, funds on deposit in the Spread Account equal to the amount of such
shortfall will be withdrawn by the Trustee and deposited into the applicable
Distribution Account for distribution to Holders of the affected Class or
Classes of Offered Certificates.
PRIORITY OF DISTRIBUTIONS
On or before each Distribution Date, the Trustee will determine the
Overcollateralization Amount for each Loan Group after giving effect to the
distribution of the Principal Remittance Amount to the related Class or
Classes of Offered Certificates on such Distribution Date and the amount of
the related Net Excess Spread. The "Amount Available" for a Loan Group on a
Distribution Date will equal the sum of (i) the Available Remittance Amount
for such Loan Group, (ii) if an Available Funds Shortfall exists in such Loan
Group, (a) first, the Net Excess Spread from the other Loan Group, to the
extent of such Available Funds Shortfall, (b) second, the Excess Principal
from the other Loan Group, to the extent of any remaining Available Funds
Shortfall, and (c) third, any amounts in respect of any remaining Available
Funds Shortfall withdrawn from the Spread Account and deposited in the
applicable Distribution Account, (iii) (a) first, the Available Transfer
Cashflow, to the extent necessary to reach the Required Overcollateralization
Amount for such Loan Group and (b) second, the Net Excess Principal, to the
extent necessary to reach the Required Overcollateralization Amount for such
Loan Group, and (iv) any Insured Payments with respect to the related Class
or Classes of Certificates. On each Distribution Date the Trustee will
withdraw from each Distribution Account the Amount Available, and make
distributions thereof in the following order of priority and to the extent of
such Amount Available:
(A) From the Distribution Account for Loan Group One:
(i) to the Certificate Insurer the monthly premium then due
with respect to Loan Group One;
(ii) to the Trustee, the Trustee Fee then due with respect to
Loan Group One;
(iii) to the Back-Up Servicer, the Back-Up Servicing Fee then
due with respect to Loan Group One;
(iv) concurrently, to the Class A-1, Class A-2 and Class I
Certificates, an amount allocable to interest equal to the
applicable Interest Remittance Amount;
(v) sequentially, to the Class A-1 and Class A-2
Certificates, in that order, an amount allocable to principal equal
to the related Principal Remittance Amount, until their respective
Class Certificate Balances have been reduced to zero;
(vi) to the Certificate Insurer an amount equal to previously
unreimbursed Insured Payments with respect to the Class A-1, Class
A-2 or Class I Certificates, together with interest thereon at the
rate referred to in the Insurance Agreement;
(vii) sequentially, to the Class A-1 and Class A-2
Certificates, in that order, an amount allocable to principal equal
to the Additional Principal, until their respective Class
Certificate Balances have been reduced to zero;
(viii) to the Certificate Insurer, all other amounts owing
to the Certificate Insurer under the Insurance Agreement;
(ix) to the Servicer certain reimbursable expenses pursuant to
the Agreement;
(x) to the Servicer, Nonrecoverable Advances not previously
reimbursed with respect to Loan Group One; and
(xi) to the Class R Certificates, the balance, if any.
(B) From the Distribution Account for Loan Group Two:
(i) to the Certificate Insurer the monthly premium then due
with respect to Loan Group Two;
(ii) to the Trustee, the Trustee Fee then due with respect to
Loan Group Two;
(iii) to the Back-Up Servicer, the Back-Up Servicing Fee then
due with respect to Loan Group Two;
(iv) to the Class A-3 Certificates, an amount allocable to
interest equal to the related Interest Remittance Amount;
(v) to the Class A-3 Certificates, an amount allocable to
principal equal to the related Principal Remittance Amount;
(vi) to the Certificate Insurer an amount equal to previously
unreimbursed Insured Payments with respect to the Class A-3
Certificates, together with interest thereon at the rate referred
to in the Insurance Agreement;
(vii) to the Class A-3 Certificates, an amount allocable to
principal equal to the Additional Principal;
(viii) to the Certificate Insurer, all other amounts owing
to the Certificate Insurer under the Insurance Agreement;
(ix) to the Servicer certain reimbursable expenses pursuant to
the Agreement;
(x) to the Servicer, Nonrecoverable Advances not previously
reimbursed with respect to Loan Group Two; and
(xi) to the Class R Certificates, the balance, if any.
Distributions allocable to principal of a Class of Offered Certificates
will not exceed the Class Certificate Balance of such Class immediately prior
to the applicable Distribution Date.
The "Additional Principal" for any Class or Classes of Offered
Certificates and any Distribution Date will equal the lesser of (i) the
amount required to be distributed as principal so that the
Overcollateralization Amount for the related Loan Group equals the related
Required Overcollateralization Amount and (ii) the sum of (x) the Remaining
Net Excess Spread for such Loan Group, (y) the Available Transfer Cashflow
and (z) the Net Excess Principal.
The "Adjusted Net Loan Rate" for any Mortgage Loan and any Distribution
Date will equal the related Loan Rate minus the Expense Fee Rate.
An "Available Funds Shortfall" means with respect to any Loan Group and
Distribution Date, the amount by which the Available Remittance Amount for
such Loan Group is less than the Required Payments for such Loan Group.
The "Available Remittance Amount" with respect to any Loan Group and
Distribution Date is equal to the sum of all amounts received or required to
be paid by the Servicer or the Seller during the related Due Period with
respect to the Loans in such Loan Group (exclusive of the Servicing Fee with
respect to each Mortgage Loan, other servicing compensation payable to the
Servicer as permitted by the Agreement and certain amounts available for
reimbursement of Monthly Advances and Servicing Advances, as described above
under "--Advances") and deposited into the applicable Collection Account
pursuant to the Agreement as of the related Determination Date, including any
Monthly Advances, Compensating Interest and, through the end of the Pre-
Funding Period, amounts withdrawn from the Capitalized Interest Account with
respect to the related Class or Classes of Offered Certificates and any
remaining amount on deposit in the Pre-Funding Account at the end of the Pre-
Funding Period and allocable to the related Loan Group, in each case with
respect to such Distribution Date.
The "Available Transfer Cashflow" for any Loan Group and Distribution
Date will equal the Remaining Net Excess Spread for the other Loan Group
remaining after the payment, if any, of Additional Principal on the Class or
Classes of Offered Certificates related to such other Loan Group.
The "Basic Principal Amount" with respect to any Loan Group and
Distribution Date will equal the sum of (i) each payment of principal on a
Mortgage Loan received by the Servicer (exclusive of amounts described in
clauses (ii) and (iii) below during the calendar month preceding the calendar
month in which such Distribution Date occurs (with respect to any
Distribution Date, the "Due Period"); (ii) curtailments (i.e., partial
prepayments) and prepayments in full received during the related Due Period;
(iii) all Insurance Proceeds and Net Liquidation Proceeds allocable to
recoveries of principal of Loans received during the related Due Period; (iv)
an amount equal to the excess, if any, of the Principal Balance (immediately
prior to liquidation) of each Mortgage Loan liquidated during the related Due
Period over the principal portion of Net Liquidation Proceeds received during
such Due Period (the "Unrecovered Class A Portion"); and (v) (a) the
outstanding Principal Balance of any Mortgage Loan purchased by the Seller or
the Servicer as required or permitted by the Agreement as of the related
Determination Date and (b) with respect to any Defective Mortgage Loan for
which the Seller substitutes an Eligible Substitute Mortgage Loan as of the
related Determination Date, any excess of the Principal Balance of such
Defective Mortgage Loan over the Principal Balance of such Eligible
Substitute Mortgage Loan, plus the amount of any unreimbursed Servicing
Advances (defined herein) made by the Servicer with respect to the Mortgage
Loan to the extent received.
The "Carry-Forward Amount" for any Class of Offered Certificates on any
Distribution Date will equal the sum of (a) the excess of the aggregate Class
Remittance Amounts as of each preceding Distribution Date over the amount of
the actual distributions to the Holders of such Class of Offered Certificates
made on any such Distribution Date and not subsequently distributed, and (b)
interest on the amount, if any, of the interest component of the amount
described in clause (a) at one-twelfth of the applicable Certificate Rate.
The "Excess Principal" for any Loan Group and Distribution Date will
equal the lesser of (i) the portion, if any, of the Basic Principal Amount
for such Loan Group that is not required to be included in the Principal
Remittance Amount for the related Class or Classes of Offered Certificates
for such Distribution Date and (ii) the amount of such portion remaining
after the application of the related Available Remittance Amount to the
Required Payments for such Loan Group.
The "Excess Spread" for any Loan Group and Distribution Date will equal
interest collected or advanced on the Loans in such Loan Group (including
amounts allocated to the related Class of Offered Certificates in the
Capitalized Interest Account) minus the sum of (i) the Interest Remittance
Amount for the related Class or Classes of Offered Certificates and, (in the
case of Loan Group One, the Interest Remittance Amount for the Class I
Certificates) and (ii) the Expense Fees for such Loan Group.
The "Expense Fee Rate" will equal the sum of the per annum rates at
which the Servicing Fee, the Back-up Servicing Fee, the Trustee Fee and the
Premium are calculated which, will be ____%.
The "Interest Remittance Amount" for any Distribution Date will equal
interest accrued during the related Interest Period (a) in the case of a
Class of Offered Certificates, at the applicable Certificate Rate on the
Class Certificate Balance of such Class of Offered Certificates immediately
prior to the related Distribution Date, and (b) in the case of the Class I
Certificates, at the rate of _____% per annum on the Notional Balance
thereof which, (for any Distribution Date, will equal the Loan Group Balance
of Loan Group One as of the first day of the related Due Period.)
The "Principal Remittance Amount" for any Class of Offered Certificates
and any Distribution Date will be equal to the sum of:
(i) the lesser of (x) the Basic Principal Amount for the related
Loan Group and (y) the portion of such Basic Principal Amount required
to be distributed to increase the Overcollateralization Amount for the
related Loan Group to the Required Overcollateralization Amount for such
Loan Group on such Distribution Date;
(ii) the Carry-Forward Amount; and
(iii) on the Distribution Date at the end of the Pre-Funding
Period, amounts deposited in the related Distribution Account from the
Pre-Funding Account pursuant to the Agreement and allocable to the
related Loan Group.
A "Liquidated Mortgage Loan" means, as to any Distribution Date, any
Mortgage Loan in respect of which the Servicer has determined, based on the
servicing procedures specified in the Agreement, as of the end of the
preceding Due Period that all Liquidation Proceeds which it expects to
recover with respect to the disposition of the related Mortgaged Property
have been recovered.
The "Net Excess Principal" for any Loan Group and Distribution Date will
equal the Excess Principal for such Loan Group remaining after the
application thereof to cover an Available Funds Shortfall with respect to the
other Loan Group.
The "Net Excess Spread" for any Loan Group and Distribution Date will
equal the Excess Spread for such Loan Group remaining after the application
thereof to cover an Available Funds Shortfall with respect to such Loan
Group.
"Net Liquidation Proceeds" with respect to a Mortgage Loan are equal to
the Liquidation Proceeds, reduced by related expenses, up to the unpaid
Principal Balance of the Mortgage Loan plus accrued and unpaid interest
thereon. "Liquidation Proceeds" are the proceeds received in connection with
the liquidation of any Mortgage Loan, whether through trustee's sale,
foreclosure sale or otherwise.
The "Overcollateralization Amount" for any Loan Group and Distribution
Date will equal the sum of (a) the excess, if any, of (i) the sum of the Loan
Group Balance and the amount on deposit in the Pre-Funding Account allocated
to such Loan Group (exclusive of any investment earnings included therein) as
of the close of business on the last day of the related Due Period, over (ii)
the Class Certificate Balance of the related Class or Classes of Offered
Certificates, after giving effect to the distributions of the related
Principal Remittance Amount on such Distribution Date, and (b) the amount, if
any on deposit in the Spread Account allocated to the related Class or
Classes of Offered Certificates.
The "Remaining Net Excess Spread" for any Loan Group and Distribution
Date will equal the Net Excess Spread for such Loan Group remaining after the
application thereof to cover an Available Funds Shortfall with respect to the
other Loan Group.
The "Required Payments" for any Loan Group and Distribution Date will
equal the amount required to pay the Expense Fees, other than the Servicing
Fee, the related Interest Remittance Amount(s) and the related Principal
Remittance Amount and to reimburse the Certificate Insurer for previously
unreimbursed Insured Payments with respect to the related Class or Classes of
Certificates, together with interest thereon at the rate referred to in the
Insurance Agreement.
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to the Certificateholders, the
Trustee will forward to each Certificateholder a statement setting forth,
among other items, the following information with respect to each Class of
Offered Certificates:
(i) the Available Remittance Amount for the related Distribution
Date;
(ii) the related Interest Remittance Amount and Certificate Rate;
(iii) the related Principal Remittance Amount, stating separately
the components thereof;
(iv) the amount of the Monthly Advances and Compensating Interest
Payments;
(v) the Servicing Fee for such Distribution Date;
(vi) the Additional Principal;
(vii) the Class Certificate Balance, after giving effect to such
distribution;
(viii) the related Loan Group Balance;
(ix) the number and aggregate Principal Balances of the Loans in
the related Loan Group as to which the minimum monthly payment is
delinquent for 30-59 days, 60-89 days and 90 or more days, respectively,
as of the end of the preceding Due Period;
(x) the book value of any real estate which is acquired by the
Trust through foreclosure or grant of deed in lieu of foreclosure; and
(xi) the amount of any Insured Payments for such Distribution Date;
and
(xii) the amount of the Unrecovered Class A Portions for each Loan
Group realized during the related Due Period; the cumulative amount of
losses realized since the Cut-Off Date for each Loan Group with separate
items indicating gross losses, principal losses, recoveries, net losses
and a breakout for recovery expenses.
In the case of information furnished pursuant to clauses (ii) and (iii)
above, the amounts shall be expressed as a dollar amount per Certificate with
a $1,000 denomination.
Within 60 days after the end of each calendar year, the Trustee will
forward to each Person who was a Certificateholder during the prior calendar
year a statement containing the information set forth in clauses (ii) and
(iii) above aggregated for such calendar year.
COLLECTION AND OTHER SERVICING PROCEDURES ON LOANS
The Servicer will make reasonable efforts to collect all payments called
for under the Loans and will, consistent with the Agreement, follow such
collection procedures as it follows from time to time with respect to the
home equity loans and home improvement loans in its servicing portfolio
comparable to the Home Equity Loans and Home Improvement Contracts.
Consistent with the above, the Servicer may in its discretion waive any late
payment charge or any assumption or other fee or charge that may be collected
in the ordinary course of servicing the Loans.
With respect to the Loans, the Servicer may arrange with a borrower a
schedule for the payment of interest due and unpaid for a period, provided
that any such arrangement is consistent with the Servicer's policies with
respect to the home equity mortgage loans and home improvement loans it owns
or services. With respect to Loans that are junior in priority to a First
Lien on a Mortgaged Property, the Servicer has the power under certain
circumstances to consent to a new mortgage lien on such Mortgaged Property
having priority over such Mortgage Loan in connection with the refinancing of
such First Lien.
HAZARD INSURANCE
The Servicer will cause to be maintained fire and hazard insurance with
extended coverage customary in the area where the Mortgaged Property is
located, in an amount which is at least equal to the least of (i) the
outstanding Principal Balance on the Mortgage Loan and any related First
Lien, (ii) the full insurable value of the premises securing the Mortgage
Loan and (iii) the minimum amount required to compensate for damage or loss
on a replacement cost basis in each case in an amount not less than such
amount as is necessary to avoid the application of any co-insurance clause
contained in the related hazard insurance policy. Generally, if the
Mortgaged Property is in an area identified in the Federal Register by the
Federal Emergency Management Agency as Flood Zone "A", such flood insurance
has been made available and the Servicer determines that such insurance is
necessary in accordance with accepted mortgage servicing practices of prudent
lending institutions servicing similar mortgage loans, the Servicer will
cause to be purchased a flood insurance policy with a generally acceptable
insurance carrier, in an amount representing coverage not less than the least
of (a) the outstanding Principal Balance of the Mortgage Loan and any related
First Lien, (b) the full insurable value of the Mortgaged Property, or (c)
the maximum amount of insurance available under the National Flood Insurance
Act of 1968, as amended. The Servicer will also maintain on REO Property, to
the extent such insurance is available, fire and hazard insurance in the
applicable amounts described above, liability insurance and, to the extent
required and available under the National Flood Insurance Act of 1968, as
amended, and the Servicer determines that such insurance is necessary in
accordance with accepted mortgage servicing practices of prudent lending
institutions servicing similar mortgage loans, flood insurance in an amount
equal to that required above. Any amounts collected by the Servicer under
any such policies (other than amounts to be applied to the restoration or
repair of the Mortgaged Property, or to be released to the Mortgagor in
accordance with the Servicer's normal mortgage servicing procedures) will be
deposited in the applicable Collection Account, subject to retention by the
Servicer to the extent such amounts constitute servicing compensation or to
withdrawal pursuant to the Agreement.
In the event that the Servicer obtains and maintains a blanket policy as
provided in the Agreement insuring against fire and hazards of extended
coverage on all of the Loans, then, to the extent such policy names the
Servicer as loss payee and provides coverage in an amount equal to the
aggregate unpaid principal balance of the Loans without coinsurance and
otherwise complies with the requirements of the preceding paragraph, the
Servicer will be deemed conclusively to have satisfied its obligations with
respect to fire and hazard insurance coverage.
REALIZATION UPON DEFAULTED LOANS
The Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Loans as come into
default when, in accordance with applicable servicing procedures under the
Agreement, no satisfactory arrangements can be made for the collection of
delinquent payments. In connection with such foreclosure or other
conversion, the Servicer will follow such practices as it deems necessary or
advisable and as are in keeping with its general mortgage servicing
activities, provided the Servicer will not be required to expend its own
funds in connection with foreclosure or other conversion, correction of
default on a related First Lien or restoration of any property unless, in its
sole judgment, such foreclosure, correction or restoration will increase Net
Liquidation Proceeds. The Servicer will be reimbursed out of Liquidation
Proceeds for advances of its own funds as liquidation expenses before any Net
Liquidation Proceeds are distributed to Certificateholders.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
When any Mortgaged Property is about to be conveyed by the obligor, the
Servicer will, to the extent it has knowledge of such prospective conveyance
and prior to the time of the consummation of such conveyance, exercise its
rights to accelerate the maturity of the related Mortgage Loan under the
applicable "due-on-sale" clause, if any, unless it reasonably believes that
such clause is not enforceable under applicable law. In such event, the
Servicer is authorized to accept from or enter into an assumption agreement
with the person to whom such property has been or is about to be conveyed,
pursuant to which such person becomes liable under the Mortgage Loan and
pursuant to which the original obligor is released from liability and such
person is substituted as the obligor and becomes liable under the Mortgage
Loan. Any fee collected in connection with an assumption will be retained by
the Servicer as additional servicing compensation. The terms of a Mortgage
Loan may not be changed in connection with an assumption.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Due Period, the Servicer will receive from interest
payments actually received in respect of the Loans a portion of such interest
payments as a monthly Servicing Fee in the amount equal to ____% per annum
(the "Servicing Fee Rate") on the Principal Balance of each Mortgage Loan as
of the first day of each such Due Period. All assumption fees, late payment
charges and other fees and charges, to the extent collected from borrowers,
will be retained by the Servicer as additional servicing compensation. The
Servicer will pay certain ongoing expenses associated with the Trust and
incurred by it in connection with its responsibilities under the Agreement.
EVIDENCE AS TO COMPLIANCE
The Agreement provides for delivery on or before January 31 in each
year, beginning in January ____, to the Depositor, the Trustee, the
Certificate Insurer and the Rating Agencies of an annual statement signed by
an officer of the Servicer to the effect that the Servicer has fulfilled its
material obligations under the Agreement throughout the preceding fiscal
year, except as specified in such statement.
On or before January 31 in each year, beginning in January ____, the
Servicer will furnish a report prepared by a firm of nationally recognized
independent public accountants (who may also render other services to the
Servicer or the Seller) to the Depositor, the Trustee, the Certificate
Insurer and the Rating Agencies to the effect that such firm has examined
certain documents and the records relating to servicing of the Loans under
the Uniform Single Audit Program for Mortgage Bankers and such firm's
conclusion with respect thereto.
CERTAIN MATTERS REGARDING THE SERVICER
The Agreement provides that the Servicer may not resign from its
obligations and duties thereunder, except in connection with a permitted
transfer of servicing, unless (i) such duties and obligations are no longer
permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature presently
carried on by it or (ii) upon the satisfaction of the following conditions:
(a) the Servicer has proposed a successor servicer to the Trustee in writing
and such proposed successor servicer is reasonably acceptable to the Trustee;
(b) the Rating Agencies have confirmed to the Trustee that the appointment of
such proposed successor servicer as the Servicer will not result in the
reduction or withdrawal of the then current rating of the Offered
Certificates; and (c) such proposed successor servicer is reasonably
acceptable to the Certificate Insurer. No such resignation will become
effective until the Trustee or a successor servicer has assumed the
Servicer's obligations and duties under the Agreement.
The Servicer may perform any of its duties and obligations under the
Agreement through one or more subservicers or delegates, which may be
affiliates of the Servicer. Notwithstanding any such arrangement, the
Servicer will remain liable and obligated to the Trustee and the
Certificateholders for the Servicer's duties and obligations under the
Agreement, without any diminution of such duties and obligations and as if
the Servicer itself were performing such duties and obligations.
The Agreement provides that none of the Depositor, the Seller or the
Servicer or any of their respective directors, officers, employees or agents
will be under any other liability to the Trust, the Trustee, the
Certificateholders or any other person for any action taken or for refraining
from taking any action pursuant to the Agreement. However, the Servicer will
not be protected against any liability which would otherwise be imposed by
reason of its willful misconduct, bad faith or negligence in the performance
of its duties under the Agreement or by reason of reckless disregard of its
obligations thereunder. In addition, the Agreement provides that the
Servicer will not be under any obligation to appear in, prosecute or defend
any legal action which is not incidental to the Servicer's servicing
responsibilities under the Agreement. The Servicer may, in its sole
discretion, undertake any such legal action which it may deem necessary or
desirable with respect to the Agreement and the rights and duties of the
parties thereto and the interest of the Certificateholders thereunder.
Any corporation into which the Servicer may be merged or consolidated,
or any corporation resulting from any merger, conversion or consolidation to
which the Servicer shall be a party, or any corporation succeeding to the
business of the Servicer shall be the successor of the Servicer, without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, anything in the Agreement to the contrary notwithstanding.
THE BACK-UP SERVICER
____________ will be appointed as the Back-Up Servicer under the
Agreement. Prior to the occurrence of an Event of Servicer Termination, the
Agreement requires the Back-Up Servicer to maintain current records of each
Mortgagor's account and the activity therein. The Servicer will be required
to furnish electronically such records to the Back-Up Servicer on a monthly
basis, and the Back-Up Servicer will be required to recalculate the
Servicer's application of all funds received from or on behalf of the
Mortgagors. Upon the occurrence of an Event of Servicer Termination, the
Back-Up Servicer will be obligated to assume the obligations of the Servicer
as described below. In performing its obligations under the Agreement, the
Back-Up Servicer will be entitled to the same protections afforded to the
Servicer under the Agreement.
EVENTS OF SERVICER TERMINATION
The Servicer's rights under the Agreement may be terminated upon the
occurrence of an Event of Default or a Trigger Event. "Events of Default"
will consist of: (i) any failure of the Servicer to deposit in either
Collection Account any deposit required to be made under the Agreement, which
failure continues unremedied for three Business Days after the giving of
written notice of such failure to the Servicer by the Trustee, or to the
Servicer and the Trustee by the Certificate Insurer or Certificateholders of
any Class evidencing Percentage Interests aggregating not less than 25% of
such Class; (ii) any failure by the Servicer duly to observe or perform in
any material respect any other of its covenants or agreements in the
Agreement which continues unremedied for 30 days after the giving of written
notice of such failure to the Servicer by the Trustee, or to the Servicer and
the Trustee by the Certificate Insurer or Certificateholders of any Class
evidencing Percentage Interests aggregating not less than 25% of such Class;
(iii) any failure by the Servicer to make any required Servicing Advance,
which failure continues unremedied for a period of 30 days after the giving
of written notice of such failure to the Servicer by the Trustee, or to the
Servicer and the Trustee by the Certificate Insurer or Certificateholders of
any Class evidencing Percentage Interests aggregating not less than 25% of
such Class; (iv) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings relating to the
Servicer and certain actions by the Servicer indicating insolvency,
reorganization or inability to pay its obligations (an "Insolvency Event");
(v) so long as the Seller is an affiliate of the Servicer, any failure of the
Seller to repurchase or substitute Eligible Substitute Loans for Defective
Loans as required by the Purchase Agreement; (vi) any failure to pay any
Monthly Advance or any Compensating Interest Payments which continues
unremedied for a period of one Business Day; or (vii) any insufficiency in
either Amount Available excluding Insured Payments occurs on a Distribution
Date resulting in the need for an Insured Payment.
A "Trigger Event" will consist of: (i) the failure by the Seller or the
Servicer to pay any amount due the Certificate Insurer pursuant to the
Insurance Agreement among the Depositor, the Seller, the Servicer and the
Certificate Insurer, which continues unremedied for three Business Days after
written notice of such failure by the Certificate Insurer; (ii) the
Certificate Insurer determines that the performance of the Servicer is not
satisfactory; or (iii) the Servicer is a party to a merger, consolidation or
other corporate transaction in which the Servicer is not the surviving
entity, the debt of such surviving entity is not investment grade or the
Certificate Insurer determines that the servicing capabilities of the
surviving entity could materially and adversely affect the servicing of the
Loans.
RIGHTS UPON AN EVENT OF SERVICER TERMINATION
So long as an Event of Default remains unremedied, either the Trustee,
or Certificateholders of any Class evidencing Percentage Interests of at
least 51% of such Class, with the consent of the Certificate Insurer, or the
Certificate Insurer, may terminate all of the rights and obligations of the
Servicer under the Agreement and in and to the Loans, whereupon the Back-Up
Servicer will succeed to all the responsibilities, duties and liabilities of
the Servicer under the Agreement (the "Successor Servicer") and will be
entitled to similar compensation arrangements. Upon the occurrence and
continuation beyond the applicable grace period of the event described in
clause (vi) in the second preceding paragraph, the Back-Up Servicer will
immediately assume the duties of the Servicer. The Back-Up Servicer, as
Successor Servicer, will be obligated to make Monthly Advances and Servicing
Advances and certain other advances unless it determines reasonably and in
good faith that such advances would not be recoverable. In the event that
the Back-Up Servicer would be obligated to succeed the Servicer but is
unwilling or unable so to act, it may appoint, or petition a court of
competent jurisdiction for the appointment of, a housing and home finance
institution or other mortgage loan or home equity loan servicer with all
licenses and permits required to perform its obligations under the Agreement
and having a net worth of at least $_________ and acceptable to the
Certificate Insurer to act as Successor Servicer under the Agreement.
Pending such appointment, the Back-Up Servicer will be obligated to act in
such capacity unless prohibited by law. Such successor will be entitled to
receive the same compensation that the Servicer would otherwise have received
(or such lesser compensation as the Trustee and such successor may agree). A
trustee in bankruptcy for the Servicer may be empowered to prevent the
termination and replacement of the Servicer if the only Event of Default has
occurred is an Insolvency Event.
Upon the occurrence of a Trigger Event, the Certificate Insurer, in its
sole discretion, may direct the Trustee to remove the Servicer and to appoint
a Successor Servicer.
AMENDMENT
The Agreement may be amended from time to time by the Depositor, the
Servicer and the Trustee, with the consent of the Certificate Insurer, but
without the consent of the Certificateholders, to cure any ambiguity, to
correct or supplement any provisions therein which may be defective or
inconsistent with any other provisions of the Agreement, to add to the duties
of the Depositor or the Servicer, to comply with any requirements imposed by
the Code or any regulation thereunder, or to add or amend any provisions of
the Agreement as required by the Rating Agencies in order to maintain or
improve any rating of the Offered Certificates (it being understood that,
after obtaining the ratings in effect on the Closing Date, none of the
Depositor, the Seller, the Servicer or the Trustee is obligated to obtain,
maintain, or improve any such rating) or to add any other provisions with
respect to matters or questions arising under the Agreement which shall not
be inconsistent with the provisions of the Agreement, provided that such
action will not, as evidenced by an opinion of counsel, materially and
adversely affect the interests of any Certificateholder or the Certificate
Insurer; provided, that any such amendment will not be deemed to materially
and adversely affect the Certificateholders and no such opinion will be
required to be delivered if the person requesting such amendment obtains a
letter from the Rating Agencies stating that such amendment would not result
in a downgrading of the then current rating of the Offered Certificates. The
Agreement may also be amended from time to time by the Depositor, the
Servicer and the Trustee, with the consent of Holders of Certificates
evidencing Percentage Interests aggregating not less than 51% of each Class
affected thereby and the Certificate Insurer for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions
of the Agreement or of modifying in any manner the rights of the
Certificateholders, provided that no such amendment will (i) reduce in any
manner the amount of, or delay the timing of, collections of payments on the
Certificates or distributions or payments under the Policy which are required
to be made on any Certificate without the consent of the Certificateholder or
(ii) reduce the aforesaid percentage required to consent to any such
amendment, without the consent of the holders of all Certificates then
outstanding. Notwithstanding the foregoing, the provisions of the Agreement
relating to overcollateralization may be reduced or eliminated by the
Certificate Insurer without the consent of any Certificateholder so long as a
Certificate Insurer Default has not occurred.
TERMINATION; RETIREMENT OF THE CERTIFICATES
The Trust will terminate on the Distribution Date following the later of
(A) termination of the Policy and payment in full of all amounts owing to the
Certificate Insurer and (B) the earliest of (i) the Distribution Date on
which the Class Certificate Balance of each Class of Offered Certificates has
been reduced to zero, (ii) the final payment or other liquidation of the last
Mortgage Loan in the Trust, and (iii) the optional transfer to the Servicer
of the Loans, as described below.
The Servicer will have the right to purchase all remaining Loans, and
related REO Properties in the Trust and thereby effect early retirement of
the Certificates, subject to the Pool Balance of such Loans and REO
Properties at the time of purchase being less than or equal to __% of the sum
of the Pool Balance as of the Cut-Off Date and the Principal Balance of each
Subsequent Mortgage Loan as of the applicable Subsequent Cut-Off Date. In
the event the Servicer exercises such option, the purchase price will be at
least equal to (x) 100% of its then outstanding principal balance plus (y)
the greater of (i) the aggregate amount of accrued and unpaid interest on the
Loans through the related Due Period and (ii) 30 days' accrued interest
thereon at the Loan Rate, in each case net of the Servicing Fee plus (z) any
amounts due to the Certificate Insurer.
The termination of the Trust will be effected in a manner consistent
with applicable federal income tax regulations and the status of the Trust as
a REMIC.
OPTIONAL PURCHASE OF DEFAULTED LOANS
The Servicer has the option to purchase from the Trust any Loan __ days
or more delinquent at a purchase price equal to the outstanding Principal
Balance of such Loan as of the date of purchase, plus the greater of (i) all
accrued and unpaid interest on such principal balance and (ii) 30 days'
interest on such principal balance, computed at the Loan Rate, plus all
unreimbursed amounts owing to the Certificate Insurer with interest thereon
at the rate referred to in the Insurance Agreement.
THE TRUSTEE
________________, a ____________ organized under the laws of the
___________, has been named Trustee pursuant to the Agreement.
The Trustee may have normal banking relationships with the Depositor,
the Seller and the Servicer.
The Trustee may resign at any time, in which event the Depositor will be
obligated to appoint a successor Trustee, as approved by the Certificate
Insurer and the Servicer. The Depositor may also remove the Trustee if the
Trustee ceases to be eligible to continue as such under the Agreement or if
the Trustee becomes insolvent. Upon becoming aware of such circumstances,
the Depositor will be obligated to appoint a successor Trustee, as approved
by the Certificate Insurer and the Servicer. Any resignation or removal of
the Trustee and appointment of a successor Trustee will not become effective
until acceptance of the appointment by the successor Trustee.
No holder of a Certificate will have any right under the Agreement to
institute any proceeding with respect to the Agreement unless such holder
previously has given to the Trustee written notice of default and unless
Certificateholders evidencing Percentage Interests of at least 51% of the
applicable Class have made written requests upon the Trustee to institute
such proceeding in its own name as Trustee thereunder and have offered to the
Trustee reasonable indemnity and the Trustee for 60 days has neglected or
refused to institute any such proceeding. The Trustee will be under no
obligation to exercise any of the trusts or powers vested in it by the
Agreement or to make any investigation of matters arising thereunder or to
institute, conduct or defend any litigation thereunder or in relation thereto
at the request, order or direction of any of the Certificateholders, unless
such Certificateholders have offered to the Trustee reasonable security or
indemnity against the cost, expenses and liabilities which may be incurred
therein or thereby.
THE POLICY AND THE CERTIFICATE INSURER
THE POLICY
Simultaneously with the issuance of the Certificates, the Certificate
Insurer will issue the Policy pursuant to which it will irrevocably and
unconditionally guaranty payment on each Distribution Date to the Trustee for
the benefit of the Holders of each Class of Offered Certificates of a maximum
amount equal to the applicable Guaranteed Interest Payment Amount and the
applicable Guaranteed Principal Payment Amount for such Distribution Date.
The Offered Certificates and the Agreement may not be amended unless the
Certificate Insurer has given its prior written consent. The amount of the
actual payment (the "Insured Payment"), if any, made by the Certificate
Insurer under the Policy on each Distribution Date allocated to such Class of
Offered Certificates or the Class I Certificates, as the case may be, is
equal to the sum of (A) the excess, if any, of (1) the Interest Remittance
Amount with respect to such Class and Distribution Date over (2) the Amount
Available (net of Insured Payments) for the related Loan Group and (B) the
amount by which the Class Certificate Balance of such Class of Offered
Certificates (or in the case of the Fixed Rate Certificates, the aggregate
Class Certificate Balance of such Certificates) after giving effect to all
allocations and distributions to principal on such Class or Classes of
Offered Certificates on such Distribution Date exceeds the related Loan Group
Balance as of such Distribution Date. The Certificate Insurer's obligations
under the Policy to make Insured Payments will be discharged to the extent
funds are transferred to the Trustee as provided in the Policy, whether or
not such funds are properly applied by the Trustee.
Payment of claims under the Policy will be made by the Certificate
Insurer following Receipt by the Certificate Insurer of the appropriate
notice for payment on the later to occur of (a) 11:00 a.m., New York City
time, on the second Business Day following Receipt of such notice for
payment, and (b) 11:00 a.m., New York City time, on the Business Day
immediately preceding the relevant Distribution Date.
The terms "Receipt" and "Received," with respect to the Policy, means
actual delivery to the Certificate Insurer, prior to 2:00 pm., New York City
time, on a Business Day; delivery either on a day that is not a Business Day
or after 2:00 pm., New York City time, shall be deemed to be Receipt on the
next succeeding Business Day.
If the payment of the Guaranteed Interest Payment Amount or the
Guaranteed Principal Payment Amount is voided pursuant to a final and non-
appealable order (a "Preference Event") under any applicable bankruptcy,
insolvency, receivership or similar law in an Insolvency Proceeding, and, as
a result of such a Preference Event, the Trustee is required to return such
voided payment, or any portion of such voided payment, made in respect of the
Certificates (an "Avoided Payment"), the Certificate Insurer will pay an
amount equal to such Avoided Payment, upon receipt by the Certificate Insurer
from the Trustee of (x) a certified copy of a final order of a court
exercising jurisdiction in such Insolvency Proceeding to the effect that the
Trustee is required to return any such payment or portion thereof during the
term of the Policy because such payment was voided under applicable law, with
respect to which order the appeal period has expired without an appeal having
been filed (the "Final Order"), (y) an assignment, in form reasonably
satisfactory to the Certificate Insurer, irrevocably assigning to the
Certificate Insurer all rights and claims of the Trustee relating to or
arising under such Avoided Payment and (z) a notice for payment appropriately
completed and executed by the Trustee. Such payment shall be disbursed to
the receiver, conservator, debtor-in-possession or trustee in bankruptcy
named in the Final Order and not to the Trustee directly.
Notwithstanding the foregoing, in no event shall the Certificate Insurer
be obligated to make any payment in respect of any Avoided Payment, which
payment represents a payment of the principal amount of a Class of Offered
Certificates, prior to the time the Certificate Insurer would have been
required to make a payment in respect of such principal in the absence of
such Preference Event.
The Certificate Insurer shall make payments due in respect of Avoided
Payments prior to 1:00 p.m., New York City time, on the second Business Day
following the Certificate Insurer's receipt of the documents required under
clauses (x) through (z) of the second preceding paragraph. Any such
documents received by the Certificate Insurer after 3:00 p.m., New York City
time, on any Business Day or on any day that is not a Business Day shall be
deemed to have been received by the Certificate Insurer prior to 3:00 p.m. on
the next succeeding Business Day.
Under the Policy, "Business Day" means any day other than (i) a Saturday
or Sunday or (ii) a day on which banking institutions in the City of New
York, New York are authorized or obligated by law or executive order to be
closed.
"Insolvency Proceeding" means the commencement, after the Closing Date,
of any bankruptcy, insolvency, readjustment of debt, reorganization,
marshalling of assets and liabilities or similar proceedings by or against
any Person, or the commencement, after the Closing Date, of any proceedings
by or against any Person for the winding up or liquidation of its affairs, or
the consent after the date hereof to the appointment of a trustee,
conservator, receiver or liquidator in any bankruptcy, insolvency,
readjustment of debt, reorganization, marshalling of assets and liabilities
or similar proceedings of or relating to any Person.
The terms of the Policy cannot be modified, altered or affected by any
other agreement or instrument, or by the merger, consolidation or dissolution
of the Depositor, the Seller or Servicer. The Policy by its terms may not be
canceled orrevoked. ThePolicy is governed bythe laws ofthe State ofNew York.
Pursuant to the terms of the Agreement, unless a Certificate Insurer
Default exists, the Certificate Insurer will be entitled to exercise all
rights of the Holders of the Offered Certificates, without the consent of
such Certificateholders, and the Holders of the Offered Certificates may
exercise such rights only with the prior written consent of the Certificate
Insurer. In addition, the Certificate Insurer will, as a third party
beneficiary to the Agreement, have, among others, the following rights: (i)
the right to give notices of breach or to terminate the rights and
obligations of the Servicer under the Agreement in the event of an Event of
Default by the Servicer and to institute proceedings against the Servicer;
(ii) the right to consent to or direct any waivers of defaults by the
Servicer; (iii) the right to remove the Trustee pursuant to the Agreement;
(iv) the right to direct the actions of the Trustee during the continuation
of a Servicer default; (v) the right to require the Seller to repurchase
Loans for breach of representation and warranty or defect in documentation;
(vi) the right to direct foreclosures upon the failure of the Servicer to do
so in accordance with the Agreement; and (vii) the right to direct the
Trustee to investigate certain matters. The Certificate Insurer's consent
will be required prior to, among other things, (i) the removal of the
Trustee, (ii) the appointment of any successor Trustee or Servicer or (iii)
any amendment to the Agreement (which consent will not be withheld if an
opinion of counsel is delivered and addressed to the Certificate Insurer and
the Trustee to the effect that failure to amend the Agreement would adversely
affect the interests of the Certificateholders).
THE CERTIFICATE INSURER
The information set forth in this section and in Appendix B and Appendix
C hereto has been supplied by ____________. Accordingly, none of the
Depositor, the Seller, the Servicer, the Trustee or the Underwriter makes any
representation as to the accuracy and completeness of such information.
________ is a ___________ which engages only in the business of
financial guarantee and surety insurance. _______ is licensed in ___ states
in addition to _________. ________ insures structured asset-backed,
corporate, municipal and other financial obligations in the U.S. and
international capital markets. ____________ also provides financial
guarantee reinsurance for structured asset-backed, corporate, municipal and
other financial obligations written by other major insurance companies.
_________'s claims-paying ability is rated "Aaa" by Moody's Investors
Service, Inc. ("Moody's"), "AAA" by Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. ("Standard & Poor's"), "AAA" by Duff & Phelps
Credit Rating Co. ("Duff & Phelps") and "AAA" by Fitch IBCA, Inc. Such
ratings reflect only the views of the respective rating agencies, are not
recommendations to buy, sell or hold securities and are subject to revision
or withdrawal at any time by such rating agencies.
________ is regulated by ___________. In addition, _________ is subject
to regulation by the insurance laws and regulations of the other
jurisdictions in which it is licensed. Such insurance laws regulate, among
other things, the amount of net exposure per risk that ________ may retain,
capital transfers, dividends, investment of assets, changes in control,
transactions with affiliates and consolidations and acquisitions. __________
is subject to periodic regulatory examinations by the same regulatory
authorities.
________'s obligations under the Policy may be reinsured. Such
reinsurance does not relieve _________ of any of its obligations under the
Policy.
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY
FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
As at December 31, _____ and ____, _____________ had qualified statutory
capital (which consists of policyholders' surplus and contingency reserve) of
approximately $____ million and $____ million, respectively, and had not
incurred any debt obligations. ______________ requires ________ to establish
and maintain the contingency reserve, which is available to cover claims
under surety bonds issued by ____________.
The audited financial statements of ______________ prepared in
accordance with generally accepted accounting principles for the period ended
December 31, ____ are attached as Appendix B to this Prospectus Supplement,
and the unaudited financial statements of _________ for the period
ended ______________, are attached as Appendix C to this Prospectus
Supplement. Copies of _________'s financial statements prepared in
accordance with statutory accounting standards, which differ from generally
accepted accounting principles, and filed with _____________________ are
available upon request. __________ is located at ____________________
and its telephone number is _______________.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Offered
Certificates will be used by the Depositor to purchase the Loans. The Loans
will have been acquired by the Depositor from _____________ in a privately
negotiated transaction.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement (the "Underwriting Agreement") between the Depositor and Bear,
Stearns & Co. Inc. (the "Underwriter"), the Depositor has agreed to sell to
the Underwriter and the Underwriter has agreed to purchase from the
Depositor, each Class of Offered Certificates.
In the Underwriting Agreement, the Underwriter has agreed, subject to
the terms and conditions set forth therein, to purchase all of the
Certificates offered hereby, if any are purchased. The Depositor has been
advised by the Underwriter that it proposes initially to offer the
Certificates to the public at the respective offering prices set forth on the
cover page hereof and to certain dealers at such price less a concession not
in excess of the respective amounts set forth in the table below (expressed
as a percentage of the relative Certificate Principal Balance). The
Underwriter may allow and such dealers may reallow a discount not in excess
of the respective amounts set forth in the table below to certain other
dealers.
<TABLE>
<CAPTION>
Selling Reallowance
Class Concession Discount
- ----- ---------- -----------
<S> <C> <C>
A-1 . . . . . . . . . . . . . . . . . . . . . % %
A-2 . . . . . . . . . . . . . . . . . . . . . % %
A-3 . . . . . . . . . . . . . . . . . . . . . % %
</TABLE>
The Depositor is an affiliate of the Underwriter.
(Stabilization Language)
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
REPORT OF EXPERTS
The financial statements of __________________ included in this
Prospectus Supplement in Appendix B, as of December 31, ____ and ____ and for
each of the years in the two year period then ended, have been included in
reliance upon the report of ______________, independent certified public
accountants, appearing in Appendix B, upon the authority of such firm
as expert in accounting and auditing.
RATINGS
It is a condition to issuance that each Class of Offered Certificates be
rated not lower than ____________ by _________________ and _____________ by
__________________.
A securities rating addresses the likelihood of the receipt by Holders
of distributions on the Loans to which they are entitled. The rating takes
into consideration the characteristics of the Loans and the structural, legal
and tax aspects associated with the Offered Certificates. The ratings on the
Offered Certificates do not, however, constitute statements regarding the
likelihood or frequency of prepayments on the Loans or the possibility that
Holders might realize a lower than anticipated yield. The ratings assigned
to the Offered Certificates will depend primarily upon the creditworthiness
of the Certificate Insurer. Any reduction in a rating assigned to the
claims-paying ability of the Certificate Insurer below the ratings initially
assigned to the Offered Certificates may result in a reduction of one or more
of the ratings assigned to the Offered Certificates.
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
LEGAL MATTERS
Certain legal matters with respect to the Certificates will be passed
upon by Brown & Wood LLP, New York, New York.
APPENDIX A
CERTAIN STATISTICAL INFORMATION
REGARDING THE INITIAL LOANS IN THE LOAN GROUPS
AS OF THE CUT-OFF DATE
LOAN GROUP ONE
LOAN GROUP TWO
Information contained herein is subject to completion or amendment. A
registration statement relating to these Securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these Securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
PROSPECTUS SUPPLEMENT
(To Prospectus dated ________, 199__)
$______________
Bear Stearns Home Equity Loan Trust 199__-__
$__________ ASSET-BACKED NOTES, SERIES 199__-__
$__________ ASSET-BACKED CERTIFICATES, SERIES 199__-__
The Home Equity Loan Trust 199__-__ (the "Trust") will be formed pursuant
to a trust agreement to be dated as of ______, 199__ (the "Trust Agreement") and
entered into by Bear Stearns Asset Backed Securities, Inc. (the "Depositor"),
__________, as servicer (the "Servicer"), and ________, as owner trustee (the
"Owner Trustee"). The Trust will issue $_________ aggregate principal amount of
Asset Backed Notes (the "Notes"). The Notes will be issued pursuant to an
indenture to be dated as of ______ 1, 199__ (the "Indenture"), between the Trust
and _________, as indenture trustee (the "Indenture Trustee"). The Trust will
also issue $________ aggregate principal amount of Asset Backed Certificates,
Series 199__-__ (the "Certificates" and, together with the Notes, the
"Securities"). The Trust will consist of certain [adjustable rate] [fixed rate]
home equity revolving credit line loans made or to be made in the future (the
"Revolving Credit Line Loans") secured [primarily] by [second] deeds of trust or
Mortgages on residential properties that are primarily one- to four-family
properties, the Collections in respect of such
(cover continued on next page)
SEE "RISK FACTORS" HEREIN ON PAGE S-10
AND IN THE PROSPECTUS ON PAGE 15 FOR
CERTAIN FACTORS TO BE CONSIDERED IN
PURCHASING THE SECURITIES.
THE SECURITIES DO NOT REPRESENT AN OBLIGATION OF OR INTEREST IN
THE DEPOSITOR, THE SELLER, THE SERVICER, THE TRUSTEES OR ANY
OF THEIR RESPECTIVE AFFILIATES. NEITHER THE SECURITIES
NOR THE UNDERLYING HOME EQUITY LOANS ARE INSURED
OR GUARANTEED BY ANY GOVERNMENTAL AGENCY, THE
SELLER, THE SERVICER OR ANY OF THEIR
AFFILIATES.
-----------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
-----------------------------
<TABLE>
<CAPTION>
===========================================================================================================================
Initial Security Pass-Through Price to Underwriting Proceeds to
Balance Interest Rate Public(1) Discount Depositor(1)(2)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Note $ [(3)] % % % %
Per Certificate................. $ [(3)] % % % %
- ---------------------------------------------------------------------------------------------------------------------------
Total........................... $ % % %
===========================================================================================================================
</TABLE>
- ---------------
(1) Plus accrued interest, if any, from _________.
(2) Before deducting expenses, estimated to be $________.
(3) [The [Notes] [Certificates] will bear interest at a variable rate that,
for any Distribution Date, will equal the lesser of (i) ____% per annum
and (ii) the weighted average of the Loan Rates (as defined herein) of the
Loans. The Pass-Through Rate for the first Distribution Date is
expected to be approximately ____% per annum.] See "Description of the
Securities" herein.
The Securities are offered by Bear, Stearns & Co. Inc. [and _________]
(the "Underwriters") when, as and if issued, delivered to and accepted by the
Underwriters and subject to certain other conditions. It is expected that
delivery of the Securities will be made in book-entry form only, through the
Same Day Funds Settlement System of The Depository Trust Company, on or about
_________, 199__.
-----------------------------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
-----------------------------
Each Series of Securities offered hereby constitutes part of a separate
Series of Asset Backed Securities being offered by Bear, Stearns & Co. Inc. from
time to time pursuant to the Prospectus dated _________, 199__. This Prospectus
Supplement does not contain complete information about the offering of the
Securities. Additional information is contained in the Prospectus and investors
are urged to read both this Prospectus Supplement and the Prospectus in full.
Sales of the Securities may not be consummated unless the purchaser has received
both this Prospectus Supplement and the Prospectus.
-----------------------------
BEAR, STEARNS & CO. INC.
The date of this Prospectus Supplement is _______, 199__
(cover page continued)
Revolving Credit Line Loans, and certain other property relating to such
Revolving Credit Line Loans. [In addition, the Securities will have the benefit
of an irrevocable and unconditional limited financial guaranty insurance policy
(the "Policy") issued by __________ (the "Insurer") covering [describe].]
Distributions of principal of and interest on the Notes will be made on the
_____ day of each month or, if such date is not a Business Day, then on the
succeeding Business Day (each, a "Distribution Date"), commencing on ________,
199__, to the extent described herein. Interest will accrue on the Notes at a
rate (the "Note Rate") equal to ____% per annum from the Closing Date to the
first Distribution Date and at [a floating rate equal to LIBOR plus ____% per
annum] [____% per annum] thereafter. The Certificates will represent fractional
undivided interests in the Trust. Distributions of principal of and interest on
the Securities will be made on each Distribution Date to the extent described
herein. Interest will accrue on the Certificates at a rate (the "Pass-Through
Rate") equal to ____% per annum from the Closing Date to the first Distribution
Date and at [a floating rate equal to LIBOR plus ____% per annum] [____% per
annum] thereafter. Payments of interest on and principal of the Notes will have
equal priority (and will be made pro rata) with payments of principal of and
interest on the Certificates.
There is currently no secondary market for the Securities. The
Underwriters intend to establish a market in the Securities but are not
obligated to do so. There can be no assurance that a secondary market for any of
the Securities will develop, or if one does develop, that it will continue or
offer sufficient liquidity of investment.
The yield to investors on each Class of Securities will be sensitive in
varying degrees to the rate and timing of principal payments (including
prepayments) on the Loans, which generally may be prepaid in full or in part at
any time without penalty. The yield to maturity of a Class of Securities
purchased at a discount or premium will be more sensitive to the rate and timing
of payments thereon. Holders of the Securities should consider, in the case of
any such Securities purchased at a discount, the risk that a slower than
anticipated rate of principal payments could result in an actual yield that is
lower than the anticipated yield and, in the case of any Securities purchased at
a premium, the risk that a faster than anticipated rate of principal payments
could result in an actual yield that is lower than the anticipated yield. No
representation is made as to the anticipated rate of prepayments on the Loans or
as to the resulting yield to maturity of any Class of Securities.
An election will be made to treat certain assets of the Trust as a real
estate mortgage investment conduit ("REMIC") for federal income tax purposes. As
described more fully herein and in the Prospectus, the Certificates will be
designated as "regular interests" in a REMIC. See "Certain Federal Income Tax
Considerations" herein and in the Prospectus.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON
OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY
IS UNLAWFUL.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF ANY
CLASS OF SECURITIES. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN
CONNECTION WITH THE OFFERING AND MAY BID FOR AND PURCHASE THE SECURITIES IN
THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
-----------------------------
SUMMARY
The following summary of certain pertinent information is qualified in
its entirety by reference to the detailed information appearing elsewhere in
this Prospectus Supplement and in the accompanying Prospectus. Certain
capitalized terms used herein are defined elsewhere in the Prospectus Supplement
or in the Prospectus.
Trust...................................Bear Stearns Home Equity Loan Trust
199__-__ (the "Trust" or the "Issuer"),
a Delaware business trust established
pursuant to the Trust Agreement, dated
as of _______, 199__. The property of
the Trust will include: a pool of
[adjustable] [fixed] rate home equity
loan revolving credit line loans made or
to be made in the future (the "Revolving
Credit Line Loans") under certain home
equity revolving credit line loan
agreements (the "Revolving Credit Line
Loan Agreements") and secured
[primarily] by [second] [deeds of trust]
[Mortgages] on residential properties
that are primarily one- to four-family
properties (the "Mortgaged Properties");
the Collections in respect of the
Revolving Credit Line Loans received on
or after the Cut-off Date; property that
secured the Revolving Credit Line Loans
that has been acquired by foreclosure or
deed in lieu of foreclosure; [a surety
bond or letter of credit]; an assignment
of the Depositor's rights under the
Purchase Agreement; rights under certain
hazard insurance policies covering the
Mortgaged Properties; and certain other
property, as described more fully
herein.
The Trust will include the Principal
Balance of each Revolving Credit Line
Loan as of the Cut-off Date (the
"Cut-off Date Principal Balance") plus
any additions thereto as a result of new
advances made pursuant to the applicable
Revolving Credit Line Loan Agreement
(the "Additional Balances") during the
life of the Trust. With respect to any
date, the "Pool Balance" will be equal
to the aggregate of the Principal
Balances of all Revolving Credit Line
Loans as of such date. The "Principal
Balance" of a Loan (other than a
Liquidated Loan) on any day is equal to
its Cut-off Date Principal Balance, plus
(i) any Additional Balances in respect
of such Revolving Credit Line Loan,
minus (ii) all Collections credited
against the Principal Balance of such
Revolving Credit Line Loan in accordance
with the related Revolving Credit Line
Loan Agreement prior to such day. The
Principal Balance of a Liquidated Loan
after the final recovery of related
Liquidation Proceeds shall be zero.
Securities Offered......................The Securities offered hereby are
(i) Asset Backed Notes (the "Notes") and
(ii) Asset Backed Certificates (the
"Certificates" and, together with the
Notes, the "Securities"). Each Security
represents the right to receive payments
of interest at the rate described below,
payable monthly, and payments of
principal at such time and to the extent
provided below.
Depositor...............................Bear Stearns Asset Backed Securities,
Inc. (the "Depositor") was incorporated
in the State of Delaware in June 1995,
and is a wholly-owned, special purpose
subsidiary of The Bear Stearns Companies
Inc. None of The Bear Stearns Companies
Inc., the Depositor, the Servicer, the
Trustees, the Seller or any affiliate of
the foregoing has guaranteed or is
otherwise obligated with respect to the
Securities of any Series. See "The
Depositor" in the Prospectus.
Servicer ..............................._________ (the "Servicer"). The Servicer
will service the Revolving Credit Line
Loans pursuant to a Servicing Agreement
dated _________, 199__, between the
Issuer and the Servicer.
Indenture ..............................The Notes will be issued pursuant to an
indenture dated as of _________, 199__
(the "Indenture") between the Trust and
_______________, in its capacity as
indenture trustee (the "Indenture
Trustee"). The Indenture Trustee will
allocate distributions of principal and
interest to Holders of the Notes (the
"Noteholders") in accordance with the
Indenture.
Trust Agreement ........................Pursuant to a trust agreement dated as
of ________, 199__ (the "Trust
Agreement"), among the Depositor, the
Servicer and ___________, in its
capacity as owner trustee (the "Owner
Trustee"), the Trust will issue the
Certificates in an initial aggregate
amount of $__________. The Certificates
will represent fractional undivided
interests in the Trust.
The Revolving Credit Line Loans ........The Revolving Credit Line Loans are
[primarily] secured by [second] deeds of
trust or Mortgages on Mortgaged
Properties. The Revolving Credit Line
Loans were originated by ______ and on
or prior to the Closing Date, _______
will sell the Revolving Credit Line
Loans to the Depositor pursuant to a
purchase agreement (the "Purchase
Agreement"). The aggregate Cut-off Date
Principal Balance of the Revolving
Credit Line Loans is $___________ (the
"Cut-off Date Pool Balance").
The combined loan-to-value ratio of each
Revolving Credit Line Loan, computed
using the maximum amount the borrower
was permitted to draw down under the
related Revolving Credit Line Loan
Agreement (the "Credit Limit") and
taking into account the amounts of any
related senior mortgage loans (the
"Combined Loan-to-Value Ratio"), did not
exceed ___% as of the Cut-off Date. The
weighted average Combined Loan-to-Value
Ratio of the Revolving Credit Line Loans
was ____% as of the Cut-off Date. See
"The Home Equity Lending
Program--Underwriting Procedures
Relating to the Revolving Credit Line
Loans" herein.
Interest on each Revolving Credit Line
Loan is payable monthly and computed on
the related average daily Principal
Balance for each billing cycle at a
variable rate per annum (the "Loan
Rate") equal at any time (subject to
minimum and maximum rates, as described
herein under "The Home Equity Lending
Program--Revolving Credit Line Loan
Terms," and further subject to
applicable usury limitations) to the sum
of (i) [the prime rate published in the
"Money Rates" section of The Wall Street
Journal generally on the Monday of the
week in which such Loan Rate adjusts
(or, if no rate is published on such
day, then on the next succeeding
calendar day on which a prime rate is
published), rounded to the nearest 1/8
of 1 percent] and (ii) a margin
generally within the range of ___% to
___%. The Loan Rate is subject to
adjustment ________. With respect to
each Revolving Credit Line Loan, a
"billing cycle" is the calendar month
preceding a Due Date. Interest accrued
at such rate will be due on the Due Date
in the month following the close of the
billing cycle. [As to each Revolving
Credit Line Loan, the Due Date is the
____ day of the month.] The Cut-off Date
Principal Balances of the Revolving
Credit Line Loans ranged from $______ to
$_______ and averaged $_______. Credit
Limits under the Revolving Credit Line
Loans as of the Cut-off Date ranged from
approximately $_____ to $______ and
averaged $______. Each Revolving Credit
Line Loan was originated in the period
from _______ to ________, and, as of the
Cut-off Date, the weighted average
Credit Limit Utilization Rate (as
defined herein) was approximately ___%.
See "The Home Equity Lending Program"
and "Description of the Revolving Credit
Line Loans" herein.
Collections.............................All Collections on the Revolving Credit
Line Loans will be allocated by the
Servicer in accordance with the
Revolving Credit Line Loan Agreements
between amounts collected in respect of
interest ("Interest Collections") and
amounts collected in respect of
principal ("Principal Collections" and,
together with Interest Collections,
"Collections"). The Servicer will
generally deposit Collections
distributable to the Holders in an
account established for such purpose
under the Servicing Agreement (the
"Collection Account"). See "Description
of the Servicing Agreement--Allocations
and Collections" herein and "The
Agreements--Payments on Loans; Deposits
to Security Account" and "Servicing of
Loans--Collection Procedures" in the
Prospectus.
Description of the Securities
A. Distributions..............On each Distribution Date, Collections
on the Revolving Credit Line Loans will
be applied in the following order of
priority:
(i) to the Servicer, the
Servicing Fee;
(ii) as payment for the
accrued interest due and any
overdue accrued interest (with
interest thereon to the extent
lawful) on the respective
outstanding principal balances of
the Notes (the "Note Balance") and
the Certificates (the "Certificate
Balance" and, together with the
Note Balance, the "Security
Balance");
(iii) as principal of the
Securities, the excess of Principal
Collections over Additional
Balances created during the
preceding Collection Period, such
amount to be allocated between the
Notes and Certificates, pro rata,
based on their respective Security
Balances;
(iv) as principal of the
Securities, as payment for any
Liquidation Loss Amounts on the
Revolving Credit Line Loans;
(v) as payment for the
premium on the Policy;
(vi) to reimburse prior draws
made on the Policy; and
(vii) any remaining amounts,
to the Depositor.
As to any Distribution Date, the
"Collection Period" is the calendar
month preceding the month in which such
Distribution Date occurs.
"Liquidation Loss Amount" means, with
respect to any liquidated Revolving
Credit Line Loan, the unrecovered
Principal Balance thereof at the end of
the related Collection Period in which
such Revolving Credit Line Loan became a
liquidated Revolving Credit Line Loan,
after giving effect to the Liquidation
Proceeds in connection therewith.
B. Note Rate..................Interest will accrue on the unpaid
Note Balance of the Notes (i) at a per
annum rate (the "Note Rate") equal to
___% from the Closing Date to the first
Distribution Date and (ii) thereafter,
from and including the preceding
Distribution Date to but excluding such
current Distribution Date (each, an
"Accrual Period") at [a floating rate
equal to LIBOR plus ___%] [___%].
[Interest will be calculated on the
basis of the actual number of days in
each Accrual Period divided by 360.] A
failure to pay interest on any Notes on
any Distribution Date that continues for
five days will constitute an Event of
Default under the Indenture.
C. Pass-Through Rate .........Interest will accrue on the unpaid
Certificate Balance of the Certificates
(i) at a per annum rate (the
"Pass-Through Rate") equal to ___% from
the Closing Date to the first
Distribution Date and (ii) thereafter,
at [a floating rate equal to LIBOR plus
___%] [___%]. [Interest will be
calculated on the basis of the actual
number of days in each Accrual Period
divided by 360.] A failure to pay
interest on any Certificates on any
Distribution Date that continues for
five days will constitute an Event of
Default under the Trust Agreement.
D. Distribution Date .........The _____ day of each month or, if such
day is not a Business Day, the next
succeeding Business Day, commencing with
_______, 199__. A "Business Day" is any
day other than a Saturday, Sunday or
other day on which banking institutions
in New York, New York [and ____________]
are authorized or obligated by law,
regulation or executive order to be
closed.
E. Record Date ................The last day preceding a Distribution
Date or, if the Securities are no longer
Book-Entry Securities, the last day of
the month preceding the month in which a
Distribution Date occurs.
F. Final Scheduled Distribution
Dates.......................To the extent not previously paid,
(i) the Certificate Balance of the
Certificates will be due on the ______
Distribution Date and (ii) the Note
Balance of the Notes will be due on the
_____ Distribution Date. Failure to pay
the full Note Balance of Notes or the
full Certificate Balance on the
Certificates on or before the related
Final Scheduled Distribution Date will
constitute an Event of Default under the
Indenture or the Trust Agreement, as the
case may be.
G. Form and Registration ......The Securities will initially be
delivered in Book-Entry form
("Book-Entry Securities"). Holders of
such Securities may elect to hold their
interests through The Depository Trust
Company ("DTC"), [in the United States,
or Cedel Bank, societe anonyme,
("Cedel") or the Euroclear System
("Euroclear"), in Europe]. Transfers
within DTC [, Cedel or Euroclear, as the
case may be,] will be in accordance with
the usual rules and operating procedures
of the relevant system. So long as the
Securities are Book-Entry Securities,
such Securities will be evidenced by one
or more securities registered in the
name of Cede & Co. ("Cede"), as the
nominee of DTC [or one of the relevant
depositaries]. Cross-market transfers
between Persons holding directly or
indirectly through DTC[, on the one
hand, and counterparties holding
directly or indirectly through Cedel or
Euroclear, on the other,] will be
effected in DTC through Citibank N.A.
("Citibank") or Morgan Guaranty Trust
Company of New York ("Morgan"), the
relevant depositaries of Cedel and
Euroclear, respectively, and each a
participating member of DTC. The
Securities will initially be registered
in the name of Cede. The interests of
such Holders will be represented by book
entries on the records of DTC and
participating members thereof. No Holder
of a Security will be entitled to
receive a definitive note representing
such Person's interest, except in the
event that Securities in fully
registered, certificated form
("Definitive Securities") are issued
under the limited circumstances
described in "Description of the
Securities--General" in the Prospectus.
All references in this Prospectus
Supplement to Securities reflect the
rights of Holders of such Notes only as
such rights may be exercised through DTC
and its participating organizations for
so long as such Securities are held by
DTC. See "Description of the
Securities--Book-Entry Securities"
herein.
H. Denominations ..............The Notes will be issued in minimum
denominations of $_______ and integral
multiples of $______ in excess thereof.
The Certificates will be issued in
minimum denominations of $_______ and
integral multiples of $______ in excess
thereof.
[Letter of Credit]
[Surety Bond] Issuer...................._______________ (the "[Letter of Credit]
[Surety Bond] Issuer"). See "The [Letter
of Credit] [Surety Bond] Issuer" herein.
[Letter of Credit]
[Surety Bond]...........................On the Closing Date , the [Letter of
Credit] [Surety Bond] Issuer will issue
a [letter of credit] [surety bond] (the
"[Letter of Credit] [Surety Bond]") in
favor of the Owner Trustee on behalf of
the Trust. In the event that on any
Distribution Date, available amounts on
deposit in the Collection Account with
respect to the preceding Collection
Period are insufficient to provide for
the payment of the amount required to be
distributed to the Holders and the
Servicer on such Distribution Date, the
Owner Trustee will draw on the [Letter
of Credit] [Surety Bond] to the extent
of the [Letter of Credit] [Surety Bond]
Amount for such Distribution Date, in an
amount equal to such deficiency. See
"Description of the Securities--
Distributions" herein and "Enhancement"
in the Prospectus.
[[Letter of Credit]
[Surety Bond]
Amount.................................The amount available under the [Letter
of Credit] [Surety Bond] (the "[Letter
of Credit] [Surety Bond] Amount") for
the initial Distribution Date will be
$___________. For each Distribution Date
thereafter, the [Letter of Credit]
[Surety Bond] Amount will equal the
lesser of (i)___ % of the Pool Balance
as of the first day of the preceding
Collection Period (after giving effect
to any amounts distributed in respect of
principal of the Revolving Credit Line
Loans on the Distribution Date occurring
in such preceding Collection Period) and
(ii) the [Letter of Credit] [Surety
Bond] Amount as of the first day of the
preceding Collection Period, minus any
amounts drawn under the [Letter of
Credit] [Surety Bond] during such
preceding Collection Period, plus any
amounts paid to the [Letter of Credit]
[Surety Bond] Issuer on the Distribution
Date occurring in such preceding
Collection Period up to the amount of
any previous draws on the [Letter of
Credit] [Surety Bond].]
Servicing...............................The Servicer will be responsible for
servicing, managing and making
Collections on the Revolving Credit Line
Loans. On the ________ business day, but
no later than the _______ calendar day,
of each month (each, a "Determination
Date"), the Servicer will calculate, and
will instruct the related Trustee
regarding, the amounts to be paid, as
described herein, with respect to the
related Collection Period, to the
related Holders. See "Description of the
Securities--Distributions" herein. The
Servicer will receive a monthly
servicing fee in the amount of ____% per
annum (the "Servicing Fee Rate") of the
related Pool Balance, and certain other
amounts, as servicing compensation from
the Trust. See "Servicing of the
Revolving Credit Line Loans--Servicing
Compensation and Payment of Expenses"
herein. In certain limited
circumstances, the Servicer may resign
or be removed, in which event either the
Owner Trustee or a third-party servicer
will be appointed as successor Servicer.
See "Servicing of the Loans--Certain
Matters Regarding the Servicer" and "The
Agreements--Events of Default; Rights
Upon Events of Default" in the
Prospectus.
[Final Payment of Principal;
Termination.............................The Trust will terminate on the
Distribution Date following the earlier
of (i) ______________ and (ii) the final
payment or other liquidation of the last
Revolving Credit Line Loan and Private
Security in the Trust. The Revolving
Credit Line Loans will be subject to
optional repurchase by the Servicer on
any Distribution Date after the
aggregate Principal Balance thereof is
reduced to an amount less than or equal
to $_____ ([5]% of the initial Principal
Balance). The Repurchase Price will be
equal to the sum of the aggregate
Principal Balance of the Revolving
Credit Line Loans and accrued and unpaid
interest thereon at the weighted average
of the Loan Rates through the day
preceding the Final Scheduled
Distribution Date. See "Description of
the Securities--Optional Termination"
herein and "The Agreements--Termination"
in the Prospectus.]
Certain Federal Income Tax
Considerations..........................In the opinion of Tax Counsel, for
federal income tax purposes, the Notes
will be characterized as indebtedness,
and the Trust will not be characterized
as an association (or publicly traded
partnership) taxable as a corporation.
Each Holder of a Note, by its acceptance
of a Note, will agree to treat such Note
as indebtedness for federal, state and
local income and franchise tax purposes.
See "Certain Federal Income Tax
Considerations" and "State Tax
Considerations" herein and in the
Prospectus concerning the application of
federal, state and local tax laws.
Legal Investment........................The Securities will not constitute
"mortgage related securities" for
purposes of the Secondary Mortgage
Market Enhancement Act of 1984, as
amended ("SMMEA"), because not all of
the Mortgages securing the Revolving
Credit Line Loans are first mortgages.
Accordingly, many institutions with
legal authority to invest in comparably
rated securities based solely on first
mortgages may not be legally authorized
to invest in the Securities. See "Legal
Investment Considerations" herein and
"Legal Investment" in the Prospectus.
ERISA ..................................Generally, Plans that are subject to the
requirements of ERISA and the Code are
permitted to purchase instruments
similar to the Notes that are debt under
applicable state law and have no
"substantial equity features" without
reference to the prohibited transaction
requirements of ERISA and the Code. In
the opinion of ERISA Counsel (as defined
herein), the Notes will be classified as
indebtedness without substantial equity
features for ERISA purposes. However, if
the Notes were to be deemed to be equity
interests and no statutory, regulatory
or administrative exemption were to
apply, the Trust will hold plan assets
by reason of a Plan's investment in the
Notes. Accordingly, any Plan fiduciary
considering whether to purchase the
Notes on behalf of a Plan should consult
with its counsel regarding the
applicability of the provisions of ERISA
and the Code and the availability of any
exemptions. Under current law, the
purchase and holding of the Certificates
by or on behalf of any employee benefit
plan (each, a "Plan") subject to the
fiduciary responsibility provisions of
the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), may
result in a "prohibited transaction"
within the meaning of ERISA and the Code
or other violation of the fiduciary
responsibility provisions of ERISA and
Section 4975 of the Code. [Consequently,
the Certificates may not be transferred
to a proposed transferee that is a Plan
subject to ERISA or that is described in
Section 4975(e)(1) of the Code, or a
Person acting on behalf of any such Plan
or using the assets of such Plan, unless
the Owner Trustee and the Depositor
receive an opinion of counsel reasonably
satisfactory to the Owner Trustee and
the Depositor to the effect that the
purchase and holding of such
Certificates will not result in the
assets of the Trust being deemed to be
"plan assets" for ERISA purposes and
will not be a prohibited transaction
under ERISA or Section 4975 of the
Code.] See "ERISA Considerations" herein
and in the Prospectus.
Rating .................................It is a condition to the issuance of the
Securities that they be rated _______ by
at least ____ nationally recognized
statistical rating organizations (each,
a "Rating Agency"). In general, ratings
address credit risk and do not address
the likelihood of prepayments. A
security rating is not a recommendation
to buy, sell or hold securities.
RISK FACTORS
[CASH FLOW CONSIDERATIONS
During the first ____-year draw down period under the related Revolving
Credit Line Loan Agreements for the Revolving Credit Line Loans, Collections on
such Revolving Credit Line Loans may vary because, among other things, borrowers
are not required to make monthly payments of principal. With respect to some of
the Revolving Credit Line Loans, during the second ____-year draw down period,
no monthly payments of principal are required. Collections on the Revolving
Credit Line Loans may also vary due to seasonal purchasing and payment habits of
borrowers.
General credit risk may also be greater to Holders than to holders of
instruments representing interests in level payment first mortgage loans, since
no payment of principal generally is required until after either a five- or
ten-year interest-only period under the related Revolving Credit Line Loan
Agreements. Minimum monthly payments will at least equal and may exceed accrued
interest. Even assuming that the Mortgaged Properties provide adequate security
for the Revolving Credit Line Loans, substantial delay could be encountered in
connection with the liquidation of Revolving Credit Line Loans that are
delinquent and corresponding delays in the receipt of related proceeds by
Holders could occur if the [Letter of Credit] [Surety Bond] provider were unable
to perform on its obligations under the [Letter of Credit] [Surety Bond].
Further, liquidation expenses (such as legal fees, real estate taxes, and
maintenance and preservation expenses) will reduce the Liquidation Proceeds
payable to Holders and thereby reduce the security for the Revolving Credit Line
Loans. In the event any of the Mortgaged Properties fail to provide adequate
security for the related Revolving Credit Line Loans, Holders could experience a
loss if the [Letter of Credit] [Surety Bond] provider were unable to perform its
obligations under the [Letter of Credit] [Surety Bond].]
PREPAYMENT CONSIDERATIONS
All of the Revolving Credit Line Loans may be prepaid in whole or in
part at any time without penalty. Home equity loans, such as the Revolving
Credit Line Loans, have been originated in significant volume only during the
past few years and neither the Depositor nor the Servicer is aware of any
publicly available studies or statistics on the rate of prepayment of such
loans. The Trust's prepayment experience may be affected by a wide variety of
factors, including general economic conditions, interest rates, the availability
of alternative financing and homeowner mobility. In addition, substantially all
of the Revolving Credit Line Loans contain due-on-sale provisions and the
Servicer intends to enforce such provisions unless (i) such enforcement is not
permitted by applicable law or (ii) the Servicer, in a manner consistent with
reasonable commercial practice, permits the purchaser of the related Mortgaged
Property to assume the Revolving Credit Line Loan. To the extent permitted by
applicable law, such assumption will not release the original borrower from its
obligation under any such Revolving Credit Line Loan. See "Certain Legal Aspects
of the Loans--Due-on-Sale Clauses in Revolving Credit Line Loans" in the
Prospectus.
LEGAL CONSIDERATIONS
The Revolving Credit Line Loans are secured by deeds of trust or
Mortgages. With respect to Revolving Credit Line Loans that are secured by first
Mortgages, the Servicer has the power under certain circumstances to consent to
a new mortgage lien on the Mortgaged Property having priority over such
Revolving Credit Line Loan. Revolving Credit Line Loans secured by senior
Mortgages are entitled to proceeds that remain from the sale of the related
Mortgaged Property after any related senior mortgage loan and prior statutory
liens have been satisfied. In the event that such proceeds are insufficient to
satisfy such loans and prior liens in the aggregate [and the [Letter of Credit]
[Surety Bond] provider is unable to perform its obligations under the [Letter of
Credit] [Surety Bond] or if the coverage under the [Letter of Credit] [Surety
Bond] is exhausted], the Trust, and accordingly, the Holders, bear (i) the risk
of delay in distributions while a deficiency judgment against the borrower is
obtained and (ii) the risk of loss if the deficiency judgment cannot be obtained
or is not realized upon. See "Certain Legal Aspects of the Loans" in the
Prospectus.
The sale of the Revolving Credit Line Loans from the Seller to the
Depositor pursuant to the Purchase Agreement will be treated as a sale of the
Revolving Credit Line Loans. The Seller will warrant that such transfer is
either a sale of its interest in the Revolving Credit Line Loans or a grant of a
first priority perfected security interest therein. In the event of an
insolvency of the Seller, the receiver of the Seller may attempt to
recharacterize the sale of the Revolving Credit Line Loans as a borrowing by the
Seller secured by a pledge of the Revolving Credit Line Loans. If the receiver
decided to challenge such transfer, delays in payments of the Securities and
possible reductions in the amount thereof could occur. The Depositor will
warrant in the Trust Agreement that the transfer of its interest in the
Revolving Credit Line Loans to the Trust is a valid transfer and assignment of
such interest.
If a conservator, receiver or trustee were appointed for the Seller, or
if certain other events relating to the bankruptcy or insolvency of the Seller
were to occur, Additional Balances would not be transferred by the Seller to the
Trust pursuant to the Purchase Agreement (as assigned by the Depositor to the
Trust). In such an event, an Event of Default under the Trust Agreement and
Indenture would occur and the Owner Trustee would attempt to sell the Revolving
Credit Line Loans (unless Holders of Securities evidencing undivided interests
aggregating at least 51% of each of the Note Balance and the Certificate Balance
instruct otherwise), thereby causing early payment of the respective Security
Balances of the Notes and the Certificates.
In the event of a bankruptcy or insolvency of the Servicer, the related
bankruptcy trustee or receiver may have the power to prevent the Owner Trustee
or the Holders from appointing a successor Servicer.
SERVICER'S ABILITY TO CHANGE THE TERMS OF THE REVOLVING CREDIT LINE LOANS
The Servicer may agree to changes in the terms of a Revolving Credit
Line Loan Agreement, provided that such changes (i) do not adversely affect the
interests of the Holders and (ii) are consistent with prudent business practice.
There can be no assurance that changes in applicable law or the marketplace for
home equity loans or prudent business practice will not result in changes in the
terms of the Revolving Credit Line Loans.
[DELINQUENT REVOLVING CREDIT LINE LOANS
The Trust will include Revolving Credit Line Loans that are 59 or
fewer days delinquent. The Cut-off Date Principal Balance of such delinquent
Revolving Credit Line Loans was $____________.]
THE TRUST
GENERAL
The Issuer, Bear Stearns Home Equity Loan Trust 199__-__, is a business
trust formed under the laws of the State of Delaware pursuant to the Trust
Agreement for the transactions described in this Prospectus Supplement. The
Trust Agreement constitutes the "governing instrument" under the laws of the
State of Delaware relating to business trusts. After its formation, the Issuer
will not engage in any activity other than (i) acquiring, holding and managing
the Revolving Credit Line Loans and the other assets of the Trust and proceeds
therefrom, (ii) issuing the Notes and the Certificates, (iii) making payments on
the Notes and the Certificates and (iv) engaging in other activities that are
necessary, suitable or convenient to accomplish the foregoing or are incidental
thereto or connected therewith.
The property of the Trust will consist of: (i) the Revolving Credit
Line Loans; (ii) Collections on the Revolving Credit Line Loans received on or
after the Cut-off Date; (iii) Mortgaged Properties relating to the Revolving
Credit Line Loans that are acquired by foreclosure or deed in lieu of
foreclosure; (iv) the Collection Account and the Distribution Accounts
(excluding, in each case, net earnings thereon); (v) the [Letter of Credit]
[Surety Bond]; and (vi) an assignment of the Depositor's rights under the
Purchase Agreement, including all rights of the Depositor to purchase Additional
Balances.
The Trust's principal offices are in __________, Delaware, in care of
_______________, as Owner Trustee, at ____________.
THE [LETTER OF CREDIT] [SURETY BOND] ISSUER
The following information with respect to _________ has been furnished
by __________.
[Description of Letter of Credit/Surety Bond Issuer]
THE HOME EQUITY LENDING PROGRAM
The information set forth below concerning ________ and its
underwriting policies has been provided by _________. The Depositor does not
make any representation as to the accuracy or completeness of such information.
GENERAL
The Revolving Credit Line Loans were originated by _____________ (in
such capacity, the "Seller") under its home equity lending program. The Seller
first offered [fixed] [adjustable] rate home equity revolving credit line loans
("home equity loans") in 19___. As of __________, _______ owned and serviced
approximately $__________ aggregate principal amount of outstanding home equity
loans secured by properties located in __________ under home equity credit
lines.
UNDERWRITING PROCEDURES RELATING TO THE REVOLVING CREDIT LINE LOANS
Each Revolving Credit Line Loan was originated after a review by the
Seller in accordance with its established underwriting procedures, which were
intended to assess the applicant's ability to assume and repay such Revolving
Credit Line Loan and the adequacy of the real property that was to serve as
collateral for such Revolving Credit Line Loan. The maximum Credit Limit for a
Revolving Credit Line Loan provided by the Seller was
$_____________.
Each applicant for a home equity loan was required to complete an
application that listed the applicant's assets, liabilities, income, credit and
employment history and other demographic and personal information. If
information in the loan application demonstrated that there was sufficient
income and equity to justify making a home equity loan and the Seller (i)
received a satisfactory independent credit bureau report on the credit history
of the borrower and (ii) obtained, in the case of all home equity loans
originated prior to ________, 19___, a drive-by appraisal of the related
Mortgaged Property or, for all home equity loans originated as of _______,
19___, a satisfactory appraisal completed on forms approved by FNMA, and if such
information met the Seller's underwriting standards, the Seller issued a
commitment subject to satisfaction of certain other conditions. These conditions
included: (i) obtaining and reviewing pay stubs, income tax returns or a
verification of employment from the applicant's employer; (ii) obtaining and
reviewing a verification of deposit; and (iii) when the home equity loan was to
be in a junior lien position, obtaining and reviewing a verification of the loan
or loans in a senior lien position.
Appraisals of the Mortgaged Properties were performed by a qualified
appraiser or an independent third-party, fee-based appraiser who had been
previously approved for such assignment by the Seller.
It is the Seller's policy to require a title policy insuring title
mortgage in accordance with the intended lien position.
Generally, a home equity loan needed a Combined Loan-to-Value Ratio of
___% for loans for which the Seller obtained full documentary support and ___%
for loans for which limited documentary support was obtained.
After obtaining all applicable employment, credit and property
information, the Seller determined whether sufficient unencumbered equity in the
property existed and whether the prospective borrower had sufficient monthly
income available to support the payments of interest at the current prime rate
plus the applicable margin based on the Credit Limit in addition to any senior
mortgage loan payments (including any escrows for property taxes and hazard
insurance premiums) and other monthly credit obligations based on the
prospective borrower's debt-to-gross income ratio. The "debt-to-gross income
ratio" is the ratio of (a) certain of the borrower's debt obligations, which
include: (i) the monthly first mortgage payment plus taxes; (ii) monthly
installment debt payments with a term of more than ten months; (iii) five
percent of the total revolving obligations; (iv) monthly alimony and child
support obligations; and (v) the payment on the home equity loan calculated at
the Credit Limit and current prime rate plus margin for such home equity loan to
(b) the borrower's gross verifiable monthly income. The debt-to-gross income
ratio generally did not exceed ______%.
When the commitment conditions had been satisfied, the Revolving Credit
Line Loan was completed by signing a Revolving Credit Line Loan Agreement,
rescission statement, and Mortgage that secured the repayment of principal of
and interest on the Revolving Credit Line Loan. The original Mortgage was then
recorded in the appropriate county government office.
REVOLVING CREDIT LINE LOAN TERMS
A borrower may access a home equity loan by writing a check. On all
home equity loans, there is [a ten-year] draw down period as long as the
borrower is not in default under the loan agreement. Home equity loans bear
interest at a variable rate, which may change biweekly. Home equity loans may be
subject to a maximum per annum interest rate (the "Maximum Rate") of ______% per
annum and in all cases are subject to applicable usury limitations. See "Certain
Legal Aspects of the Loans--Applicability of Usury Laws" in the Prospectus. The
daily periodic rate on the Revolving Credit Line Loans (the "Loan Rate") is the
sum of the Index Rate plus a spread (the "Margin"), which generally ranges
between ____% and ____%, divided by 365 days or 366 days, as applicable.
The "Index Rate" is based on [the prime rate published in the "Money
Rates" section of The Wall Street Journal generally on the Monday of the week in
which such Loan Rate adjusts (or, if no rate is published on such day, then on
the next succeeding calendar day on which a prime rate is published), rounded to
the nearest 1/8 of 1 percent.] The annual percentage rate for any biweekly
period will be based on the prime rate in effect on the Monday on which the rate
may change. [If a prime rate range is published in The Wall Street Journal, then
the midpoint (average) of such range will be used.] There are no limitations on
increases or decreases (except for those Revolving Credit Line Loans that have
Maximum Rates). Only the Revolving Credit Line Loans that have Maximum Rates of
____% also have annual adjustment caps of __% as to both increases and decreases
in their Loan Rates.
Billing statements are mailed monthly. The statement details all debits
and credits and specifies the minimum payment due and the available credit line.
Notice of changes in the applicable Loan Rate are provided by the Seller to the
borrower with such statements. All payments are due by the tenth day after the
date the billing statement is issued.
The Revolving Credit Line Loan Agreements further provide that if
publication of the Index Rate is discontinued, the Index Rate will be changed
upon notification in accordance with such Revolving Credit Line Loan Agreements.
The borrower's right to obtain additional credit may be suspended or
terminated, or the borrower may be required to pay the entire balance due plus
all other accrued but unpaid charges immediately, if (i) the borrower fails to
make any required payment by the due date, (ii) the total outstanding principal
balance including all charges payable exceeds the Credit Limit, (iii) the
borrower made any statement or signature on any document that is fraudulent or
contained a material misrepresentation, (iv) the borrower dies or becomes
incompetent, (v) the borrower becomes bankrupt or insolvent, (vi) the borrower
becomes subject to any judgment, lien or attachment or any execution is issued
against the Mortgaged Property, (vii) the borrower fails to obtain and maintain
required property insurance or (viii) the borrower sells or transfers the
Mortgaged Property or does not maintain the Mortgaged Property. In addition, the
right to obtain additional credit may be suspended or a borrower's Credit Limit
may be reduced, if (i) the value of the Mortgaged Property decreases for any
reason to less than 80% of the original appraised value, (ii) the borrower is in
default under the Revolving Credit Line Loan Agreement, (iii) government action
impairs the Seller's lien priority or (iv) a regulatory agency has notified the
Seller that continued advances would constitute an unsafe and unsound practice.
DELINQUENCY AND LOSS EXPERIENCE OF THE SERVICER'S PORTFOLIO
The following tables set forth the delinquency and loss experience for
each of the periods shown for the home equity loans indicated on the table. The
Servicer believes that there have been no material trends or anomalies in the
historical delinquency and loss experience as represented in the following
tables. The data presented in the following tables are for illustrative purposes
only, and there is no assurance that the delinquency and loss experience of the
Revolving Credit Line Loans will be similar to that set forth below.
<TABLE>
DELINQUENCY EXPERIENCE
(DOLLARS IN THOUSANDS)
<CAPTION>
AS OF
-----------------------------------------
NUMBER OF LOANS
LOANS AMOUNT
------------------- -----------------
<S> <C> <C>
Amount Outstanding at
Period End..............................
Delinquency
30-59 Days.............................. $
60-89 Days..............................
90 or More Days.........................
Foreclosures and Bankruptcies...........
-----------------
=================
Total Delinquencies....................... %
30-59 Days Percentage.....................
60-89 Days Percentage..................... %
90 or More Days Percentage................ %
Foreclosures and Bankruptcies.............
</TABLE>
LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR
ENDING ________
---------------------
<S> <C>
Average Amount
Outstanding................................ $
Gross Charge-Offs............................ $
Recoveries................................... $
Net Losses as a Percentage
of Average Amount Outstanding.............. %
</TABLE>
SERVICING OF THE REVOLVING CREDIT LINE LOANS
The information set forth below concerning the Servicer and its
servicing policies has been provided by the Servicer. The Depositor does not
make any representation as to the accuracy or completeness of such information.
GENERAL
The Servicer will be responsible for servicing the Revolving Credit
Line Loans as agent for the Trust in accordance with the Servicer's policies and
procedures for servicing home equity loans and in accordance with the terms of
the Servicing Agreement.
With respect to real estate secured loans, the general policy of the
Servicer is to initiate foreclosure on the underlying property (i) after such
loan is 90 days or more delinquent; (ii) if a notice of default on a senior lien
is received by the Servicer; or (iii) if circumstances are discovered by the
Servicer that would indicate that a potential for loss exists. Foreclosure
proceedings may be terminated if the delinquency is cured. However, under
certain circumstances, the Servicer may elect not to commence foreclosure or
stay the foreclosure proceeding if the borrower's default is due to special
circumstances that are temporary and are not expected to last beyond a specified
period. The loans to borrowers in bankruptcy proceedings will be restructured in
accordance with law and with a view to maximizing recovery of such home equity
loans, including any deficiencies. Additionally, at any time during foreclosure,
a forbearance, short sale, deed in lieu of foreclosure or payment plan can be
authorized.
After foreclosure, if the home equity loan is secured by a first
mortgage lien, title to the related Mortgaged Property will pass to the
Servicer, or a wholly-owned subsidiary of the Servicer, which will liquidate the
Mortgaged Property and charge off the balance of the home equity loan that was
not recovered by the Liquidation Proceeds. If the Mortgaged Property was subject
to a senior lien position, the Servicer will either satisfy such lien at the
time of foreclosure or take other action as deemed necessary to protect the
Servicer's interest in the Mortgaged Property. If, in the judgment of the
Servicer, the cost of maintaining or purchasing the senior lien position exceeds
the economic benefit of such action, the Servicer will generally charge off the
entire home equity loan, will seek a money judgment against the borrower or will
not pursue any recovery.
Servicing and charge-off policies and collection practices may change
over time in accordance with the Servicer's business judgment, changes in the
Servicer's real estate secured revolving credit line loans and applicable laws
and regulations, and other considerations.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Collection Period other than the first Collection
Period, the servicing compensation to be paid to the Servicer in respect of its
servicing activities relating to the Revolving Credit Line Loans will be paid to
it from Interest Collections in respect of the Revolving Credit Line Loans and
will be equal to ____% per annum (the "Servicing Fee Rate") on the Pool Balance
as of the first day of each such Collection Period (the "Servicing Fee"). With
respect to the first Collection Period, the Servicer will receive from such
Collections ____% of the amount calculated in the preceding sentence. All
assumption fees, late payment charges and other fees and charges, to the extent
collected from borrowers, will be retained by the Servicer as additional
servicing compensation.
The Servicer will pay certain ongoing expenses associated with the
Trust and incurred by it in connection with its responsibilities under the
Servicing Agreement including, without limitation, payment of the fees and
disbursements of the Trustees, any custodian appointed by a Trustee, the
registrar and any paying agent. In addition, the Servicer will be entitled to
reimbursement for certain expenses incurred by it in connection with defaulted
Revolving Credit Line Loans and in connection with the restoration of Mortgaged
Properties related thereto, such right of reimbursement being prior to the
rights of Holders to receive any related Liquidation Proceeds.
DESCRIPTION OF THE REVOLVING CREDIT LINE LOANS
REVOLVING CREDIT LINE LOANS
The Revolving Credit Line Loans were originated pursuant to loan
agreements and disclosure statements (the "Revolving Credit Line Loan
Agreements") and are secured by Mortgages or deeds of trust on Mortgaged
Properties. The Mortgaged Properties securing the Revolving Credit Line Loans
consist primarily of residential properties that are one to four-family
properties. ____% of the Mortgaged Properties are owner-occupied. See
"--Revolving Credit Line Loan Pool Statistics."
The Cut-off Date Pool Balance is $___________, which is equal to the
aggregate Principal Balance of the Revolving Credit Line Loans as of ______,
199__ (the "Cut-off Date"). As of the Cut-off Date, the Revolving Credit Line
Loans were not more than 59 days delinquent and had a Loan Rate of at least
____% per annum. The average Cut-off Date Principal Balance was $_______, the
minimum Cut-off Date Principal Balance was zero, the maximum Cut-off Date
Principal Balance was $_______, the minimum Loan Rate and the maximum Loan Rate
on the Cut-off Date were ____% and ____% per annum, respectively, and the
weighted average Loan Rate on the Cut-off Date was ____% per annum. As of the
Cut-off Date, the weighted average Credit Limit Utilization Rate was ____%, the
minimum Credit Limit Utilization Rate was zero and the maximum Credit Limit
Utilization Rate was ____%. The "Credit Limit Utilization Rate" is determined by
dividing the Cut-off Date Principal Balance of a Revolving Credit Line Loan by
the Credit Limit of the related Revolving Credit Line Loan Agreement. The
weighted average Combined Loan-to-Value Ratio of the Revolving Credit Line Loans
was ____% as of the Cut-off Date.
REVOLVING CREDIT LINE LOAN POOL STATISTICS
The Depositor has compiled the following additional information as of
the Cut-off Date with respect to the Revolving Credit Line Loans to be included
in the Trust.
[TABULAR INFORMATION]
ASSIGNMENT OF REVOLVING CREDIT LINE LOANS
At the time of issuance of the Securities, the Depositor will transfer
to the Trust all of its right, title and interest in and to each Revolving
Credit Line Loan (including its right to purchase any Additional Balances
arising in the future), the related Revolving Credit Line Loan Agreements,
Mortgages and other related documents (collectively, the "Related Documents")
and all Collections received on or with respect to each such Revolving Credit
Line Loan on or after the Cut-off Date pursuant to an assignment of the
Depositor's rights and obligations under the Purchase Agreement. The related
Trustee, concurrently with such transfer, will deliver the Securities. Each
Revolving Credit Line Loan transferred to the Owner Trust will be identified on
a schedule (the "Revolving Credit Line Loan Schedule") delivered to the Owner
Trustee pursuant to the Purchase Agreement. Such schedule will include
information as to the Cut-off Date Principal Balance of each Revolving Credit
Line Loan, as well as information with respect to the Loan Rate.
The Purchase Agreement will require, within the time period specified
therein, the Seller to deliver to the Owner Trustee (or a custodian, as the
Owner Trustee's agent for such purpose) the Revolving Credit Line Loans endorsed
in blank and the Related Documents. In lieu of delivery of original Mortgages,
the Seller may deliver true and correct copies thereof that have been certified
as to authenticity by the appropriate county recording office where such
Mortgage is recorded.
Under the terms of the Purchase Agreement, the Seller, acting at the
Depositor's request, will have [___ days after the Closing Date] to prepare and
record assignments of the Mortgages related to each Revolving Credit Line Loan
in favor of the Owner Trustee, unless opinions of counsel satisfactory to the
Rating Agencies and the Insurer are delivered to the Owner Trustee and the
Insurer to the effect that recordation of such assignments is not required in
the relevant jurisdictions to protect the interests of the Owner Trustee in the
Revolving Credit Line Loans.
Within 90 days after the Closing Date, the Owner Trustee will review
the Revolving Credit Line Loans and the Related Documents, and if any Revolving
Credit Line Loan or Related Document is found to be defective in any material
respect and such defect is not cured within 90 days following notification
thereof to the Seller and the Depositor by the Owner Trustee, the Seller will be
obligated to repurchase such defective Revolving Credit Line Loan and to deposit
the Repurchase Price into the Collection Account. Upon such retransfer, the
Principal Balance of such Revolving Credit Line Loan will be deducted from the
Pool Balance. In lieu of any such repurchase, the Seller may substitute an
Eligible Substitute Revolving Credit Line Loan. Any such repurchase or
substitution will be considered a payment in full of such Revolving Credit Line
Loan. The obligation of the Seller to accept a transfer of a Defective Revolving
Credit Line Loan is the sole remedy regarding any defects in the Revolving
Credit Line Loans and Related Documents available to the Owner Trustee or the
Holders.
With respect to any Revolving Credit Line Loan, the "Repurchase Price"
is equal to the Principal Balance of such Revolving Credit Line Loan at the time
of any transfer described above plus accrued and unpaid interest thereon to the
date of repurchase.
An "Eligible Substitute Revolving Credit Line Loan" is a Revolving
Credit Line Loan substituted by the Seller for a Defective Revolving Credit Line
Loan that must, on the date of such substitution, (i) have a Principal Balance
(or in the case of a substitution of more than one Revolving Credit Line Loan
for a Defective Revolving Credit Line Loan, an aggregate Principal Balance), not
5% more or less than the Principal Balance relating to such Defective Revolving
Credit Line Loan; (ii) have a Loan Rate not less than the Loan Rate of the
Defective Revolving Credit Line Loan and not more than 1% in excess of the Loan
Rate of such Defective Revolving Credit Line Loan; (iii) have a Loan Rate based
on the same index with adjustments to such Loan Rate made on the same date of
adjustment of the Loan Rate as that of the Defective Revolving Credit Line Loan;
(iv) have a Margin that is not less than the Margin of the Defective Revolving
Credit Line Loan and not more than 100 basis points higher than the Margin for
the Defective Revolving Credit Line Loan; (v) have a mortgage of the same or
higher level of priority as the Mortgage relating to the Defective Revolving
Credit Line Loan; (vi) have a remaining term to maturity not more than six
months earlier and not later than the remaining term to maturity of the
Defective Revolving Credit Line Loan; (vii) comply with each representation and
warranty as to the Revolving Credit Line Loans set forth in the Purchase
Agreement (deemed to be made as of the date of substitution); and (viii) satisfy
certain other conditions specified in the Purchase Agreement. To the extent the
Principal Balance of an Eligible Substitute Revolving Credit Line Loan is less
than the Principal Balance of the related Defective Revolving Credit Line Loan,
the Seller will be required to make a deposit to the Collection Account equal to
such difference ("Substitution Adjustment Amounts").
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the Owner
Trustee with respect to each Revolving Credit Line Loan (e.g., Cut-off Date
Principal Balance and Loan Rate). In addition, the Seller will represent and
warrant on the Closing Date that, among other things: (i) at the time of
transfer to the Depositor, the Seller has transferred or assigned all of its
right, title and interest in and to each Revolving Credit Line Loan and the
Related Documents, free of any lien (subject to certain exceptions); and (ii)
each Revolving Credit Line Loan was generated under a Revolving Credit Line Loan
Agreement that complied, at the time of origination, in all material respects
with applicable state and federal laws. Upon discovery of a breach of any such
representation and warranty that materially and adversely affects the interests
of the Holders in the related Revolving Credit Line Loan and Related Documents,
the Seller will have a period of 60 days after discovery or notice of such
breach to effect a cure. If the breach cannot be cured within such 60-day
period, the Seller will be obligated to substitute such Defective Revolving
Credit Line Loan or repurchase such Defective Revolving Credit Line Loan from
the Trust. The same procedure and limitations that are set forth above for the
repurchase or substitution of Defective Revolving Credit Line Loans will apply
to the transfer of a Revolving Credit Line Loan that is required to be
repurchased or substituted because of a breach of a representation or warranty
in the Purchase Agreement that materially and adversely affects the interests of
the Holders.
Revolving Credit Line Loans required to be transferred to the Seller as
described in the preceding paragraphs are referred to as "Defective Revolving
Credit Line Loans."
DESCRIPTION OF THE SERVICING AGREEMENT
The Servicer will establish and maintain on behalf of the Owner Trustee
an account (the "Collection Account") for the benefit of the Holders. The
Collection Account will be an Eligible Account. Subject to the investment
provision described in the following paragraphs, upon receipt by the Servicer of
amounts in respect of the Revolving Credit Line Loans (excluding amounts
representing administrative charges, annual fees, taxes, assessments, credit
insurance charges, insurance proceeds to be applied to the restoration or repair
of a Mortgaged Property or similar items), the Servicer will deposit such
amounts into the Collection Account. Amounts so deposited may be invested in
Eligible Investments (as described in the Servicing Agreement) maturing no later
than one Business Day prior to the date on which the amount on deposit therein
is required to be deposited into the related Distribution Account or on such
Distribution Date if approved by the Rating Agencies. No later than the fifth
Business Day prior to each Distribution Date (each, a "Determination Date"), the
Servicer will notify the Owner Trustee and the Indenture Trustee of the amount
of such deposit to be included in funds available for the related Distribution
Date.
The Owner Trustee and the Indenture Trustee will establish one or more
accounts (the "Security Account") into which will be deposited amounts withdrawn
from the Collection Account for distribution to Holders on a Distribution Date.
The Security Account will be an Eligible Account, and amounts on deposit therein
will be invested in Eligible Investments maturing on or before the Business Day
prior to the related Distribution Date.
An "Eligible Account" is an account that is (i) maintained with a
depository institution the debt obligations of which at the time of any deposit
therein have the highest short-term debt rating by the Rating Agencies, (ii)
maintained with a depository institution, which accounts are fully insured by
either the Savings Association Insurance Fund ("SAIF") or the Bank Insurance
Fund ("BIF") of the Federal Deposit Insurance Corporation established by such
fund with a minimum long-term unsecured debt rating of ____, (iii) a segregated
trust account maintained with the Owner Trustee or an affiliate thereof in its
fiduciary capacity or (iv) otherwise acceptable to each Rating Agency as
evidenced by a letter from each Rating Agency to the Owner Trustee, without
reduction or withdrawal of their then current ratings of the Securities.
"Eligible Investments" are specified in the Servicing Agreement and are
limited to investments that meet the criteria of the Rating Agencies from time
to time as being consistent with their then current ratings of the Securities.
ALLOCATIONS AND COLLECTIONS
All Collections on the Revolving Credit Line Loans will generally be
allocated in accordance with the Revolving Credit Line Loan Agreements between
amounts collected in respect of interest and amounts collected in respect of
principal. As to any Distribution Date, "Interest Collections" will be equal to
the aggregate of the amounts collected during the related Collection Period,
including Liquidation Proceeds, allocated to interest pursuant to the terms of
the Revolving Credit Line Loan Agreements.
As to any Distribution Date, "Principal Collections" will be equal to
the sum of (i) the amounts collected during the related Collection Period,
including Liquidation Proceeds, and allocated to principal pursuant to the terms
of the Revolving Credit Line Loan Agreements and (ii) any Substitution
Adjustment Amounts. "Liquidation Proceeds" with respect to a Revolving Credit
Line Loan are equal to the aggregate of all amounts received upon liquidation of
such Revolving Credit Line Loan, including, without limitation, insurance
proceeds, reduced by related liquidation expenses, but not including the
portion, if any, of such amount that exceeds the Principal Balance of such
Revolving Credit Line Loan at the end of the Collection Period immediately
preceding the Collection Period in which such Revolving Credit Line Loan became
a liquidated Revolving Credit Line Loan, plus accrued and unpaid interest
thereon through the date of liquidation.
With respect to any date, the "Pool Balance" will be equal to the
aggregate of the Principal Balances of all Revolving Credit Line Loans as of
such date. The Principal Balance of a Revolving Credit Line Loan (other than a
liquidated Revolving Credit Line Loan) on any day is equal to the Cut-off Date
Principal Balance thereof, plus (i) any Additional Balances in respect of such
Revolving Credit Line Loan minus (ii) all Collections credited against the
Principal Balance of such Revolving Credit Line Loan in accordance with the
related Revolving Credit Line Loan Agreement prior to such day. The Principal
Balance of a liquidated Revolving Credit Line Loan after final recovery of
related Liquidation Proceeds shall be zero.
HAZARD INSURANCE
The Servicing Agreement provides that the Servicer maintain certain
hazard insurance on the Mortgaged Properties relating to the Revolving Credit
Line Loans. While the terms of the related Revolving Credit Line Loan Agreements
generally require borrowers to maintain certain hazard insurance, the Servicer
will not monitor the maintenance of such insurance.
The Servicing Agreement requires the Servicer to maintain for any
Mortgaged Property relating to a Revolving Credit Line Loan acquired upon
foreclosure of a Revolving Credit Line Loan, or by deed in lieu of such
foreclosure, hazard insurance with extended coverage in an amount equal to the
lesser of (i) the maximum insurable value of such Mortgaged Property or (ii) the
outstanding balance of such Revolving Credit Line Loan plus the outstanding
balance on any mortgage loan senior to such Revolving Credit Line Loan at the
time of foreclosure or deed in lieu of foreclosure, plus accrued interest and
the Servicer's good faith estimate of the related liquidation expenses to be
incurred in connection therewith. The Servicing Agreement provides that the
Servicer may satisfy its obligation to cause hazard policies to be maintained by
maintaining a blanket policy insuring against losses on such Mortgaged
Properties. If such blanket policy contains a deductible clause, the Servicer
will be obligated to deposit into the Collection Account the sums that would
have been deposited therein but for such clause. The Servicer will initially
satisfy these requirements by maintaining a blanket policy. As set forth above,
all amounts collected by the Servicer (net of any reimbursements to the
Servicer) under any hazard policy (except for amounts to be applied to the
restoration or repair of the Mortgaged Property) will ultimately be deposited
into the Collection Account.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm, hail and the like, and strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the Revolving Credit Line Loans will
be underwritten by different insurers and therefore will not contain identical
terms and conditions, the basic terms thereof are dictated by state laws and
most of such policies typically do not cover any physical damage resulting from
the following: war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive or an exact description of the insurance policies relating to the
Mortgaged Properties.
REALIZATION UPON DEFAULTED REVOLVING CREDIT LINE LOANS
The Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Revolving Credit Line Loans
as come into default when, in accordance with applicable servicing procedures
under the Servicing Agreement, no satisfactory arrangements can be made for the
collection of delinquent payments. In connection with such foreclosure or other
conversion, the Servicer will follow such practices as it deems necessary or
advisable and as are in keeping with its general mortgage servicing activities,
provided that the Servicer will not be required to expend its own funds in
connection with foreclosure or other conversion, correction of default on a
related senior mortgage loan or restoration of any property unless, in its sole
judgment, such foreclosure, correction or restoration will increase the related
Liquidation Proceeds. The Servicer will be reimbursed out of Liquidation
Proceeds for advances of its own funds as liquidation expenses before any
Liquidation Proceeds are distributed to the Holders.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Collection Period, other than the first Collection
Period, the Servicer will receive from Interest Collections in respect of the
Revolving Credit Line Loans a portion of such Interest Collections as a monthly
Servicing Fee in the amount equal to the Servicing Fee Rate on the Pool Balance
as of the first day of each such Collection Period. All assumption fees, late
payment charges and other fees and charges, to the extent collected from
borrowers, will be retained by the Servicer as additional servicing
compensation.
The Servicer will pay certain ongoing expenses associated with the
Trust and incurred by it in connection with its responsibilities under the
Servicing Agreement including, without limitation, payment of the fees and
disbursements of the Trustees, any custodian appointed by a Trustee, the
registrar and any paying agent. In addition, the Servicer will be entitled to
reimbursement for certain expenses incurred by it in connection with defaulted
Revolving Credit Line Loans and in connection with the restoration of Mortgaged
Properties, such right of reimbursement being prior to the rights of the Holders
to receive any related Liquidation Proceeds.
DESCRIPTION OF THE SECURITIES
GENERAL
The Notes will be issued pursuant to the Indenture, and the
Certificates will be issued pursuant to the Trust Agreement. The following
summaries describe certain provisions of the Securities, the Indenture and the
Trust Agreement. Such summaries do not purport to be complete and are subject
to, and qualified in their entirety by reference to, the provisions of the
applicable Agreement. As used herein, "Agreement" shall mean either the Trust
Agreement or the Indenture, as the context requires.
The Securities will be issued in fully registered, certificated form
only. The Securities will be freely transferable and exchangeable at the
corporate trust office of, with respect to the Certificates, the Owner Trustee
or, with respect to the Notes, the Indenture Trustee.
BOOK-ENTRY SECURITIES
The Securities will be Book-Entry Securities. Persons acquiring
beneficial ownership interests in the Securities ("Security Owners") will hold
their Securities through DTC in the United States[, or Cedel or Euroclear (in
Europe)] if they are participants of such systems, or indirectly through
organizations that are participants in such systems. The Book-Entry Securities
will be issued in one or more certificates that will equal the aggregate
Security Balance of the Securities and will initially be registered in the name
of Cede, the nominee of DTC. [Cedel and Euroclear will hold omnibus positions on
behalf of their participants through customers' securities accounts in Cedel's
and Euroclear's names on the books of their respective depositaries, which in
turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank will act as depositary for
Cedel and the Brussels, Belgium Branch of Morgan will act as depositary for
Euroclear.] Investors may hold such beneficial interests in the Book-Entry
Securities in minimum denominations of $_______ and integral multiples of $____
in excess thereof. Except as described below, no Person acquiring a Book-Entry
Security will be entitled to receive a physical certificate representing such
Security (each, a "Definitive Security"). Unless and until Definitive Securities
are issued, it is anticipated that the only "Holder" of the Securities will be
Cede, as nominee of DTC. Security Owners will not be Holders as such term is
used in the Trust Agreement and the Indenture. Security Owners are only
permitted to exercise their rights indirectly through Participants and DTC.
DISTRIBUTIONS
On each Distribution Date, Collections on the Revolving Credit Line
Loans will be applied in the following order of priority:
(i) to the Servicer, the Servicing Fee;
(ii) as payment for the accrued interest due and any overdue
accrued interest on the respective Security Balance of the Notes and
the Certificates;
(iii) as principal of the Securities, the excess of Principal
Collections over Additional Balances created during the preceding
Collection Period, such amount to be allocated between the Notes and
the Certificates pro rata, based on their respective Security Balances;
(iv) as principal of the Securities, as payment for any
Liquidation Loss Amounts on the Revolving Credit Line Loans;
(v) as payment for the premium for the [Letter of Credit]
[Surety Bond];
(vi) to reimburse prior draws made on the [Letter of Credit]
[Surety Bond]; and
(vii) any remaining amounts, to the Depositor.
As to any Distribution Date, the "Collection Period" is the calendar
month preceding the month of such Distribution Date.
"Liquidation Loss Amount" means, with respect to any liquidated
Revolving Credit Line Loan, the unrecovered Principal Balance thereof at the end
of the Collection Period in which such Revolving Credit Line Loan became a
liquidated Revolving Credit Line Loan, after giving effect to the Liquidation
Proceeds in connection therewith.
INTEREST
Note Rate. Interest will accrue on the Note Balance of the Notes (i) at
the per annum rate (the "Note Rate") equal to ___% per annum from the Closing
Date to the first Distribution Date and (ii) thereafter, from and including the
preceding Distribution Date to but excluding such current Distribution Date
(each, an "Accrual Period") at [a floating rate equal to LIBOR plus ___%]
[___%]. [Interest will be calculated on the basis of the actual number of days
in each Accrual Period divided by 360.] A failure to pay interest on any Notes
on any Distribution Date that continues for five days will constitute an Event
of Default under the Indenture.
Pass-Through Rate. Interest will accrue on the unpaid Certificate
Balance of the Certificates (i) at the per annum rate (the "Pass-Through Rate")
equal to ___% per annum from the Closing Date to the first Distribution Date and
(ii) thereafter, for each Accrual Period at [a floating rate equal to LIBOR plus
___%] [___%]. [Interest will be calculated on the basis of the actual number of
days in each Accrual Period divided by 360.] A failure to pay interest on any
Certificates on any Distribution Date that continues for five days constitutes
an Event of Default under the Trust Agreement.
OPTIONAL TERMINATION
The Trust will terminate on the Distribution Date following the earlier
of (i) ____________ and (ii) the final payment or other liquidation of the last
Revolving Credit Line Loan in the Trust. The Revolving Credit Line Loans will be
subject to optional repurchase by the Servicer on any Distribution Date after
the aggregate Principal Balance thereof is reduced to an amount less than or
equal to $_________ ([5]% of the initial aggregate Principal Balance thereof).
The Repurchase Price will be equal to the sum of the Pool Balance and accrued
and unpaid interest thereon at the weighted average of the Loan Rates through
the day preceding the Final Scheduled Distribution Date.
THE INDENTURE
The following summary describes certain terms of the Indenture. Such
summary does not purport to be complete and is subject to, and qualified in its
entirety by reference to, the provisions of the Indenture. Whenever particular
sections or defined terms of the Indenture are referred to, such sections or
defined terms are thereby incorporated herein by reference. See "Description of
the Securities" herein for a summary of certain additional terms of the
Indenture.
REPORTS TO NOTEHOLDERS
The Indenture Trustee will mail to each Noteholder, at such
Noteholder's request, at its address listed on the Note Register maintained with
the Indenture Trustee, a report setting forth certain amounts relating to the
Notes.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
With respect to the Notes, Events of Default under the Indenture will
consist of: (i) a default for five days or more in the payment of any interest
on any Note; (ii) a default in the payment of the principal of or any
installment of the principal of any Note when the same becomes due and payable;
(iii) a default in the observance or performance of any covenant or agreement of
the Trust made in the Indenture and the continuation of any such default for a
period of 30 days after notice thereof is given to the Trust by the Indenture
Trustee or to the Trust and the Indenture Trustee by the Holders of at least 25%
in aggregate principal amount of the Notes then outstanding; (iv) any
representation or warranty made by the Trust in the Indenture or in any
certificate delivered pursuant thereto or in connection therewith having been
incorrect in any material respect as of the time made, and such breach not
having been cured within 30 days after notice thereof is given to the Trust by
the Indenture Trustee or to the Trust and the Indenture Trustee by the Holders
of at least 25% in aggregate principal amount of Notes then outstanding; or (v)
certain events of bankruptcy, insolvency, receivership or liquidation of the
Trust. [The amount of principal required to be paid to Noteholders under the
Indenture will generally be limited to amounts available to be deposited into
the Collection Account. Therefore, the failure to pay principal of the Notes
generally will not result in the occurrence of an Event of Default until the
Final Scheduled Distribution Date for such Notes.] If there is an Event of
Default with respect to a Note due to late payment or nonpayment of interest due
on such Note, additional interest will accrue on such unpaid interest at the
interest rate on such Note (to the extent lawful) until such interest is paid.
Such additional interest on unpaid interest shall be due at the time such
interest is paid. If there is an Event of Default due to late payment or
nonpayment of principal of a Note, interest will continue to accrue on such
principal at the interest rate on the Note until such principal is paid. If an
Event of Default should occur and be continuing with respect to the Notes, the
Indenture Trustee or the Holders of a majority in aggregate principal amount of
Notes then outstanding may declare the principal of such Notes to be immediately
due and payable. Such declaration may, under certain circumstances, be rescinded
by the Holders of a majority in aggregate principal amount of the Notes then
outstanding. If the Notes are due and payable following an Event of Default with
respect thereto, the Indenture Trustee may institute proceedings to collect
amounts due, foreclose on Trust property or exercise remedies as a secured
party. If an Event of Default occurs and is continuing with respect to the
Notes, the Indenture Trustee will be under no obligation to exercise any of the
rights or powers under the Indenture at the request or direction of any Holders
of the Notes if the Indenture Trustee reasonably believes it will not be
adequately indemnified against the costs, expenses and liabilities that might be
incurred by it in complying with such request. Subject to the provisions for
indemnification and certain limitations contained in the Indenture, the Holders
of a majority in aggregate principal amount of the outstanding Notes will have
the right to direct the time, method and place of conducting any proceeding or
remedy available to the Indenture Trustee, and the Holders of a majority in
aggregate principal amount of the Notes then outstanding may, in certain cases,
waive any default with respect thereto, except a default in the payment of
principal or interest or a default in respect of a covenant or provision of the
Indenture that cannot be modified without the waiver or consent of all Holders
of the outstanding Notes. No Noteholder will have the right to institute any
proceeding with respect to the Indenture, unless (i) such Noteholder previously
has given the Indenture Trustee written notice of a continuing Event of Default,
(ii) the Holders of not less than 25% in aggregate principal amount of the
outstanding Notes have made written request to the Indenture Trustee to
institute such proceeding in its own name as Indenture Trustee, (iii) such
Noteholder or Noteholders have offered the Indenture Trustee reasonable
indemnity, (iv) the Indenture Trustee has for 60 days failed to institute such
proceeding and (v) no direction inconsistent with such written request has been
given to the Indenture Trustee during the 60-day period by the Holders of a
majority in aggregate principal amount of the Notes. In addition, the Indenture
Trustee and the Noteholders, by accepting the Notes, will covenant that they
will not at any time institute against the Trust any bankruptcy, reorganization
or other proceeding under any federal or state bankruptcy or similar law. With
respect to the Trust, neither the Indenture Trustee or the Owner Trustee in
their respective individual capacities, any Holder of a Certificate representing
an ownership interest in the Trust nor any of their respective owners,
beneficiaries, agents, officers, directors, employees, affiliates, successors or
assigns will, in the absence of an express agreement to the contrary, be
personally liable for the payment of the principal of or interest on the Notes
or for the agreements of the Trust contained in the Indenture.
CERTAIN COVENANTS
The Indenture will provide that the Trust may not consolidate with or
merge into any other entity unless (i) the entity formed by or surviving such
consolidation or merger is organized under the laws of the United States, any
state or the District of Columbia, (ii) such entity expressly assumes the
Trust's obligation to make due and punctual payments upon the Notes and the
performance or observance of any agreement and covenant of the Trust under the
Indenture, (iii) no Event of Default shall have occurred and be continuing
immediately after such merger or consolidation, (iv) the Trust has been advised
that the ratings of the Securities then in effect would not be reduced or
withdrawn by any Rating Agency as a result of such merger or consolidation and
(v) the Trust has received an opinion of counsel to the effect that such
consolidation or merger would have no material adverse tax consequence to the
Trust or to any Holder. The Trust will not, among other things, (i) except as
expressly permitted by the Indenture, sell, transfer, exchange or otherwise
dispose of any of the assets of the Trust, (ii) claim any credit on or make any
deduction from the principal and interest payable in respect of the Notes (other
than amounts withheld under the Code or applicable state law) or assert any
claim against any present or former Noteholder because of the payment of taxes
levied or assessed upon the Trust, (iii) dissolve or liquidate in whole or in
part, (iv) permit the validity or effectiveness of the Indenture to be impaired
or permit any Person to be released from any covenants or obligations with
respect to the Notes under the Indenture except as may be expressly permitted
thereby or (v) permit any lien, charge, excise, claim, security interest,
mortgage or other encumbrance to be created on or extend to or otherwise arise
upon or burden the assets of the Trust or any part thereof, or any interest
therein or the proceeds thereof. The Trust may not engage in any activity other
than as specified under "The Trust" herein. The Trust will not incur, assume or
guarantee any indebtedness other than indebtedness incurred pursuant to the
Notes and the Indenture.
ANNUAL COMPLIANCE STATEMENT
The Trust will be required to file annually with the Indenture Trustee
a written statement as to the fulfillment of its obligations under the
Indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT
The Indenture Trustee will be required to mail each year to all
Noteholders a report relating to any change in its eligibility and qualification
to continue as Indenture Trustee under the Indenture, any amounts advanced by it
under the Indenture, the amount, interest rate and maturity date of any
indebtedness owing by the Trust to the Indenture Trustee in its individual
capacity, any change in the property and funds physically held by the Indenture
Trustee as such and any action taken by it that materially affects the Notes and
that has not been previously reported, but if no such changes have occurred,
then no report shall be required.
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture will be discharged with respect to the collateral
securing the Notes upon the delivery to the Indenture Trustee for cancellation
of all Notes or, with certain limitations, upon deposit with the Indenture
Trustee of funds sufficient for the payment in full of all Notes.
MODIFICATION OF INDENTURE
With the consent of the Holders of a majority in aggregate principal
amount of the Notes then outstanding, the Trust and the Indenture Trustee may
execute a supplemental indenture to add provisions to, change in any manner or
eliminate any provisions of, the Indenture, or modify (except as provided below)
in any manner the rights of the Noteholders. Without the consent of the Holder
of each outstanding Note affected thereby, however, no supplemental indenture
may: (i) change the due date of any installment of principal of or interest on
any Note or reduce the principal amount thereof, the interest rate specified
thereon or the redemption price with respect thereto or change any place of
payment where or the coin or currency in which any Note or any interest thereon
is payable; (ii) impair the right to institute suit for the enforcement of
certain provisions of the Indenture regarding payment; (iii) reduce the
percentage of the aggregate amount of the outstanding Notes, the consent of the
Holders of which is required for any supplemental indenture or the consent of
the Holders of which is required for any waiver of compliance with certain
provisions of the Indenture or of certain defaults thereunder and their
consequences as provided for in the Indenture; (iv) modify or alter the
provisions of the Indenture regarding the voting of Notes held by the Trust, the
Depositor or an affiliate thereof; (v) decrease the percentage of the aggregate
principal amount of Notes required to amend the sections of the Indenture that
specify the applicable percentage of aggregate principal amount of the Notes
necessary to amend the Indenture or certain other related agreements; or (vi)
permit the creation of any lien ranking prior to or on a parity with the lien of
the Indenture with respect to any of the collateral for the Notes or, except as
otherwise permitted or contemplated in the Indenture, terminate the lien of the
Indenture on any such collateral or deprive the Holder of any Note of the
security afforded by the lien of the Indenture. The Trust and the Indenture
Trustee may also enter into supplemental indentures without obtaining the
consent of the Noteholders, for the purpose of, among other things, adding any
provisions to or changing in any manner or eliminating any of the provisions of
the Indenture or modifying in any manner the rights of the Noteholders;
provided, that such action will not materially and adversely affect the
interests of any Noteholder.
VOTING RIGHTS
At all times, the voting rights of the Noteholders under the Indenture
will be allocated among the Notes pro rata in accordance with their outstanding
Note Balances.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE AND THE DEPOSITOR
Neither the Depositor, the Indenture Trustee nor any director, officer
or employee of the Depositor or the Indenture Trustee will be under any
liability to the Trust or the related Noteholders for any action taken or for
refraining from the taking of any action in good faith pursuant to the Indenture
or for errors in judgment; provided, however, that none of the Indenture
Trustee, the Depositor or any director, officer or employee thereof will be
protected against any liability that would otherwise be imposed by reason of
willful malfeasance, bad faith or negligence in the performance of duties or by
reason of reckless disregard of obligations and duties under the Indenture.
Subject to certain limitations set forth in the Indenture, the Indenture Trustee
and any director, officer, employee or agent of the Indenture Trustee will be
indemnified by the Trust and held harmless against any loss, liability or
expense incurred in connection with investigating, preparing to defend or
defending any legal action, commenced or threatened, relating to the Indenture
other than any loss, liability or expense incurred by reason of willful
malfeasance, bad faith or gross negligence in the performance of its duties
under the Indenture or by reason of reckless disregard of its obligations and
duties under the Indenture. Any such indemnification by the Trust will reduce
the amount distributable to the Noteholders. All Persons into which the
Indenture Trustee may be merged or with which it may be consolidated or any
Person resulting from such merger or consolidation shall be the successor of the
Indenture Trustee under the Indenture.
THE TRUST AGREEMENT
The following summary describes certain terms of the Trust Agreement.
Such summary does not purport to be complete and is subject to, and qualified in
its entirety by reference to, the provisions of the Trust Agreement. Whenever
particular sections or defined terms of the Trust Agreement are referred to,
such sections or defined terms are thereby incorporated herein by reference. See
"Description of the Securities" herein for a summary of certain additional terms
of the Trust Agreement.
REPORTS TO HOLDERS
Concurrently with each distribution to the Certificateholders, the
Servicer will forward to the Owner Trustee for mailing to such Certificateholder
a statement setting forth:
(i) the amount of interest included in such distribution and
the related Pass-Through Rate;
(ii) the amount, if any, of overdue accrued interest included
in such distribution (and the amount of interest thereon);
(iii) the amount, if any, of the remaining overdue accrued
interest after giving effect to such distribution;
(iv) the amount, if any, of principal included in such
distribution;
(v) the amount, if any, of the reimbursement of previous
Liquidation Loss Amounts included in such distribution;
(vi) the amount, if any, of the aggregate unreimbursed
Liquidation Loss Amounts after giving effect to such distribution;
(vii) the Servicing Fee for such Distribution Date;
(viii) the Pool Balance as of the end of the preceding
Collection Period;
(ix) the number and aggregate Principal Balances of the
Revolving Credit Line Loans as to which the minimum monthly payment is
delinquent for 30-59 days, 60-89 days and 90 or more days,
respectively, as of the end of the preceding Collection Period; and
(x) the book value of any real estate acquired by the Trust
through foreclosure or deed in lieu of foreclosure.
In the case of information furnished pursuant to clauses (iii), (iv)
and (v) above, the amounts shall be expressed as a dollar amount per Certificate
with a $1,000 denomination.
Within 60 days after the end of each calendar year, the Servicer will
be required to forward to the Owner Trustee a statement containing the
information set forth in clauses (iii) and (viii) above aggregated for such
calendar year.
AMENDMENT
The Trust Agreement may be amended by the Depositor and the Owner
Trustee without consent of the Certificateholders to cure any ambiguity, to
correct or supplement any provision or for the purpose of adding any provisions
to or changing in any manner or eliminating any of the provisions thereof or of
modifying in any manner the rights of such Certificateholders; provided,
however, that such action will not, as evidenced by an opinion of counsel
satisfactory to the Owner Trustee, adversely affect in any material respect the
interests of any Certificateholders. The Trust Agreement may also be amended by
the Depositor and the Owner Trustee with the consent of the Holders of
Certificates evidencing at least a majority in aggregate principal amount of
then outstanding Certificates and Certificateholders owning Voting Interests
aggregating not less than a majority of the aggregate Voting Interests for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of the Trust Agreement or modifying in any manner the rights
of the Holders.
INSOLVENCY EVENT
"Insolvency Event" means, with respect to any Person, any of the
following events or actions: certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings with respect to
such Person; and certain actions by such Person indicating its insolvency,
reorganization pursuant to bankruptcy proceedings or inability to pay its
obligations. Upon termination of the Trust, the Owner Trustee shall direct the
Indenture Trustee promptly to sell the assets of the Trust (other than the
Collection Account) in a commercially reasonable manner and on commercially
reasonable terms. The proceeds from any such sale, disposition or liquidation of
the Revolving Credit Line Loans will be treated as Collections on the Revolving
Credit Line Loans and will be deposited into the Collection Account. The Trust
Agreement will provide that the Owner Trustee does not have the power to
commence a voluntary proceeding in bankruptcy with respect to the Trust without
the unanimous prior approval of all Holders (including the Depositor) and the
delivery to the Owner Trustee by each Holder (including the Depositor) of a
certificate certifying that the Holder reasonably believes that the Trust is
insolvent.
LIABILITY OF THE DEPOSITOR
Under the Trust Agreement, the Depositor will agree to be liable
directly to an injured party for the entire amount of any losses, claims,
damages or liabilities (other than those incurred by a Holder in the capacity of
an investor with respect to the Trust) arising out of or based on the
arrangement created by the Trust Agreement.
VOTING INTERESTS
As of any date, the aggregate Certificate Balance of all Certificates
then outstanding will constitute the voting interest of the Issuer (the "Voting
Interest"), except that, for purposes of determining Voting Interests,
Certificates owned by the Issuer or its affiliates (other than the Depositor)
will be disregarded and deemed not to be outstanding; and except that, in
determining whether the Owner Trustee is protected in relying upon any such
request, demand, authorization, direction, notice, consent or waiver, only
Certificates the Owner Trustee knows to be so owned will be so disregarded.
Certificates so owned that have been pledged in good faith may be regarded as
outstanding if the pledgee thereof establishes to the satisfaction of the Owner
Trustee the pledgor's right so to act with respect to such Certificates and that
the pledgee is not the Issuer or as affiliate thereof.
CERTAIN MATTERS REGARDING THE OWNER TRUSTEE AND THE DEPOSITOR
Neither the Depositor, the Owner Trustee nor any director, officer or
employee of the Depositor or the Owner Trustee will be under any liability to
the Trust or the related Holders for any action taken or for refraining from the
taking of any action in good faith pursuant to the Trust Agreement or for errors
in judgment; provided, however, that none of the Owner Trustee, the Depositor or
any director, officer or employee thereof will be protected against any
liability that would otherwise be imposed by reason of willful malfeasance, bad
faith or negligence in the performance of duties or by reason of reckless
disregard of obligations and duties under the Trust Agreement. Subject to
certain limitations set forth in the Trust Agreement, the Owner Trustee and any
director, officer, employee or agent of the Owner Trustee shall be indemnified
by the Trust and held harmless against any loss, liability or expense incurred
in connection with investigating, preparing to defend or defending any legal
action, commenced or threatened, relating to the Trust Agreement other than any
loss, liability or expense incurred by reason of willful malfeasance, bad faith
or gross negligence in the performance of its duties under such Trust Agreement
or by reason of reckless disregard of its obligations and duties under the Trust
Agreement. Any such indemnification by the Trust will reduce the amount
distributable to the Holders. All Persons into which the Owner Trustee may be
merged or with which it may be consolidated or any Person resulting from such
merger or consolidation shall be the successor of the Owner Trustee under the
Trust Agreement.
ADMINISTRATION AGREEMENT
The _______________, in its capacity as Administrator, will enter into
the Administration Agreement with the Trust and the Owner Trustee pursuant to
which the Administrator will agree, to the extent provided in such
Administration Agreement, to provide notices and perform other administrative
obligations required by the Indenture and the Trust Agreement.
THE INDENTURE TRUSTEE
________________________ is the Indenture Trustee under the Indenture.
The mailing address of the Indenture Trustee is ________________, Attention:
___________________.
THE OWNER TRUSTEE
__________________________ is the Owner Trustee under the Trust
Agreement. The mailing address of the Owner Trustee is _________________,
Attention: ____________________.
USE OF PROCEEDS
The net proceeds from the sale of the Securities will be applied by
the Depositor towards the purchase price of the Revolving Credit Line Loans.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Tax Counsel, for federal income tax purposes, the
Notes will be characterized as indebtedness, and the Trust will not be
characterized as an association (or a publicly-traded partnership) taxable as a
corporation. Each Holder of a Note, by its acceptance of a Note, will agree to
treat such Note as indebtedness for federal, state and local income and
franchise tax purposes.
Prospective purchasers should see "Certain Federal Income Tax
Considerations" in the Prospectus for a discussion of the application of certain
federal income and state tax laws to the Trust and the Securities.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Certain Federal Income Tax Considerations" herein and in the Prospectus,
potential investors should consider the state income tax consequences of the
acquisition, ownership, and disposition of the Securities offered hereunder.
State income tax law may differ substantially from the corresponding federal tax
law, and the tax considerations set forth herein and in the Prospectus do not
purport to describe any aspect of the income tax laws of any state. Therefore,
potential investors should consult their own tax advisors with respect to the
various state tax consequences of investments in the Securities offered
hereunder. See "State Tax Considerations" in the Prospectus.
ERISA CONSIDERATIONS
PROHIBITED TRANSACTIONS
Section 406 of ERISA prohibits parties in interest with respect to a
Plan from engaging in certain transactions (including loans) involving a Plan
and its assets unless a statutory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes certain excise taxes (or, in some
cases, a civil penalty may be assessed pursuant to Section 502(i) of ERISA) on
parties in interest that engage in nonexempt prohibited transactions.
PLAN ASSET REGULATION
The United States Department of Labor ("Labor") has issued final
regulations concerning the definition of what constitutes the assets of a Plan
for purposes of ERISA and the prohibited transaction provisions of the Code (the
"Plan Asset Regulation"). The Plan Asset Regulation describes the circumstances
under which the assets of an entity in which a Plan invests will be considered
to be "plan assets" such that any Person who exercises control over such assets
would be subject to ERISA's fiduciary standards. Under the Plan Asset
Regulation, generally when a Plan invests in another entity, the Plan's assets
do not include, solely by reason of such investment, any of the underlying
assets of the entity. However, the Plan Asset Regulation provides that, if a
Plan acquires an "equity interest" in an entity that is neither a
"publicly-offered security" (as defined therein) nor a security issued by an
investment company registered under the Investment Company Act of 1940, the
assets of the entity will be treated as assets of the Plan investor unless
certain exceptions apply. If the [Notes/Certificates] were deemed to be equity
interests and no statutory, regulatory or administrative exemption were to
apply, the Trust could be considered to hold plan assets by reason of a Plan's
investment in the [Notes] [Certificates]. Such plan assets would include an
undivided interest in any assets held by the Trust. In such an event, the Owner
Trustee and other Persons, in providing services with respect to the Trust's
assets, may be parties in interest with respect to such Plans, subject to the
fiduciary responsibility provisions of Title I of ERISA, including the
prohibited transaction provisions of Section 406 of ERISA and Section 4975 of
the Code with respect to transactions involving the Trust's assets. [Under the
Plan Asset Regulation, the term "equity interest" is defined as any interest in
an entity other than an instrument that is treated as indebtedness under
"applicable local law" and that has no "substantial equity features." If the
Notes constitute debt without substantial equity features for purposes of the
Plan Assets Regulation, then a Plan's acquisition of Notes will not cause the
assets of the Issuer to be deemed assets of such Plan for purposes of sections
404 and 406 of ERISA or section 4975 of the Code, and the Plan's interest will
be deemed solely to include an interest in such Notes. Conversely, if the Notes
do not constitute debt without substantial equity features for purposes of the
Plan Assets Regulation, then a Plan's acquisition of Notes may cause the assets
of the Issuer to be deemed to be assets of such Plan for purposes of sections
404 and 406 of ERISA and section 4975 of the Code. In such event, ERISA's
fiduciary provisions (including the prohibited transaction restrictions of
section 406 of ERISA) and section 4975 of the Code might apply to transactions
involving the assets of the Issuer. Although the Notes generally will be treated
as debt for federal income tax purposes, no assurance can be given that such
Notes will or will not constitute debt without substantial equity features for
purposes of the Plan Assets Regulations. If the Notes were deemed to be equity
interests in the Trust and no statutory, regulatory or administrative exemption
were to apply, the Trust could be considered to hold plan assets by reason of a
Plan's investment in the Notes.]
THE UNDERWRITERS' EXEMPTION
The Representative believes that the Underwriter Exemption will apply
to the acquisition and holding of the [Notes/Certificates] by Plans and that all
conditions of the Underwriter Exemption other than those within the control of
the investors will be met. See "ERISA Considerations" in the Prospectus.
REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any
[Notes/Certificates] on behalf of a Plan should consult with its counsel
regarding the applicability of the fiduciary responsibility and prohibited
transaction provisions of ERISA and the Code to such investment. Among other
things, before purchasing any [Notes/Certificates], a fiduciary of a Plan should
make its own determination as to whether the Trust, as obligor on the
[Notes/Certificates], is a party in interest with respect to the Plan, the
availability of the exemptive relief provided in the Plan Asset Regulations and
the availability of any other prohibited transaction exemptions. Purchasers
should analyze whether the decision may have an impact with respect to purchases
of the [Notes/Certificates].
LEGAL INVESTMENT CONSIDERATIONS
The Securities will not constitute "mortgage related securities" for
purposes of SMMEA, because not all of the Mortgages securing the Revolving
Credit Line Loans are first mortgages. Accordingly, many institutions with legal
authority to invest in comparably rated securities based solely on first
mortgages may not be legally authorized to invest in the Securities. The
appropriate characterization of the Securities under various legal investment
restrictions, and thus the ability of investors subject to these restrictions to
purchase Securities, may be subject to significant interpretive uncertainties.
All investors whose investment authority is subject to legal restrictions should
consult their own legal advisors to determine whether, and to what extent, the
Securities will constitute legal investments for them. The Depositor makes no
representation as to the proper characterization of the Securities for legal
investment or financial institution regulatory purposes or as to the ability of
particular investors to purchase Securities under applicable legal investment
restrictions. The uncertainties described above and any unfavorable future
determinations concerning legal investment or financial institution regulatory
characteristics of the Securities may adversely affect the liquidity of the
Securities.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Depositor has agreed to sell to the Underwriters, and the
Underwriters have agreed to purchase from the Depositor, the Securities. The
Underwriters are obligated to purchase all the Securities offered hereby if any
are purchased. Distribution of the Securities will be made by the Underwriters
from time to time in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. Proceeds to the Depositor are expected to be
$_________ from the sale of the Notes and $__________ from the sale of the
Certificates, before deducting expenses payable by the Depositor of $_________.
In connection with the purchase and sale of the Securities, the Underwriters may
be deemed to have received compensation from the Depositor in the form of
underwriting discounts, concessions or commissions.
In connection with the offering of the Securities, the Underwriters may
engage in transactions that stabilize, maintain or otherwise affect the price of
any Class of Securities. Specifically, the Underwriters may overallot the
offering, creating a syndicate short position. The Underwriters may bid for and
purchase the Securities in the open market to cover syndicate short positions.
In addition, the Underwriters may bid for and purchase the Securities in the
open market to stabilize the price of the Securities. These activities may
stabilize or maintain the market price of the Securities above independent
market levels. The Underwriters are not required to engage in these activities,
and may end these activities at any time.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriters against certain liabilities, including liabilities under the
Securities Act, or contribute payments the Underwriters may be required to make
in respect thereof. [Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to directors, officers or persons
controlling the registrant pursuant to the foregoing provisions, the registrant
has been informed that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.] The Depositor is an affiliate of the
Representative.
LEGAL MATTERS
Certain legal matters with respect to the Securities will be passed
upon for the Depositor by Brown & Wood LLP, New York, New York and for the
Representative by Brown & Wood LLP, New York, New York.
RATINGS
It is a condition to issuance that each Class of the Notes be rated at
least ____ by _______ and ____ by ________. It is a condition to issuance that
the Certificates be rated at least ____ by _______ and ____ by ________. A
securities rating addresses the likelihood of the receipt by Holders of
distributions on the Revolving Credit Line Loans. The rating takes into
consideration the structural, legal and tax aspects associated with the
Certificates and the Notes. The ratings on the Securities do not, however,
constitute statements regarding the possibility that Holders might realize a
lower than anticipated yield. A securities rating is not a recommendation to
buy, sell or hold securities and may be subject to revision or withdrawal at any
time by the assigning rating organization. Each securities rating should be
evaluated independently of similar ratings on different securities.
The ratings assigned by Duff & Phelps Credit Rating Co. ("Duff &
Phelps") to securities address the likelihood of the receipt by the holders of
such securities of all distributions to which they are entitled under the
transaction structure. Duff & Phelps' ratings reflect its analysis of the
riskiness of the related mortgages and its analysis of the structure of the
transaction as set forth in the operative documents. Duff & Phelps' ratings do
not address the effect on yield on the securities attributable to prepayments or
recoveries on the underlying assets.
The ratings assigned by Fitch IBCA, Inc. ("Fitch") to securities
address the likelihood of the receipt of all distributions on the assets by the
related holders of securities under the agreements pursuant to which such
securities are issued. Fitch's ratings take into consideration the credit
quality of the related pool, including any credit support providers, the
structural and legal aspects associated with such securities, and the extent to
which the payment stream on the pool is adequate to make the payments required
by such securities. Fitch's ratings on such securities do not, however,
constitute a statement regarding frequency of prepayments of the assets.
The ratings assigned by Moody's Investors Service, Inc. ("Moody's") to
securities address the likelihood of the receipt by holders of securities of all
distributions to which such holders are entitled. Moody's ratings on securities
do not represent any assessment of the likelihood or rate of principal
prepayments. The ratings do not address the possibility that holders of
securities might suffer a lower than anticipated yield as a result of
prepayments.
The ratings assigned by Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. ("Standard & Poor's"), to securities address the
likelihood of the receipt of all distributions on the assets by the related
holders of securities under the agreements pursuant to which such securities are
issued. Standard & Poor's ratings take into consideration the credit quality of
the related pool, including any credit support providers, structural and legal
aspects associated with such securities, and the extent to which the payment
stream on such pool is adequate to make payments required by such securities.
Standard & Poor's ratings on such certificates do not, however, constitute a
statement regarding frequency of prepayments on the related assets. The letter
"r" attached to a Standard & Poor's rating highlights derivative, hybrid and
certain other types of securities that Standard & Poor's believes may experience
high volatility or high variability in expected returns due to non-credit risks.
The absence of an "r" symbol in the rating of a class of securities should not
be taken as an indication that such securities will exhibit no volatility or
variability in total return.
<TABLE>
<CAPTION>
<S> <C>
================================================================== ===============================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE DEPOSITOR OR THE UNDERWRITERS.
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN
OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH THEY RELATE OR
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY $____,____,____,____
PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION
WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THEIR RESPECTIVE DATES. BEAR STEARNS HOME EQUITY LOAN
TRUST 199__-__
TABLE OF CONTENTS $______ [FIXED] [FLOATING] RATE
ASSET-BACKED NOTES
Page
---- $______ [FIXED] [FLOATING] RATE
PROSPECTUS SUPPLEMENT ASSET-BACKED CERTIFICATES
Summary...................................................... S-3
Risk Factors..................................................S-10
The Trust.....................................................S-11
The [Letter of Credit] [Surety Bond] Issuer...................S-12
The Home Equity Lending Program...............................S-12
Servicing of the Revolving Credit Line Loans..................S-14
Description of the Revolving Credit Line Loans................S-16
Description of the Servicing Agreement........................S-18
Description of the Securities.................................S-20
The Indenture.................................................S-21
The Trust Agreement...........................................S-24
Administration Agreement......................................S-25
The Indenture Trustee.........................................S-26
The Owner Trustee.............................................S-26
Use of Proceeds...............................................S-26
Certain Federal Income Tax Considerations.....................S-26
State Tax Considerations......................................S-27
ERISA Considerations..........................................S-27
Legal Investment Considerations...............................S-28
Underwriting..................................................S-29
Legal Matters.................................................S-29
Ratings.......................................................S-29
PROSPECTUS
Prospectus Supplement.......................................... 3
Reports to Holders............................................. 3
Available Information.......................................... 3
Incorporation of Certain Documents
by Reference................................................. 4
Summary of Terms............................................... 5 BEAR STEARNS ASSET BACKED
Risk Factors....................................................15 SECURITIES, INC.
Description of the Securities...................................20 (DEPOSITOR)
The Trust Funds.................................................24
Enhancement.....................................................31
Servicing of Loans..............................................33
The Agreements..................................................39
Certain Legal Aspects of the Loans..............................47
The Depositor...................................................57
Use of Proceeds.................................................57
Certain Federal Income Tax Considerations.......................57
State Tax Considerations........................................77 PROSPECTUS SUPPLEMENT
FASIT Securities................................................77 _______, 199_
ERISA Considerations............................................80
Legal Matters...................................................84
Financial Information...........................................84
Rating..........................................................84
Legal Investment................................................85
Plan of Distribution............................................85
Glossary of Terms...............................................86
=================================================================== ==============================================================
</TABLE>
PROSPECTUS
Asset-Backed Certificates
Asset-Backed Notes
(Issuable in Series)
Bear Stearns Asset Backed Securities, Inc.
(Depositor)
Bear Stearns Asset Backed Securities, Inc. (the "Depositor") may offer
from time to time under this Prospectus and related Prospectus Supplements
the Asset-Backed Certificates (the "Certificates") and the Asset-Backed
Notes (the "Notes" and, together with the Certificates, the "Securities"),
which may be sold from time to time in one or more series (each, a
"Series").
As specified in the related Prospectus Supplement, the Certificates of
a Series will evidence undivided interests in certain assets deposited into
a trust (each, a "Trust Fund") by the Depositor pursuant to a Pooling and
Servicing Agreement or a Trust Agreement, as described herein. As specified
in the related Prospectus Supplement, the Notes of a Series will be issued
and secured pursuant to an Indenture and will represent indebtedness of the
related Trust Fund. The Trust Fund for a Series of Securities will include
assets purchased from the seller or sellers specified in the related
Prospectus Supplement (collectively, the "Seller") composed of (a) Primary
Assets, which may include one or more pools of (i) closed-end and/or
revolving home equity loans (the "Mortgage Loans"), secured generally by
subordinate liens on one- to four-family residential or mixed-use
properties, (ii) home improvement installment sales contracts and
installment loan agreements (the "Home Improvement Contracts"), which are
either unsecured or secured generally by subordinate liens on one- to
four-family residential or mixed-use properties, or by purchase money
security interests in the home improvements financed thereby (the "Home
Improvements") and (iii) securities backed or secured by Mortgage Loans
and/or Home Improvement Contracts, (b) all monies due thereunder net, if
and as provided in the related Prospectus Supplement, of certain amounts
payable to the servicer of the Mortgage Loans and/or Home Improvement
Contracts (collectively, the "Loans"), which servicer may also be the
Seller, specified in the related Prospectus Supplement (the "Servicer"),
(c) if specified in the related Prospectus Supplement, funds on deposit in
one or more pre-funding accounts and/or capitalized interest accounts and
(d) reserve funds, letters of credit, surety bonds, insurance policies or
other forms of credit support as described herein and in the related
Prospectus Supplement.
(cover continued on next page)
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF, AND CERTIFICATES OF A
GIVEN SERIES EVIDENCE BENEFICIAL INTERESTS IN, THE RELATED TRUST FUND
ONLY AND ARE NOT GUARANTEED BY ANY GOVERNMENTAL AGENCY OR BY THE
DEPOSITOR, THE SELLER, THE TRUSTEES,THE SERVICER OR BY ANY OF
THEIR RESPECTIVE AFFILIATES OR, UNLESS OTHERWISE SPECIFIED
IN THE RELATED PROSPECTUS SUPPLEMENT, BY ANY OTHER PERSON
OR ENTITY. THE DEPOSITOR'S ONLY OBLIGATIONS WITH
RESPECT TO ANY SERIES OF SECURITIES WILL BE PURSUANT
TO CERTAIN REPRESENTATIONS AND WARRANTIES SET FORTH
IN THE RELATED AGREEMENT AS DESCRIBED HEREIN
OR IN THE RELATED PROSPECTUS SUPPLEMENT.
------------------------
See "Risk Factors" beginning on page 19 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.
_____________, 199_
(continued from previous page)
Each Series of Securities will be issued in one or more classes (each,
a "Class"). Interest on and principal of the Securities of a Series will be
payable on each Distribution Date specified in the related Prospectus
Supplement at the times, at the rates, in the amounts and in the order of
priority set forth in the related Prospectus Supplement.
If a Series includes multiple Classes, such Classes may vary with
respect to the amount, percentage and timing of distributions of principal,
interest or both and one or more Classes may be subordinated to other
Classes with respect to distributions of principal, interest or both as
described herein and in the related Prospectus Supplement. If so specified
in the related Prospectus Supplement, the Primary Assets and other assets
comprising the Trust Fund may be divided into one or more Asset Groups and
each Class of the related Series will evidence beneficial ownership of the
corresponding Asset Group, as applicable.
The rate of reduction of the aggregate principal balance of each Class
of a Series may depend upon the rate of payment (including prepayments)
with respect to the Loans or, in the case of Private Securities, Underlying
Loans, as applicable. In such a case, a rate of prepayment lower or higher
than anticipated will affect the yield on the Securities of a Series in the
manner described herein and in the related Prospectus Supplement. Under
certain limited circumstances described herein and in the related
Prospectus Supplement, a Series of Securities may be subject to termination
or redemption under the circumstances described herein and in the related
Prospectus Supplement.
If specified in the related Prospectus Supplement, an election may be
made to treat certain assets comprising the Trust Fund for a Series as a
"real estate mortgage investment conduit" (a "REMIC") for federal income
tax purposes. See "Certain Federal Income Tax Considerations" herein.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Securities to be
offered hereunder will, among other things, set forth with respect to
such Series of Securities: (i) the aggregate principal amount, interest
rate and authorized denominations of each Class of such Securities;
(ii) certain information concerning the Primary Assets, the Seller and
any Servicer; (iii) the terms of any Enhancement with respect to such
Series; (iv) the terms of any insurance related to the Primary Assets;
(v) information concerning any other assets in the related Trust Fund,
including any Reserve Fund; (vi) the Final Scheduled Distribution Date
of each Class of such Securities; (vii) the method to be used to
calculate the amount of principal required to be applied to the
Securities of each Class of such Series on each Distribution Date, the
timing of the application of principal and the order of priority of the
application of such principal to the respective Classes and the
allocation of principal to be so applied; (viii) the Distribution Dates
and any Assumed Reinvestment Rate; (ix) additional information with
respect to the plan of distribution of such Securities; and (x) whether
a REMIC election will be made with respect to some or all of the assets
included in the Trust Fund for such Series.
REPORTS TO HOLDERS
Periodic and annual reports concerning the related Trust Fund for
a Series of Securities are required under the related Agreement to be
forwarded to Holders. Unless otherwise specified in the related
Prospectus Supplement, such reports will not be examined and reported
on by an independent public accountant. If so specified in the
Prospectus Supplement for a Series of Securities, such Series or one or
more Classes of such Series will be issued in book-entry form. In such
event, (i) owners of beneficial interests in such Securities will not
be considered "Holders" under the related Agreements and will not
receive such reports directly with respect to the related Trust Fund;
rather, such reports will be furnished to such owners through the
participants and indirect participants of the applicable book-entry
system, and (ii) references herein to the rights of "Holders" shall
refer to the rights of such owners as they may be exercised indirectly
through such participants. See "The Agreements--Reports to Holders"
herein.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement under the
Securities Act of 1933, as amended (the "Securities Act"), with respect
to the Securities. This Prospectus, which forms a part of the
Registration Statement, and the Prospectus Supplement relating to each
Series of Securities contain summaries of the material terms of the
documents referred to herein and therein, but do not contain all of the
information set forth in the Registration Statement pursuant to the
Rules and Regulations of the Commission. For further information,
reference is made to such Registration Statement and the exhibits
thereto. Such Registration Statement and exhibits can be inspected and
copied at prescribed rates at the public reference facilities
maintained by the Commission at its Public Reference Section, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at its Regional Office
located as follows: Midwest Regional Office, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and Northeast
Regional Office, 7 World Trade Center, Suite 1300, New York, New York
10048. The Commission also maintains a Web site at http://www.sec.gov
from which such Registration Statement and exhibits may be obtained.
Each Trust Fund will be required to file certain reports with the
Commission pursuant to the requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). The Depositor intends to
cause each Trust Fund to suspend filing such reports if and when such
reports are no longer required under the Exchange Act.
No person has been authorized to give any information or to make
any representation other than those contained in this Prospectus and
any Prospectus Supplement with respect hereto and, if given or made,
such information or representations must not be relied upon. This
Prospectus and any Prospectus Supplement with respect hereto do not
constitute an offer to sell or a solicitation of an offer to buy any
securities other than the Securities offered hereby and thereby nor an
offer of the Securities to any person in any state or other
jurisdiction in which such offer would be unlawful. The delivery of
this Prospectus at any time does not imply that information herein is
correct as of any time subsequent to its date.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the Trust Fund
referred to in the accompanying Prospectus Supplement with the
Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act after the date of this Prospectus and prior to the
termination of any offering of the Securities issued by such Trust Fund
shall be deemed to be incorporated by reference in this Prospectus and
to be a part of this Prospectus from the date of the filing of such
documents. Any statement contained in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified
or superseded for all purposes of this Prospectus to the extent that a
statement contained herein or in the accompanying Prospectus Supplement
or in any other subsequently filed document that also is or is deemed
to be incorporated by reference modifies or replaces such statement.
Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this
Prospectus.
The Depositor on behalf of any Trust Fund will provide without
charge to each person to whom this Prospectus is delivered, on the
written or oral request of such person, a copy of any or all of the
documents referred to above that have been or may be incorporated by
reference in this Prospectus (not including exhibits to the information
that is incorporated by reference unless such exhibits are specifically
incorporated by reference into the information that this Prospectus
incorporates). Such requests should be directed to the Depositor at 245
Park Avenue, New York, New York 10167.
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to
the detailed information appearing elsewhere in this Prospectus and by
reference to the information with respect to each Series of Securities
contained in the Prospectus Supplement to be prepared and delivered in
connection with the offering of Securities of such Series. Capitalized
terms used and not otherwise defined herein or in the related
Prospectus Supplement shall have the meanings set forth in the
"Glossary of Terms" herein.
Securities Offered......................Asset-Backed Certificates (the
"Certificates") and/or Asset-Backed
Notes (the "Notes"). Certificates are
issuable from time to time in Series
pursuant to a Pooling and Servicing
Agreement or Trust Agreement, as the
case may be. Each Certificate of a
Series will evidence an interest in the
Trust Fund for such Series, or in an
Asset Group specified in the related
Prospectus Supplement. Notes are
issuable from time to time in Series
pursuant to an Indenture. Each Series of
Securities will consist of one or more
Classes, one or more of which may be
Classes of Compound Interest Securities,
Planned Amortization Class ("PAC")
Securities, Variable Interest
Securities, Zero Coupon Securities,
Principal Only Securities, Interest Only
Securities, Participating Securities,
Senior Securities or Subordinated
Securities. Each Class may differ in,
among other things, the amounts
allocated to and the priority of
principal and interest payments, Final
Scheduled Distribution Dates,
Distribution Dates and interest rates.
The Securities of each Class will be
issued in fully registered form in the
denominations specified in the related
Prospectus Supplement. If so specified
in the related Prospectus Supplement,
the Securities or certain Classes of
such Securities offered thereby may be
available in book-entry form only.
Depositor...............................Bear Stearns Asset Backed
Securities, Inc. (the "Depositor")
was incorporated in the State of
Delaware in June 1995, and is a
wholly-owned, special purpose subsidiary
of The Bear Stearns Companies Inc. None
of The Bear Stearns Companies Inc., the
Depositor, the Servicer, any Trustee,
the Seller or any affiliate of the
foregoing has guaranteed or is otherwise
obligated with respect to the Securities
of any Series. See "The Depositor."
Interest Payments...................... Interest payments on the Securities
of a Series entitled by
their terms to receive interest will be
made on each Distribution Date, to the
extent set forth in, and at the
applicable rate specified in (or
determined in the manner set forth in),
the related Prospectus Supplement. The
interest rate on Securities of a Series
may be variable or change with changes
in the rates of interest on the related
Loans or Underlying Loans relating to
the Private Securities, as applicable,
and/or as prepayments occur with respect
to such Loans or Underlying Loans, as
applicable. Interest Only Securities may
be assigned a Notional Amount set forth
in the related Prospectus Supplement,
which is used solely for convenience in
expressing the calculation of interest
and for certain other purposes and does
not represent the right to receive any
distributions allocable to principal.
Principal Only Securities may not be
entitled to receive any interest
payments or may be entitled to receive
only nominal interest payments. Interest
payable on the Securities of a Series on
a Distribution Date will include all
interest accrued during the period
specified in the related Prospectus
Supplement. See "Description of the
Securities--Payments of Interest."
Principal Payments..................... All payments of principal of a Series of
Securities will be made in an aggregate
amount determined as set forth in the
related Prospectus Supplement, and will
be paid at the times, allocated among
the Classes of such Series in the order
and amounts and applied either on a pro
rata or a random lot basis among all
Securities of any such Class, all as
specified in the related Prospectus
Supplement.
Final Scheduled
Distribution Date
of the Securities. ....................The Final Scheduled Distribution
Date with
respect to (i) each Class of Notes is
the date not later than which principal
of the Notes will be fully paid and (ii)
each Class of Certificates is the date
after which no Certificates of such
Class are expected to remain
outstanding, in each case calculated on
the basis of the assumptions applicable
to such Series described in the related
Prospectus Supplement. The Final
Scheduled Distribution Date of a Class
may equal the maturity date of the
Primary Asset in the related Trust Fund
that has the latest stated maturity, or
will be determined as described herein
and in the related Prospectus
Supplement.
The actual final Distribution Date of
the Securities of a Series will, to the
extent described in the related
Prospectus Supplement, depend upon the
rate of payment (including prepayments,
liquidations due to default, the receipt
of proceeds from casualty Insurance
Policies and repurchases) of the Loans
or Underlying Loans relating to the
Private Securities, as applicable, in
the related Trust Fund. Unless otherwise
specified in the related Prospectus
Supplement, the actual final
Distribution Date of any Security is
likely to occur earlier and may occur
substantially earlier or may occur later
than its Final Scheduled Distribution
Date as a result of the application of
prepayments to the reduction of the
principal balances of the Securities and
as a result of defaults on the Primary
Assets. The rate of payments on the
Loans or Underlying Loans relating to
the Private Securities, as applicable,
in the Trust Fund for a Series will
depend on a variety of factors,
including certain characteristics of
such Loans or Underlying Loans, as
applicable, and the prevailing level of
interest rates from time to time, as
well as on a variety of economic,
demographic, tax, legal, social and
other factors. No assurance can be given
as to the actual prepayment experience
with respect to a Series. See "Risk
Factors--Yield May Vary" and
"Description of the Securities--Weighted
Average Life of the Securities" herein.
Optional Termination....................One or more Classes of Securities
of any Series may be redeemed
or repurchased in whole or in part, at
the Depositor's or the Servicer's
option, at such time and under the
circumstances specified in the related
Prospectus Supplement, at the price set
forth therein. If so specified in the
related Prospectus Supplement for a
Series of Securities, the Depositor, the
Servicer or such other entity that is
specified in the related Prospectus
Supplement may, at its option, cause an
early termination of the related Trust
Fund by repurchasing all of the Primary
Assets remaining in the Trust Fund on or
after a specified date, or on or after
such time as the aggregate principal
balance of the Securities of the Series
or the Primary Assets relating to such
Series, as specified in the related
Prospectus Supplement, is less than the
amount or percentage specified in the
related Prospectus Supplement. See
"Description of the Securities--Optional
Redemption, Purchase or Termination."
In addition, the related Prospectus
Supplement may provide other
circumstances under which Holders of
Securities of a Series could be fully
paid significantly earlier than would
otherwise be the case if payments or
distributions were solely based on the
activity of the related Primary Assets.
The Trust Fund..........................The Trust Fund for a Series of
Securities will consist of one
or more of the assets described below,
as described in the related Prospectus
Supplement.
A. Primary Assets....................The Primary Assets for a Series may
consist of any combination
of the following assets, to the extent
and as specified in the related
Prospectus Supplement. The Primary
Assets will be purchased from the Seller
or may be purchased by the Depositor in
the open market or in privately
negotiated transactions, including
transactions with entities affiliated
with the Depositor.
(1) Loans.......................Primary Assets for a Series will
consist, in whole or in part,
of Loans. Some Loans may be delinquent
or non-performing as specified in the
related Prospectus Supplement. Loans may
be originated by or acquired from an
affiliate of the Depositor, and an
affiliate of the Depositor may be an
obligor with respect to any such Loan.
The Loans will be conventional contracts
or contracts insured by the Federal
Housing Administration (the "FHA") or
partially guaranteed by the Veterans
Administration (the "VA"). See "The
Trust Funds--The Loans" for a discussion
of such guarantees. To the extent
provided in the related Prospectus
Supplement, additional Loans may be
periodically added to the Trust Fund, or
may be removed from time to time if
certain asset value tests are met, as
described in the related Prospectus
Supplement.
The "Loans" for a Series will consist of
(i) closed-end home equity loans (the
"Closed-End Loans") and/or revolving
home equity loans or certain balances
therein (the "Revolving Credit Line
Loans" and, together with the Closed-End
Loans, the "Mortgage Loans") and (ii)
home improvement installment sales
contracts and installment loan
agreements (the "Home Improvement
Contracts"). The Mortgage Loans and the
Home Improvement Contracts are
collectively referred to herein as the
"Loans." The Loans may, as specified in
the related Prospectus Supplement, have
various payment characteristics,
including balloon or other irregular
payment features, and may accrue
interest at a fixed rate or an
adjustable rate.
As specified in the related Prospectus
Supplement, the Mortgage Loans will, and
the Home Improvement Contracts may, be
secured by mortgages and deeds of trust
or other similar security instruments
creating a lien on the related Mortgaged
Property, which may be subordinated to
one or more senior liens on the
Mortgaged Property as described in the
related Prospectus Supplement. As
specified in the related Prospectus
Supplement, Home Improvement Contracts
may be unsecured or secured by purchase
money security interests in the Home
Improvements financed thereby. The
Mortgaged Properties and the Home
Improvements are collectively referred
to herein as the "Properties."
The related Prospectus Supplement will
describe certain characteristics of the
Loans for a Series including, without
limitation and to the extent relevant:
(i) the aggregate unpaid Principal
Balance of the Loans (or the aggregate
unpaid Principal Balance included in the
Trust Fund for the related Series); (ii)
the range and weighted average Loan Rate
on the Loans and in the case of
adjustable rate Loans, the range and
weighted average of the Current Loan
Rates and the Lifetime Rate Caps, if
any; (iii) the range and the average
outstanding Principal Balance of the
Loans; (iv) the weighted average
original and remaining term-to-stated
maturity of the Loans and the range of
original and remaining terms-to-stated
maturity, if applicable; (v) the range
and Combined Loan-to-Value Ratios or
Loan-to-Value Ratios, as applicable, of
the Loans, computed in the manner
described in the related Prospectus
Supplement; (vi) the percentage (by
Principal Balance as of the Cut-off
Date) of Loans that accrue interest at
adjustable or fixed interest rates;
(vii) any enhancement relating to the
Loans; (viii) the percentage (by
Principal Balance as of the Cut-off
Date) of Loans that are secured by
Mortgaged Properties or Home
Improvements, or that are unsecured;
(ix) the geographic distribution of any
Mortgaged Properties securing the Loans;
(x) the use and type of each Property
securing a Loan; (xi) the lien priority
of the Loans; (xii) the delinquency
status and year of origination of the
Loans; (xiii) whether such Loans are
Closed-End Loans and/or Revolving Credit
Line Loans; and (xiv) in the case of
Revolving Credit Line Loans, the general
payment and credit line features of such
Loans and other pertinent features
thereof.
(2) Private Securities...............Primary Assets for a Series may
consist, in whole or in part,
of Private Securities, which include (i)
pass-through certificates representing
beneficial interests in loans of the
type that would otherwise be eligible to
be Loans (the "Underlying Loans") or
(ii) collateralized obligations secured
by Underlying Loans. Such pass-through
certificates or collateralized
obligations will have previously been
(i) offered and distributed to the
public pursuant to an effective
registration statement or (ii) purchased
in a transaction not involving any
public offering from a person who is not
an affiliate of the issuer of such
securities at the time of sale (nor an
affiliate thereof at any time during the
three preceding months); provided, that
a period of three years has elapsed
since the later of the date such
securities were acquired from the
related issuer or an affiliate thereof.
Although individual Underlying Loans may
be insured or guaranteed by the United
States or an agency or instrumentality
thereof, they need not be, and the
Private Securities themselves will not
be, so insured or guaranteed. See "The
Trust Funds--Private Securities." Unless
otherwise specified in the Prospectus
Supplement relating to a Series of
Securities, payments on the Private
Securities will be distributed directly
to the related PS Trustee as registered
owner of such Private Securities.
The related Prospectus Supplement for a
Series will specify (on an approximate
basis, as described above, and as of the
date specified in the related Prospectus
Supplement), to the extent relevant and
to the extent such information is
reasonably available to the Depositor
and the Depositor reasonably believes
such information to be reliable: (i) the
aggregate approximate principal amount
and type of any Private Securities to be
included in the Trust Fund for such
Series; (ii) certain characteristics of
the Underlying Loans, including (a) the
payment features of such Underlying
Loans (i.e., whether they are Closed-End
Loans and/or Revolving Credit Line
Loans, whether they are fixed rate or
adjustable rate and whether they provide
for fixed level payments, negative
amortization or other payment features),
(b) the approximate aggregate principal
amount of such Underlying Loans that are
insured or guaranteed by a governmental
entity, (c) the servicing fee or range
of servicing fees with respect to such
Underlying Loans (d) the minimum and
maximum stated maturities of such
Underlying Loans at origination, (e) the
lien priority of such Underlying Loans
and (f) the delinquency status and year
of origination of such Underlying Loans;
(iii) the maximum original
term-to-stated maturity of the Private
Securities; (iv) the weighted average
term-to-stated maturity of the Private
Securities; (v) the pass-through or
certificate rate or ranges thereof for
the Private Securities; (vi) the sponsor
or depositor of the Private Securities
(the "PS Sponsor"), the servicer of the
Private Securities (the "PS Servicer")
and the trustee of the Private
Securities (the "PS Trustee"); (vii)
certain characteristics of enhancement,
if any, such as reserve funds, insurance
policies, letters of credit or
guarantees, relating to the Loans
underlying the Private Securities, or to
such Private Securities themselves;
(viii) the terms on which the Underlying
Loans may or are required to be
repurchased prior to stated maturity;
and (ix) the terms on which substitute
Underlying Loans may be delivered to
replace those initially deposited with
the PS Trustee. See "The Trust
Funds--Additional Information" herein.
B. Collection and
Distribution Accounts............Unless otherwise provided in the related
Prospectus Supplement, all payments on
or in respect of the Primary Assets for
a Series will be remitted directly to an
account (each, a "Collection Account")
to be established for such Series with
the Trustee or the Servicer, in the name
of the Trustee. Unless otherwise
provided in the related Prospectus
Supplement, the applicable Trustee shall
be required to apply a portion of the
amount in the Collection Account,
together with reinvestment earnings from
eligible investments specified in the
related Prospectus Supplement, to the
payment of certain amounts payable to
the Servicer under the related Agreement
and any other person specified in the
Prospectus Supplement, and to deposit a
portion of the amount in the Collection
Account into a separate account (each, a
"Distribution Account") to be
established for such Series, each in the
manner and at the times specified in the
related Prospectus Supplement. All
amounts deposited into such Distribution
Account(s) will be available, unless
otherwise specified in the related
Prospectus Supplement, for (i)
application to the payment of principal
of and interest on such Series of
Securities on the next Distribution
Date, (ii) the making of adequate
provision for future payments on certain
Classes of Securities and (iii) any
other purpose specified in the related
Prospectus Supplement. After applying
the funds in the Collection Account as
described above, any funds remaining in
the Collection Account may be paid over
to the Servicer, the Depositor, any
provider of Enhancement with respect to
such Series (an "Enhancer") or any other
person entitled thereto in the manner
and at the times specified in the
related Prospectus Supplement.
C. Pre-Funding and
Capitalized Interest
Accounts . . . .................If specified in the related
Prospectus Supplement, a Trust Fund
will include one or more segregated
trust accounts (each, a "Pre-Funding
Account") established and maintained
with the Trustee of the Trust Fund for
the related Series (the "Trustee"). If
so specified, on the Closing Date for
such Series, a portion of the proceeds
of the sale of the Securities of such
Series (such amount, the "Pre-Funded
Amount") will be deposited into the
Pre-Funding Account and may be used to
purchase additional Primary Assets
during the period of time specified in
the related Prospectus Supplement (the
"Pre-Funding Period"). The Primary
Assets to be so purchased generally will
be selected on the basis of the same
criteria as those used to select the
initial Primary Assets, and the same
representations and warranties will be
made with respect thereto. If any
Pre-Funded Amount remains on deposit in
the Pre-Funding Account at the end of
the Pre-Funding Period, such amount will
be applied in the manner specified in
the related Prospectus Supplement to
prepay the Notes and/or the Certificates
of the applicable Series.
If a Pre-Funding Account is established,
one or more segregated trust accounts
(each, a "Capitalized Interest Account")
may be established and maintained with
the Trustee for the related Series. On
the related Closing Date, a portion of
the proceeds of the sale of the
Securities of such Series will be
deposited into the Capitalized Interest
Account and used to fund the excess, if
any, of (i) the sum of (a) the amount of
interest accrued on the Securities of
such Series and (b) if specified in the
related Prospectus Supplement, certain
fees or expenses during the Pre-Funding
Period such as trustee fees and credit
enhancement fees, over (ii) the amount
of interest available therefor from the
Primary Assets in the Trust Fund. Any
amounts on deposit in the Capitalized
Interest Account at the end of the
Pre-Funding Period that are not
necessary for such purposes will be
distributed as specified in the related
Prospectus Supplement.
Enhancement.............................If stated in the Prospectus Supplement
relating to a Series, the Depositor will
obtain an irrevocable letter of credit,
surety bond, insurance policy (each, a
"Security Policy") or other form of
credit support (collectively,
"Enhancement") in favor of the
applicable Trustee on behalf of the
the Holders of such Series and any other
person specified in such Prospectus
Supplement from an institution
acceptable to the rating agency or
agencies identified in the related
Prospectus Supplement as rating such
Series of Securities (each, a "Rating
Agency") for the purposes specified in
such Prospectus Supplement. The
Enhancement will support the payments on
the Securities and may be used for other
purposes, to the extent and under the
conditions specified in such Prospectus
Supplement. See "Enhancement."
Enhancement for a Series may include one
or more of the following types of
Enhancement, or such other type of
Enhancement specified in the related
Prospectus Supplement.
A. Subordinate
Securities.......................If stated in the related Prospectus
Supplement, Enhancement for
a Series may consist of one or more
Classes of Subordinated Securities. The
rights of the related Subordinated
Securityholders to receive distributions
on any Distribution Date will be
subordinate in right and priority to the
rights of Holders of Senior Securities
of the Series, but only to the extent
described in the related Prospectus
Supplement.
B. Insurance.. .....................If stated in the related Prospectus
Supplement, Enhancement for
a Series may consist of special hazard
Insurance Policies, bankruptcy bonds and
other types of insurance supporting
payments on the Securities.
C. Reserve Funds....................If stated in the Prospectus
Supplement, the Depositor may
deposit cash, a letter or letters of
credit, short-term investments, or other
instruments acceptable to the Rating
Agencies in one or more reserve funds to
be established in the name of the
applicable Trustee (each, a "Reserve
Fund"), which will be used, as specified
in such Prospectus Supplement, by such
Trustee to make required payments of
principal of or interest on the
Securities of such Series, to make
adequate provision for future payments
on such Securities, or for any other
purpose specified in the Agreement with
respect to such Series, to the extent
that funds are not otherwise available.
In the alternative or in addition to
such deposit, a Reserve Fund for a
Series may be funded through application
of all or a portion of the excess cash
flow from the Primary Assets for such
Series, to the extent described in the
related Prospectus Supplement.
D. Minimum Principal
Payment Agreement.................If stated in the Prospectus
Supplement relating to a Series of
Securities, the Depositor will enter
into a minimum principal payment
agreement (the "Minimum Principal
Payment Agreement") with an entity
meeting the criteria of the Rating
Agencies, pursuant to which such entity
will provide funds in the event that
aggregate principal payments on the
Primary Assets for such Series are not
sufficient to make certain payments, as
provided in the related Prospectus
Supplement. See "Enhancement--Minimum
Principal Payment Agreement."
E. Deposit Agreement.................If stated in the related Prospectus
Supplement, the Depositor
and the applicable Trustee will enter
into a guaranteed investment contract or
an investment agreement (the "Deposit
Agreement") pursuant to which all or a
portion of the amounts held in the
Collection Account, the Distribution
Account(s) or in any Reserve Fund will
be invested with the entity specified in
such Prospectus Supplement. Such Trustee
will be entitled to withdraw amounts so
invested, plus interest at a rate equal
to the Assumed Reinvestment Rate, in the
manner specified in such Prospectus
Supplement. See "Enhancement--Deposit
Agreement."
Servicing..............................The Servicer will be responsible
for servicing, managing and
making collections on the Loans for a
Series. In addition, the Servicer, if so
specified in the related Prospectus
Supplement, will act as custodian and
will be responsible for maintaining
custody of the Loans and related
documentation on behalf of the Trustee.
Advances with respect to delinquent
payments of principal of or interest on
a Loan will be made by the Servicer only
to the extent described in the related
Prospectus Supplement. Such advances
will be intended to provide liquidity
only and, unless otherwise specified in
the related Prospectus Supplement, will
be reimbursable to the Servicer from
scheduled payments of principal and
interest, late collections, the proceeds
of liquidation of the related Loans or
other recoveries relating to such Loans
(including any Insurance Proceeds or
payments from other credit support). In
performing these functions, the Servicer
will exercise the same degree of skill
and care that it customarily exercises
with respect to similar receivables or
Loans owned or serviced by it. Under
certain limited circumstances, the
Servicer may resign or be removed, in
which event either the Trustee or a
third-party servicer will be appointed
as successor servicer. The Servicer will
receive a periodic fee as servicing
compensation (the "Servicing Fee") and
may, as specified herein and in the
related Prospectus Supplement, receive
certain additional compensation. See
"Servicing of Loans--Servicing
Compensation and Payment of Expenses"
herein.
Federal Income
Tax Considerations
A. Debt Securities and
REMIC Residual
Securities.. ..................If (i) an election is
made to treat all or a portion of a
Trust Fund for a Series as a "real
estate mortgage investment conduit" (a
"REMIC") or (ii) so provided in the
related Prospectus Supplement, a Series
of Securities will include one or more
Classes of taxable debt obligations
under the Internal Revenue Code of 1986,
as amended (the "Code"). Stated interest
with respect to such Classes of
Securities will be reported by the
related Holder in accordance with such
Holder's method of accounting except
that, in the case of Securities
constituting "regular interests" in a
REMIC ("Regular Interests"), such
interest will be required to be reported
on the accrual methods regardless of
such Holder's usual method of
accounting. Securities that are Compound
Interest Securities, Zero Coupon
Securities or Interest Only Securities
will, and certain other Classes of
Securities may, be issued with original
issue discount that is not de minimis.
In such cases, the related Holder will
be required to include original issue
discount in gross income as it accrues,
which may be prior to the receipt of
cash attributable to such income. If a
Security is issued at a premium, such
Holder may be entitled to make an
election to amortize such premium on a
constant yield method.
In the case of a REMIC election, a Class
of Securities may be treated as a REMIC
"residual interest" (each, a "Residual
Interest"). A Holder of a Residual
Interest will be required to include in
its income its pro rata share of the
taxable income of the REMIC. In certain
circumstances, the Holder of a Residual
Interest may have REMIC taxable income
or tax liability attributable to REMIC
taxable income for a particular period
in excess of cash distributions for such
period or have an after-tax return that
is less than the after-tax return on
comparable debt instruments. In
addition, a portion (or, in some cases,
all) of the income from a Residual
Interest (i) may not be subject to
offset by losses from other activities
or investments, (ii) for a Holder that
is subject to tax under the Code on
unrelated business taxable income, may
be treated as unrelated business taxable
income and (iii) for a foreign Holder,
may not qualify for exemption from or
reduction of withholding. In addition,
(i) Residual Interests are subject to
transfer restrictions and (ii) certain
transfers of Residual Interests will not
be recognized for federal income tax
purposes. Further, individual Holders
are subject to limitations on the
deductibility of expenses of the REMIC.
See "Certain Federal Income Tax
Considerations."
B. Non-REMIC
Pass-Through
Securities......................If so specified in the
related Prospectus Supplement, the Trust
Fund for a Series will be treated as a
grantor trust and will not be classified
as an association taxable as a
corporation for federal income tax
purposes, and Holders of Securities of
such Series ("Pass-Through Securities")
will be treated as owning directly
rights to receive certain payments of
interest or principal, or both, on the
Primary Assets held in the Trust Fund
for such Series. All income with respect
to a Stripped Security will be accounted
for as original issue discount and,
unless otherwise specified in the
related Prospectus Supplement, will be
reported by the applicable Trustee on an
accrual basis, which may be prior to the
receipt of cash associated with such
income.
C. Owner Trust
Securities.......................If so specified in the Prospectus
Supplement, the Trust Fund
will be treated as a partnership for
purposes of federal and state income
tax. Each Noteholder, by the acceptance
of a Note of a given Series, will agree
to treat such Note as indebtedness; and
each Certificateholder, by the
acceptance of a Certificate of a given
Series, will agree to treat the related
Trust Fund as a partnership in which
such Certificateholder is a partner for
federal income and state tax purposes.
Alternative characterizations of such
Trust Fund and such Certificates are
possible, but would not result in
materially adverse tax consequences to
Certificateholders. See "Certain Federal
Income Tax Considerations."
ERISA Considerations...................A fiduciary of any employee benefit
plan or other retirement
plan or arrangement subject to the
Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), or the
Code should carefully review with its
own legal advisors whether the purchase
or holding of Securities could give rise
to a transaction prohibited or otherwise
impermissible under ERISA or the Code.
Certain Classes of Securities may not be
transferred unless the applicable
Trustee and the Depositor are furnished
with a letter of representation or an
opinion of counsel to the effect that
such transfer will not result in a
violation of the prohibited transaction
provisions of ERISA and the Code and
will not subject the applicable Trustee,
the Depositor or the Servicer to
additional obligations. See "Description
of the Securities--General" and "ERISA
Considerations."
Legal Investment.......................Unless otherwise specified in
the related Prospectus
Supplement, Securities of each Series
offered by this Prospectus and the
related Prospectus Supplement will not
constitute "mortgage related securities"
under the Secondary Mortgage Market
Enhancement Act of 1984, as amended
("SMMEA"). Investors whose investment
authority is subject to legal
restrictions should consult their own
legal advisors to determine whether and
to what extent the Securities constitute
legal investments for them. See "Legal
Investment."
Use of Proceeds........................The Depositor will use the net
proceeds from the sale of each
Series for one or more of the following
purposes: (i) to purchase the related
Primary Assets, (ii) to repay
indebtedness incurred to obtain funds to
acquire such Primary Assets, (iii) to
establish any Reserve Funds described in
the related Prospectus Supplement and
(iv) to pay costs of structuring and
issuing such Securities, including the
costs of obtaining Enhancement, if any.
If so specified in the related
Prospectus Supplement, the purchase of
the Primary Assets for a Series will be
effected by an exchange of Securities
with the Seller of such Primary Assets.
See "Use of Proceeds."
Ratings.................................It will be a requirement for
issuance of any Series that the
Securities offered by this Prospectus
and the related Prospectus Supplement be
rated by at least one Rating Agency in
one of its four highest applicable
rating categories. The rating or ratings
applicable to Securities of each Series
offered hereby and by the related
Prospectus Supplement will be as set
forth in the related Prospectus
Supplement. A securities rating should
be evaluated independently of similar
ratings on different types of
securities. A securities rating is not a
recommendation to buy, hold or sell
securities, and does not address the
effect that the rate of prepayments on
Loans or Underlying Loans relating to
Private Securities, as applicable, for a
Series may have on the yield to
investors in the Securities of such
Series. See "Risk Factors--Ratings Are
Not Recommendations."
RISK FACTORS
Investors should consider, among other things, the following
factors in connection with the purchase of the Securities.
No Secondary Market. There will be no market for the Securities of
any Series prior to the issuance thereof, and there can be no assurance
that a secondary market will develop or, if it does develop, that it
will provide Holders with liquidity of investment or will continue for
the life of the Securities of such Series. The underwriter(s) specified
in the related Prospectus Supplement (the "Underwriters") expect to
make a secondary market in the related Securities, but will have no
obligation to do so.
Primary Assets Are Only Source of Repayment. The Depositor does
not have, nor is it expected to have, any significant assets. The
Securities of a Series will be payable solely from the assets of the
Trust Fund for such Securities. There will be no recourse to the
Depositor or any other person for any default on or any failure to
receive distributions on the Securities. Further, unless otherwise
stated in the related Prospectus Supplement, at the times set forth in
such Prospectus Supplement, certain Primary Assets and/or any balance
remaining in the Collection Account or Distribution Account(s)
immediately after making all payments due on the Securities of such
Series and other payments specified in Securities Prospectus
Supplement, may be promptly released or remitted to the Depositor, the
Servicer, the Enhancer or any other person entitled thereto, and will
no longer be available for making payments to Holders. Consequently,
Holders of Securities of each Series must rely solely upon payments
with respect to the Primary Assets and the other assets constituting
the Trust Fund for a Series of Securities, including, if applicable,
any amounts available pursuant to any Enhancement for such Series, for
the payment of principal of and interest on the Securities of such
Series.
Holders of Notes will be required under the Indenture to proceed
only against the Primary Assets and other assets constituting the
related Trust Fund in the case of a default with respect to such Notes
and may not proceed against any assets of the Depositor. There is no
assurance that the market value of the Primary Assets or any other
assets for a Series will at any time be equal to or greater than the
aggregate principal amount of the Securities of such Series then
outstanding, plus accrued interest thereon. Moreover, upon an Event of
Default under the Indenture for a Series of Notes and a sale of the
assets in the Trust Fund or upon a sale of the assets of a Trust Fund
for a Series of Certificates, the Trustee under the related Indenture
(the "Indenture Trustee"), the Servicer, if any, the Enhancer and any
other service provider specified in the related Prospectus Supplement
generally will be entitled to receive the proceeds of any such sale to
the extent of unpaid fees and other amounts owing to such persons under
the related Agreement prior to distributions to Holders of Securities.
Upon any such sale, the proceeds thereof may be insufficient to pay in
full the principal of and interest on the Securities of such Series.
The only obligations, if any, of the Depositor with respect to the
Securities of any Series will be pursuant to certain representations
and warranties. See "The Agreements--Assignment of Primary Assets"
herein. The Depositor does not have, and is not expected in the future
to have, any significant assets with which to meet any obligation to
repurchase Primary Assets with respect to which there has been a breach
of any representation or warranty. If, for example, the Depositor were
required to repurchase a Primary Asset, its only source of funds from
which to make such repurchase would be from funds obtained from the
enforcement of a corresponding obligation, if any, on the part of the
originator of the Primary Assets, the Servicer or the Seller, as the
case may be, or from a Reserve Fund established to provide funds for
such repurchases.
Limited Protection Against Losses. Although any Enhancement is
intended to reduce the risk of delinquent payments or losses to Holders
of Securities entitled to the benefit thereof, the amount of such
Enhancement will be limited, as set forth in the related Prospectus
Supplement, and will decline and could be depleted under certain
circumstances prior to the payment in full of the related Series of
Securities, and as a result, Holders may suffer losses. See
"Enhancement."
Yield May Vary; Subordination. The yield to maturity experienced
by a Holder of Securities may be affected by the rate of payment of
principal of the Loans or Underlying Loans relating to the Private
Securities, as applicable. The timing of principal payments on the
Securities of a Series will be affected by a number of factors,
including the following: (i) the extent of prepayments of the Loans or
Underlying Loans relating to the Private Securities, as applicable,
which prepayments may be influenced by a variety of factors; (ii) the
manner of allocating principal payments among the Classes of Securities
of a Series as specified in the related Prospectus Supplement; (iii)
the exercise by the party entitled thereto of any right of optional
termination; and (iv) in the case of Trust Funds comprised of Revolving
Credit Line Loans, any provisions in the related Agreement described in
the applicable Prospectus Supplement respecting any non-amortization,
early amortization or scheduled amortization period. See "Description
of the Securities--Weighted Average Life of Securities." Prepayments
may also result from repurchases of Loans or Underlying Loans, as
applicable, due to material breaches of the Seller's or the Depositor's
warranties.
Interest payable on the Securities of a Series on a Distribution
Date will include all interest accrued during the period specified in
the related Prospectus Supplement. In the event interest accrues during
the calendar month prior to a Distribution Date, the effective yield to
Holders will be reduced from the yield that would otherwise be
obtainable if interest payable on the Security were to accrue through
the day immediately preceding each Distribution Date, and the effective
yield (at par) to Holders will be less than the indicated coupon rate.
See "Description of the Securities--Payments of Interest."
The rights of Subordinated Securityholders to receive
distributions to which they would otherwise be entitled with respect to
the Trust Fund will be subordinate to the rights of the Servicer and
the Holders of Senior Securities, to the extent described in the
related Prospectus Supplement. As a result of the foregoing, investors
must be prepared to bear the risk that they may be subject to delays in
payment and may not recover their initial investments in the
Subordinated Securities.
Balloon Payments. Certain of the Loans as of the related Cut-off
Date may not be fully amortizing over their terms to maturity, and thus
will require substantial principal payments (i.e., balloon payments) at
their stated maturity. Loans with balloon payments involve a greater
degree of risk because the ability of a borrower to make a balloon
payment typically will depend upon such borrower's ability either to
timely refinance the related Loan or to timely sell the related
Property. The ability of a borrower to accomplish either of these goals
will be affected by a number of factors, including the level of
available mortgage rates at the time of sale or refinancing, the
borrower's equity in the related Property, the financial condition of
the borrower and tax laws. Losses on such Loans that are not otherwise
covered by the credit enhancement described in the applicable
Prospectus Supplement will be borne by the Holders of one or more
Classes of Securities of the related Series.
Property Values May Be Insufficient. If the Mortgage Loans in a
Trust Fund are primarily junior liens subordinate to the rights of the
mortgagee under the related senior mortgage or mortgages, the proceeds
from any liquidation, insurance or condemnation proceedings will be
available to satisfy the outstanding balance of such junior mortgage
only to the extent that the claims of such senior mortgagees have been
satisfied in full, including any related foreclosure costs. In
addition, a junior mortgagee may not foreclose on the Property securing
a junior mortgage unless it forecloses subject to the senior mortgages,
in which case it must either pay the entire amount due on the senior
mortgages to the senior mortgagees at or prior to the foreclosure sale
or undertake the obligation to make payments on the senior mortgages in
the event the mortgagor is in default thereunder. The Trust Fund will
not have any source of funds to satisfy the senior mortgages or make
payments due to the senior mortgagees.
There are several factors that could adversely affect the value of
Properties such that the outstanding balance of the related Loan,
together with any senior financing on the Properties, would equal or
exceed the value of the Properties. Among the factors that could
adversely affect the value of the Properties are an overall decline in
the residential real estate market in the areas in which the Properties
are located or a decline in the general condition of the Properties as
a result of failure of borrowers to maintain adequately the Properties
or of natural disasters that are not necessarily covered by insurance,
such as earthquakes and floods. Any such decline could extinguish the
value of a junior interest in a Property before having any effect on
the related senior interest therein. If such a decline occurs, the
actual rates of delinquencies, foreclosure and losses on the junior
Loans could be higher than those currently experienced in the mortgage
lending industry in general.
Risks relating to Certain Geographic Regions where Mortgage Loans
may be Concentrated. Certain geographic regions of the United States
from time to time will experience weaker regional economic conditions
and housing markets, and, consequently, will experience higher rates of
loss and delinquency than will be experienced on mortgage loans
generally. The Mortgage Loans underlying certain Series of Securities
may be concentrated in these regions, and such concentration may
present risk considerations in addition to those generally present for
similar mortgage-backed securities without such concentration.
Book-Entry Registration. If Securities are issued in book-entry
form, such registration may reduce the liquidity of such Securities in
the secondary trading market, since investors may be unwilling to
purchase Securities for which they cannot obtain physical certificates.
Since transactions in book-entry Securities can be effected only
through the Depository Trust Company ("DTC"), participating
organizations, Financial Intermediaries and certain banks, the ability
of a Holder to pledge a book-entry Security to persons or entities that
do not participate in the DTC system may be limited due to lack of a
physical certificate representing such Securities. Security Owners will
not be recognized as Holders as such term is used in the related
Agreement, and Security Owners will be permitted to exercise the rights
of Holders only indirectly through DTC and its Participants.
In addition, Holders may experience some delay in their receipt of
distributions of principal of and interest on book-entry Securities,
since distributions are required to be forwarded by the applicable
Trustee to DTC and DTC will then be required to credit such
distributions to the accounts of Depository participants, which
thereafter will be required to credit them to the accounts of Holders
either directly or indirectly through Financial Intermediaries.
Pre-Funding May Adversely Affect Investment. If a Trust Fund
includes a Pre-Funding Account and the Principal Balance of additional
Loans delivered to the Trust Fund during the Pre-Funding Period is less
than the original Pre-Funded Amount, the Holders of the Securities of
the related Series will receive a prepayment of principal as and to the
extent described in the related Prospectus Supplement. Any such
principal prepayment may adversely affect the yield to maturity of the
applicable Securities. Since prevailing interest rates are subject to
fluctuation, there can be no assurance that investors will be able to
reinvest such a prepayment at yields equaling or exceeding the yields
on the related Securities. It is possible that the yield on any such
reinvestment will be lower, and may be significantly lower, than the
yield on the related Securities.
The ability of a Trust Fund to invest in subsequent Loans during
the related Pre-Funding Period will be dependant on the ability of the
Seller to originate or acquire Loans that satisfy the requirements for
transfer to the Trust Fund. The ability of the Seller to originate or
acquire such Loans will be affected by a variety of social and economic
factors, including the prevailing level of market interest rates,
unemployment levels and consumer perceptions of general economic
conditions.
Although subsequent Loans must satisfy the characteristics
described in the related Prospectus Supplement and generally must be
selected on the basis of the same criteria as those used to select the
initial Loans, such Loans may have been originated more recently than
the Loans originally transferred to the Trust Fund and may be of a
lesser credit quality. As a result, the addition of subsequent Loans
may adversely affect the performance of the related Securities.
Bankruptcy Risks. Federal and state statutory provisions,
including the federal bankruptcy laws and state laws affording relief
to debtors, may interfere with or affect the ability of the secured
mortgage lender to realize upon its security. For example, in a
proceeding under the federal Bankruptcy Code, a lender may not
foreclose on a mortgaged property without the permission of the
bankruptcy court. The rehabilitation plan proposed by the related
debtor may provide, if the mortgaged property is not the debtor's
principal residence and the court determines that the value of the
mortgaged property is less than the principal balance of the related
mortgage loan, for the reduction of the secured indebtedness to the
value of the mortgaged property as of the date of the commencement of
the bankruptcy, rendering the lender a general unsecured creditor for
the difference, and also may reduce the monthly payments due under such
mortgage loan, change the rate of interest and alter the mortgage loan
repayment schedule. The effect of any such proceedings under the
federal Bankruptcy Code, including but not limited to any automatic
stay, could result in delays in receiving payments on the Loans
underlying a Series of Securities and possible reductions in the
aggregate amount of such payments.
Consequences of Owning Original Issue Discount Securities. Debt
Securities that are Compound Interest Securities will be, and certain
of the Debt Securities may be, issued with original issue discount for
federal income tax purposes. A Holder of Debt Securities issued with
original issue discount will be required to include original issue
discount in ordinary gross income for federal income tax purposes as it
accrues, in advance of receipt of the cash attributable to such income.
Accrued but unpaid interest on the Debt Securities that are Compound
Interest Securities generally will be treated as having original issue
discount for this purpose. See "Certain Federal Income Tax
Considerations--Interest and Acquisition Discount" herein.
REMIC-Related Risks. Holders of Residual Interest Securities will
be required to report on their federal income tax returns as ordinary
income their pro rata share of the taxable income of the REMIC,
regardless of the amount or timing of their receipt of cash payments,
as described in "Certain Federal Income Tax Considerations."
Accordingly, under certain circumstances, Holders of Securities that
constitute Residual Interest Securities may have taxable income and tax
liabilities arising from such investment during a taxable year in
excess of the cash received during such period. Individual Holders of
Residual Interest Securities may be limited in their ability to deduct
servicing fees and other expenses of the REMIC. In addition, Residual
Interest Securities are subject to certain restrictions on transfer.
Because of the special tax treatment of Residual Interest Securities,
the taxable income arising in a given year on a Residual Security will
not be equal to the taxable income associated with investment in a
corporate bond or stripped instrument having similar cash flow
characteristics and pre-tax yield. Therefore, the after-tax yield on
the Residual Interest Security may be significantly less than that of a
corporate bond or stripped instrument having similar cash flow
characteristics. Additionally, prospective purchasers of a REMIC
Residual Interest Security should be aware that the IRS recently
finalized regulations that provide that a REMIC Residual Interest
Security acquired after January 3, 1995 cannot be marked-to-market.
Prospective purchasers of a REMIC Residual Interest Security should
consult their tax advisors regarding the possible application of such
regulations. See "Certain Federal Income Tax Considerations--Taxation
of Holders of Residual Interest Securities--Mark to Market Rules."
Unsecured Home Improvement and Other Loans. The Trust Fund for any
Series may include Home Improvement Contracts that are not secured by
an interest in real estate or otherwise. The Trust Fund for any Series
may also include home equity contracts that were originated with
Loan-to-Value Ratios or Combined Loan-to-Value Ratios in excess of the
value of the related Mortgaged Property pledged as security therefor.
Under such circumstances, the Trust Fund for the related Series could
be treated as a general unsecured creditor as to any unsecured portion
of any such Loan. In the event of a default under a Loan that is
unsecured in whole or in part, the related Trust Fund will have
recourse only against the borrower's assets generally for the unsecured
portion of the Loan, along with all other general unsecured creditors
of the borrower. In a bankruptcy or insolvency proceeding relating to a
borrower on any such Loan, the unsecured obligations of the borrower
with respect to such Loan may be discharged, even though the value of
the borrower's assets made available to the related Trust Fund as a
general unsecured creditor is insufficient to pay amounts due and
owning under the related Loan.
Risk of Losses Associated with Adjustable Rate Loans. Adjustable
rate Loans may be underwritten on the basis of an assessment that
Mortgagors will have the ability to make payments in higher amounts
after relatively short periods of time. In some instances, Mortgagors'
income may not be sufficient to enable them to continue to make their
loan payments as such payments increase and thus the likelihood of
default will increase.
Potential Liability For Environmental Conditions. Real property
pledged as security to a lender may be subject to certain environmental
risks. Federal, state and local laws and regulations impose a wide
range of requirements on activities that may affect the environment,
health and safety. In certain circumstances, these laws and regulations
impose obligations on owners or operators of residential properties
such as those subject to the Loans. The failure to comply with such
laws and regulations may result in fines and penalties.
In particular, under various federal, state and local laws and
regulations, an owner or operator of real estate may be liable for the
costs of addressing hazardous substances on, in or beneath such
property and related costs. Such liability could exceed the value of
the property and the aggregate assets of the owner or operator. In
addition, persons who transport or dispose of hazardous substances, or
arrange for the transportation, disposal or treatment of hazardous
substances, at off-site locations may also be held liable if there are
releases or threatened releases of hazardous substances at such
off-site locations.
In addition, under the laws of some states and under the Federal
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), contamination of property may give rise to a lien on the
property to assure the payment of the costs of clean-up. In several
states, such a lien has priority over the lien of an existing mortgage
against such property.
Under the laws of some states, and under CERCLA and the Federal
Solid Waste Disposal Act, there is a possibility that a lender may be
held liable as an "owner" or "operator" for costs of addressing
releases or threatened releases of hazardous substances at a property,
or releases of petroleum from an underground storage tank, under
certain circumstances. See "Certain Legal Aspects of the
Loans--Environmental Risks."
Consumer Protection Laws May Affect Loans. Applicable state laws
generally regulate interest rates and other charges and require certain
disclosures. In addition, other state laws, public policy and general
principles of equity relating to the protection of consumers, unfair
and deceptive practices and debt collection practices may apply to the
origination, servicing and collection of the Loans. Depending on the
provisions of the applicable law and the specific facts and
circumstances involved, violations of these laws, policies and
principles may limit the ability of the Servicer to collect all or part
of the principal of or interest on the Loans, may entitle the borrower
to a refund of amounts previously paid and, in addition, could subject
the owner of the Loan to damages and administrative enforcement.
The Loans are also subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z
promulgated thereunder, which require certain disclosures to
the borrowers regarding the terms of the Loans;
(ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the
basis of age, race, color, sex, religion, marital status,
national origin, receipt of public assistance or the exercise
of any right under the Consumer Credit Protection Act, in the
extension of credit;
(iii) the Fair Credit Reporting Act, which regulates the
use and reporting of information related to the borrower's
credit experience; and
(iv) for loans that were originated or closed after
November 7, 1989, the Home Equity Loan Consumer Protection Act
of 1988, which requires additional application disclosures,
limits changes that may be made to the loan documents without
the borrower's consent and restricts a lender's ability to
declare a default or to suspend or reduce a borrower's credit
limit to certain enumerated events.
The Riegle Act. Certain mortgage loans are subject to the Riegle
Community Development and Regulatory Improvement Act of 1994 (the
"Riegle Act"), which incorporates the Home Ownership and Equity
Protection Act of 1994. These provisions impose additional disclosure
and other requirements on creditors with respect to non-purchase money
mortgage loans with high interest rates or high up-front fees and
charges. The provisions of the Riegle Act apply on a mandatory basis to
all mortgage loans originated on or after October 1, 1995. These
provisions can impose specified statutory liabilities upon creditors
who fail to comply with their provisions and may affect the
enforceability of the related loans. In addition, any assignee of the
creditor would generally be subject to all claims and defenses that the
consumer could assert against the creditor, including, without
limitation, the right to rescind the mortgage loan.
The Home Improvement Contracts are also subject to the
Preservation of Consumers' Claims and Defenses regulations of the
Federal Trade Commission and other similar federal and state statutes
and regulations (collectively, the "Holder in Due Course Rules"), which
protect the homeowner from defective craftsmanship or incomplete work
by a contractor. These laws permit the obligor to withhold payment if
the work does not meet the quality and durability standards agreed to
by the homeowner and the contractor. The Holder in Due Course Rules
have the effect of subjecting any assignee of the seller in a consumer
credit transaction to all claims and defenses the obligor in the credit
sale transaction could assert against the seller of the goods.
Violations of certain provisions of these federal laws may limit
the ability of the Servicer to collect all or part of the principal of
or interest on the Loans and in addition, could subject the Trust Fund
to damages and administrative enforcement. See "Certain Legal Aspects
of the Loans."
Contracts Will Not Be Stamped. In order to give notice of the
right, title and interest of Holders to the Home Improvement Contracts,
the Depositor will cause a UCC-1 financing statement to be executed by
the Depositor or the Seller identifying the applicable Trustee as the
secured party and identifying all Home Improvement Contracts as
collateral. Unless otherwise specified in the related Prospectus
Supplement, the Home Improvement Contracts will not be stamped or
otherwise marked to reflect their assignment to the Trust Fund.
Therefore, if, through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the Home Improvement
Contracts without notice of such assignment, the interest of Holders in
the Home Improvement Contracts could be defeated. See "Certain Legal
Aspects of the Loans--The Home Improvement Contracts."
Ratings Are Not Recommendations. It will be a condition to the
issuance of a Series of Securities that they be rated in one of the
four highest rating categories by the Rating Agencies identified in the
related Prospectus Supplement. Any such rating would be based on, among
other things, the adequacy of the value of the Primary Assets and any
Enhancement with respect to such Series. Such rating should not be
deemed a recommendation to purchase, hold or sell Securities, inasmuch
as it does not address market price or suitability for a particular
investor. There is also no assurance that any such rating will remain
in effect for any given period of time or may not be lowered or
withdrawn entirely by the Rating Agencies if in their judgment
circumstances in the future so warrant. In addition to being lowered or
withdrawn due to any erosion in the adequacy of the value of the
Primary Assets, such rating might also be lowered or withdrawn, among
other reasons, because of an adverse change in the financial or other
condition of an Enhancer or a change in the rating of such Enhancer's
long term debt.
DESCRIPTION OF THE SECURITIES
General
Each Series of Notes will be issued pursuant to an indenture
(each, an "Indenture") between the related Trust Fund and the entity
named in the related Prospectus Supplement as Indenture Trustee with
respect to such Series. A form of Indenture has been filed as an
exhibit to the Registration Statement of which this Prospectus forms a
part. The Certificates will also be issued in Series pursuant to
separate agreements (each, a "Pooling and Servicing Agreement" or a
"Trust Agreement") among the Depositor, the Servicer, if the Series
relates to Loans, and the Trustee. A form of Pooling and Servicing
Agreement has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. A Series may consist of both Notes
and Certificates.
The Seller may agree to reimburse the Depositor for certain fees
and expenses of the Depositor incurred in connection with the offering
of the Securities.
The following summaries describe certain provisions in the
Agreements common to each Series of Securities. The summaries do not
purport to be complete and are subject to, and are qualified in their
entirety by reference to, the provisions of the Agreements and the
Prospectus Supplement relating to each Series of Securities. Where
particular provisions or terms used in the Agreements are referred to,
the actual provisions (including definitions of terms) are incorporated
herein by reference as part of such summaries.
Each Series of Securities will consist of one or more Classes of
Securities, one or more of which may be Compound Interest Securities,
Variable Interest Securities, PAC Securities, Zero Coupon Securities,
Principal Only Securities, Interest Only Securities or Participating
Securities. A Series may also include one or more Classes of
Subordinated Securities. The Securities of each Series will be issued
only in fully registered form, without coupons, in the authorized
denominations for each Class specified in the related Prospectus
Supplement. Upon satisfaction of the conditions, if any, applicable to
a Class of a Series, as described in the related Prospectus Supplement,
the transfer of the Securities may be registered and the Securities may
be exchanged at the office of the applicable Trustee specified in the
Prospectus Supplement without the payment of any service charge other
than any tax or governmental charge payable in connection with such
registration of transfer or exchange. If specified in the related
Prospectus Supplement, one or more Classes of a Series may be available
in book-entry form only.
Unless otherwise provided in the related Prospectus Supplement,
payments of principal of and interest on a Series of Securities will be
made on the Distribution Dates specified in the Prospectus Supplement
relating to such Series by check mailed to Holders of such Series,
registered as such at the close of business on the record date
specified in the related Prospectus Supplement applicable to such
Distribution Dates at their addresses appearing on the security
register, except that (a) payments may be made by wire transfer (at the
expense of the Holder requesting payment by wire transfer) in certain
circumstances described in the related Prospectus Supplement and (b)
final payments of principal in retirement of each Security will be made
only upon presentation and surrender of such Security at the office of
the applicable Trustee specified in the Prospectus Supplement. Notice
of the final payment on a Security will be mailed to the Holder of such
Security before the Distribution Date on which the final principal
payment on any Security is expected to be made to the Holder of such
Security.
Payments of principal of and interest on the Securities will be
made by the applicable Trustee, or a paying agent on behalf of such
Trustee, as specified in the related Prospectus Supplement. Unless
otherwise provided in the related Prospectus Supplement, all payments
with respect to the Primary Assets for a Series, together with
reinvestment income thereon, amounts withdrawn from any Reserve Fund,
and amounts available pursuant to any other Enhancement will be
deposited directly into the Collection Account. If provided in the
related Prospectus Supplement, such deposits may be net of certain
amounts payable to the related Servicer and any other person specified
in such Prospectus Supplement. Such amounts thereafter will be
deposited into the Distribution Account(s) and will be available to
make payments on the Securities of such Series on the next Distribution
Date. See "The Trust Funds--Collection and Distribution Accounts."
Valuation of the Primary Assets
If specified in the related Prospectus Supplement for a Series of
Notes, each Primary Asset included in the related Trust Fund for a
Series will be assigned an initial "Asset Value." Unless otherwise
specified in the related Prospectus Supplement, at any time the Asset
Value of the Primary Assets will be equal to the product of the Asset
Value Percentage as set forth in the Indenture and the lesser of (a)
the stream of remaining regularly scheduled payments on the Primary
Assets, net, unless otherwise provided in the related Prospectus
Supplement, of certain amounts payable as expenses, together with
income earned on each such scheduled payment received through the day
preceding the next Distribution Date at the Assumed Reinvestment Rate,
if any, discounted to present value at the highest interest rate on the
Notes of such Series over periods equal to the interval between
payments on the Notes, and (b) the then-outstanding Principal Balance
of the Primary Assets. Unless otherwise specified in the related
Prospectus Supplement, the initial Asset Value of the Primary Assets
will be at least equal to the principal amount of the Notes of the
related Series at the date of issuance thereof.
The "Assumed Reinvestment Rate," if any, for a Series will be the
highest rate permitted by the Rating Agencies or a rate insured by
means of a surety bond, guaranteed investment contract, Deposit
Agreement or other arrangement satisfactory to the Rating Agencies. If
the Assumed Reinvestment Rate is so insured, the related Prospectus
Supplement will set forth the terms of such arrangement.
Payments of Interest
The Securities of each Class by their terms entitled to receive
interest will bear interest (calculated, unless otherwise specified in
the related Prospectus Supplement, on the basis of a 360-day year of
twelve 30-day months) from the date and at the per annum rate
specified, or calculated in the method described, in the related
Prospectus Supplement. Interest on such Securities of a Series will be
payable on the Distribution Date specified in the related Prospectus
Supplement. The rate of interest on Securities of a Series may be
variable or may change with changes in the annual percentage rates of
the Loans or Underlying Loans relating to the Private Securities, as
applicable, included in the related Trust Fund and/or as prepayments
occur with respect to such Loans or Underlying Loans, as applicable.
Principal Only Securities may not be entitled to receive any interest
distributions or may be entitled to receive only nominal interest
distributions. Any interest on Zero Coupon Securities that is not paid
on the related Distribution Date will accrue and be added to the
principal thereof on such Distribution Date.
Interest payable on the Securities on a Distribution Date will
include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues during the
calendar month preceding a Distribution Date, the effective yield to
Holders will be reduced from the yield that would otherwise be
obtainable if interest payable on the Securities were to accrue through
the day immediately preceding such Distribution Date.
Payments of Principal
On each Distribution Date for a Series, principal payments will be
made to the Holders of the Securities of such Series on which principal
is then payable, to the extent set forth in the related Prospectus
Supplement. Such payments will be made in an aggregate amount
determined as specified in the related Prospectus Supplement and will
be allocated among the respective Classes of a Series in the manner, at
the times and in the priority (which may, in certain cases, include
allocation by random lot) set forth in the related Prospectus
Supplement.
Final Scheduled Distribution Date
The Final Scheduled Distribution Date with respect to each Class
of a Series of Notes is the date no later than which the principal
thereof will be fully paid and with respect to each Class of a Series
of Certificates will be the date on which the entire aggregate
principal balance of such Class is expected to be reduced to zero, in
each case calculated on the basis of the assumptions applicable to such
Series described in the related Prospectus Supplement. The Final
Scheduled Distribution Date for each Class of a Series will be
specified in the related Prospectus Supplement. Since payments on the
Primary Assets will be used to make distributions in reduction of the
outstanding principal amount of the Securities, it is likely that the
actual final Distribution Date of any such Class will occur earlier,
and may occur substantially earlier, than its Final Scheduled
Distribution Date. Furthermore, with respect to a Series of
Certificates, unless otherwise specified in the related Prospectus
Supplement, as a result of delinquencies, defaults and liquidations of
the Primary Assets in the Trust Fund, the actual final Distribution
Date of any Certificate may occur later than its Final Scheduled
Distribution Date. No assurance can be given as to the actual
prepayment experience with respect to a Series.
See "Weighted Average Life of the Securities" below.
Special Redemption
If so specified in the Prospectus Supplement relating to a Series
of Securities having other than monthly Distribution Dates, one or more
Classes of Securities of such Series may be subject to special
redemption, in whole or in part, on the day specified in the related
Prospectus Supplement (the "Special Redemption Date") if, as a
consequence of prepayments on the Loans or Underlying Loans, as
applicable, relating to such Securities, or low yields then available
for reinvestment, the entity specified in the related Prospectus
Supplement determines, based on assumptions specified in the applicable
Agreement, that the amount available for the payment of interest that
will have accrued on such Securities (the "Available Interest Amount")
through the designated interest accrual date specified in the related
Prospectus Supplement is less than the amount of interest that will
have accrued on such Securities to such date. In such event and as
further described in the related Prospectus Supplement, the applicable
Trustee will redeem a principal amount of outstanding Securities of
such Series as will cause the Available Interest Amount to equal the
amount of interest that will have accrued through such designated
interest accrual date for such Series of Securities outstanding
immediately after such redemption.
Optional Redemption, Purchase or Termination
The Depositor or the Servicer may, at its option, redeem, in whole
or in part, one or more Classes of Notes or purchase one or more
Classes of Certificates of any Series, on any Distribution Date under
the circumstances, if any, specified in the Prospectus Supplement
relating to such Series. Alternatively, if so specified in the related
Prospectus Supplement for a Series of Certificates, the Depositor, the
Servicer, or another entity designated in the related Prospectus
Supplement may, at its option, cause an early termination of a Trust
Fund by repurchasing all of the Primary Assets from such Trust Fund on
or after a date specified in the related Prospectus Supplement, or on
or after such time as the aggregate outstanding principal amount of the
Certificates or Primary Assets, as specified in the related Prospectus
Supplement, is equal to or less than the amount or percentage specified
in the related Prospectus Supplement. Notice of such redemption,
purchase or termination must be given by the Depositor or the Trustee
prior to the related date. The redemption, purchase or repurchase price
will be set forth in the related Prospectus Supplement. If specified in
the related Prospectus Supplement, in the event that a REMIC election
has been made, the Trustee shall receive a satisfactory opinion of
counsel that the optional redemption, purchase or termination will be
conducted so as to constitute a "qualified liquidation" under Section
860F of the Code.
In addition, the Prospectus Supplement may provide other
circumstances under which Holders of Securities of a Series could be
fully paid significantly earlier than would otherwise be the case if
payments or distributions were solely based on the activity of the
related Primary Assets.
Weighted Average Life of the Securities
Weighted average life refers to the average amount of time that
will elapse from the date of issue of a security until each dollar of
principal of such security will be repaid to the investor. Unless
otherwise specified in the related Prospectus Supplement, the weighted
average life of the Securities of a Class will be influenced by the
rate at which the amount financed under the Loans or Underlying Loans
relating to the Private Securities, as applicable, included in the
Trust Fund for a Series is paid, which may be in the form of scheduled
amortization or prepayments.
Prepayments on loans and other receivables can be measured
relative to a prepayment standard or model. The Prospectus Supplement
for a Series of Securities will describe the prepayment standard or
model, if any, used and may contain tables setting forth the projected
weighted average life of each Class of Securities of such Series and
the percentage of the original principal amount of each Class of
Securities of such Series that would be outstanding on specified
Distribution Dates for such Series based on the assumptions stated in
such Prospectus Supplement, including assumptions that prepayments on
the Loans or Underlying Loans relating to the Private Securities, as
applicable, included in the related Trust Fund are made at rates
corresponding to various percentages of the prepayment standard or
model specified in such Prospectus Supplement.
There is, however, no assurance that prepayment of the Loans or
Underlying Loans relating to the Private Securities, as applicable,
included in the related Trust Fund will conform to any level of any
prepayment standard or model specified in the related Prospectus
Supplement. The rate of principal prepayments on pools of loans may be
influenced by a variety of factors, including job related factors such
as transfers, layoffs or promotions and personal factors such as
divorce, disability or prolonged illness. Economic conditions, either
generally or within a particular geographic area or industry, also may
affect the rate of principal prepayments. Demographic and social
factors may influence the rate of principal prepayments in that some
borrowers have greater financial flexibility to move or refinance than
do other borrowers. The deductibility of mortgage interest payments,
servicing decisions and other factors also affect the rate of principal
prepayments. As a result, there can be no assurance as to the rate or
timing of principal prepayments of the Loans or Underlying Loans either
from time to time or over the lives of such Loans or Underlying Loans.
The rate of prepayments of conventional housing loans and other
receivables has fluctuated significantly in recent years. In general,
however, if prevailing interest rates fall significantly below the
interest rates on the Loans or Underlying Loans relating to the Private
Securities, as applicable, for a Series, such loans are likely to
prepay at rates higher than if prevailing interest rates remain at or
above the interest rates borne by such loans. In this regard, it should
be noted that the Loans or Underlying Loans, as applicable, for a
Series may have different interest rates. In addition, the weighted
average life of the Securities may be affected by the varying
maturities of the Loans or Underlying Loans relating to the Private
Securities, as applicable. If any Loans or Underlying Loans relating to
the Private Securities, as applicable, for a Series have actual
terms-to-stated maturity of less than those assumed in calculating the
Final Scheduled Distribution Date of the related Securities, one or
more Classes of the Series may be fully paid prior to their respective
Final Scheduled Distribution Date, even in the absence of prepayments
and a reinvestment return higher than the Assumed Reinvestment Rate.
THE TRUST FUNDS
General
The Notes of each Series will be secured by the pledge of the
assets of the related Trust Fund, and the Certificates of each Series
will represent interests in the assets of the related Trust Fund. The
Trust Fund of each Series will include assets purchased from the Seller
composed of (i) the Primary Assets, (ii) amounts available from the
reinvestment of payments on such Primary Assets at the Assumed
Reinvestment Rate, if any, specified in the related Prospectus
Supplement, (iii) any Enhancement, (iv) any Property that secured a
Loan but which is acquired by foreclosure or deed in lieu of
foreclosure or repossession and (v) the amount, if any, initially
deposited into the Collection Account or Distribution Account(s) for a
Series as specified in the related Prospectus Supplement.
The Securities will be non-recourse obligations of the related
Trust Fund. The assets of the Trust Fund specified in the related
Prospectus Supplement for a Series of Securities, unless otherwise
specified in the related Prospectus Supplement, will serve as
collateral only for that Series of Securities. Holders of a Series of
Notes may only proceed against such collateral securing such Series of
Notes in the case of a default with respect to such Series of Notes and
may not proceed against any assets of the Depositor or the related
Trust Fund not pledged to secure such Notes.
The Primary Assets for a Series will be sold by the Seller to the
Depositor or purchased by the Depositor in the open market or in
privately negotiated transactions, which may include transactions with
affiliates and will be transferred by the Depositor to the Trust Fund.
Loans relating to a Series will be serviced by the Servicer, which may
be the Seller, specified in the related Prospectus Supplement, pursuant
to a Pooling and Servicing Agreement, with respect to a Series of
Certificates or a servicing agreement (each, a "Servicing Agreement")
between the Trust Fund and Servicer, with respect to a Series of Notes.
If so specified in the related Prospectus Supplement, a Trust Fund
relating to a Series of Securities may be a business trust formed under
the laws of the state specified in the related Prospectus Supplement
pursuant to a trust agreement (each, a "Trust Agreement") between the
Depositor and the Trustee of such Trust Fund specified in the related
Prospectus Supplement.
With respect to each Trust Fund, prior to the initial offering of
the related Series of Securities, the Trust Fund will have no assets or
liabilities. No Trust Fund is expected to engage in any activities
other than acquiring, managing and holding the related Primary Assets
and other assets contemplated herein and in the related Prospectus
Supplement and the proceeds thereof, issuing Securities and making
payments and distributions thereon and certain related activities. No
Trust Fund is expected to have any source of capital other than its
assets and any related Enhancement.
Primary Assets included in the Trust Fund for a Series may consist
of any combination of Loans and Private Securities, to the extent and
as specified in the related Prospectus Supplement.
The Loans
Mortgage Loans. The Primary Assets for a Series may consist, in
whole or in part, of closed-end home equity loans (the "Closed-End
Loans") and/or revolving home equity loans or certain balances therein
(the "Revolving Credit Line Loans" and, together with the Closed-End
Loans, the "Mortgage Loans") secured by mortgages primarily on Single
Family Properties that may be subordinated to other mortgages on the
same Mortgaged Property. The Mortgage Loans may have fixed interest
rates or adjustable interest rates and may provide for other payment
characteristics as described below and in the related Prospectus
Supplement.
The full principal amount of a Closed-End Loan is advanced at
origination of the loan and generally is repayable in equal (or
substantially equal) installments of an amount sufficient to fully
amortize such loan at its stated maturity. Unless otherwise described
in the related Prospectus Supplement, the original terms to stated
maturity of Closed-End Loans will not exceed 360 months. Principal
amounts on a Revolving Credit Line Loan may be drawn down (up to a
maximum amount as set forth in the related Prospectus Supplement) or
repaid under each Revolving Credit Line Loan from time to time, but may
be subject to a minimum periodic payment. Except to the extent provided
in the related Prospectus Supplement, the Trust Fund will not include
any amounts borrowed under a Revolving Credit Line Loan after the
Cut-off Date. As more fully described in the related Prospectus
Supplement, interest on each Revolving Credit Line Loan, excluding
introductory rates offered from time to time during promotional
periods, is computed and payable monthly on the average daily Principal
Balance of such Loan. Under certain circumstances, under either a
Revolving Credit Line Loan or a Closed-End Loan, a borrower may choose
an interest only payment option and is obligated to pay only the amount
of interest that accrues on the loan during the billing cycle. An
interest only payment option may be available for a specified period
before the borrower must begin paying at least the minimum monthly
payment of a specified percentage of the average outstanding balance of
the loan.
The rate of prepayment on the Mortgage Loans cannot be predicted.
Home equity loans have been originated in significant volume only
during the past few years and the Depositor is not aware of any
publicly available studies or statistics on the rate of prepayment of
such loans. Generally, home equity loans are not viewed by borrowers as
permanent financing. Accordingly, the Mortgage Loans may experience a
higher rate of prepayment than traditional first mortgage loans. On the
other hand, because home equity loans such as the Revolving Credit Line
Loans generally are not fully amortizing, the absence of voluntary
borrower prepayments could cause rates of principal payments lower
than, or similar to, those of traditional fully-amortizing first
mortgages. The prepayment experience of the related Trust Fund may be
affected by a wide variety of factors, including general economic
conditions, prevailing interest rate levels, the availability of
alternative financing and homeowner mobility and the frequency and
amount of any future draws on any Revolving Credit Line Loans. Other
factors that might be expected to affect the prepayment rate of a pool
of home equity mortgage loans or home improvement contracts include the
amounts of, and interest rates on, the underlying first mortgage loans,
and the use of first mortgage loans as long-term financing for home
purchase and subordinate mortgage loans as shorter-term financing for a
variety of purposes, including home improvement, education expenses and
purchases of consumer durables such as automobiles. Accordingly, the
Mortgage Loans may experience a higher rate of prepayment than
traditional fixed-rate mortgage loans. In addition, any future
limitations on the right of borrowers to deduct interest payments on
home equity loans for federal income tax purposes may further increase
the rate of prepayments of the Loans. Moreover, the enforcement of a
"due-on-sale" provision (as described below) will have the same effect
as a prepayment of the related Loan. See "Certain Legal Aspects of the
Loans--Due-on-Sale Clauses in Mortgage Loans."
Collections on Revolving Credit Line Loans may vary because, among
other things, borrowers may (i) make payments during any month as low
as the minimum monthly payment for such month or, during the
interest-only period for certain Revolving Credit Line Loans and, in
more limited circumstances, Closed-End Loans with respect to which an
interest-only payment option has been selected, the interest and the
fees and charges for such month or (ii) make payments as high as the
entire Principal Balance plus accrued interest and the fees and charges
thereon. It is possible that borrowers may fail to make the required
periodic payments. In addition, collections on the Mortgage Loans may
vary due to seasonal purchasing and the payment habits of borrowers.
The Mortgaged Properties will include Single Family Property
(i.e., one- to four-family residential housing, including Condominium
Units and Cooperative Dwellings) and mixed-use property. Mixed-use
properties will consist of structures of no more than three stories
that include one- to four-residential dwelling units and space used for
retail, professional or other commercial uses. Such uses, which will
not involve more than 50% of the space in the structure, may include
doctor, dentist or law offices, real estate agencies, boutiques,
newsstands, convenience stores or other similar types of uses intended
to cater to individual customers as specified in the related Prospectus
Supplement. The properties may be located in suburban or metropolitan
districts. Any such non-residential use will be in compliance with
local zoning laws and regulations. The Mortgaged Properties may consist
of detached individual dwellings, individual condominiums, townhouses,
duplexes, row houses, individual units in planned unit developments and
other attached dwelling units. Each Single Family Property will be
located on land owned in fee simple by the borrower or on land leased
by the borrower for a term at least ten years (unless otherwise
provided in the related Prospectus Supplement) greater than the term of
the related Loan. Attached dwellings may include owner-occupied
structures where each borrower owns the land upon which the unit is
built, with the remaining adjacent land owned in common or dwelling
units subject to a proprietary lease or occupancy agreement in a
cooperatively owned apartment building.
Unless otherwise specified in the related Prospectus Supplement,
Mortgages on Cooperative Dwellings consist of a lien on the shares
issued by such Cooperative Dwelling and the proprietary lease or
occupancy agreement relating to such Cooperative Dwelling.
The aggregate Principal Balance of Loans secured by Properties
that are owner-occupied will be disclosed in the related Prospectus
Supplement. Unless otherwise specified in the Prospectus Supplement,
the sole basis for a representation that a given percentage of the
Loans are secured by Single Family Property that is owner-occupied will
be either (i) the making of a representation by the Mortgagor at
origination of the Mortgage Loan either that the underlying Mortgaged
Property will be used by the Mortgagor for a period of at least six
months every year or that the Mortgagor intends to use the Mortgaged
Property as a primary residence, or (ii) a finding that the address of
the underlying Mortgaged Property is the Mortgagor's mailing address as
reflected in the Servicer's records. To the extent specified in the
related Prospectus Supplement, the Mortgaged Properties may include
non-owner occupied investment properties and vacation and second homes.
Unless otherwise specified in the related Prospectus Supplement,
the initial Combined Loan-to-Value Ratio of a Loan is computed in the
manner described in the related Prospectus Supplement, taking into
account the amounts of any related senior mortgage loans.
Home Improvement Contracts. The Primary Assets for a Series may
consist, in whole or in part, of home improvement installment sales
contracts and installment loan agreements (the "Home Improvement
Contracts") originated by a home improvement contractor in the ordinary
course of business. As specified in the related Prospectus Supplement,
the Home Improvement Contracts will either be unsecured or secured by
the Mortgages primarily on Single Family Properties, which are
generally subordinated to other mortgages on the same Mortgaged
Property or by purchase money security interests in the Home
Improvements financed thereby. Unless otherwise specified in the
applicable Prospectus Supplement, the Home Improvement Contracts will
be fully amortizing and may have fixed interest rates or adjustable
interest rates and may provide for other payment characteristics as
described below and in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
the home improvements (the "Home Improvements") securing the Home
Improvement Contracts include, but are not limited to, replacement
windows, house siding, new roofs, swimming pools, satellite dishes,
kitchen and bathroom remodeling goods and solar heating panels. The
initial Loan-to-Value Ratio of a Home Improvement Contract will be
computed in the manner described in the related Prospectus Supplement.
Additional Information. The selection criteria that will apply
with respect to the Loans, including, but not limited to, the Combined
Loan-to-Value Ratios or Loan-to-Value Ratios, as applicable, original
terms to maturity and delinquency information, will be specified in the
related Prospectus Supplement.
The Loans for a Series may include Loans that do not amortize
their entire Principal Balance by their stated maturity in accordance
with their terms and require a balloon payment of the remaining
Principal Balance at maturity, as specified in the related Prospectus
Supplement. As further described in the related Prospectus Supplement,
the Loans for a Series may include Loans that do not have a specified
stated maturity.
The Loans will be conventional contracts or contracts insured by
the Federal Housing Administration (the "FHA") or partially guaranteed
by the Veterans Administration (the "VA"). Loans designated in the
related Prospectus Supplement as insured by the FHA will be insured by
the FHA as authorized under the United States Housing Act of 1937, as
amended. Such Loans will be insured under various FHA programs. These
programs generally limit the principal amount and interest rates of the
mortgage loans insured. Loans insured by the FHA generally require a
minimum down payment of approximately 5% of the original principal
amount of the loan. No FHA-insured Loans relating to a Series may have
an interest rate or original principal amount exceeding the applicable
FHA limits at the time or origination of such loan.
The insurance premiums for Loans insured by the FHA are collected
by lenders approved by the Department of Housing and Urban Development
("HUD") and are paid to the FHA. The regulations governing FHA
single-family mortgage insurance programs provide that insurance
benefits are payable either upon foreclosure (or other acquisition of
possession) and conveyance of the mortgaged premises to HUD or upon
assignment of the defaulted Loan to HUD. With respect to a defaulted
FHA-insured Loan, the Servicer is limited in its ability to initiate
foreclosure proceedings. When it is determined, either by the Servicer
or HUD, that default was caused by circumstances beyond the mortgagor's
control, the Servicer is expected to make an effort to avoid
foreclosure by entering, if feasible, into one of a number of available
forms of forbearance plans with the mortgagor. Such plans may involve
the reduction or suspension of regular mortgage payments for a
specified period, with such payments to be made upon or before the
maturity date of the mortgage, or the recasting of payments due under
the mortgage up to or beyond the maturity date. In addition, when a
default caused by such circumstances is accompanied by certain other
criteria, HUD may provide relief by making payments to the Servicer in
partial or full satisfaction of amounts due under the Loan (which
payments are to be repaid by the mortgagor to HUD) or by accepting
assignment of the loan from the Servicer. With certain exceptions, at
least three full monthly installments must be due and unpaid under the
Loan and HUD must have rejected any request for relief from the
mortgagor before the Servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash
or in debentures issued by HUD. Currently, claims are being paid in
cash, and claims have not been paid in debentures since 1965. HUD
debentures issued in satisfaction of FHA insurance claims bear interest
at the applicable HUD debenture interest rate. The Servicer of each
FHA-insured Loan will be obligated to purchase any such debenture
issued in satisfaction of such Loan upon default for an amount equal to
the principal amount of any such debenture.
The amount of insurance benefits generally paid by the FHA is
equal to the entire unpaid principal amount of the defaulted Loan
adjusted to reimburse the Servicer for certain costs and expenses and
to deduct certain amounts received or retained by the Servicer after
default. When entitlement to insurance benefits results from
foreclosure (or other acquisition of possession) and conveyance to HUD,
the Servicer is compensated for no more than two-thirds of its
foreclosure costs, and is compensated for interest accrued and unpaid
prior to such date but in general only to the extent it was allowed
pursuant to a forbearance plan approved by HUD. When entitlement to
insurance benefits results from assignment of the Loan to HUD, the
insurance payment includes full compensation for interest accrued and
unpaid to the assignment date. The insurance payment itself, upon
foreclosure of an FHA-insured Loan, bears interest from a date 30 days
after the mortgagor's first uncorrected failure to perform any
obligation to make any payment due under the Loan and, upon assignment,
from the date of assignment to the date of payment of the claim, in
each case at the same interest rate as the applicable HUD debenture
interest rate as described above.
Loans designated in the related Prospectus Supplement as
guaranteed by the VA will be partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended (the "VA Guaranty").
The Serviceman's Readjustment Act of 1944, as amended, permits a
veteran (or in certain instances, the spouse of a veteran) to obtain a
mortgage loan guaranty by the VA covering mortgage financing of the
purchase of a one- to four-family dwelling unit at interest rates
permitted by the VA. The program has no mortgage loan limits, requires
no down payment from the purchaser and permits the guarantee of
mortgage loans of up to 30 years' duration.
The maximum guaranty that may be issued by the VA under a VA
guaranteed mortgage loan depends upon the original principal amount of
the mortgage loan, as further described in 38 United States Code
Section 1803(a), as amended. The liability on the guaranty is reduced
or increased pro rata with any reduction or increase in the amount of
indebtedness, but in no event will the amount payable on the guaranty
exceed the amount of the original guaranty. The VA may, at its option
and without regard to the guaranty, make full payment to a mortgage
holder of unsatisfied indebtedness on a mortgage upon its assignment to
the VA.
With respect to a defaulted VA guaranteed Loan, the Servicer is,
absent exceptional circumstances, authorized to announce its intention
to foreclose only when the default has continued for three months.
Generally, a claim for the guaranty is submitted after liquidation of
the Mortgaged Property.
The amount payable under the guaranty will be the percentage of
the VA-insured Loan originally guaranteed applied to indebtedness
outstanding as of the applicable date of computation specified in the
VA regulations. Payments under the guaranty will be equal to the unpaid
principal amount of the loan, interest accrued on the unpaid balance of
the loan to the appropriate date of computation and limited expenses of
the mortgagee, but in each case only to the extent that such amounts
have not been recovered through liquidation of the Mortgaged Property.
The amount payable under the guaranty may in no event exceed the amount
of the original guaranty.
The related Prospectus Supplement for each Series will provide
information with respect to the Loans that are Primary Assets as of the
Cut-off Date, including, among other things, and to the extent
relevant: (a) the aggregate unpaid Principal Balance of the Loans; (b)
the range and weighted average Loan Rate on the Loans, and, in the case
of adjustable rate Loans, the range and weighted average of the current
Loan Rates and the Lifetime Rate Caps, if any; (c) the range and
average Principal Balance of the Loans; (d) the weighted average
original and remaining term-to-stated maturity of the Loans and the
range of original and remaining terms-to-stated maturity, if
applicable; (e) the range and weighted average of Combined
Loan-to-Value Ratios or Loan-to-Value Ratios for the Loans, as
applicable; (f) the percentage (by Principal Balance as of the Cut-off
Date) of Loans that accrue interest at adjustable or fixed interest
rates; (g) any special hazard Insurance Policy or bankruptcy bond or
other enhancement relating to the Loans; (h) the percentage (by
Principal Balance as of the Cut-off Date) of Loans that are secured by
Mortgaged Properties or Home Improvements or that are unsecured; (i)
the geographic distribution of any Mortgaged Properties securing the
Loans; (j) the percentage of Loans (by Principal Balance as of the
Cut-off Date) that are secured by Single Family Properties, shares
relating to Cooperative Dwellings, Condominium Units, investment
property and vacation or second homes; (k) the lien priority of the
Loans; (l) the delinquency status and year of origination of the Loans;
(m) whether such Loans are Closed-End Loans and/or Revolving Credit
Line Loans; and (n) in the case of Revolving Credit Line Loans, the
general payments and credit line terms of such Loans and other
pertinent features thereof. The related Prospectus Supplement will also
specify any other limitations on the types or characteristics of Loans
for a Series.
If information of the nature described above respecting the Loans
is not known to the Depositor at the time the Securities are initially
offered, approximate or more general information of the nature
described above will be provided in the Prospectus Supplement and
additional information will be set forth in a Current Report on Form
8-K to be available to investors on the date of issuance of the related
Series and to be filed with the Commission within 15 days after the
initial issuance of such Securities.
Private Securities
General. Primary Assets for a Series may consist, in whole or in
part, of Private Securities that include pass-through certificates
representing beneficial interests in loans of the type that would
otherwise be eligible to be Loans (the "Underlying Loans") or (b)
collateralized obligations secured by Underlying Loans. Such
pass-through certificates or collateralized obligations will have
previously been (a) offered and distributed to the public pursuant to
an effective registration statement or (b) purchased in a transaction
not involving any public offering from a person who is not an affiliate
of the issuer of such securities at the time of sale (nor an affiliate
thereof at any time during the three preceding months); provided a
period of three years elapsed since the later of the date the
securities were acquired from the issuer or an affiliate thereof.
Although individual Underlying Loans may be insured or guaranteed by
the United States or an agency or instrumentality thereof, they need
not be, and Private Securities themselves will not be so insured or
guaranteed.
Private Securities will have been issued pursuant to a pooling and
servicing agreement, a trust agreement or similar agreement (a "PS
Agreement"). The seller/servicer of the Underlying Loans will have
entered into the PS Agreement with the trustee under such PS Agreement
(the "PS Trustee"). The PS Trustee or its agent, or a custodian, will
possess the Underlying Loans. Underlying Loans will be serviced by a
servicer (the "PS Servicer") directly or by one or more sub-servicers
who may be subject to the supervision of the PS Servicer.
The sponsor of the Private Securities (the "PS Sponsor") will be a
financial institution or other entity engaged generally in the business
of lending; a public agency or instrumentality of a state, local or
federal government; or a limited purpose corporation organized for the
purpose of, among other things, establishing trusts and acquiring and
selling loans to such trusts, and selling beneficial interests in such
trusts. If so specified in the Prospectus Supplement, the PS Sponsor
may be an affiliate of the Depositor. The obligations of the PS Sponsor
will generally be limited to certain representations and warranties
with respect to the assets conveyed by it to the related trust. Unless
otherwise specified in the related Prospectus Supplement, the PS
Sponsor will not have guaranteed any of the assets conveyed to the
related trust or any of the Private Securities issued under the PS
Agreement. Additionally, although the Underlying Loans may be
guaranteed by an agency or instrumentality of the United States, the
Private Securities themselves will not be so guaranteed.
Distributions of principal and interest will be made on the
Private Securities on the dates specified in the related Prospectus
Supplement. The Private Securities may be entitled to receive nominal
or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private
Securities by the PS Trustee or the PS Servicer. The PS Sponsor or the
PS Servicer may have the right to repurchase the Underlying Loans after
a certain date or under other circumstances specified in the related
Prospectus Supplement.
The Underlying Loans may be fixed rate, level payment, fully
amortizing loans or adjustable rate loans or loans having balloon or
other irregular payment features. Such Underlying Loans will be secured
by mortgages on Mortgaged Properties.
Credit Support Relating to Private Securities. Credit support in
the form of Reserve Funds, subordination of other private securities
issued under the PS Agreement, guarantees, cash collateral accounts,
Security Policies or other types of credit support may be provided with
respect to the Underlying Loans or with respect to the Private
Securities themselves. The type, characteristics and amount of credit
support will be a function of certain characteristics of the Underlying
Loans and other factors and will have been established for the Private
Securities on the basis of requirements of the nationally recognized
statistical rating organization that rated the Private Securities.
Additional Information. The Prospectus Supplement for a Series for
which the Primary Assets include Private Securities will specify (such
disclosure may be on an approximate basis and will be as of the date
specified in the related Prospectus Supplement), to the extent relevant
and to the extent such information is reasonably available to the
Depositor and the Depositor reasonably believes such information to be
reliable: (i) the aggregate approximate principal amount and type of
the Private Securities to be included in the Trust Fund for such
Series; (ii) certain characteristics of the Underlying Loans, including
(a) the payment features of such Underlying Loans (i.e., whether they
are Closed-End Loans and/or Revolving Credit Line Loans, whether they
are fixed rate or adjustable rate and whether they provide for fixed
level payments or other payment features), (b) the approximate
aggregate Principal Balance, if known, of such Underlying Loans insured
or guaranteed by a governmental entity, (c) the servicing fee or range
of servicing fees with respect to the Underlying Loans, (d) the minimum
and maximum stated maturities of such Underlying Loans at origination,
(e) the lien priority of such Underlying Loans and (f) the delinquency
status and year of origination of such Underlying Loans; (iii) the
maximum original term-to-stated maturity of the Private Securities;
(iv) the weighted average term-to-stated maturity of the Private
Securities; (v) the pass-through or certificate rate or ranges thereof
for the Private Securities; (vi) the PS Sponsor, the PS Servicer (if
other than the PS Sponsor) and the PS Trustee for such Private
Securities; (vii) certain characteristics of credit support if any,
such as Reserve Funds, Security Policies or guarantees relating to such
Loans underlying the Private Securities or to such Private Securities
themselves; (viii) the terms on which Underlying Loans may, or are
required to, be purchased prior to their stated maturity or the stated
maturity of the Private Securities; and (ix) the terms on which
Underlying Loans may be substituted for those originally underlying the
Private Securities.
If information of the nature described above representing the
Private Securities is not known to the Depositor at the time the
Securities are initially offered, approximate or more general
information of the nature described above will be provided in the
Prospectus Supplement and the additional information, if available,
will be set forth in a Current Report on Form 8-K to be available to
investors on the date of issuance of the related Series and to be filed
with the Commission within 15 days of the initial issuance of such
Securities.
Collection and Distribution Accounts
A separate Collection Account will be established by the Trustee
or the Servicer, in the name of the Trustee, for each Series of
Securities for receipt of the amount of cash, if any, specified in the
related Prospectus Supplement to be initially deposited therein by the
Depositor, all amounts received on or with respect to the Primary
Assets and, unless otherwise specified in the related Prospectus
Supplement, income earned thereon. Certain amounts on deposit in such
Collection Account and certain amounts available pursuant to any
Enhancement, as provided in the related Prospectus Supplement, will be
deposited into the applicable Distribution Account, which will also be
established by the applicable Trustee for each such Series of
Securities, for distribution to the related Holders. Unless otherwise
specified in the related Prospectus Supplement, the applicable Trustee
will invest the funds in the Collection Account and the Distribution
Account(s) in Eligible Investments maturing, with certain exceptions,
not later, in the case of funds in the Collection Account, than the day
preceding the date such funds are due to be deposited into the
Distribution Account(s) or otherwise distributed and, in the case of
funds in the Distribution Account(s), than the day preceding the next
Distribution Date for the related Series of Securities. Eligible
Investments include, among other investments, obligations of the United
States and certain agencies thereof, federal funds, certificates of
deposit, commercial paper, demand and time deposits and banker's
acceptances, certain repurchase agreements of United States government
securities and certain guaranteed investment contracts, in each case
acceptable to the Rating Agencies.
Notwithstanding any of the foregoing, amounts may be deposited and
withdrawn pursuant to any Deposit Agreement or Minimum Principal
Payment Agreement as specified in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, a Trust Fund
will include one or more segregated trust accounts (each, a
"Pre-Funding Account") established and maintained with the Trustee for
the related Series. If so specified, on the Closing Date for such
Series, a portion of the proceeds of the sale of the Securities of such
Series (such amount, the "Pre-Funded Amount") will be deposited into
the Pre-Funding Account and may be used to purchase additional Primary
Assets during the period of time specified in the related Prospectus
Supplement (the "Pre-Funding Period"). In no case will the Pre-Funded
Amount exceed 50% of the aggregate principal amount of the related
Securities, and in no case will the Pre-Funding Period exceed one year.
The Primary Assets to be so purchased generally will be selected on the
basis of the same criteria as those used to select the initial Primary
Assets, and the same representations and warranties will be made with
respect thereto. If any Pre-Funded Amount remains on deposit in the
Pre-Funding Account at the end of the Pre-Funding Period, such amount
will be applied in the manner specified in the related Prospectus
Supplement to prepay the Notes and/or the Certificates of the
applicable Series.
If a Pre-Funding Account is established, one or more segregated
trust accounts (each, a "Capitalized Interest Account") may be
established and maintained with the Trustee for the related Series. On
the Closing Date for such Series, a portion of the proceeds of the sale
of the Securities of such Series will be deposited into the Capitalized
Interest Account and used to fund the excess, if any, of the sum of (i)
the amount of interest accrued on the Securities of such Series and
(ii) if specified in the related Prospectus Supplement, certain fees or
expenses during the Pre-Funding Period, over the amount of interest
available therefor from the Primary Assets in the Trust Fund. Any
amounts on deposit in the Capitalized Interest Account at the end of
the Pre-Funding Period that are not necessary for such purposes will be
distributed to the person specified in the related Prospectus
Supplement.
ENHANCEMENT
If stated in the Prospectus Supplement relating to a Series of
Securities, simultaneously with the Depositor's assignment of the
Primary Assets to the Trustee, the Depositor will obtain a Security
Policy, issue Subordinated Securities or obtain any other form of
enhancement or combination thereof (collectively, "Enhancement") in
favor of the Trustee on behalf of the Holders of the related Series or
designated Classes of such Series from an institution or by other means
acceptable to the Rating Agencies. The Enhancement will support the
payment of principal of and interest on the Securities, and may be
applied for certain other purposes to the extent and under the
conditions set forth in such Prospectus Supplement. Enhancement for a
Series may include one or more of the following forms, or such other
form as may be specified in the related Prospectus Supplement. If so
specified in the related Prospectus Supplement, any of such Enhancement
may be structured so as to protect against losses relating to more than
one Trust Fund, in the manner described therein.
Subordinated Securities
If specified in the related Prospectus Supplement, Enhancement for
a Series may consist of one or more Classes of Subordinated Securities.
The rights of the related Subordinated Securityholders to receive
distributions on any Distribution Date will be subordinate in right and
priority to the rights of Holders of Senior Securities of the Series,
but only to the extent described in the related Prospectus Supplement.
Insurance
If stated in the related Prospectus Supplement, Enhancement for a
Series may consist of special hazard Insurance Policies, bankruptcy
bonds and other types of insurance relating to the Primary Assets, as
described below and in the related Prospectus Supplement.
Pool Insurance Policy. If so specified in the Prospectus
Supplement relating to a Series of Securities, the Depositor will
obtain a pool insurance policy (the "Pool Insurance Policy") for the
Loans in the related Trust Fund. The Pool Insurance Policy will cover
any loss (subject to the limitations described in a related Prospectus
Supplement) by reason of default. but will not cover the portion of the
Principal Balance of any Loan that is required to be covered by any
primary mortgage Insurance Policy. The amount and terms of any such
coverage will be set forth in the related Prospectus Supplement.
Special Hazard Insurance Policy. Although the terms of such
policies vary to some degree, a special hazard Insurance Policy
typically provides that, where there has been damage to Property
securing a defaulted or foreclosed Loan (title to which has been
acquired by the insured) and to the extent such damage is not covered
by the standard hazard Insurance Policy or any flood Insurance Policy,
if applicable, required to be maintained with respect to such Property,
or in connection with partial loss resulting from the application of
the coinsurance clause in a standard hazard Insurance Policy, the
special hazard insurer will pay the lesser of (i) the cost of repair or
replacement of such Property or (ii) upon transfer of such Property to
the special hazard insurer, the unpaid Principal Balance of such Loan
at the time of acquisition of such Property by foreclosure or deed in
lieu of foreclosure, plus accrued interest to the date of claim
settlement and certain expenses incurred by the Servicer with respect
to such Property. If the unpaid Principal Balance plus accrued interest
and certain expenses is paid by the special hazard insurer, the amount
of further coverage under the special hazard Insurance Policy will be
reduced by such amount less any net proceeds from the sale of such
Property. Any amount paid as the cost of repair of such Property will
reduce coverage by such amount. Special hazard Insurance Policies
typically do not cover losses occasioned by war, civil insurrection,
certain governmental actions, errors in design, faulty workmanship or
materials (except under certain circumstances), nuclear reaction, flood
(if the mortgaged property is in a federally designated flood area),
chemical contamination and certain other risks.
Restoration of the Property with the proceeds described under (i)
above is expected to satisfy the condition under any Pool Insurance
Policy that such Property be restored before a claim under such Pool
Insurance Policy may be validly presented with respect to the defaulted
Loan secured by such Property. The payment described under (ii) above
will render unnecessary presentation of a claim in respect of such Loan
under any Pool Insurance Policy. Therefore, so long as such Pool
Insurance Policy remains in effect, the payment by the special hazard
insurer of the cost of repair or of the unpaid Principal Balance of the
related Loan plus accrued interest and certain expenses will not affect
the total amount in respect of insurance proceeds paid to Holders of
the Securities, but will affect the relative amounts of coverage
remaining under the special hazard Insurance Policy and Pool Insurance
Policy.
Bankruptcy Bond. In the event of a bankruptcy of a borrower, the
bankruptcy court may establish the value of the Property securing the
related Loan at an amount less than the then-outstanding Principal
Balance of such Loan. The amount of the secured debt could be reduced
to such value, and the holder of such Loan thus would become an
unsecured creditor to the extent the Principal Balance of such Loan
exceeds the value so assigned to the Property by the bankruptcy court.
In addition, certain other modifications of the terms of a Loan can
result from a bankruptcy proceeding. See "Certain Legal Aspects of the
Loans." If so provided in the related Prospectus Supplement, the
Depositor or other entity specified in the related Prospectus
Supplement will obtain a bankruptcy bond or similar insurance contract
(the "bankruptcy bond") covering losses resulting from proceedings with
respect to borrowers under the Bankruptcy Code. The bankruptcy bond
will cover certain losses resulting from a reduction by a bankruptcy
court of scheduled payments of principal of and interest on a Loan or a
reduction by such court of the principal amount of a Loan and will
cover certain unpaid interest on the amount of such a principal
reduction from the date of the filing of a bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount
specified in the related Prospectus Supplement for all Loans in the
Trust Fund for such Series. Such amount will be reduced by payments
made under such bankruptcy bond in respect of such Loans, unless
otherwise specified in the related Prospectus Supplement, and will not
be restored.
Reserve Funds
If so specified in the Prospectus Supplement relating to a Series
of Securities, the Depositor will deposit into one or more funds to be
established with the applicable Trustee as part of the Trust Fund for
such Series or for the benefit of any Enhancer with respect to such
Series (each, a "Reserve Fund") cash, a letter or letters of credit,
cash collateral accounts, Eligible Investments, or other instruments
meeting the criteria of the Rating Agencies rating any Series of the
Securities in the amount specified in such Prospectus Supplement. In
the alternative or in addition to such deposit, a Reserve Fund for a
Series may be funded over time through application of all or a portion
of the excess cash flow from the Primary Assets for such Series, to the
extent described in the related Prospectus Supplement. If applicable,
the initial amount of the Reserve Fund and the Reserve Fund maintenance
requirements for a Series of Securities will be described in the
related Prospectus Supplement.
Amounts withdrawn from any Reserve Fund will be applied by the
applicable Trustee to make payments on the Securities of a Series, to
pay expenses, to reimburse any Enhancer or for any other purpose, in
the manner and to the extent specified in the related Prospectus
Supplement.
Amounts deposited into a Reserve Fund will be invested by the
applicable Trustee in Eligible Investments maturing no later than the
day specified in the related Prospectus Supplement.
Minimum Principal Payment Agreement
If stated in the Prospectus Supplement relating to a Series of
Securities, the Depositor will enter into a Minimum Principal Payment
Agreement with an entity meeting the criteria of the Rating Agencies
pursuant to which such entity will provide certain payments on the
Securities of such Series in the event that aggregate scheduled
principal payments and/or prepayments on the Primary Assets for such
Series are not sufficient to make certain payments on the Securities of
such Series, as provided in the Prospectus Supplement.
Deposit Agreement
If specified in a Prospectus Supplement, the Depositor and the
applicable Trustee for such Series of Securities will enter into a
Deposit Agreement with the entity specified in such Prospectus
Supplement on or before the sale of such Series of Securities. The
purpose of a Deposit Agreement would be to accumulate available cash
for investment so that such cash, together with income thereon, can be
applied to future distributions on one or more Classes of Securities.
The Prospectus Supplement for a Series of Securities pursuant to which
a Deposit Agreement is used will contain a description of the terms of
such Deposit Agreement.
SERVICING OF LOANS
General
Customary servicing functions with respect to Loans comprising
the Primary Assets in the Trust Fund will be provided by the Servicer
directly pursuant to the related Servicing Agreement or Pooling and
Servicing Agreement, as the case may be, with respect to a Series of
Securities. Collection Procedures; Escrow Accounts
The Servicer will make reasonable efforts to collect all payments
required to be made under the Loans and will, consistent with the terms
of the related Agreement for a Series and any applicable Enhancement,
follow such collection procedures as it follows with respect to
comparable loans held in its own portfolio. Consistent with the above,
the Servicer may, in its discretion, (i) waive any assumption fee, late
payment charge, or other charge in connection with a Loan and (ii) to
the extent provided in the related Agreement, arrange with an obligor a
schedule for the liquidation of delinquencies by extending the Due
Dates for Scheduled Payments on such Loan.
If specified in the related Prospectus Supplement, the Servicer,
to the extent permitted by law, will establish and maintain escrow or
impound accounts (each, an "Escrow Account") with respect to Loans in
which payments by obligors to pay taxes, assessments, mortgage and
hazard Insurance Policy premiums, and other comparable items will be
deposited. Loans may not require such payments under the loan related
documents, in which case the Servicer would not be required to
establish any Escrow Account with respect to such Loans. Withdrawals
from the Escrow Accounts are to be made to effect timely payment of
taxes, assessments and mortgage and hazard insurance, to refund to
obligors amounts determined to be overages, to pay interest to obligors
on balances in the Escrow Account to the extent required by law, to
repair or otherwise protect the property securing the related Loan and
to clear and terminate such Escrow Account. The Servicer will be
responsible for the administration of the Escrow Accounts and generally
will make advances to such accounts when a deficiency exists therein.
Deposits to and Withdrawals from the Collection Account
Unless otherwise specified in the related Prospectus Supplement,
the Trustee or the Servicer will establish a separate account (the
"Collection Account") in the name of the Trustee. Unless otherwise
indicated in the related Prospectus Supplement, the Collection Account
will be an account maintained (i) at a depository institution, the
long-term unsecured debt obligations of which at the time of any
deposit therein are rated by each Rating Agency rating the Securities
of such Series at levels satisfactory to each Rating Agency or (ii) in
an account or accounts the deposits in which are insured to the maximum
extent available by the Federal Deposit Insurance Corporation or that
are secured in a manner meeting requirements established by each Rating
Agency.
Unless otherwise specified in the related Prospectus Supplement,
the funds held in the Collection Account may be invested in Eligible
Investments. If so specified in the related Prospectus Supplement, the
Servicer will be entitled to receive as additional compensation any
interest or other income earned on funds in the Collection Account.
Unless otherwise specified in the related Prospectus Supplement,
the Servicer, the Depositor, the Trustee or the Seller, as appropriate,
will deposit into the Collection Account for each Series on the
Business Day following the Closing Date, any amounts representing
Scheduled Payments due after the related Cut-off Date but received by
the Servicer on or before the Closing Date, and thereafter, within two
business days after the date of receipt thereof, the following payments
and collections received or made by it (other than, unless otherwise
provided in the related Prospectus Supplement, in respect of principal
of and interest on the related Primary Assets due on or before such
Cut-off Date):
(i) All payments in respect of principal, including pre-
payments, on such Primary Assets;
(ii) All payments in respect of interest on such Primary
Assets after deducting therefrom, at the discretion of the
Servicer but only to the extent of the amount permitted to be
withdrawn or withheld from the Collection Account in
accordance with the related Agreement, the Servicing Fee in
respect of such Primary Assets;
(iii) All amounts received by the Servicer in connection
with the liquidation of Primary Assets or property acquired in
respect thereof, whether through foreclosure sale,
repossession or otherwise, including payments in connection
with such Primary Assets received from the obligor, other than
amounts required to be paid or refunded to the obligor
pursuant to the terms of the applicable loan documents or
otherwise pursuant to law, net of related liquidation expenses
("Liquidation Proceeds"), exclusive of, in the discretion of
the Servicer, but only to the extent of the amount permitted
to be withdrawn from the Collection Account in accordance with
the related Agreement, the Servicing Fee, if any, in respect
of the related Primary Asset;
(iv) All proceeds under any title insurance, hazard
Insurance Policy or other Insurance Policy covering any such
Primary Asset, other than proceeds to be applied to the
restoration or repair of the related Property or released to
the obligor in accordance with the related Agreement;
(v) All amounts required to be deposited therein from
any Reserve Fund for such Series pursuant to the related
Agreement;
(vi) All Advances made by the Servicer required pursuant
to the related Agreement; and
(vii) All repurchase prices of any such Primary Assets
repurchased by the Depositor, the Servicer or the Seller
pursuant to the related Agreement.
Unless otherwise specified in the related Prospectus Supplement,
the Servicer is permitted, from time to time, to make withdrawals from
the Collection Account for each Series for the following purposes:
(i) to reimburse itself for Advances for such Series
made by it pursuant to the related Agreement; provided, that
the Servicer's right to reimburse itself is limited to amounts
received on or in respect of particular Loans (including, for
this purpose, Liquidation Proceeds and Insurance Proceeds)
that represent late recoveries of Scheduled Payments with
respect to which any such Advance was made;
(ii) to the extent provided in the related Agreement, to
reimburse itself for any Advances for such Series that the
Servicer determines in good faith it will be unable to recover
from amounts representing late recoveries of Scheduled
Payments respecting which such Advance was made or from
Liquidation Proceeds or Insurance Proceeds;
(iii) to reimburse itself from Liquidation Proceeds for
liquidation expenses and for amounts expended by it in good
faith in connection with the restoration of damaged Property
and, in the event deposited into the Collection Account and
not previously withheld, and to the extent that Liquidation
Proceeds after such reimbursement exceed the Principal Balance
of the related Loan, together with accrued and unpaid interest
thereon to the Due Date for such Loan next succeeding the date
of its receipt of such Liquidation Proceeds, to pay to itself
out of such excess the amount of any unpaid Servicing Fee and
any assumption fees, late payment charges, or other charges on
the related Loan;
(iv) in the event it has elected not to pay itself the
Servicing Fee out of the interest component of any Scheduled
Payment, late payment or other recovery with respect to a
particular Loan prior to the deposit of such Scheduled
Payment, late payment or recovery into the Collection Account,
to pay to itself the Servicing Fee, as adjusted pursuant to
the related Agreement, from any such Scheduled Payment, late
payment or such other recovery, to the extent permitted by the
related Agreement;
(v) to reimburse itself for expenses incurred by and
recoverable by or reimbursable to it pursuant to the related
Agreement;
(vi) to pay to the applicable person with respect to each
Primary Asset or REO Property acquired in respect thereof that
has been repurchased or removed from the Trust Fund by the
Depositor, the Servicer or the Seller pursuant to the related
Agreement, all amounts received thereon and not distributed as
of the date on which the related repurchase price was
determined;
(vii) to make payments to the applicable Trustee of such
Series for deposit into the related Distribution Account, if
any, or for remittance to the Holders of such Series in the
amounts and in the manner provided for in the related
Agreement; and
(viii) to clear and terminate the Collection Account
pursuant to the related Agreement.
In addition, if the Servicer deposits into the Collection Account
for a Series any amount not required to be deposited therein, it may,
at any time, withdraw such amount from such Collection Account.
Advances and Limitations Thereon
The related Prospectus Supplement will describe the circumstances,
if any, under which the Servicer will make Advances with respect to
delinquent payments on Loans. If specified in the related Prospectus
Supplement, the Servicer will be obligated to make Advances, and such
obligation may be limited in amount, or may not be activated until a
certain portion of a specified Reserve Fund is depleted. Advances are
intended to provide liquidity and, except to the extent specified in
the related Prospectus Supplement, not to guarantee or insure against
losses. Accordingly, any funds advanced are recoverable by the Servicer
out of amounts received on particular Loans that represent late
recoveries of principal or interest, Insurance Proceeds or Liquidation
Proceeds respecting which any such Advance was made. If an Advance is
made and subsequently determined to be nonrecoverable from late
collections, Insurance Proceeds or Liquidation Proceeds from the
related Loan, the Servicer may be entitled to reimbursement from other
funds in the Collection Account or Distribution Account(s), as the case
may be, or from a specified Reserve Fund, as applicable, to the extent
specified in the related Prospectus Supplement.
Maintenance of Insurance Policies and Other Servicing Procedures
Standard Hazard Insurance; Flood Insurance. Except as otherwise
specified in the related Prospectus Supplement, the Servicer will be
required to maintain or to cause the obligor on each Loan to maintain a
standard hazard Insurance Policy providing coverage of the standard
form of fire insurance with extended coverage for certain other hazards
as is customary in the state in which the related Property is located.
The standard hazard Insurance Policies will provide for coverage at
least equal to the applicable state standard form of fire Insurance
Policy with extended coverage for property of the type securing the
related Loans. In general, the standard form of fire and extended
coverage policy will cover physical damage to or destruction of, the
related Property caused by fire, lightning, explosion, smoke,
windstorm, hail, riot, strike and civil commotion, subject to the
conditions and exclusions particularized in each policy. Because the
standard hazard Insurance Policies relating to the Loans will be
underwritten by different hazard insurers and will cover Properties
located in various states, such policies will not contain identical
terms and conditions. The basic terms, however, generally will be
determined by state law and generally will be similar. Most such
policies typically will not cover any physical damage resulting from
war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and
mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects
or domestic animals, theft and, in certain cases, vandalism. The
foregoing list is merely indicative of certain kinds of uninsured risks
and is not intended to be all inclusive. Uninsured risks not covered by
a special hazard Insurance Policy or other form of Enhancement will
adversely affect distributions to Holders. When a Property securing a
Loan is located in a flood area identified by HUD pursuant to the Flood
Disaster Protection Act of 1973, as amended, the Servicer will be
required to cause flood insurance to be maintained with respect to such
Property, to the extent available.
The standard hazard Insurance Policies covering Properties
securing Loans typically will contain a "coinsurance" clause, which in
effect will require the insured at all times to carry hazard insurance
of a specified percentage (generally 80% to 90%) of the full
replacement value of the Property, including any improvements on the
Property, in order to recover the full amount of any partial loss. If
the insured's coverage falls below this specified percentage, such
clause will provide that the hazard insurer's liability in the event of
partial loss will not exceed the greater of (i) the actual cash value
(the replacement cost less physical depreciation) of the Property,
including the improvements, if any, damaged or destroyed or (ii) such
proportion of the loss, without deduction for depreciation, as the
amount of insurance carried bears to the specified percentage of the
full replacement cost of such Property and improvements. Since the
amount of hazard insurance to be maintained on the improvements
securing the Loans declines as the Principal Balances owing thereon
decrease, and since the value of the Properties will fluctuate over
time, the effect of this requirement in the event of partial loss may
be that hazard Insurance Proceeds will be insufficient to restore fully
the damage to the affected Property.
Unless otherwise specified in the related Prospectus Supplement,
coverage will be in an amount at least equal to the greater of (i) the
amount necessary to avoid the enforcement of any co-insurance clause
contained in the policy or (ii) the outstanding Principal Balance of
the related Loan. Unless otherwise specified in the related Prospectus
Supplement, the Servicer will also maintain on REO Property that
secured a defaulted Loan and that has been acquired upon foreclosure,
deed in lieu of foreclosure or repossession, a standard hazard
Insurance Policy in an amount that is at least equal to the maximum
insurable value of such REO Property. No earthquake or other additional
insurance will be required of any obligor or will be maintained on REO
Property acquired in respect of a defaulted Loan, other than pursuant
to such applicable laws and regulations as shall at any time be in
force and shall require such additional insurance.
Any amounts collected by the Servicer under any such Insurance
Policies (other than amounts to be applied to the restoration or repair
of the Property, released to the obligor in accordance with normal
servicing procedures or used to reimburse the Servicer for amounts to
which it is entitled to reimbursement) will be deposited into the
Collection Account. In the event that the Servicer obtains and
maintains a blanket policy insuring against hazard losses on all of the
Loans, written by an insurer then acceptable to each Rating Agency that
assigns a rating to such Series, it will conclusively be deemed to have
satisfied its obligations to cause to be maintained a standard hazard
Insurance Policy for each Loan or related REO Property. This blanket
policy may contain a deductible clause, in which case the Servicer will
be required, in the event that there has been a loss that would have
been covered by such policy absent such deductible clause, to deposit
into the Collection Account the amount not otherwise payable under the
blanket policy because of the application of such deductible clause.
Realization Upon Defaulted Loans
The Servicer will use its reasonable best efforts to foreclose
upon, repossess or otherwise comparably convert the ownership of the
Properties securing the related Loans as come into and continue in
default and as to which no satisfactory arrangements can be made for
collection of delinquent payments. In connection with such foreclosure
or other conversion, the Servicer will follow such practices and
procedures as it deems necessary or advisable and as are normal and
usual in its servicing activities with respect to comparable loans
serviced by it. However, the Servicer will not be required to expend
its own funds in connection with any foreclosure or towards the
restoration of the Property unless it determines that (i) such
restoration or foreclosure will increase the Liquidation Proceeds in
respect of the related Loan available to the Holders after
reimbursement to itself for such expenses and (ii) such expenses will
be recoverable by it either through Liquidation Proceeds or Insurance
Proceeds. Notwithstanding anything to the contrary herein, in the case
of a Trust Fund for which a REMIC election has been made, the Servicer
will be required to liquidate any Property acquired through foreclosure
within two years after the acquisition of the beneficial ownership of
such Property. While the holder of a Property acquired through
foreclosure can often maximize its recovery by providing financing to a
new purchaser, the Trust Fund, if applicable, will have no ability to
do so and neither the Servicer nor the Depositor will be required to do
so.
The Servicer may arrange with the obligor on a defaulted Loan a
change in the terms of such Loan (a "Modification") to the extent
provided in the related Prospectus Supplement. Such Modifications may
only be entered into if they meet the underwriting policies and
procedures employed by the Servicer in servicing receivables for its
own account and meet the other conditions set forth in the related
Prospectus Supplement.
Enforcement of Due-On-Sale Clauses
Unless otherwise specified in the related Prospectus Supplement
for a Series, when any Property is about to be conveyed by the obligor,
the Servicer will, to the extent it has knowledge of such prospective
conveyance and prior to the time of the consummation of such
conveyance, exercise its rights to accelerate the maturity of the
related Loan under the applicable "due-on-sale" clause, if any, unless
it reasonably believes that such clause is not enforceable under
applicable law or if the enforcement of such clause would result in
loss of coverage under any primary mortgage Insurance Policy. In such
event, the Servicer is authorized to accept from or enter into an
assumption agreement with the person to whom such property has been or
is about to be conveyed, pursuant to which such person becomes liable
under the Loan and pursuant to which the original obligor is released
from liability and such person is substituted as the obligor and
becomes liable under the Loan. Any fee collected in connection with an
assumption will be retained by the Servicer as additional servicing
compensation. The terms of a Loan may not be changed in connection with
an assumption.
Servicing Compensation and Payment of Expenses
Except as otherwise provided in the related Prospectus Supplement,
the Servicer will be entitled to a periodic fee as servicing
compensation (the "Servicing Fee") in an amount to be determined as
specified in the related Prospectus Supplement. The Servicing Fee may
be fixed or variable, as specified in the related Prospectus
Supplement. In addition, unless otherwise specified in the related
Prospectus Supplement, the Servicer will be entitled to servicing
compensation in the form of assumption fees, late payment charges and
similar items, or excess proceeds following disposition of Property in
connection with defaulted Loans.
Unless otherwise specified in the related Prospectus Supplement,
the Servicer will pay certain expenses incurred in connection with the
servicing of the Loans, including, without limitation, the payment of
the fees and expenses of each applicable Trustee and independent
accountants, payment of Security Policy and Insurance Policy premiums,
if applicable, and the cost of credit support, if any, and payment of
expenses incurred in preparation of reports to Holders.
When an obligor makes a principal prepayment in full between Due
Dates on the related Loan, the obligor will generally be required to
pay interest on the amount prepaid only to the date of prepayment. If
and to the extent provided in the related Prospectus Supplement, in
order that one or more Classes of the Holders of a Series will not be
adversely affected by any resulting shortfall in interest, the amount
of the Servicing Fee may be reduced to the extent necessary to include
in the Servicer's remittance to the applicable Trustee for deposit into
the related Distribution Account an amount equal to one month's
interest on the related Loan (less the Servicing Fee). If the aggregate
amount of such shortfalls in a month exceeds the Servicing Fee for such
month, a shortfall to Holders may occur.
Unless otherwise specified in the related Prospectus Supplement,
the Servicer will be entitled to reimbursement for certain expenses
incurred by it in connection with the liquidation of defaulted Loans.
The related Holders will suffer no loss by reason of such expenses to
the extent expenses are covered under related Insurance Policies or
from excess Liquidation Proceeds. If claims are either not made or paid
under the applicable Insurance Policies or if coverage thereunder has
been exhausted, the related Holders will suffer a loss to the extent
that Liquidation Proceeds, after reimbursement of the Servicer's
expenses, are less than the Principal Balance of and unpaid interest on
the related Loan that would be distributable to Holders. In addition,
the Servicer will be entitled to reimbursement of expenditures incurred
by it in connection with the restoration of property securing a
defaulted Loan, such right of reimbursement being prior to the rights
of the Holders to receive any related Insurance Proceeds, Liquidation
Proceeds or amounts derived from other Enhancement. The Servicer is
generally also entitled to reimbursement from the Collection Account
for Advances.
Unless otherwise specified in the related Prospectus Supplement,
the rights of the Servicer to receive funds from the Collection Account
for a Series, whether as the Servicing Fee or other compensation, or
for the reimbursement of Advances, expenses or otherwise, are not
subordinate to the rights of Holders of such Series.
Evidence as to Compliance
If so specified in the related Prospectus Supplement, the
applicable Agreement for each Series will provide that each year, a
firm of independent public accountants will furnish a statement to the
applicable Trustee to the effect that such firm has examined certain
documents and records relating to the servicing of the Loans by the
Servicer and that, on the basis of such examination, such firm is of
the opinion that the servicing has been conducted in compliance with
such Agreement, except for (i) such exceptions as such firm believes to
be immaterial and (ii) such other exceptions as are set forth in such
statement.
If so specified in the related Prospectus Supplement, the
applicable Agreement for each Series will also provide for delivery to
the applicable Trustee for such Series of an annual statement signed by
an officer of the Servicer to the effect that the Servicer has
fulfilled its obligations under such Agreement throughout the preceding
calendar year.
Certain Matters Regarding the Servicer
The Servicer for each Series will be identified in the related
Prospectus Supplement. The Servicer may be an affiliate of the
Depositor and may have other business relationships with the Depositor
and its affiliates.
If an Event of Default occurs under either a Servicing Agreement
or a Pooling and Servicing Agreement, the Servicer may be replaced by
the Trustee or a successor Servicer. Unless otherwise specified in the
related Prospectus Supplement, such Events of Default and the rights of
a Trustee upon such a default under the Agreement for the related
Series will be substantially similar to those described under "The
Agreements--Events of Default; Rights Upon Events of Default--Pooling
and Servicing Agreement; Servicing Agreement" herein.
Unless otherwise specified in the related Prospectus Supplement,
the Servicer does not have the right to assign its rights and delegate
its duties and obligations under the related Agreement for each Series
unless the successor Servicer accepting such assignment or delegation
(i) services similar loans in the ordinary course of its business, (ii)
is reasonably satisfactory to the Trustee for the related Series, (iii)
has a net worth of not less than the amount specified in the related
Prospectus Supplement, (iv) would not cause any Rating Agency's rating
of the Securities for such Series in effect immediately prior to such
assignment, sale or transfer to be qualified, downgraded or withdrawn
as a result of such assignment, sale or transfer and (v) executes and
delivers to the Trustee an agreement, in form and substance reasonably
satisfactory to the Trustee, that contains an assumption by such
Servicer of the due and punctual performance and observance of each
covenant and condition to be performed or observed by the Servicer
under the related Agreement from and after the date of such agreement.
No such assignment will become effective until the Trustee or a
successor Servicer has assumed the servicer's obligations and duties
under the related Agreement. To the extent that the Servicer transfers
its obligations to a wholly-owned subsidiary or affiliate, such
subsidiary or affiliate need not satisfy the criteria set forth above;
however, in such instance, the assigning Servicer will remain liable
for the servicing obligations under the related Agreement. Any entity
into which the Servicer is merged or consolidated or any successor
corporation resulting from any merger, conversion or consolidation will
succeed to the Servicer's obligations under the related Agreement;
provided, that such successor or surviving entity meets the
requirements for a successor Servicer set forth above.
Except to the extent otherwise provided therein, each Agreement
will provide that neither the Servicer, nor any director, officer,
employee or agent of the Servicer, will be under any liability to the
related Trust Fund, the Depositor or the Holders for any action taken
or for failing to take any action in good faith pursuant to the related
Agreement, or for errors in judgment; provided, however, that neither
the Servicer nor any such person will be protected against any breach
of warranty or representations made under such Agreement or the failure
to perform its obligations in compliance with any standard of care set
forth in such Agreement, or liability that would otherwise be imposed
by reason of willful misfeasance, bad faith or negligence in the
performance of their duties or by reason of reckless disregard of their
obligations and duties thereunder. Each Agreement will further provide
that the Servicer and any director, officer, employee or agent of the
Servicer is entitled to indemnification from the related Trust Fund and
will be held harmless against any loss, liability or expense incurred
in connection with any legal action relating to the Agreement or the
Securities, other than any loss, liability or expense incurred by
reason of willful misfeasance, bad faith or negligence in the
performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. In addition, the related Agreement
will provide that the Servicer is not under any obligation to appear
in, prosecute or defend any legal action that is not incidental to its
servicing responsibilities under such Agreement that, in its opinion,
may involve it in any expense or liability. The Servicer may, in its
discretion, undertake any such action that it may deem necessary or
desirable with respect to the related Agreement and the rights and
duties of the parties thereto and the interests of the Holders
thereunder. In such event the legal expenses and costs of such action
and any liability resulting therefrom may be expenses, costs, and
liabilities of the Trust Fund and the Servicer may be entitled to be
reimbursed therefor out of the Collection Account.
THE AGREEMENTS
The following summaries describe certain provisions of the
Agreements. The summaries do not purport to be complete and are subject
to, and qualified in their entirety by reference to, the provisions of
the Agreements. Where particular provisions or terms used in the
Agreements are referred to, such provisions or terms are as specified
in the related Agreements.
Assignment of Primary Assets
General. At the time of issuance of the Securities of a Series,
the Depositor will transfer, convey and assign to the Trust Fund all
right, title and interest of the Depositor in the Primary Assets and
other property to be transferred to the Trust Fund for a Series. Such
assignment will include all principal and interest due on or with
respect to the Primary Assets after the Cut-off Date specified in the
related Prospectus Supplement (except for any Retained Interests). The
Trustee will, concurrently with such assignment, execute and deliver
the Securities.
Assignment of Contracts. Unless otherwise specified in the related
Prospectus Supplement, the Depositor will, as to each Loan, deliver or
cause to be delivered to the Trustee, or, as specified in the related
Prospectus Supplement, a custodian on behalf of the Trustee (the
"Custodian"), the Mortgage Note endorsed without recourse to the order
of the Trustee or in blank, the original Mortgage with evidence of
recording indicated thereon (except for any Mortgage not returned from
the public recording office, in which case a copy of such Mortgage will
be delivered, together with a certificate that the original of such
Mortgage was delivered to such recording office) and an assignment of
the Mortgage in recordable form. The Trustee, or, if so specified in
the related Prospectus Supplement, the Custodian, will hold such
documents in trust for the benefit of the Holders.
Unless otherwise specified in the related Prospectus Supplement,
the Depositor will as to each Home Improvement Contract deliver or
cause to be delivered to the Trustee (or the Custodian) the original
Home Improvement Contract and copies of documents and instruments
related to each Home Improvement Contract and, other than in the case
of unsecured Home Improvement Contracts, the security interest in the
property securing such Home Improvement Contract. In order to give
notice of the right, title and interest of Holders to the Home
Improvement Contracts, the Depositor will cause a UCC-1 financing
statement to be executed by the Depositor or the Seller identifying the
Trustee as the secured party and identifying all Home Improvement
Contracts as collateral. Unless otherwise specified in the related
Prospectus Supplement, the Home Improvement Contracts will not be
stamped or otherwise marked to reflect their assignment to the Trust.
Therefore, if, through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the Home Improvement
Contracts without notice of such assignment, the interest of Holders in
the Home Improvement Contracts could be defeated. See "Certain Legal
Aspects of the Loans--The Home Improvement Contracts."
With respect to Loans secured by Mortgages, if so specified in the
related Prospectus Supplement, the Depositor will, at the time of
issuance of the Securities, cause assignments to the Trustee of the
Mortgages relating to the Loans for a Series to be recorded in the
appropriate public office for real property records, except in states
where, in the opinion of counsel acceptable to the Trustee, such
recording is not required to protect the Trustee's interest in the
related Loans. If specified in the related Prospectus Supplement, the
Depositor will cause such assignments to be so recorded within the time
after issuance of the Securities as is specified in the related
Prospectus Supplement, in which event, the Agreement may, as specified
in the related Prospectus Supplement, require the Depositor to
repurchase from the Trustee any Loan the related Mortgage of which is
not recorded within such time, at the price described below with
respect to repurchases by reason of defective documentation. Unless
otherwise provided in the related Prospectus Supplement, the
enforcement of the repurchase obligation would constitute the sole
remedy available to the Holders or the Trustee for the failure of a
Mortgage to be recorded.
Each Loan will be identified in a schedule appearing as an exhibit
to the related Agreement (the "Loan Schedule"). Such Loan Schedule will
specify with respect to each Loan: the original principal amount and
unpaid Principal Balance as of the Cut-off Date; the current Loan Rate;
the current Scheduled Payment of principal and interest; the maturity
date, if any, of the related Mortgage Note; if the Loan is an
adjustable rate Loan, the Lifetime Rate Cap, if any, and the current
index.
Assignment of Private Securities. The Depositor will cause Private
Securities to be registered in the name of the PS Trustee (or its
nominee or correspondent). The PS Trustee (or its nominee or
correspondent) will have possession of any certificated Private
Securities. Unless otherwise specified in the related Prospectus
Supplement, the PS Trustee will not be in possession of or be assignee
of record of any underlying assets for a Private Security. See "The
Trust Funds--Private Securities" herein. Each Private Security will be
identified in a schedule appearing as an exhibit to the related
Agreement (the "Certificate Schedule"), which will specify the original
principal amount, Principal Balance as of the Cut-off Date, annual
pass-through rate or interest rate and maturity date for each Private
Security conveyed to the Trust Fund. In the Agreement, the Depositor
will represent and warrant to the PS Trustee regarding the Private
Securities: (i) that the information contained in the Certificate
Schedule is true and correct in all material respects; (ii) that,
immediately prior to the conveyance of the Private Securities, the
Depositor had good title thereto, and was the sole owner thereof
(subject to any Retained Interest); (iii) that there has been no other
sale by it of such Private Securities; and (iv) that there is no
existing lien, charge, security interest or other encumbrance (other
than any Retained Interest) on such Private Securities.
Repurchase and Substitution of Non-Conforming Primary Assets.
Unless otherwise provided in the related Prospectus Supplement, if any
document in the file relating to the Primary Assets delivered by the
Depositor to the Trustee (or Custodian) is found by the Trustee within
90 days of the execution of the related Agreement (or promptly after
the Trustee's receipt of any document permitted to be delivered after
the Closing Date) to be defective in any material respect and the
Depositor or Seller does not cure such defect within 90 days, or within
such other period specified in the related Prospectus Supplement, the
Depositor or Seller will, not later than 90 days or within such other
period specified in the related Prospectus Supplement, after the
Trustee's notice to the Depositor or the Seller, as the case may be, of
the defect, repurchase the related Primary Asset or any property
acquired in respect thereof from the Trustee at a price equal to,
unless otherwise specified in the related Prospectus Supplement, (a)
the lesser of (i) the Principal Balance of such Primary Asset and (ii)
the Trust Fund's federal income tax basis in the Primary Asset and (b)
accrued and unpaid interest to the date of the next scheduled payment
on such Primary Asset at the rate set forth in the related Agreement,
provided, however, the purchase price shall not be limited in (i) above
to the Trust Fund's federal income tax basis if the repurchase at a
price equal to the Principal Balance of such Primary Asset will not
result in any prohibited transaction tax under Section 860F(a) of the
Code.
If provided in the related Prospectus Supplement, the Depositor or
Seller, as the case may be, may, rather than repurchase the Primary
Asset as described above, remove such Primary Asset from the Trust Fund
(the "Deleted Primary Asset") and substitute in its place one or more
other Primary Assets (each, a "Qualifying Substitute Primary Asset");
provided, however, that (i) with respect to a Trust Fund for which no
REMIC election is made, such substitution must be effected within 120
days of the date of initial issuance of the Securities and (ii) with
respect to a Trust Fund for which a REMIC election is made, after a
specified time period, the Trustee must have received a satisfactory
opinion of counsel that such substitution will not cause the Trust Fund
to lose its status as a REMIC or otherwise subject the Trust Fund to a
prohibited transaction tax.
Unless otherwise specified in the related Prospectus Supplement,
any Qualifying Substitute Primary Asset will have, on the date of
substitution, (i) a Principal Balance, after deduction of all Scheduled
Payments due in the month of substitution, not in excess of the
Principal Balance of the Deleted Primary Asset (the amount of any
shortfall to be deposited to the Collection Account in the month of
substitution for distribution to Holders), (ii) an interest rate not
less than (and not more than 2% greater than) the interest rate of the
Deleted Primary Asset, (iii) a remaining term-to-stated maturity not
greater than (and not more than two years less than) that of the
Deleted Primary Asset, and will comply with all of the representations
and warranties set forth in the applicable Agreement as of the date of
substitution.
Unless otherwise provided in the related Prospectus Supplement,
the above-described cure, repurchase or substitution obligations
constitute the sole remedies available to the Holders or the Trustee
for a material defect in a document for a Primary Asset.
The Depositor or another entity will make representations and
warranties with respect to Primary Assets for a Series. If the
Depositor or such entity cannot cure a breach of any such
representations and warranties in all material respects within the time
period specified in the related Prospectus Supplement after
notification by the Trustee of such breach, and if such breach is of a
nature that materially and adversely affects the value of such Primary
Asset, the Depositor or such entity will be obligated to repurchase the
affected Primary Asset or, if provided in the related Prospectus
Supplement, provide a Qualifying Substitute Primary Asset therefor,
subject to the same conditions and limitations on purchases and
substitutions as described above.
The Depositor's only source of funds to effect any cure,
repurchase or substitution will be through the enforcement of the
corresponding obligations, if any, of the responsible originator or
seller of such Primary Assets. See "Special Considerations--Limited
Assets."
No Holder of Securities of a Series, solely by virtue of such
Holder's status as a Holder, will have any right under the applicable
Agreement for such Series to institute any proceeding with respect to
such Agreement, unless such Holder previously has given to the
applicable Trustee for such Series written notice of default and unless
the Holders of Securities evidencing not less than 51% of the aggregate
voting rights of the Securities for such Series have made written
request upon the applicable Trustee to institute such proceeding in its
own name as Trustee thereunder and have offered to such Trustee
reasonable indemnity, and such Trustee for 60 days has neglected or
refused to institute any such proceeding.
Reports to Holders
The applicable Trustee or other entity specified in the related
Prospectus Supplement will prepare and forward to each Holder on each
Distribution Date, or as soon thereafter as is practicable, a statement
setting forth, to the extent applicable to any Series, among other
things:
(i) the amount of principal distributed to Holders of the
related Securities and the outstanding principal balance of
such Securities following such distribution;
(ii) the amount of interest distributed to Holders of the
related Securities and the current interest on such
Securities;
(iii) the amount of (a) any overdue accrued interest
included in such distribution, (b) any remaining overdue
accrued interest with respect to such Securities or (c) any
current shortfall in amounts to be distributed as accrued
interest to Holders of such Securities;
(iv) the amount of (a) any overdue payments of scheduled
principal included in such distribution, (b) any remaining
overdue principal amounts with respect to such Securities, (c)
any current shortfall in receipt of scheduled principal
payments on the related Primary Assets or (d) any realized
losses or Liquidation Proceeds to be allocated as reductions
in the outstanding principal balances of such Securities;
(v) the amount received under any related Enhancement, and
the remaining amount available under such Enhancement;
(vi) the amount of any delinquencies with respect to
payments on the related Primary Assets;
(vii) the book value of any REO Property acquired by the
related Trust Fund; and
(viii) such other information as specified in the related
Agreement.
In addition, within a reasonable period of time after the end of
each calendar year, the applicable Trustee, unless otherwise specified
in the related Prospectus Supplement, will furnish to each Holder of
record at any time during such calendar year (a) the aggregate of
amounts reported pursuant to (i), (ii) and (iv)(d) above for such
calendar year and (b) such information specified in the related
Agreement to enable Holders to prepare their tax returns including,
without limitation, the amount of original issue discount accrued on
the Securities, if applicable. Information in the Distribution Date and
annual statements provided to the Holders will not have been examined
and reported upon by an independent public accountant. However, the
Servicer will provide to each applicable Trustee a report by
independent public accountants with respect to the Servicer's servicing
of the Loans. See "Servicing of Loans--Evidence as to Compliance"
herein.
If so specified in the Prospectus Supplement for a Series of
Securities, such Series or one or more Classes of such Series will be
issued in book-entry form. In such event, owners of beneficial
interests in such Securities will not be considered Holders and will
not receive such reports directly from the applicable Trustee. The
applicable Trustee will forward such reports only to the entity or its
nominee that is the registered holder of the global certificate that
evidences such book-entry securities. Beneficial owners will receive
such reports from the participants and indirect participants of the
applicable book-entry system in accordance with the policies and
procedures of such entities.
Events of Default; Rights Upon Event of Default
Pooling and Servicing Agreement; Servicing Agreement. Unless
otherwise specified in the related Prospectus Supplement, Events of
Default under the Pooling and Servicing Agreement for each Series of
Certificates relating to Loans include (i) any failure by the Servicer
to deposit amounts in the Collection Account and Distribution
Account(s) to enable the applicable Trustee to distribute to Holders of
such Series any required payment, which failure continues unremedied
for the number of days specified in the related Prospectus Supplement
after the giving of written notice of such failure to the Servicer by
the applicable Trustee for such Series, or to the Servicer and such
Trustee by the Holders of such Series evidencing not less than 25% of
the aggregate voting rights of the Securities for such Series, (ii) any
failure by the Servicer duly to observe or perform in any material
respect any other of its covenants or agreements in the applicable
Agreement that continues unremedied for the number of days specified in
the related Prospectus Supplement after the giving of written notice of
such failure to the Servicer by the applicable Trustee, or to the
Servicer and such Trustee by the Holders of such Series evidencing not
less than 25% of the aggregate voting rights of the Securities for such
Series, and (iii) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings and
certain actions by the Servicer indicating its insolvency,
reorganization or inability to pay its obligations.
So long as an Event of Default remains unremedied under the
applicable Agreement for a Series of Securities relating to the
servicing of Loans, unless otherwise specified in the related
Prospectus Supplement, the Trustee for such Series or Holders of
Securities of such Series evidencing not less than 51% of the aggregate
voting rights of the Securities for such Series may terminate all of
the rights and obligations of the Servicer as servicer under the
applicable Agreement (other than its right to recovery of other
expenses and amounts advanced pursuant to the terms of such Agreement,
which rights the Servicer will retain under all circumstances),
whereupon the Trustee will succeed to all the responsibilities, duties
and liabilities of the Servicer under such Agreement and will be
entitled to reasonable servicing compensation not to exceed the
applicable servicing fee, together with other servicing compensation in
the form of assumption fees, late payment charges or otherwise as
provided in such Agreement.
In the event that the Trustee is unwilling or unable so to act, it
may select, or petition a court of competent jurisdiction to appoint, a
finance institution, bank or loan servicing institution with a net
worth specified in the related Prospectus Supplement to act as
successor Servicer under the provisions of the applicable Agreement.
The successor Servicer would be entitled to reasonable servicing
compensation in an amount not to exceed the Servicing Fee as set forth
in the related Prospectus Supplement, together with other servicing
compensation in the form of assumption fees, late payment charges or
otherwise, as provided in such Agreement.
During the continuance of any Event of Default of a Servicer under
an Agreement for a Series of Securities, the applicable Trustee for
such Series will have the right to take action to enforce its rights
and remedies and to protect and enforce the rights and remedies of the
Holders of such Series, and, unless otherwise specified in the related
Prospectus Supplement, Holders of Securities evidencing not less than
51% of the aggregate voting rights of the Securities for such Series
may direct the time, method and place of conducting any proceeding for
any remedy available to the applicable Trustee or exercising any trust
or power conferred upon such Trustee. However, the applicable Trustee
will not be under any obligation to pursue any such remedy or to
exercise any of such trusts or powers unless such Holders have offered
such Trustee reasonable security or indemnity against the cost,
expenses and liabilities that may be incurred by such Trustee therein
or thereby. The applicable Trustee may decline to follow any such
direction if such Trustee determines that the action or proceeding so
directed may not lawfully be taken or would involve it in personal
liability or be unjustly prejudicial to the non-assenting Holders.
Indenture. Unless otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of
Notes include: (i) a default for thirty (30) days or more in the
payment of any principal of or interest on any Note of such Series;
(ii) failure to perform any other covenant of the Depositor or the
Trust Fund in the Indenture that continues for a period of sixty (60)
days after notice thereof is given in accordance with the procedures
described in the related Prospectus Supplement; (iii) any
representation or warranty made by the Depositor or the Trust Fund in
the Indenture or in any certificate or other writing delivered pursuant
thereto or in connection therewith with respect to or affecting such
Series having been incorrect in a material respect as of the time made,
and such breach is not cured within sixty (60) days after notice
thereof is given in accordance with the procedures described in the
related Prospectus Supplement; (iv) certain events of bankruptcy,
insolvency, receivership or liquidation of the Depositor or the Trust
Fund; or (v) any other Event of Default provided with respect to Notes
of that Series.
If an Event of Default with respect to the Notes of any Series at
the time outstanding occurs and is continuing, either the Indenture
Trustee or the Holders of a majority of the then-aggregate outstanding
amount of the Notes of such Series may declare the principal amount
(or, if the Notes of that Series are Zero Coupon Securities, such
portion of the principal amount as may be specified in the terms of
that Series, as provided in the related Prospectus Supplement) of all
the Notes of such Series to be due and payable immediately. Such
declaration may, under certain circumstances, be rescinded and annulled
by the Holders of a majority in aggregate outstanding amount of the
Notes of such Series.
If, following an Event of Default with respect to any Series of
Notes, the Notes of such Series have been declared to be due and
payable, the Indenture Trustee may, in its discretion, notwithstanding
such acceleration, elect to maintain possession of the collateral
securing the Notes of such Series and to continue to apply
distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds
for the payment of principal of and interest on the Notes of such
Series as they would have become due if there had not been such a
declaration. In addition, the Indenture Trustee may not sell or
otherwise liquidate the collateral securing the Notes of a Series
following an Event of Default other than a default in the payment of
any principal of or interest on any Note of such Series for thirty (30)
days or more, unless (a) the Holders of 100% of the then-aggregate
outstanding amount of the Notes of such Series consent to such sale,
(b) the proceeds of such sale or liquidation are sufficient to pay in
full the principal of and accrued interest due and unpaid on the
outstanding Notes of such Series at the date of such sale or (c) the
Indenture Trustee determines that such collateral would not be
sufficient on an ongoing basis to make all payments on such Notes as
such payments would have become due if such Notes had not been declared
due and payable, and the Indenture Trustee obtains the consent of the
Holders of 66 2/3% of the then-aggregate outstanding amount of the
Notes of such Series.
In the event that the Indenture Trustee liquidates the collateral
in connection with an Event of Default involving a default for thirty
(30) days or more in the payment of principal of or interest on the
Notes of a Series, the Indenture provides that the Indenture Trustee
will have a prior lien on the proceeds of any such liquidation for
unpaid fees and expenses. As a result, upon the occurrence of such an
Event of Default, the amount available for distribution to the
Noteholders may be less than would otherwise be the case. However, the
Indenture Trustee may not institute a proceeding for the enforcement of
its lien except in connection with a proceeding for the enforcement of
the lien of the Indenture for the benefit of the Noteholders after the
occurrence of such an Event of Default.
Unless otherwise specified in the related Prospectus Supplement,
in the event the principal of the Notes of a Series is declared due and
payable, as described above, the Holders of any such Notes issued at a
discount from par may be entitled to receive no more than an amount
equal to the unpaid principal amount thereof less the amount of such
discount that is unamortized.
Subject to the provisions of the Indenture relating to the duties
of the Indenture Trustee, in case an Event of Default shall occur and
be continuing with respect to a Series of Notes, the Indenture Trustee
will be under no obligation to exercise any of the rights or powers
under the Indenture at the request or direction of any of the Holders
of Notes of such Series, unless such Holders offered to the Indenture
Trustee security or indemnity satisfactory to it against the costs,
expenses and liabilities that might be incurred by it in complying with
such request or direction. Subject to such provisions for
indemnification and certain limitations contained in the Indenture, the
Holders of a majority of the then-aggregate outstanding amount of the
Notes of such Series shall have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the
Indenture Trustee or exercising any trust or power conferred on the
Indenture Trustee with respect to the Notes of such Series, and the
Holders of a majority of the then-aggregate outstanding amount of the
Notes of such Series may, in certain cases, waive any default with
respect thereto, except a default in the payment of principal or
interest or a default in respect of a covenant or provision of the
Indenture that cannot be modified without the waiver or consent of all
the Holders of the outstanding Notes of such Series affected thereby.
The Trustees
The identity of the commercial bank, savings and loan association
or trust company named as the Trustee or Indenture Trustee, as the case
may be, for each Series of Securities will be set forth in the related
Prospectus Supplement. Entities serving as Trustee may have normal
banking relationships with the Depositor or the Servicer. In addition,
for the purpose of meeting the legal requirements of certain local
jurisdictions, each Trustee will have the power to appoint co-trustees
or separate trustees. In the event of such appointment, all rights,
powers, duties and obligations conferred or imposed upon the applicable
Trustee by the Agreement relating to such Series will be conferred or
imposed upon such Trustee and each such separate trustee or co-trustee
jointly, or, in any jurisdiction in which such Trustee shall be
incompetent or unqualified to perform certain acts, singly upon such
separate trustee or co-trustee who will exercise and perform such
rights, powers, duties and obligations solely at the direction of the
applicable Trustee. The applicable Trustee may also appoint agents to
perform any of the responsibilities of such Trustee, which agents will
have any or all of the rights, powers, duties and obligations of such
Trustee conferred on them by such appointment; provided, that the
applicable Trustee will continue to be responsible for its duties and
obligations under the Agreement.
Duties of Trustees
No Trustee will make any representations as to the validity or
sufficiency of the related Agreement, the Securities or of any Primary
Asset or related documents. If no Event of Default (as defined in the
related Agreement) has occurred, the applicable Trustee will be
required to perform only those duties specifically required of it under
such Agreement. Upon receipt of the various certificates, statements,
reports or other instruments required to be furnished to it, the
applicable Trustee will be required to examine them to determine
whether they are in the form required by the related Agreement.
However, such Trustee will not be responsible for the accuracy or
content of any such documents furnished to it by the Holders or the
Servicer under the related Agreement.
Each Trustee may be held liable for its own negligent action or
failure to act, or for its own misconduct; provided, however, that no
Trustee will be personally liable with respect to any action taken,
suffered or omitted to be taken by it in good faith in accordance with
the direction of the related Holders in an Event of Default. No Trustee
will be required to expend or risk its own funds or otherwise incur any
financial liability in the performance of any of its duties under the
related Agreement, or in the exercise of any of its rights or powers,
if it has reasonable grounds for believing that repayment of such funds
or adequate indemnity against such risk or liability is not reasonably
assured to it.
Resignation of Trustees
Each Trustee may, upon written notice to the Depositor, resign at
any time, in which event the Depositor will be obligated to use its
best efforts to appoint a successor Trustee. If no successor Trustee
has been appointed and has accepted such appointment within 30 days
after the giving of such notice of resignation, the resigning Trustee
may petition any court of competent jurisdiction for appointment of a
successor Trustee. Each Trustee may also be removed at any time (i) if
such Trustee ceases to be eligible to continue as such under the
related Agreement, (ii) if such Trustee becomes insolvent or (iii) by
the Holders of Securities evidencing over 50% of the aggregate voting
rights of the Securities in the Trust Fund upon written notice to the
applicable Trustee and to the Depositor. Any resignation or removal of
a Trustee and appointment of a successor Trustee will not become
effective until acceptance of the appointment by the successor Trustee.
Amendment of Agreement
Unless otherwise specified in the Prospectus Supplement, the
Agreement for each Series of Securities may be amended by the
Depositor, the Servicer (with respect to a Series relating to Loans),
and the applicable Trustee with respect to such Series, without notice
to or consent of the Holders (i) to cure any ambiguity, (ii) to correct
any defective provisions or to correct or supplement any provision
therein, (iii) to add to the duties of the Depositor, the applicable
Trustee or the Servicer, (iv) to add any other provisions with respect
to matters or questions arising under such Agreement or related
Enhancement, (v) to add or amend any provisions of such Agreement as
required by a Rating Agency in order to maintain or improve the rating
of the Securities (it being understood that none of the Depositor, the
Seller, the Servicer or any Trustee is obligated to maintain or improve
such rating), or (vi) to comply with any requirements imposed by the
Code; provided, that any such amendment except pursuant to clause (vi)
above will not adversely affect in any material respect the interests
of any Holders of such Series, as evidenced by an opinion of counsel
delivered to the applicable Trustee. Any such amendment except pursuant
to clause (vi) above shall be deemed not to adversely affect in any
material respect the interests of any Holder if the applicable Trustee
receives written confirmation from each Rating Agency rating such
Securities that such amendment will not cause such Rating Agency to
reduce the then-current rating thereof. Unless otherwise specified in
the Prospectus Supplement, each Agreement for each Series may also be
amended by the applicable Trustee, the Servicer, if applicable, and the
Depositor with respect to such Series with the consent of the Holders
possessing not less than 66 2/3% of the aggregate outstanding
principal amount of the Securities of such Series or, if only certain
Classes of such Series are affected by such amendment, 66 2/3% of the
aggregate outstanding principal amount of the Securities of each Class
of such Series affected thereby, for the purpose of adding any
provisions to or changing in any manner or eliminating any of the
provisions of such Agreement or modifying in any manner the rights of
Holders of such Series; provided, however, that no such amendment may
(a) reduce the amount or delay the timing of payments on any Security
without the consent of the Holder of such Security; or (b) reduce the
aforesaid percentage of the aggregate outstanding principal amount of
Securities of each Class, the Holders of which are required to consent
to any such amendment, without the consent of the Holders of 100% of
the aggregate outstanding principal amount of each Class of Securities
affected thereby.
Voting Rights
The related Prospectus Supplement will set forth the method of
determining allocation of voting rights with respect to a Series.
List of Holders
Upon written request of three or more Holders of record of a
Series for purposes of communicating with other Holders with respect to
their rights under the Agreement, which request is accompanied by a
copy of the communication such Holders propose to transmit, the
applicable Trustee will afford such Holders access during business
hours to the most recent list of Holders of that Series held by such
Trustee.
No Agreement will provide for the holding of any annual or other
meeting of Holders.
Book-Entry Securities
If specified in the Prospectus Supplement for a Series of
Securities, such Series or one or more Classes of such Series may be
issued in book-entry form. In such event, beneficial owners of such
Securities will not be considered "Holders" under the Agreements and
may exercise the rights of Holders only indirectly through the
participants in the applicable book-entry system.
REMIC Administrator
For any Series with respect to which a REMIC election is made,
preparation of certain reports and certain other administrative duties
with respect to the Trust Fund may be performed by a REMIC
administrator, who may be an affiliate of the Depositor.
Termination
Pooling and Servicing Agreement; Trust Agreement. The obligations
created by the Pooling and Servicing Agreement or Trust Agreement for a
Series will terminate upon the distribution to Holders of all amounts
distributable to them pursuant to such Agreement under the
circumstances described in the related Prospectus Supplement. See
"Description of the Securities--Optional Redemption, Purchase or
Termination" herein.
Indenture. The Indenture will be discharged with respect to a
Series of Notes (except with respect to certain continuing rights
specified in the Indenture) upon the delivery to the Indenture Trustee
for cancellation of all the Notes of such Series or, with certain
limitations, upon deposit with the Indenture Trustee of funds
sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the
Indenture will provide that, if so specified with respect to the Notes
of any Series, the related Trust Fund will be discharged from any and
all obligations in respect of the Notes of such Series (except for
certain obligations relating to temporary Notes and exchange of Notes,
to register the transfer of or exchange Notes of such Series, to
replace stolen, lost or mutilated Notes of such Series, to maintain
paying agencies and to hold monies for payment in trust) upon the
deposit with the Indenture Trustee, in trust, of money and/or direct
obligations of or obligations guaranteed by the United States of
America that, through the payment of interest and principal in respect
thereof in accordance with their terms, will provide money in an amount
sufficient to pay the principal of and each installment of interest on
the Notes of such Series on the Final Scheduled Distribution Date for
such Notes and any installment of interest on such Notes in accordance
with the terms of the Indenture and the Notes of such Series. In the
event of any such defeasance and discharge of Notes of such Series,
Holders of Notes of such Series would be able to look only to such
money and/or direct obligations for payment of principal of and
interest on, if any, their Notes until maturity.
CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries of certain legal
aspects of mortgage loans, home improvement installment sales contracts
and home improvement installment loan agreements that are general in
nature. Because certain of such legal aspects are governed by
applicable state law (which laws may differ substantially), the
summaries do not purport to be complete nor reflect the laws of any
particular state, nor encompass the laws of all states in which the
properties securing the Loans are situated.
Mortgages
The Loans for a Series will, and certain Home Improvement
Contracts for a Series may, be secured by either mortgages or deeds of
trust or deeds to secure debt (such Mortgage Loans and Home Improvement
Contracts are hereinafter referred to in this section as "mortgage
loans"), depending upon the prevailing practice in the state in which
the property subject to a mortgage loan is located. The filing of a
mortgage, deed of trust or deed to secure debt creates a lien or title
interest upon the real property covered by such instrument and
represents the security for the repayment of an obligation that is
customarily evidenced by a promissory note. It is not prior to the lien
for real estate taxes and assessments or other charges imposed under
governmental police powers and may also be subject to other liens
pursuant to the laws of the jurisdiction in which the Mortgaged
Property is located. Priority with respect to such instruments depends
on their terms, the knowledge of the parties to the mortgage and
generally on the order of recording with the applicable state, county
or municipal office. There are two parties to a mortgage, the
mortgagor, who is the borrower/property owner or the land trustee (as
described below), and the mortgagee, who is the lender. Under the
mortgage instrument, the mortgagor delivers to the mortgagee a note or
bond and the mortgage. In the case of a land trust, there are three
parties because title to the property is held by a land trustee under a
land trust agreement of which the borrower/property owner is the
beneficiary; at origination of a mortgage loan, the borrower executes a
separate undertaking to make payments on the mortgage note. A deed of
trust transaction normally has three parties: the trustor, who is the
borrower/property owner; the beneficiary, who is the lender; and the
trustee, a third-party grantee. Under a deed of trust, the trustor
grants the property, irrevocably until the debt is paid, in trust,
generally with a power of sale, to the trustee to secure payment of the
obligation. The mortgagee's authority under a mortgage and the
trustee's authority under a deed of trust are governed by the law of
the state in which the real property is located, the express provisions
of the mortgage or deed of trust, and, in some cases, in deed of trust
transactions, the directions of the beneficiary.
Foreclosure on Mortgages
Foreclosure of a mortgage is generally accomplished by judicial
action. Generally, the action is initiated by the service of legal
pleadings upon all parties having an interest of record in the real
property. Delays in completion of the foreclosure occasionally may
result from difficulties in locating necessary parties defendant. When
the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time-consuming and
expensive. After the completion of a judicial foreclosure proceeding,
the court may issue a judgment of foreclosure and appoint a receiver or
other officer to conduct the sale of the property. In some states,
mortgages may also be foreclosed by advertisement, pursuant to a power
of sale provided in the mortgage. Foreclosure of a mortgage by
advertisement is essentially similar to foreclosure of a deed of trust
by nonjudicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a
nonjudicial trustee's sale under a specific provision in the deed of
trust that authorizes the trustee to sell the property upon any default
by the borrower under the terms of the note or deed of trust. In
certain states, such foreclosure also may be accomplished by judicial
action in the manner provided for foreclosure of mortgages. In some
states, the trustee must record a notice of default and send a copy to
the borrower-trustor and to any person who has recorded a request for a
copy of a notice of default and notice of sale. In addition, the
trustee in some states must provide notice to any other individual
having an interest in the real property, including any junior
lienholders. If the deed of trust is not reinstated within any
applicable cure period, a notice of sale must be posted in a public
place and, in most states, published for a specified period of time in
one or more newspapers. In addition, some state laws require that a
copy of the notice of sale be posted on the property and sent to all
parties having an interest of record in the property. The trustor,
borrower, or any person having a junior encumbrance on the real estate,
may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus the costs and expenses incurred in
enforcing the obligation. Generally, state law controls the amount of
foreclosure expenses and costs, including attorney's fees, which may be
recovered by a lender. If the deed of trust is not reinstated, a notice
of sale must be posted in a public place and, in most states, published
for a specified period of time in one or more newspapers. In addition,
some state laws require that a copy of the notice of sale be posted on
the property, recorded and sent to all parties having an interest in
the real property.
An action to foreclose a mortgage is an action to recover the
mortgage debt by enforcing the mortgagee's rights under the mortgage.
It is regulated by statutes and rules and subject throughout to the
court's equitable powers. Generally, a mortgagor is bound by the terms
of the related mortgage note and the mortgage as made and cannot be
relieved from his default if the mortgagee has exercised his rights in
a commercially reasonable manner. However, since a foreclosure action
historically was equitable in nature, the court may exercise equitable
powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither
willful nor in bad faith or the mortgagee's action established a
waiver, fraud, bad faith, or oppressive or unconscionable conduct such
as to warrant a court of equity to refuse affirmative relief to the
mortgagee. Under certain circumstances a court of equity may relieve
the mortgagor from an entirely technical default where such default was
not willful.
A foreclosure action is subject to most of the delays and expenses
of other lawsuits if defenses or counterclaims are interposed,
sometimes requiring up to several years to complete. Moreover, a
non-collusive, regularly conducted foreclosure sale may be challenged
as a fraudulent conveyance, regardless of the parties' intent, if a
court determines that the sale was for less than fair consideration and
such sale occurred while the mortgagor was insolvent and within one
year (or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law) of
the filing of bankruptcy. Similarly, a suit against the debtor on the
related mortgage note may take several years and, generally, is a
remedy alternative to foreclosure, the mortgagee being precluded from
pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of
trust, the sale by the referee or other designated officer or by the
trustee is a public sale. However, because of the difficulty potential
third party purchasers at the sale have in determining the exact status
of title and because the physical condition of the property may have
deteriorated during the foreclosure proceedings, it is uncommon for a
third party to purchase the property at a foreclosure sale. Rather, it
is common for the lender to purchase the property from the trustee or
referee for an amount that may be equal to the unpaid principal amount
of the mortgage note secured by the mortgage or deed of trust plus
accrued and unpaid interest and the expenses of foreclosure, in which
event the mortgagor's debt will be extinguished or the lender may
purchase for a lesser amount in order to preserve its right against a
borrower to seek a deficiency judgment in states where such a judgment
is available. Thereafter, subject to the right of the borrower in some
states to remain in possession during the redemption period, the lender
will assume the burdens of ownership, including obtaining hazard
insurance, paying taxes and making such repairs at its own expense as
are necessary to render the property suitable for sale. The lender will
commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property.
Depending upon market conditions, the ultimate proceeds of the sale of
the property may not equal the lender's investment in the property. Any
loss may be reduced by the receipt of any mortgage guaranty Insurance
Proceeds.
Environmental Risks
Federal, state and local laws and regulations impose a wide range
of requirements on activities that may affect the environment, health
and safety. These include laws and regulations governing air pollutant
emissions, hazardous and toxic substances, impacts to wetlands, leaks
from underground storage tanks and the management, removal and disposal
of lead- and asbestos-containing materials. In certain circumstances,
these laws and regulations impose obligations on the owners or
operators of residential properties such as those subject to the Loans.
The failure to comply with such laws and regulations may result in
fines and penalties.
Moreover, under various federal, state and local laws and
regulations, an owner or operator of real estate may be liable for the
costs of addressing hazardous substances on, in or beneath such
property and related costs. Such liability may be imposed without
regard to whether the owner or operator knew of, or was responsible
for, the presence of such substances, and could exceed the value of the
property and the aggregate assets of the owner or operator. In
addition, persons who transport or dispose of hazardous substances, or
arrange for the transportation, disposal or treatment of hazardous
substances, at off-site locations may also be held liable if there are
releases or threatened releases of hazardous substances at such
off-site locations.
In addition, under the laws of some states and under the Federal
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), contamination of property may give rise to a lien on the
property to assure the payment of the costs of clean-up. In several
states, such a lien has priority over the lien of an existing mortgage
against such property. Under CERCLA, such a lien is subordinate to
pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, there is a
possibility that a lender may be held liable as an "owner or operator"
for costs of addressing releases or threatened releases of hazardous
substances at a property, regardless of whether or not the
environmental damage or threat was caused by a current or prior owner
or operator. CERCLA and some state laws provide an exemption from the
definition of "owner or operator" for a secured creditor who, without
"participating in the management" of a facility, holds indicia of
ownership primarily to protect its security interest in the facility.
The Solid Waste Disposal Act (the "SWDA") provides similar protection
to secured creditors in connection with liability for releases of
petroleum from certain underground storage tanks. However, if a lender
"participates in the management" of the facility in question or is
found not to have held its interest primarily to protect a security
interest, the lender may forfeit its secured creditor exemption status.
A regulation promulgated by the U.S. Environmental Protection
Agency (the "EPA") in April 1992 attempted to clarify the activities in
which lenders could engage both prior to and subsequent to foreclosure
of a security interest without forfeiting the secured creditor
exemption under CERCLA. The rule was struck down in 1994 by the United
States Court of Appeals for the District of Columbia Circuit in Kelley
ex rel State of Michigan v. Environmental Protection Agency, 15 F.3d
1100 (D.C Cir. 1994), reh'g denied, 25 F.3d 1088, cert. denied sub nom.
Am. Bankers Ass'n v. Kelley, 115 S.Ct. 900 (1995). Another EPA
regulation promulgated in 1995 clarifies the activities in which
lenders may engage without forfeiting the secured creditor exemption
under the underground storage tank provisions of the SWDA. That
regulation has not been struck down.
On September 30, 1996, Congress amended both CERCLA and the SWDA
to provide additional clarification regarding the scope of the lender
liability exemptions under the two statutes. Among other things, the
1996 amendments specify the circumstances under which a lender will be
protected by the CERCLA and SWDA exemptions, both while the borrower is
still in possession of the secured property and following foreclosure
on the secured property.
Generally, the amendments state that a lender who holds indicia of
ownership primarily to protect a security interest in a facility will
be considered to participate in management only if, while the borrower
is still in possession of the facility encumbered by the security
interest, the lender (i) exercises decision-making control over
environmental compliance related to the facility such that the lender
has undertaken responsibility for hazardous substance handling or
disposal practices related to the facility or (ii) exercises control at
a level comparable to that of a manager of the facility such that the
lender has assumed or manifested responsibility for (a) overall
management of the facility encompassing daily decision-making with
respect to environmental compliance or (b) overall or substantially all
of the operational functions (as distinguished from financial or
administrative functions) of the facility other than the function of
environmental compliance. The amendments also specify certain
activities that are not considered to be "participation in management,"
including monitoring or enforcing the terms of the extension of credit
or security interest, inspecting the facility, and requiring a lawful
means of addressing the release or threatened release of a hazardous
substance.
The 1996 amendments also specify that a lender who did not
participate in management of a facility prior to foreclosure will not
be considered an "owner or operator," even if the lender forecloses on
the facility and after foreclosure sells or liquidates the facility,
maintains business activities, winds up operations, undertakes an
appropriate response action, or takes any other measure to preserve,
protect, or prepare the facility prior to sale or disposition, if the
lender seeks to sell or otherwise divest the facility at the earliest
practicable, commercially reasonable time, on commercially reasonable
terms, taking into account market conditions and legal and regulatory
requirements.
The CERCLA and SWDA lender liability amendments specifically
address the potential liability of lenders who hold mortgages or
similar conventional security interests in real property, such as the
Trust Fund does in connection with the Mortgage Loans and the Home
Improvement Contracts.
If a lender is or becomes liable under CERCLA, it may be
authorized to bring a statutory action for contribution against any
other "responsible parties," including a previous owner or operator.
However, such persons or entities may be bankrupt or otherwise judgment
proof, and the costs associated with environmental cleanup and related
actions may be substantial. Moreover, some state laws imposing
liability for addressing hazardous substances do not contain exemptions
from liability for lenders. Whether the costs of addressing a release
or threatened release at a property pledged as collateral for one of
the Loans would be imposed on the Trust Fund, and thus occasion a loss
to the Holders, therefore depends on the specific factual and legal
circumstances at issue.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or
foreclosure of a mortgage, the trustor or mortgagor and foreclosed
junior lienors are given a statutory period in which to redeem the
property from the foreclosure sale. The right of redemption should be
distinguished from the equity of redemption, which is a non-statutory
right that must be exercised prior to the foreclosure sale. In some
states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In
other states, redemption may be authorized if the former borrower pays
only a portion of the sums due. The effect of a statutory right of
redemption is to diminish the ability of the lender to sell the
foreclosed property. The exercise of a right of redemption would defeat
the title of any purchaser at a foreclosure sale, or of any purchaser
from the lender subsequent to foreclosure or sale under a deed of
trust. Consequently, the practical effect of a right of redemption is
to force the lender to retain the property and pay the expenses of
ownership until the redemption period has run. In some states, there is
no right to redeem property after a trustee's sale under a deed of
trust.
Junior Mortgages; Rights of Senior Mortgages
The Mortgage Loans comprising or underlying the Primary Assets
included in the Trust Fund for a Series will be secured by Mortgages or
deeds of trust, which may be second or more junior mortgages to other
mortgages held by other lenders or institutional investors. The rights
of the Trust Fund (and therefore the Holders), as mortgagee under a
junior mortgage, are subordinate to those of the mortgagee under the
senior mortgage, including the prior rights of the senior mortgagee to
receive hazard insurance and condemnation proceeds and to cause the
property securing the mortgage loan to be sold upon default of the
mortgagor, thereby extinguishing the junior mortgagee's lien unless the
junior mortgagee asserts its subordinate interest in the property in
foreclosure litigation and, possibly, satisfies the defaulted senior
mortgage. A junior mortgagee may satisfy a defaulted senior loan in
full and, in some states, may cure such default and bring the senior
loan current, in either event adding the amounts expended to the
balance due on the junior loan. In most states, absent a provision in
the mortgage or deed of trust, no notice of default is required to be
given to a junior mortgagee.
The standard form of the mortgage used by most institutional
lenders confers on the mortgagee the right both to receive all proceeds
collected under any hazard Insurance Policy and all awards made in
connection with condemnation proceedings, and to apply such proceeds
and awards to any indebtedness secured by the mortgage, in such order
as the mortgagee may determine. Thus, in the event improvements on the
property are damaged or destroyed by fire or other casualty, or in the
event the property is taken by condemnation, the mortgagee or
beneficiary under underlying senior mortgages will have the prior right
to collect any Insurance Proceeds payable under a hazard Insurance
Policy and any award of damages in connection with the condemnation and
to apply the same to the indebtedness secured by the senior mortgages.
Proceeds in excess of the amount of senior mortgage indebtedness, in
most cases, may be applied to the indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or
deed of trust used by institutional lenders obligates the mortgagor to
pay before delinquency all taxes and assessments on the property and,
when due, all encumbrances, charges and liens on the property that
appear prior to the mortgage or deed of trust, to provide and maintain
fire insurance on the property, to maintain and repair the property and
not to commit or permit any waste thereof, and to appear in and defend
any action or proceeding purporting to affect the property or the
rights of the mortgagee under the mortgage. Upon a failure of the
mortgagor to perform any of these obligations, the mortgagee is given
the right under certain mortgages to perform the obligation itself, at
its election, with the mortgagor agreeing to reimburse the mortgagee
for any sums expended by the mortgagee on behalf of the mortgagor. All
sums so expended by the mortgagee become part of the indebtedness
secured by the mortgage.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory prohibitions that limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a
mortgage. In some states, statutes limit the right of the beneficiary
or mortgagee to obtain a deficiency judgment against the borrower
following foreclosure or sale under a deed of trust. A deficiency
judgment is a personal judgment against the former borrower equal in
most cases to the difference between the net amount realized upon the
public sale of the real property and the amount due to the lender.
Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in
an attempt to satisfy the full debt before bringing a personal action
against the borrower. In certain other states, the lender has the
option of bringing a personal action against the borrower on the debt
without first exhausting such security; however, in some of these
states, the lender, following judgment on such personal action, may be
deemed to have elected a remedy and may be precluded from exercising
remedies with respect to the security. Consequently, the practical
effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a
personal action against the borrower. Finally, other statutory
provisions limit any deficiency judgment against the former borrower
following a foreclosure sale to the excess of the outstanding debt over
the fair market value of the property at the time of the public sale.
The purpose of these statutes is generally to prevent a beneficiary or
a mortgagee from obtaining a large deficiency judgment against the
former borrower as a result of low or no bids at the foreclosure sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including the federal bankruptcy
laws, the Federal Soldiers' and Sailors' Relief Act and state laws
affording relief to debtors, may interfere with or affect the ability
of the secured lender to realize upon collateral and/or enforce a
deficiency judgment. For example, with respect to federal bankruptcy
law, the filing of a petition acts as a stay against the enforcement of
remedies for collection of a debt. Moreover, a court with federal
bankruptcy jurisdiction may permit a debtor through a Chapter 13
Bankruptcy Code rehabilitative plan to cure a monetary default with
respect to a loan on a debtor's residence by paying arrearages within a
reasonable time period and reinstating the original loan payment
schedule even though the lender accelerated the loan and the lender has
taken all steps to realize upon his security (provided no sale of the
property has yet occurred) prior to the filing of the debtor's Chapter
13 petition. Some courts with federal bankruptcy jurisdiction have
approved plans, based on the particular facts of the reorganization
case, that effected the curing of a loan default by permitting the
obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated
that the terms of a mortgage loan may be modified if the borrower has
filed a petition under Chapter 13. These courts have suggested that
such modifications may include reducing the amount of each monthly
payment, changing the rate of interest, altering the repayment schedule
and reducing the lender's security interest to the value of the
residence, thus leaving the lender a general unsecured creditor for the
difference between the value of the residence and the outstanding
balance of the loan. Federal bankruptcy law and limited case law
indicate that the foregoing modifications could not be applied to the
terms of a loan secured by property that is the principal residence of
the debtor. In all cases, the secured creditor is entitled to the value
of its security plus post-petition interest, attorney's fees and costs
to the extent the value of the security exceeds the debt.
In a Chapter 11 case under the Bankruptcy Code, the lender is
precluded from foreclosing without authorization from the bankruptcy
court. The lender's lien may be transferred to other collateral and/or
be limited in amount to the value of the lender's interest in the
collateral as of the date of the bankruptcy. The loan term may be
extended, the interest rate may be adjusted to market rates and the
priority of the loan may be subordinated to bankruptcy court-approved
financing. The bankruptcy court can, in effect, invalidate due-on-sale
clauses through confirmed Chapter 11 plans of reorganization.
The Bankruptcy Code provides priority to certain tax liens over
the lender's security. This may delay or interfere with the enforcement
of rights in respect of a defaulted mortgage loan. In addition,
substantive requirements are imposed upon lenders in connection with
the origination and the servicing of mortgage loans by numerous federal
and some state consumer protection laws. The laws include the federal
Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting
Act and related statutes and regulations. These federal laws impose
specific statutory liabilities upon lenders who originate loans and who
fail to comply with the provisions of the law. In some cases, this
liability may affect assignees of the loans.
Due-on-Sale Clauses in Mortgage Loans
Due-on-sale clauses permit the lender to accelerate the maturity
of the loan if the borrower sells or transfers, whether voluntarily or
involuntarily, all or part of the real property securing the loan
without the lender's prior written consent. The enforceability of these
clauses has been the subject of legislation or litigation in many
states, and in some cases, typically involving single family
residential mortgage transactions, their enforceability has been
limited or denied. In any event, the Garn-St. Germain Depository
Institutions Act of 1982 (the "Garn-St. Germain Act") preempts state
constitutional, statutory and case law that prohibits the enforcement
of due-on-sale clauses and permits lenders to enforce these clauses in
accordance with their terms, subject to certain exceptions. As a
result, due-on-sale clauses have become generally enforceable except in
those states whose legislatures exercised their authority to regulate
the enforceability of such clauses with respect to mortgage loans that
were (i) originated or assumed during the "window period" under the
Garn-St. Germain Act, which ended in all cases not later than October
15, 1982, and (ii) originated by lenders other than national banks,
federal savings institutions and federal credit unions. FHLMC has taken
the position in its published mortgage servicing standards that, out of
a total of eleven "window period states," five states (Arizona,
Michigan, Minnesota, New Mexico and Utah) have enacted statutes
extending, on various terms and for varying periods, the prohibition on
enforcement of due-on-sale clauses with respect to certain categories
of window period loans. Also, the Garn-St. Germain Act does "encourage"
lenders to permit assumption of loans at the original rate of interest
or at some other rate less than the average of the original rate and
the market rate.
In addition, under federal bankruptcy law, due-on-sale clauses may
not be enforceable in bankruptcy proceedings and may, under certain
circumstances, be eliminated in any modified mortgage resulting from
such bankruptcy proceeding.
Enforceability of Prepayment and Late Payment Fees
Forms of notes, mortgages and deeds of trust used by lenders may
contain provisions obligating the borrower to pay a late charge if
payments are not timely made, and in some circumstances may provide for
prepayment fees or penalties if the obligation is paid prior to
maturity. In certain states, there are or may be specific limitations,
upon the late charges a lender may collect from a borrower for
delinquent payments. Certain states also limit the amounts that a
lender may collect from a borrower as an additional charge if the loan
is prepaid. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
Equitable Limitations on Remedies
In connection with lenders' attempts to realize upon their
security, courts have invoked general equitable principles. The
equitable principles are generally designed to relieve the borrower
from the legal effect of his defaults under the loan documents.
Examples of judicial remedies that have been fashioned include judicial
requirements that the lender undertake affirmative and expensive
actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In
some cases, courts have substituted their judgment for the lender's
judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering
from temporary financial disability. In other cases, courts have
limited the right of a lender to realize upon his security if the
default under the security agreement is not monetary, such as the
borrower's failure to adequately maintain the property or the
borrower's execution of secondary financing affecting the property.
Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process
concerns for adequate notice require that borrowers under security
agreements receive notices in addition to the statutorily-prescribed
minimums. For the most part, these cases have upheld the notice
provisions as being reasonable or have found that, in cases involving
the sale by a trustee under a deed of trust or by a mortgagee under a
mortgage having a power of sale, there is insufficient state action to
afford constitutional protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in
full or in part without penalty. The regulations of the Office of
Thrift Supervision (the "OTS") prohibit the imposition of a prepayment
penalty or equivalent fee for or in connection with the acceleration of
a loan by exercise of a due-on-sale clause. A mortgagee to whom a
prepayment in full has been tendered may be compelled to give either a
release of the mortgage or an instrument assigning the existing
mortgage. The absence of a restraint on prepayment, particularly with
respect to mortgage loans having higher mortgage rates, may increase
the likelihood of refinancing or other early retirements of such
mortgage loans.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that
state usury limitations shall not apply to certain types of residential
first mortgage loans originated by certain lenders after March 31,
1980. Similar federal statutes were in effect with respect to mortgage
loans made during the first three months of 1980. The OTS, as successor
to the Federal Home Loan Bank Board, is authorized to issue rules and
regulations and to publish interpretations governing implementation of
Title V. Title V authorizes any state to reimpose interest rate limits
by adopting, before April 1, 1983, a state law, or by certifying that
the voters of such state have voted in favor of any provision,
constitutional or otherwise, which expressly rejects an application of
the federal law. Fifteen states adopted such a law prior to the April
1, 1983 deadline. In addition, even where Title V is not so rejected,
any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V.
The Home Improvement Contracts
General
The Home Improvement Contracts, other than those Home Improvement
Contracts that are unsecured or secured by mortgages on real estate
(such Home Improvement Contracts are hereinafter referred to in this
section as "contracts") generally are "chattel paper" or constitute
"purchase money security interests," each as defined in the Uniform
Commercial Code in effect in the applicable jurisdiction (the "UCC").
Pursuant to the UCC, the sale of chattel paper is treated in a manner
similar to perfection of a security interest in chattel paper. Under
the related Agreement, the Depositor will transfer physical possession
of the contracts to the Trustee or a designated custodian or may retain
possession of the contracts as custodian for the Trustee. In addition,
the Depositor will make an appropriate filing of a UCC-1 financing
statement in the appropriate states to give notice of the Trustee's
ownership of the contracts. Unless otherwise specified in the related
Prospectus Supplement, the contracts will not be stamped or otherwise
marked to reflect their assignment from the Depositor to the Trustee.
Therefore, if through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the contracts
without notice of such assignment, the Trustee's interest in the
contracts could be defeated.
Security Interests in Home Improvements
The contracts that are secured by the Home Improvements financed
thereby grant to the originator of such contracts a purchase money
security interest in such Home Improvements to secure all or part of
the purchase price of such Home Improvements and related services. A
financing statement generally is not required to be filed to perfect a
purchase money security interest in consumer goods. Such purchase money
security interests are assignable. In general, a purchase money
security interest grants to the holder a security interest that has
priority over a conflicting security interest in the same collateral
and the proceeds of such collateral. However, to the extent that the
collateral subject to a purchase money security interest becomes a
fixture, in order for the related purchase money security interest to
take priority over a conflicting interest in the fixture, the holder's
interest in such Home Improvement must generally be perfected by a
timely fixture filing. In general, under the UCC, a security interest
does not exist under the UCC in ordinary building material incorporated
into an improvement on land. Home Improvement Contracts that finance
lumber, bricks, other types of ordinary building material or other
goods that are deemed to lose such characterization, upon incorporation
of such materials into the related property, will not be secured by a
purchase money security interest in the Home Improvement being
financed.
Enforcement of Security Interest in Home Improvements
So long as the Home Improvement has not become subject to the real
estate law, a creditor can repossess a Home Improvement securing a
contract by voluntary surrender, by "self-help" repossession that is
"peaceful" (i.e., without breach of the peace) or, in the absence of
voluntary surrender and the ability to repossess without breach of the
peace, by judicial process. The holder of a contract must give the
debtor a number of days' notice, which varies from 10 to 30 days
depending on the state, prior to commencement of any repossession. The
UCC and consumer protection laws in most states place restrictions on
repossession sales, including requiring prior notice to the debtor and
commercial reasonableness in effecting such a sale. The law in most
states also requires that the debtor be given notice of any sale prior
to resale of the unit that the debtor may redeem it at or before such
resale.
Under the laws applicable in most states, a creditor is entitled
to obtain a deficiency judgement from a debtor for any deficiency on
repossession and resale of the property securing the debtor's loan.
However, some states impose prohibitions or limitations on deficiency
judgements, and in many cases the defaulting borrower would have no
assets with which to pay a judgement.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may
limit or delay the ability of a lender to repossess and resell
collateral or enforce a deficiency judgement.
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade
Commission is intended to defeat the ability of the transferor of a
consumer credit contract that is the seller of goods that gave rise to
the transaction (and certain related lenders and assignees) to transfer
such contract free of notice of claims by the debtor thereunder. The
effect of this rule is to subject the assignee of such a contract to
all claims and defenses the debtor could assert against the seller of
goods. Liability under this rule is limited to amounts paid under a
contract; however, the obligor also may be able to assert the rule to
set off remaining amounts due as a defense against a claim brought by
the Trustee against such obligor. Numerous other federal and state
consumer protection laws impose requirements applicable to the
origination and lending pursuant to the contracts, including the Truth
in Lending Act, the Federal Trade Commission Act, the Fair Credit
Billing Act, the Fair Credit Reporting Act, the Equal Credit
Opportunity Act, the Fair Debt Collection Practices Act and the Uniform
Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the
related contract.
Applicability of Usury Laws
Title V provides that, subject to the following conditions, state
usury limitations shall not apply to any contract that is secured by a
first lien on certain kinds of consumer goods. The contracts would be
covered if they satisfy certain conditions, among other things,
governing the terms of any prepayments, late charges and deferral fees
and requiring a 30-day notice period prior to instituting any action
leading to repossession of the related unit.
Title V authorized any state to reimpose limitations on interest
rates and finance charges by adopting before April 1, 1983 a law or
constitutional provision that expressly rejects application of the
federal law. Fifteen states adopted such a law prior to the April 1,
1983 deadline. In addition, even where Title V was not so rejected, any
state is authorized by the law to adopt a provision limiting discount
points or other charges on loans covered by Title V.
Installment Sales Contracts
The Loans may also consist of installment sales contracts. Under
an installment sales contract (each, an "Installment Sales Contract")
the seller (hereinafter referred to in this section as the "lender")
retains legal title to the property and enters into an agreement with
the purchaser (hereinafter referred to in this section as the
"borrower") for the payment of the purchase price, plus interest, over
the term of such contract. Only after full performance by the borrower
of the contract is the lender obligated to convey title to the property
to the purchaser. As with mortgage or deed of trust financing, during
the effective period of the Installment Sales Contract, the borrower is
generally responsible for maintaining the property in good condition
and for paying real estate taxes, assessments and hazard Insurance
Policy premiums associated with the property.
The method of enforcing the rights of the lender under an
Installment Sales Contract varies on a state-by-state basis depending
upon the extent to which state courts are willing, or able pursuant to
state statute, to enforce the contract strictly according to the terms.
The terms of Installment Sales Contracts generally provide that upon a
default by the borrower, the borrower loses his or her right to occupy
the property, the entire indebtedness is accelerated, and the buyer's
equitable interest in the property is forfeited. The lender in such a
situation does not have to foreclose in order to obtain title to the
property, although in some cases a quiet title action is in order if
the borrower has filed the Installment Sales Contract in local land
records and an ejectment action may be necessary to recover possession.
In a few states, particularly in cases of borrower default during the
early years of an Installment Sales Contract, the courts will permit
ejectment of the buyer and a forfeiture of his or her interest in the
property. However, most state legislatures have enacted provisions by
analogy to mortgage law protecting borrowers under Installment Sales
Contracts from the harsh consequences of forfeiture. Under such
statutes, a judicial or nonjudicial foreclosure may be required, the
lender may be required to give notice of default and the borrower may
be granted some grace period during which the Installment Sales
Contract may be reinstated upon full payment of the default amount and
the borrower may have a post-foreclosure statutory redemption right. In
other states, courts in equity may permit a borrower with significant
investment in the property under an Installment Sales Contract for the
sale of real estate to share in the proceeds of sale of the property
after the indebtedness is repaid or may otherwise refuse to enforce the
forfeiture clause. Nevertheless, generally speaking, the lender's
procedures for obtaining possession and clear title under an
Installment Sales Contract in a given state are simpler and less
time-consuming and costly than are the procedures for foreclosing and
obtaining clear title to a property subject to one or more liens.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members
of all branches of the military on active duty, including draftees and
reservists in military service, (i) are entitled to have interest rates
reduced and capped at 6% per annum, on obligations (including Loans)
incurred prior to the commencement of military service for the duration
of military service, (ii) may be entitled to a stay of proceedings on
any kind of foreclosure or repossession action in the case of defaults
on such obligations entered into prior to military service for the
duration of military service and (iii) may have the maturity of such
obligations incurred prior to military service extended, the payments
lowered and the payment schedule readjusted for a period of time after
the completion of military service. However, the benefits of (i), (ii),
or (iii) above are subject to challenge by creditors and if, in the
opinion of the court, the ability of a person to comply with such
obligations is not materially impaired by military service, the court
may apply equitable principles accordingly. If a borrower's obligation
to repay amounts otherwise due on a Loan included in a Trust Fund for a
Series is relieved pursuant to the Soldiers' and Sailors' Civil Relief
Act of 1940, none of the Trust Fund, the Servicer, the Depositor nor
any Trustee will be required to advance such amounts, and any loss in
respect thereof may reduce the amounts available to be paid to the
Holders of the Securities of such Series. Unless otherwise specified in
the related Prospectus Supplement, any shortfalls in interest
collections on Loans or Underlying Loans relating to the Private
Securities, as applicable, included in a Trust Fund for a Series
resulting from application of the Soldiers' and Sailors' Civil Relief
Act of 1940 will be allocated to each Class of Securities of such
Series that is entitled to receive interest in respect of such Loans or
Underlying Loans in proportion to the interest that each such Class of
Securities would have otherwise been entitled to receive in respect of
such Loans or Underlying Loans had such interest shortfall not
occurred.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware in June
1995, and is a wholly-owned subsidiary of The Bear Stearns Companies
Inc. The Depositor's principal executive offices are located at 245
Park Avenue, New York, New York 10167. Its telephone number is (212)
272-4095.
The Depositor will not engage in any activities other than to
authorize, issue, sell, deliver, purchase and invest in (and enter into
agreements in connection with), and/or to engage in the establishment
of one or more trusts, which will issue and sell, bonds, notes, debt or
equity securities, obligations and other securities and instruments
("Depositor Securities") collateralized or otherwise secured or backed
by, or otherwise representing an interest in, among other things,
receivables or pass-through certificates, or participations or
certificates of participation or beneficial ownership in one or more
pools of receivables, and the proceeds of the foregoing, that arise in
connection with loans secured by certain first or junior mortgages on
real estate or manufactured housing and any and all other commercial
transactions and commercial, sovereign, student or consumer loans or
indebtedness and, in connection therewith or otherwise, purchasing,
acquiring, owning, holding, transferring, conveying, servicing,
selling, pledging, assigning, financing and otherwise dealing with such
receivables, pass-through certificates, or participations or
certificates of participation or beneficial ownership. Article Third of
the Depositor's Certificate of Incorporation limits the Depositor's
activities to the above activities and certain related activities, such
as credit enhancement with respect to such Depositor Securities, and to
any activities incidental to and necessary or convenient for the
accomplishment of such purposes.
USE OF PROCEEDS
The Depositor will apply all or substantially all of the net
proceeds from the sale of each Series of Securities for one or more of
the following purposes: (i) to purchase the related Primary Assets,
(ii) to repay indebtedness incurred to obtain funds to acquire such
Primary Assets, (iii) to establish any Reserve Funds described in the
related Prospectus Supplement and (iv) to pay costs of structuring and
issuing such Securities, including the costs of obtaining Enhancement,
if any. If so specified in the related Prospectus Supplement, the
purchase of the Primary Assets for a Series may be effected by an
exchange of Securities with the Seller of such Primary Assets.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
General
The following is a summary of certain anticipated material federal
income tax consequences of the purchase, ownership, and disposition of
the Securities and is based on the opinion of Brown & Wood LLP, special
counsel to the Depositor (in such capacity, "Tax Counsel"). The summary
is based upon the provisions of the Code, the regulations promulgated
thereunder, including, where applicable, proposed regulations, and the
judicial and administrative rulings and decisions now in effect, all of
which are subject to change or possible differing interpretations. The
statutory provisions, regulations, and interpretations on which this
interpretation is based are subject to change, and such a change could
apply retroactively.
The summary does not purport to deal with all aspects of federal
income taxation that may affect particular investors in light of their
individual circumstances. This summary focuses primarily upon investors
who will hold Securities as "capital assets" (generally, property held
for investment) within the meaning of Section 1221 of the Code.
Prospective investors may wish to consult their own tax advisers
concerning the federal, state, local and any other tax consequences as
relates specifically to such investors in connection with the purchase,
ownership and disposition of the Securities.
The federal income tax consequences to Holders will vary depending
on whether (i) the Securities of a Series are classified as
indebtedness; (ii) an election is made to treat the Trust Fund relating
to a particular Series of Securities as a real estate mortgage
investment conduit (a "REMIC") under the Internal Revenue Code of 1986,
as amended (the "Code"); (iii) the Securities represent an ownership
interest in some or all of the assets included in the Trust Fund for a
Series; or (iv) an election is made to treat the Trust Fund relating to
a particular Series of Certificates as a partnership; or (v) an
election is made to treat the Trust Fund relating to a particular
Series of Securities as a Financial Asset Securitization Investment
Trust ("FASIT") under the Code. The Prospectus Supplement for each
Series of Securities will specify how the Securities will be treated
for federal income tax purposes and will discuss whether a REMIC
election, if any, will be made with respect to such Series.
As used herein, the term "U.S. Person" means a citizen or resident
of the United States, a corporation, partnership or other entity
created or organized in or under the laws of the United States or any
political subdivision thereof (other than a partnership that is not
treated as a United States person under any applicable Treasury
regulations), an estate whose income is subject to U.S. federal income
tax regardless of its source of income, or a trust if a court within
the United States is able to exercise primary supervision of the trust
and one or more United States persons have the authority to control all
substantial decisions of the trust. Notwithstanding the preceding
sentence, to the extent provided in regulations, certain trusts in
existence on August 20, 1996 and treated as United States persons prior
to such date that elect to continue to be treated as United States
persons shall be considered U.S. Persons as well.
Taxation of Debt Securities
Status as Real Property Loans. Except to the extent otherwise
provided in the related Prospectus Supplement, if the Securities are
regular interests in a REMIC ("Regular Interest Securities") or
represent interests in a grantor trust, Tax Counsel is of the opinion
that: (i) Securities held by a domestic building and loan association
will constitute "loans... secured by an interest in real property"
within the meaning of Code section 7701(a)(19)(C)(v); and (ii)
Securities held by a real estate investment trust will constitute "real
estate assets" within the meaning of Code section 856(c)(4)(A) and
interest on Securities will be considered "interest on obligations
secured by mortgages on real property or on interests in real property"
within the meaning of Code section 856(c)(3)(B).
Interest and Acquisition Discount. In the opinion of Tax Counsel,
Regular Interest Securities are generally taxable to Holders in the
same manner as evidences of indebtedness issued by the REMIC. Stated
interest on the Regular Interest Securities will be taxable as ordinary
income and taken into account using the accrual method of accounting,
regardless of the Holder's normal accounting method. Interest (other
than original issue discount) on Securities (other than Regular
Interest Securities) that are characterized as indebtedness for federal
income tax purposes will be includible in income by Holders thereof in
accordance with their usual methods of accounting. Securities
characterized as debt for federal income tax purposes and Regular
Interest Securities will be referred to hereinafter collectively as
"Debt Securities."
Tax Counsel is of the opinion that Debt Securities that are
Compound Interest Securities will, and certain of the other Debt
Securities issued at a discount may, be issued with "original issue
discount" ("OID"). The following discussion is based in part on the
rules governing OID, which are set forth in Sections 1271-1275 of the
Code and the Treasury regulations issued thereunder on February 2, 1994
and amended on June 11, 1996 (the "OID Regulations"). A Holder should
be aware, however, that the OID Regulations do not adequately address
certain issues relevant to prepayable securities, such as the Debt
Securities.
In general, OID, if any, will equal the difference between the
stated redemption price at maturity of a Debt Security and its issue
price. In the opinion of Tax Counsel, a Holder of a Debt Security must
include such OID in gross income as ordinary interest income as it
accrues under a method taking into account an economic accrual of the
discount. In general, OID must be included in income in advance of the
receipt of the cash representing that income. The amount of OID on a
Debt Security will be considered to be zero if it is less than a de
minimis amount determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that Class are sold to the
public (excluding bond houses, brokers, underwriters or wholesalers).
If less than a substantial amount of a particular Class of Debt
Securities is sold for cash on or prior to the Closing Date, the issue
price for such Class will be treated as the fair market value of such
Class on the Closing Date. The issue price of a Debt Security also
includes the amount paid by an initial Debt Security Holder for accrued
interest that relates to a period prior to the issue date of the Debt
Security. The stated redemption price at maturity of a Debt Security
includes the original principal amount of the Debt Security, but
generally will not include distributions of interest if such
distributions constitute "qualified stated interest."
Under the OID Regulations, qualified stated interest generally
means interest payable at a single fixed rate or qualified variable
rate (as described below); provided, that such interest payments are
unconditionally payable at intervals of one year or less during the
entire term of the Debt Security. The OID Regulations state that
interest payments are unconditionally payable only if a late payment or
nonpayment is expected to be penalized or reasonable remedies exist to
compel payment. Certain Debt Securities may provide for default
remedies in the event of late payment or nonpayment of interest. In the
opinion of Tax Counsel, the interest on such Debt Securities will be
unconditionally payable and constitute qualified stated interest, not
OID. However, absent clarification of the OID Regulations, where Debt
Securities do not provide for default remedies, the interest payments
will be included in the Debt Security's stated redemption price at
maturity and taxed as OID. Interest is payable at a single fixed rate
only if the rate appropriately takes into account the length of the
interval between payments. Distributions of interest on Debt Securities
with respect to which deferred interest will accrue, will not
constitute qualified stated interest payments, in which case the stated
redemption price at maturity of such Debt Securities includes all
distributions of interest as well as principal thereon. Where the
interval between the issue date and the first Distribution Date on a
Debt Security is either longer or shorter than the interval between
subsequent Distribution Dates, all or part of the interest foregone, in
the case of the longer interval, and all of the additional interest, in
the case of the shorter interval, will be included in the stated
redemption price at maturity and tested under the de minimis rule
described below. In the case of a Debt Security with a long first
period that has non-de minimis OID, all stated interest in excess of
interest payable at the effective interest rate for the long first
period will be included in the stated redemption price at maturity and
the Debt Security will generally have OID. Holders of Debt Securities
should consult their own tax advisors to determine the issue price and
stated redemption price at maturity of a Debt Security.
Under the de minimis rule, OID on a Debt Security will be
considered to be zero if such OID is less than 0.25% of the stated
redemption price at maturity of the Debt Security multiplied by the
weighted average maturity of the Debt Security. For this purpose, the
weighted average maturity of the Debt Security is computed as the sum
of the amounts determined by multiplying the number of full years
(i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is
scheduled to be made by a fraction, the numerator of which is the
amount of each distribution included in the stated redemption price at
maturity of the Debt Security and the denominator of which is the
stated redemption price at maturity of the Debt Security. Holders
generally must report de minimis OID pro rata as principal payments are
received, and such income will be capital gain if the Debt Security is
held as a capital asset. However, accrual method Holders may elect to
accrue all de minimis OID as well as market discount under a constant
interest method.
Debt Securities may provide for interest based on a qualified
variable rate. Under the OID Regulations, interest is treated as
payable at a qualified variable rate and not as contingent interest if,
generally, (i) such interest is unconditionally payable at least
annually, (ii) the issue price of the debt instrument does not exceed
the total noncontingent principal payments and (iii) interest is based
on a "qualified floating rate," an "objective rate," or a combination
of "qualified floating rates" that do not operate in a manner that
significantly accelerates or defers interest payments on such Debt
Security. In the case of Compound Interest Securities, certain Interest
Weighted Securities, and certain of the other Debt Securities, none of
the payments under the instrument will be considered qualified stated
interest, and thus the aggregate amount of all payments will be
included in the stated redemption price.
The Internal Revenue Service (the "IRS") recently issued final
regulations (the "Contingent Payment Regulations") governing the
calculation of OID on instruments having contingent interest payments.
The Contingent Payment Regulations, represent the only guidance
regarding the views of the IRS with respect to contingent interest
instruments and specifically do not apply for purposes of calculating
OID on debt instruments subject to Code Section 1272(a)(6), such as the
Debt Security. Additionally, the OID Regulations do not contain
provisions specifically interpreting Code Section 1272(a)(6). Until the
Treasury issues guidance to the contrary, the applicable Trustee
intends to base its computation on Code Section 1272(a)(6) and the OID
Regulations as described in this Prospectus. However, because no
regulatory guidance currently exists under Code Section 1272(a)(6),
there can be no assurance that such methodology represents the correct
manner of calculating OID.
The Holder of a Debt Security issued with OID must include in
gross income, for all days during its taxable year on which it holds
such Debt Security, the sum of the "daily portions" of such original
issue discount. The amount of OID includible in income by a Holder will
be computed by allocating to each day during a taxable year a pro rata
portion of the original issue discount that accrued during the relevant
accrual period. In the case of a Debt Security that is not a Regular
Interest Security and the principal payments on which are not subject
to acceleration resulting from prepayments on the Loans, the amount of
OID includible in income of a Holder for an accrual period (generally
the period over which interest accrues on the debt instrument) will
equal the product of the yield to maturity of the Debt Security and the
adjusted issue price of the Debt Security, reduced by any payments of
qualified stated interest. The adjusted issue price is the sum of its
issue price plus prior accruals or OID, reduced by the total payments
made with respect to such Debt Security in all prior periods, other
than qualified stated interest payments.
The amount of OID to be included in income by a Holder of a debt
instrument, such as certain Classes of the Debt Securities, that is
subject to acceleration due to prepayments on other debt obligations
securing such instruments (a "Pay-Through Security"), is computed by
taking into account the anticipated rate of prepayments assumed in
pricing the debt instrument (the "Prepayment Assumption"). The amount
of OID that will accrue during an accrual period on a Pay-Through
Security is the excess (if any) of the sum of (a) the present value of
all payments remaining to be made on the Pay-Through Security as of the
close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the
Pay-Through Security, over the adjusted issue price of the Pay-Through
Security at the beginning of the accrual period. The present value of
the remaining payments is to be determined on the basis of three
factors: (i) the original yield to maturity of the Pay-Through Security
(determined on the basis of compounding at the end of each accrual
period and properly adjusted for the length of the accrual period),
(ii) events that have occurred before the end of the accrual period and
(iii) the assumption that the remaining payments will be made in
accordance with the original Prepayment Assumption. The effect of this
method is to increase the portions of OID required to be included in
income by a Holder to take into account prepayments with respect to the
Loans at a rate that exceeds the Prepayment Assumption, and to decrease
(but not below zero for any period) the portions of OID required to be
included in income by a Holder of a Pay-Through Security to take into
account prepayments with respect to the Loans at a rate that is slower
than the Prepayment Assumption. Although OID will be reported to
Holders of Pay-Through Securities based on the Prepayment Assumption,
no representation is made to Holders that Loans will be prepaid at that
rate or at any other rate.
The Depositor may adjust the accrual of OID on a Class of Regular
Interest Securities (or other regular interests in a REMIC) in a manner
that it believes to be appropriate, to take account of realized losses
on the Loans, although the OID Regulations do not provide for such
adjustments. If the IRS were to require that OID be accrued without
such adjustments, the rate of accrual of OID for a Class of Regular
Interest Securities could increase.
Certain Classes of Regular Interest Securities may represent more
than one Class of REMIC regular interests. Unless otherwise provided in
the related Prospectus Supplement, the applicable Trustee intends,
based on the OID Regulations, to calculate OID on such Securities as
if, solely for the purposes of computing OID, the separate regular
interests were a single debt instrument.
A subsequent Holder of a Debt Security will also be required to
include OID in gross income, but such a Holder who purchases such Debt
Security for an amount that exceeds its adjusted issue price will be
entitled (as will an initial Holder who pays more than a Debt
Security's issue price) to offset such OID by comparable economic
accruals of portions of such excess.
Effects of Defaults and Delinquencies. In the opinion of Tax
Counsel, Holders will be required to report income with respect to the
related Securities under an accrual method without giving effect to
delays and reductions in distributions attributable to a default or
delinquency on the Loans, except possibly to the extent that it can be
established that such amounts are uncollectible. As a result, the
amount of income (including OID) reported by a Holder of such a
Security in any period could significantly exceed the amount of cash
distributed to such Holder in that period. The Holder will eventually
be allowed a loss (or will be allowed to report a lesser amount of
income) to the extent that the aggregate amount of distributions on the
Securities is reduced as a result of a Loan default. However, the
timing and character of such losses or reductions in income are
uncertain and, accordingly, Holders of Securities should consult their
own tax advisors on this point.
Interest Weighted Securities. It is not clear how income should be
accrued with respect to Regular Interest Securities or Stripped
Securities (as defined under "--Tax Status as a Grantor Trust; General"
herein) the payments on which consist solely or primarily of a
specified portion of the interest payments on qualified mortgages held
by the REMIC or on Loans underlying Pass-Through Securities ("Interest
Weighted Securities"). The Trustee intends to take the position that
all of the income derived from an Interest Weighted Security should be
treated as OID and that the amount and rate of accrual of such OID
should be calculated by treating the Interest Weighted Security as a
Compound Interest Security. However, in the case of Interest Weighted
Securities that are entitled to some payments of principal and that are
Regular Interest Securities the Internal Revenue Service could assert
that income derived from an Interest Weighted Security should be
calculated as if the Security were a security purchased at a premium
equal to the excess of the price paid by such Holder for such Security
over its stated principal amount, if any. Under this approach, a Holder
would be entitled to amortize such premium only if it has in effect an
election under Section 171 of the Code with respect to all taxable debt
instruments held by such Holder, as described below. Alternatively, the
IRS could assert that an Interest Weighted Security should be taxable
under the rules governing bonds issued with contingent payments. Such
treatment may be more likely in the case of Interest Weighted
Securities that are Stripped Securities as described below. See "--Tax
Status as a Grantor Trust--Discount or Premium on Pass-Through
Securities."
Variable Rate Debt Securities. In the opinion of Tax Counsel, in
the case of Debt Securities bearing interest at a rate that varies
directly, according to a fixed formula, with an objective index, it
appears that (i) the yield to maturity of such Debt Securities and (ii)
in the case of Pay-Through Securities, the present value of all
payments remaining to be made on such Debt Securities, should be
calculated as if the interest index remained at its value as of the
issue date of such Securities. Because the proper method of adjusting
accruals of OID on a variable rate Debt Security is uncertain, Holders
of variable rate Debt Securities should consult their own tax advisers
regarding the appropriate treatment of such Securities for federal
income tax purposes.
Market Discount. In the opinion of Tax Counsel, a purchaser of a
Security may be subject to the market discount rules of Sections
1276-1278 of the Code. A Holder that acquires a Debt Security with more
than a prescribed de minimis amount of "market discount" (generally,
the excess of the principal amount of the Debt Security over the
purchaser's purchase price) will be required to include accrued market
discount in income as ordinary income in each month, but limited to an
amount not exceeding the principal payments on the Debt Security
received in that month and, if the Securities are sold, the gain
realized. Such market discount would accrue in a manner to be provided
in Treasury regulations but, until such regulations are issued, such
market discount would in general accrue either (i) on the basis of a
constant yield (in the case of a Pay-Through Security, taking into
account a prepayment assumption) or (ii) in the ratio of (a) in the
case of Securities (or in the case of a Pass-Through Security, as set
forth below, the Loans underlying such Security) not originally issued
with original issue discount, stated interest payable in the relevant
period to total stated interest remaining to be paid at the beginning
of the period or (b) in the case of Securities (or, in the case of a
Pass-Through Security, as described below, the Loans underlying such
Security) originally issued at a discount, OID in the relevant period
to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the
origination date of the Debt Security (or, in the case of a
Pass-Through Security, the Loans), the excess of interest paid or
accrued to purchase or carry a Security (or, in the case of a
Pass-Through Security, as described below, the underlying Loans) with
market discount over interest received on such Security is allowed as a
current deduction only to the extent such excess is greater than the
market discount that accrued during the taxable year in which such
interest expense was incurred. In general, the deferred portion of any
interest expense will be deductible when such market discount is
included in income, including upon the sale, disposition, or repayment
of the Security (or in the case of a Pass-Through Security, an
underlying Loan). A Holder may elect to include market discount in
income currently as it accrues, on all market discount obligations
acquired by such Holder during the taxable year such election is made
and thereafter, in which case the interest deferral rule will not
apply.
Premium. In the opinion of Tax Counsel, a Holder who purchases a
Debt Security (other than an Interest Weighted Security to the extent
described above) at a cost greater than its stated redemption price at
maturity, generally will be considered to have purchased the Security
at a premium, which it may elect to amortize as an offset to interest
income on such Security (and not as a separate deduction item) on a
constant yield method. Although no regulations addressing the
computation of premium accrual on securities similar to the Securities
have been issued, the legislative history of the 1986 Act indicates
that premium is to be accrued in the same manner as market discount.
Accordingly, it appears that the accrual of premium on a Class of
Pay-Through Securities will be calculated using the prepayment
assumption used in pricing such Class. If a Holder makes an election to
amortize premium on a Debt Security, such election will apply to all
taxable debt instruments (including all REMIC regular interests and all
pass-through certificates representing ownership interests in a trust
holding debt obligations) held by the Holder at the beginning of the
taxable year in which the election is made, and to all taxable debt
instruments acquired thereafter by such Holder, and will be irrevocable
without the consent of the IRS. Purchasers who pay a premium for the
Securities should consult their tax advisers regarding the election to
amortize premium and the method to be employed.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a Holder of a Debt Security to elect to accrue all
interest, discount (including de minimis market or original issue
discount) and premium in income as interest, based on a constant yield
method for Debt Securities acquired on or after April 4, 1994. If such
an election were to be made with respect to a Debt Security with market
discount, the Holder of the Debt Security would be deemed to have made
an election to include in income currently market discount with respect
to all other debt instruments having market discount that such Holder
of the Debt Security acquires during the year of the election or
thereafter. Similarly, a Holder of a Debt Security that makes this
election for a Debt Security that is acquired at a premium will be
deemed to have made an election to amortize bond premium with respect
to all debt instruments having amortizable bond premium that such
Holder owns or acquires. The election to accrue interest, discount and
premium on a constant yield method with respect to a Debt Security is
irrevocable.
Taxation of the REMIC and its Holders
General. In the opinion of Tax Counsel, if a REMIC election is
made with respect to a Series of Securities, then the arrangement by
which the Securities of that Series are issued will be treated as a
REMIC as long as all of the provisions of the applicable Agreement are
complied with and the statutory and regulatory requirements are
satisfied. Securities will be designated as "Regular Interests" or
"Residual Interests" in a REMIC, as specified in the related Prospectus
Supplement.
Except to the extent specified otherwise in a Prospectus
Supplement, if a REMIC election is made with respect to a Series of
Securities, in the opinion of Tax Counsel (i) Securities held by a
domestic building and loan association will constitute "a regular or a
residual interest in a REMIC" within the meaning of Code Section
7701(a)(19)(C)(xi) (assuming that at least 95% of the REMIC's assets
consist of cash, government securities, "loans secured by an interest
in real property," and other types of assets described in Code Section
7701(a)(19)(C)); and (ii) Securities held by a real estate investment
trust will constitute "real estate assets" within the meaning of Code
Section 856(c)(4)(A), and income with respect to the Securities will be
considered "interest on obligations secured by mortgages on real
property or on interests in real property" within the meaning of Code
Section 856(c)(3)(B) (assuming, for both purposes, that at least 95% of
the REMIC's assets are qualifying assets). If less than 95% of the
REMIC's assets consist of assets described in (i) or (ii) above, then a
Security will qualify for the tax treatment described in (i) or (ii) in
the proportion that such REMIC assets are qualifying assets.
REMIC Expenses; Single Class REMICs
As a general rule, in the opinion of Tax Counsel, all of the
expenses of a REMIC will be taken into account by Holders of the
Residual Interest Securities. In the case of a "single class REMIC,"
however, the expenses will be allocated, under Treasury regulations,
among the Holders of the Regular Interest Securities and the Holders of
the Residual Interest Securities on a daily basis in proportion to the
relative amounts of income accruing to each Holder on that day. In the
case of a Holder of a Regular Interest Security who is an individual or
a "pass-through interest holder" (including certain pass-through
entities but not including real estate investment trusts), such
expenses will be deductible only to the extent that such expenses, plus
other "miscellaneous itemized deductions" of the Holder, exceed 2% of
such Holder's adjusted gross income. In addition, for taxable years
beginning after December 31, 1990, the amount of itemized deductions
otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount (which amount will
be adjusted for inflation for taxable years beginning after 1990) will
be reduced by the lesser of (i) 3% of the excess of adjusted gross
income over the applicable amount, or (ii) 80% of the amount of
itemized deductions otherwise allowable for such taxable year. The
reduction or disallowance of this deduction may have a significant
impact on the yield of the Regular Interest Security to such a Holder.
In general terms, a single class REMIC is one that either (i) would
qualify, under existing Treasury regulations, as a grantor trust if it
were not a REMIC (treating all interests as ownership interests, even
if they would be classified as debt for federal income tax purposes) or
(ii) is similar to such a trust and that is structured with the
principal purpose of avoiding the single class REMIC rules. Unless
otherwise specified in the related Prospectus Supplement, the expenses
of the REMIC will be allocated to Holders of the related residual
interest securities.
Taxation of the REMIC
General. Although a REMIC is a separate entity for federal income
tax purposes, in the opinion of Tax Counsel, a REMIC is not generally
subject to entity-level tax. Rather, the taxable income or net loss of
a REMIC is taken into account by the Holders of residual interests. As
described above, the regular interests are generally taxable as debt of
the REMIC.
Calculation of REMIC Income. In the opinion of Tax Counsel, the
taxable income or net loss of a REMIC is determined under an accrual
method of accounting and in the same manner as in the case of an
individual, with certain adjustments. In general, the taxable income or
net loss will be the difference between (i) the gross income produced
by the REMIC's assets, including stated interest and any original issue
discount or market discount on loans and other assets, and (ii)
deductions, including stated interest and original issue discount
accrued on Regular Interest Securities, amortization of any premium
with respect to Loans, and servicing fees and other expenses of the
REMIC. A Holder of a Residual Interest Security that is an individual
or a "pass-through interest holder" (including certain pass-through
entities, but not including real estate investment trusts) will be
unable to deduct servicing fees payable on the loans or other
administrative expenses of the REMIC for a given taxable year, to the
extent that such expenses, when aggregated with such Holder's other
miscellaneous itemized deductions for that year, do not exceed two
percent of such Holder's adjusted gross income.
For purposes of computing its taxable income or net loss, the
REMIC should have an initial aggregate tax basis in its assets equal to
the aggregate fair market value of the regular interests and the
residual interests on the Startup Day (generally, the day that the
interests are issued). That aggregate basis will be allocated among the
assets of the REMIC in proportion to their respective fair market
values.
The OID provisions of the Code apply to loans of individuals
originated on or after March 2, 1984, and the market discount
provisions apply to loans originated after July 18, 1984. Subject to
possible application of the de minimis rules, the method of accrual by
the REMIC of OID income on such loans will be equivalent to the method
under which Holders of Pay-Through Securities accrue original issue
discount (i.e., under the constant yield method taking into account the
Prepayment Assumption). The REMIC will deduct OID on the Regular
Interest Securities in the same manner that the Holders of the Regular
Interest Securities include such discount in income, but without regard
to the de minimis rules. See "Taxation of Debt Securities" above.
However, a REMIC that acquires loans at a market discount must include
such market discount in income currently, as it accrues, on a constant
interest basis.
To the extent that the REMIC's basis allocable to loans that it
holds exceeds their principal amounts, the resulting premium, if
attributable to mortgages originated after September 27, 1985, will be
amortized over the life of the loans (taking into account the
Prepayment Assumption) on a constant yield method. Although the law is
somewhat unclear regarding recovery of premium attributable to loans
originated on or before such date, it is possible that such premium may
be recovered in proportion to payments of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be
subject to a 100% tax on any net income derived from a "prohibited
transaction." For this purpose, net income will be calculated without
taking into account any losses from prohibited transactions or any
deductions attributable to any prohibited transaction that resulted in
a loss. In general, prohibited transactions include: (i) subject to
limited exceptions, the sale or other disposition of any qualified
mortgage transferred to the REMIC; (ii) subject to a limited exception,
the sale or other disposition of a cash flow investment; (iii) the
receipt of any income from assets not permitted to be held by the REMIC
pursuant to the Code; or (iv) the receipt of any fees or other
compensation for services rendered by the REMIC. It is anticipated that
a REMIC will not engage in any prohibited transactions in which it
would recognize a material amount of net income. In addition, subject
to a number of exceptions, a tax is imposed at the rate of 100% on
amounts contributed to a REMIC after the close of the three-month
period beginning on the Startup Day. The Holders of Residual Interest
Securities will generally be responsible for the payment of any such
taxes imposed on the REMIC. To the extent not paid by such Holders or
otherwise, however, such taxes will be paid out of the Trust Fund and
will be allocated pro rata to all outstanding Classes of Securities of
such REMIC.
Taxation of Holders of Residual Interest Securities
In the opinion of Tax Counsel, the Holder of a Certificate
representing a residual interest (a "Residual Interest Security") will
take into account the "daily portion" of the taxable income or net loss
of the REMIC for each day during the taxable year on which such Holder
held the Residual Interest Security. The daily portion is determined by
allocating to each day in any calendar quarter its ratable portion of
the taxable income or net loss of the REMIC for such quarter, and by
allocating that amount among the Holders (on such day) of the Residual
Interest Securities in proportion to their respective holdings on such
day.
In the opinion of Tax Counsel, the Holder of a Residual Interest
Security must report its proportionate share of the taxable income of
the REMIC whether or not it receives cash distributions from the REMIC
attributable to such income or loss. The reporting of taxable income
without corresponding distributions could occur, for example, in
certain REMIC issues in which the loans held by the REMIC were issued
or acquired at a discount, since mortgage prepayments cause recognition
of discount income, while the corresponding portion of the prepayment
could be used in whole or in part to make principal payments on REMIC
Regular Interests issued without any discount or at an insubstantial
discount (if this occurs, it is likely that cash distributions will
exceed taxable income in later years). Taxable income may also be
greater in earlier years of certain REMIC issues as a result of the
fact that interest expense deductions, as a percentage of outstanding
principal on REMIC Regular Interest Securities, will typically increase
over time as lower yielding Securities are paid, whereas interest
income with respect to loans will generally remain constant over time
as a percentage of loan principal.
In any event, because the Holder of a residual interest is taxed
on the net income of the REMIC, the taxable income derived from a
Residual Interest Security in a given taxable year will not be equal to
the taxable income associated with investment in a corporate bond or
stripped instrument having similar cash flow characteristics and pretax
yield. Therefore, the after-tax yield on the Residual Interest Security
may be less than that of such a bond or instrument.
Limitation on Losses. In the opinion of Tax Counsel, the amount of
the REMIC's net loss that a Holder may take into account currently is
limited to the Holder's adjusted basis at the end of the calendar
quarter in which such loss arises. A Holder's basis in a Residual
Interest Security will initially equal such Holder's purchase price,
and will subsequently be increased by the amount of the REMIC's taxable
income allocated to the Holder, and decreased (but not below zero) by
the amount of distributions made and the amount of the REMIC's net loss
allocated to the Holder. Any disallowed loss may be carried forward
indefinitely, but may be used only to offset income of the REMIC
generated by the same REMIC. The ability of Holders of Residual
Interest Securities to deduct net losses may be subject to additional
limitations under the Code, as to which such Holders should consult
their tax advisers.
Distributions. In the opinion of Tax Counsel, distributions on a
Residual Interest Security (whether at their scheduled times or as a
result of prepayments) will generally not result in any additional
taxable income or loss to a Holder of a Residual Interest Security. If
the amount of such payment exceeds a Holder's adjusted basis in the
Residual Interest Security, however, the Holder will recognize gain
(treated as gain from the sale of the Residual Interest Security) to
the extent of such excess.
Sale or Exchange. In the opinion of Tax Counsel, a Holder of a
Residual Interest Security will recognize gain or loss on the sale or
exchange of a Residual Interest Security equal to the difference, if
any, between the amount realized and such Holder's adjusted basis in
the Residual Interest Security at the time of such sale or exchange.
Except to the extent provided in regulations, which have not yet been
issued, any loss upon disposition of a Residual Interest Security will
be disallowed if the selling Holder acquires any residual interest in a
REMIC or similar mortgage pool within six months before or after such
disposition.
Excess Inclusions. In the opinion of Tax Counsel, the portion of
the REMIC taxable income of a Holder of a Residual Interest Security
consisting of "excess inclusion" income may not be offset by other
deductions or losses, including net operating losses, on such Holder's
federal income tax return. Further, if the Holder of a Residual
Interest Security is an organization subject to the tax on unrelated
business income imposed by Code Section 511, such Holder's excess
inclusion income will be treated as unrelated business taxable income
of such Holder. In addition, under Treasury regulations yet to be
issued, if a real estate investment trust, a regulated investment
company, a common trust fund, or certain cooperatives were to own a
Residual Interest Security, a portion of dividends (or other
distributions) paid by the real estate investment trust (or other
entity) would be treated as excess inclusion income. If a Residual
Security is owned by a foreign person, excess inclusion income is
subject to tax at a rate of 30%, which may not be reduced by treaty, is
not eligible for treatment as "portfolio interest" and is subject to
certain additional limitations. See "Tax Treatment of Foreign
Investors." The Small Business Job Protection Act of 1996 has
eliminated the special rule permitting Section 593 institutions
("thrift institutions") to use net operating losses and other allowable
deductions to offset their excess inclusion income from Residual
Interest Securities that have "significant value" within the meaning of
the REMIC Regulations, effective for taxable years beginning after
December 31, 1995, except with respect to Residual Interest Securities
continuously held by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996
provides three rules for determining the effect on excess inclusions on
the alternative minimum taxable income of a residual Holder. First,
alternative minimum taxable income for such residual Holder is
determined without regard to the special rule that taxable income
cannot be less than excess inclusions. Second, a residual Holder's
alternative minimum taxable income for a tax year cannot be less than
excess inclusions for the year. Third, the amount of any alternative
minimum tax net operating loss deductions must be computed without
regard to any excess inclusions. These rules are effective for tax
years beginning after December 31, 1986, unless a residual Holder
elects to have such rules apply only to tax years beginning after
August 20, 1996.
The excess inclusion portion of a REMIC's income is generally
equal to the excess, if any, of REMIC taxable income for the quarterly
period allocable to a Residual Interest Security, over the daily
accruals for such quarterly period of (i) 120% of the long term
applicable federal rate on the Startup Day multiplied by (ii) the
adjusted issue price of such Residual Interest Security at the
beginning of such quarterly period. The adjusted issue price of a
Residual Interest at the beginning of each calendar quarter will equal
its issue price (calculated in a manner analogous to the determination
of the issue price of a Regular Interest), increased by the aggregate
of the daily accruals for prior calendar quarters, and decreased (but
not below zero) by the amount of loss allocated to a Holder and the
amount of distributions made on the Residual Interest Security before
the beginning of the quarter. The long-term federal rate, which is
announced monthly by the Treasury Department, is an interest rate that
is based on the average market yield of outstanding marketable
obligations of the United States government having remaining maturities
in excess of nine years.
Under the REMIC Regulations, in certain circumstances, transfers
of Residual Securities may be disregarded. See "--Restrictions on
Ownership and Transfer of Residual Interest Securities" and "--Tax
Treatment of Foreign Investors" below.
Restrictions on Ownership and Transfer of Residual Interest
Securities. As a condition to qualification as a REMIC, reasonable
arrangements must be made to prevent the ownership of a REMIC residual
interest by any "Disqualified Organization." Disqualified Organizations
include the United States, any State or political subdivision thereof,
any foreign government, any international organization, or any agency
or instrumentality of any of the foregoing, a rural electric or
telephone cooperative described in Section 1381(a)(2)(C) of the Code,
or any entity exempt from the tax imposed by Sections 1-1399 of the
Code, if such entity is not subject to tax on its unrelated business
income. Accordingly, the applicable Pooling and Servicing Agreement
will prohibit Disqualified Organizations from owning a Residual
Interest Security. In addition, no transfer of a Residual Interest
Security will be permitted unless the proposed transferee shall have
furnished to the Trustee an affidavit representing and warranting that
it is neither a Disqualified Organization nor an agent or nominee
acting on behalf of a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set
forth above), a substantial tax will be imposed on the transferor of
such Residual Interest Security at the time of the transfer. In
addition, if a Disqualified Organization holds an interest in a
pass-through entity after March 31, 1988 (including, among others, a
partnership, trust, real estate investment trust, regulated investment
company, or any person holding as nominee), that owns a Residual
Interest Security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the
REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a
Residual Interest Security to a United States person will be
disregarded for all federal tax purposes unless no significant purpose
of the transfer was to impede the assessment or collection of tax. A
Residual Interest Security is a "noneconomic residual interest" unless,
at the time of the transfer (i) the present value of the expected
future distributions on the Residual Interest Security at least equals
the product of the present value of the anticipated excess inclusions
and the highest rate of tax for the year in which the transfer occurs
and (ii) the transferor reasonably expects that the transferee will
receive distributions from the REMIC at or after the time at which the
taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. If a transfer of a Residual
Interest is disregarded, the transferor would be liable for any federal
income tax imposed upon taxable income derived by the transferee from
the REMIC. The REMIC Regulations provide no guidance as to how to
determine if a significant purpose of a transfer is to impede the
assessment or collection of tax. A similar type of limitation exists
with respect to certain transfers of residual interests by foreign
persons to United States persons. See "--Tax Treatment of Foreign
Investors."
Mark to Market Rules. Prospective purchasers of a REMIC Residual
Interest Security should be aware that the IRS recently finalized
regulations (the "Final Mark-to-Market Regulations"), which provide
that a REMIC Residual Interest Security acquired after January 3, 1995
cannot be marked-to-market. Prospective purchasers of a REMIC Residual
Interest Security should consult their tax advisors regarding the
possible application of the Mark to Market Regulations.
Administrative Matters
The REMIC's books must be maintained on a calendar year basis and
the REMIC must file an annual federal income tax return. The REMIC will
also be subject to the procedural and administrative rules of the Code
applicable to partnerships, including the determination of any
adjustments to, among other things, items of REMIC income, gain, loss,
deduction, or credit, by the IRS in a unified administrative
proceeding.
Tax Status as a Grantor Trust
General. As further specified in the related Prospectus
Supplement, if a REMIC election is not made and the Trust Fund is not
structured as a partnership, then, in the opinion of Tax Counsel, the
Trust Fund relating to a Series of Securities will be classified for
federal income tax purposes as a grantor trust under Subpart E, Part 1
of Subchapter J of the Code and not as an association taxable as a
corporation (the Securities of such Series, "Pass-Through Securities").
In some Series there will be no separation of the principal and
interest payments on the Loans. In such circumstances, a Holder will be
considered to have purchased a pro rata undivided interest in each of
the Loans. In other cases ("Stripped Securities"), sale of the
Securities will produce a separation in the ownership of all or a
portion of the principal payments from all or a portion of the interest
payments on the Loans.
In the opinion of Tax Counsel, each Holder must report on its
federal income tax return its share of the gross income derived from
the Loans (not reduced by the amount payable as fees to the applicable
Trustee and the Servicer and similar fees (collectively, the "Servicing
Fee")), at the same time and in the same manner as such items would
have been reported under the Holder's tax accounting method had it held
its interest in the Loans directly, received directly its share of the
amounts received with respect to the Loans, and paid directly its share
of the Servicing Fees. In the case of Pass-Through Securities other
than Stripped Securities, such income will consist of a pro rata share
of all of the income derived from all of the Loans and, in the case of
Stripped Securities, such income will consist of a pro rata share of
the income derived from each stripped bond or stripped coupon in which
the Holder owns an interest. The Holder of a Security will generally be
entitled to deduct such Servicing Fees under Section 162 or Section 212
of the Code to the extent that such Servicing Fees represent
"reasonable" compensation for the services rendered by the applicable
Trustee and the Servicer (or third parties that are compensated for the
performance of services). In the case of a noncorporate Holder,
however, Servicing Fees (to the extent not otherwise disallowed, e.g.,
because they exceed reasonable compensation) will be deductible in
computing such Holder's regular tax liability only to the extent that
such fees, when added to other miscellaneous itemized deductions,
exceed 2% of adjusted gross income and may not be deductible to any
extent in computing such Holder's alternative minimum tax liability. In
addition, for taxable years beginning after December 31, 1990, the
amount of itemized deductions otherwise allowable for the taxable year
for an individual whose adjusted gross income exceeds the applicable
amount (which amount will be adjusted for inflation in taxable years
beginning after 1990) will be reduced by the lesser of (i) 3% of the
excess of adjusted gross income over the applicable amount or (ii) 80%
of the amount of itemized deductions otherwise allowable for such
taxable year.
Discount or Premium on Pass-Through Securities. In the opinion of
Tax Counsel, the Holder's purchase price of a Pass-Through Security is
to be allocated among the Loans in proportion to their fair market
values, determined as of the time of purchase of the Securities. In the
typical case, the Trustee (to the extent necessary to fulfill its
reporting obligations) will treat each Loan as having a fair market
value proportional to the share of the aggregate Principal Balances of
all of the Loans that it represents, since the Securities, unless
otherwise specified in the related Prospectus Supplement, will have a
relatively uniform interest rate and other common characteristics. To
the extent that the portion of the purchase price of a Pass-Through
Security allocated to a Loan (other than to a right to receive any
accrued interest thereon and any undistributed principal payments) is
less than or greater than the portion of the Principal Balance of the
Loan allocable to the Security, the interest in the Loan allocable to
the Pass-Through Security will be deemed to have been acquired at a
discount or premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Loan with OID in
excess of a prescribed de minimis amount or a Stripped Security, a
Holder of a Security will be required to report as interest income in
each taxable year its share of the amount of OID that accrues during
that year in the manner described above. OID with respect to a Loan
could arise, for example, by virtue of the financing of points by the
originator of the Loan, or by virtue of the charging of points by the
originator of the Loan in an amount greater than a statutory de minimis
exception, in circumstances under which the points are not currently
deductible pursuant to applicable Code provisions. Any market discount
or premium on a Loan will be includible in income, generally in the
manner described above, except that in the case of Pass-Through
Securities, market discount is calculated with respect to the Loans
underlying the Certificate, rather than with respect to the Security. A
Holder that acquires an interest in a Loan originated after July 18,
1984 with more than a de minimis amount of market discount (generally,
the excess of the principal amount of the Loan over the purchaser's
allocable purchase price) will be required to include accrued market
discount in income in the manner set forth above. See "--Taxation of
Debt Securities; Market Discount" and "--Premium" above.
In the case of market discount on a Pass-Through Security
attributable to Loans originated on or before July 18, 1984, the Holder
generally will be required to allocate the portion of such discount
that is allocable to a loan among the principal payments on the Loan
and to include the discount allocable to each principal payment in
ordinary income at the time such principal payment is made. Such
treatment would generally result in discount being included in income
at a slower rate than discount would be required to be included in
income using the method described in the preceding paragraph.
Stripped Securities. A Stripped Security may represent a right to
receive only a portion of the interest payments on the Loans, a right
to receive only principal payments on the Loans, or a right to receive
certain payments of both interest and principal. Certain Stripped
Securities ("Ratio Strip Securities") may represent a right to receive
differing percentages of both the interest and principal on each Loan.
Pursuant to Section 1286 of the Code, the separation of ownership of
the right to receive some or all of the interest payments on an
obligation from ownership of the right to receive some or all of the
principal payments results in the creation of "stripped bonds" with
respect to principal payments and "stripped coupons" with respect to
interest payments. Section 1286 of the Code applies the OID rules to
stripped bonds and stripped coupons. For purposes of computing original
issue discount, a stripped bond or a stripped coupon is treated as a
debt instrument issued on the date that such stripped interest is
purchased with an issue price equal to its purchase price or, if more
than one stripped interest is purchased, the ratable share of the
purchase price allocable to such stripped interest.
Servicing fees in excess of reasonable servicing fees (the "excess
servicing fee") will be treated under the stripped bond rules. If the
excess servicing fee is less than 100 basis points (i.e., 1% interest
on the Loan's Principal Balance) or the Securities are initially sold
with a de minimis discount (assuming no prepayment assumption is
required), any non-de minimis discount arising from a subsequent
transfer of the Securities should be treated as market discount. The
IRS appears to require that reasonable servicing fees be calculated on
a Loan by Loan basis, which could result in some Loans being treated as
having more than 100 basis points of interest stripped off.
The Code, OID Regulations and judicial decisions provide no direct
guidance as to how the interest and original issue discount rules are
to apply to Stripped Securities and other Pass-Through Securities.
Under the method described above for Pay-Through Securities (the "Cash
Flow Bond Method"), a prepayment assumption is used and periodic
recalculations are made that take into account with respect to each
accrual period the effect of prepayments during such period. However,
the 1986 Act does not, absent Treasury regulations, appear specifically
to cover instruments such as the Stripped Securities, which technically
represent ownership interests in the underlying Loans, rather than
being debt instruments "secured by" those loans. Nevertheless, it is
believed that the Cash Flow Bond Method is a reasonable method of
reporting income for such Securities, and it is expected that OID will
be reported on that basis unless otherwise specified in the related
Prospectus Supplement. In applying the calculation to Pass-Through
Securities, the Trustee will treat all payments to be received by a
Holder with respect to the underlying Loans as payments on a single
installment obligation. The IRS could, however, assert that original
issue discount must be calculated separately for each Loan underlying a
Security.
Under certain circumstances, if the Loans prepay at a rate faster
than the Prepayment Assumption, the use of the Cash Flow Bond Method
may accelerate a Holder's recognition of income. If, however, the Loans
prepay at a rate slower than the Prepayment Assumption, in some
circumstances the use of this method may decelerate a Holder's
recognition of income.
In the case of a Stripped Security that is an Interest Weighted
Security, the applicable Trustee intends, absent contrary authority, to
report income to Holders as OID, in the manner described above for
Interest Weighted Securities.
Possible Alternative Characterizations. The characterizations of
the Stripped Securities described above are not the only possible
interpretations of the applicable Code provisions. Among other
possibilities, the Internal Revenue Service could contend that (i) in
certain Series, each non-Interest Weighted Security is composed of an
unstripped undivided ownership interest in Loans and an installment
obligation consisting of stripped principal payments; (ii) the
non-Interest Weighted Securities are subject to the contingent payment
provisions of the Proposed Regulations; or (iii) each Interest Weighted
Stripped Security is composed of an unstripped undivided ownership
interest in Loans and an installment obligation consisting of stripped
interest payments.
Given the variety of alternatives for treatment of the Stripped
Securities and the different federal income tax consequences that
result from each alternative, potential purchasers are urged to consult
their own tax advisers regarding the proper treatment of the Securities
for federal income tax purposes.
Character as Qualifying Loans. In the case of Stripped Securities,
there is no specific legal authority existing regarding whether the
character of the Securities, for federal income tax purposes, will be
the same as the Loans. The IRS could take the position that the Loans
character is not carried over to the Securities in such circumstances.
Pass-Through Securities will be, and, although the matter is not free
from doubt, Stripped Securities should be considered to represent "real
estate assets" within the meaning of Section 856(c)(4)(A) of the Code,
and "loans secured by an interest in real property" within the meaning
of Section 7701(a)(19)(C)(v) of the Code; and interest income
attributable to the Securities should be considered to represent
"interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Section 856(c)(3)(B)
of the Code. Reserves or funds underlying the Securities may cause a
proportionate reduction in the above-described qualifying status
categories of Securities.
Sale or Exchange
Subject to the discussion below with respect to Trust Funds as to
which a partnership election is made, in the opinion of Tax Counsel, a
Holder's tax basis in its Security is the price such Holder pays for a
Security, plus amounts of original issue or market discount included in
income and reduced by any payments received (other than qualified
stated interest payments) and any amortized premium. Gain or loss
recognized on a sale, exchange, or redemption of a Security, measured
by the difference between the amount realized and the Security's basis
as so adjusted such gain will generally be capital gain or loss,
assuming that the Security is held as a capital asset and will
generally be long-term capital gain or loss if the holding period of
the security is one year or more. The Taxpayer Relief Act of 1997 (the
"Act") reduces the maximum rates on long-term capital gains recognized
on capital assets held by individual taxpayers for more than eighteen
months as of the date of disposition (and would further reduce the
maximum rates on such gains in the year 2001 and thereafter for certain
individual taxpayers who meet specified conditions). The capital gains
rate for capital assets held by individual taxpayers for more than
twelve months but less than eighteen months was not changed by the Act.
The Act does not change the capital gain rates for corporations.
Prospective investors should consult their own tax advisors concerning
these tax law changes.
In the case of a Security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or loss
realized on the sale or exchange of a Regular Interest Security will be
taxable as ordinary income or loss. In addition, gain from the
disposition of a Regular Interest Security that might otherwise be
capital gain will be treated as ordinary income to the extent of the
excess, if any, of (i) the amount that would have been includible in
the Holder's income if the yield on such Regular Interest Security had
equaled 110% of the applicable federal rate as of the beginning of such
Holder's holding period, over the amount of ordinary income actually
recognized by the Holder with respect to such Regular Interest
Security.
Miscellaneous Tax Aspects
Backup Withholding. Subject to the discussion below with respect
to Trust Funds as to which a partnership election is made, a Holder,
other than a Holder of a REMIC Residual Security, may, under certain
circumstances, be subject to "backup withholding" at a rate of 31% with
respect to distributions or the proceeds of a sale of certificates to
or through brokers that represent interest or original issue discount
on the Securities. This withholding generally applies if the Holder of
a Security (i) fails to furnish the applicable Trustee with its
taxpayer identification number (the "TIN"); (ii) furnishes the
applicable Trustee an incorrect TIN; (iii) fails to report properly
interest, dividends or other "reportable payments" as defined in the
Code; or (iv) under certain circumstances, fails to provide the
applicable Trustee or such Holder's securities broker with a certified
statement, signed under penalty of perjury, that the TIN provided is
its correct number and that the Holder is not subject to backup
withholding. Backup withholding will not apply, however, with respect
to certain payments made to Holders, including payments to certain
exempt recipients (such as exempt organizations) and to certain
Nonresidents (as defined below). Holders should consult their tax
advisers as to their qualification for exemption from backup
withholding and the procedure for obtaining the exemption.
The applicable Trustee will report to the Holders and to the
Servicer for each calendar year the amount of any "reportable payments"
during such year and the amount of tax withheld, if any, with respect
to payments on the Securities.
New Withholding Regulations
On October 6, 1997, the Treasury Department issued new regulations
(the "New Regulations"), which make certain modifications to the
withholding, backup withholding and information reporting rules
described above. The New Regulations attempt to unify certification
requirements and modify reliance standards. The New Regulations will
generally be effective for payments made after December 31, 1998,
subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
Tax Treatment of Foreign Investors
Subject to the discussion below with respect to Trust Funds as to
which a partnership election is made, under the Code, unless interest
(including OID) paid on a Security (other than a Residual Interest
Security) is considered to be "effectively connected" with a trade or
business conducted in the United States by a nonresident alien
individual, foreign partnership or foreign corporation
("Nonresidents"), in the opinion of Tax Counsel, such interest will
normally qualify as portfolio interest (except where (i) the recipient
is a holder, directly or by attribution, of 10% or more of the capital
or profits interest in the issuer, or (ii) the recipient is a
controlled foreign corporation to which the issuer is a related person)
and will be exempt from federal income tax. Upon receipt of appropriate
ownership statements, the issuer normally will be relieved of
obligations to withhold tax from such interest payments. These
provisions supersede the generally applicable provisions of United
States law that would otherwise require the issuer to withhold at a 30%
rate (unless such rate were reduced or eliminated by an applicable tax
treaty) on, among other things, interest and other fixed or
determinable, annual or periodic income paid to Nonresidents. Holders
of Pass-Through Securities and Stripped Securities, including Ratio
Strip Securities, however, may be subject to withholding to the extent
that the Loans were originated on or before July 18, 1984.
Interest and OID of Holders who are foreign persons are not
subject to withholding if they are effectively connected with a United
States business conducted by the Holder. They will, however, generally
be subject to the regular United States income tax.
Payments to Holders of Residual Interest Securities who are
foreign persons will generally be treated as interest for purposes of
the 30% (or lower treaty rate) United States withholding tax. Holders
should assume that such income does not qualify for exemption from
United States withholding tax as "portfolio interest." It is clear
that, to the extent that a payment represents a portion of REMIC
taxable income that constitutes excess inclusion income, a Holder of a
Residual Interest Security will not be entitled to an exemption from or
reduction of the 30% (or lower treaty rate) withholding tax rule. If
the payments are subject to United States withholding tax, they
generally will be taken into account for withholding tax purposes only
when paid or distributed (or when the Residual Interest Security is
disposed of). The Treasury has statutory authority, however, to
promulgate regulations that would require such amounts to be taken into
account at an earlier time in order to prevent the avoidance of tax.
Such regulations could, for example, require withholding prior to the
distribution of cash in the case of Residual Interest Securities that
do not have significant value. Under the REMIC Regulations, if a
Residual Interest Security has tax avoidance potential, a transfer of a
Residual Interest Security to a Nonresident will be disregarded for all
federal tax purposes. A Residual Interest Security has tax avoidance
potential unless, at the time of the transfer the transferor reasonably
expects that the REMIC will distribute to the transferee residual
interest Holder amounts that will equal at least 30% of each excess
inclusion, and that such amounts will be distributed at or after the
time at which the excess inclusions accrue and not later than the
calendar year following the calendar year of accrual. If a Nonresident
transfers a Residual Interest Security to a United States person, and
if the transfer has the effect of allowing the transferor to avoid tax
on accrued excess inclusions, then the transfer is disregarded and the
transferor continues to be treated as the owner of the Residual
Interest Security for purposes of the withholding tax provisions of the
Code. See "--Excess Inclusions."
Tax Characterization of the Trust Fund as a Partnership
Tax Counsel is of the opinion that a Trust Fund structured as a
partnership will not be an association (or publicly traded partnership)
taxable as a corporation for federal income tax purposes. This opinion
is based on the assumption that the terms of the Trust Agreement and
related documents will be complied with, and on counsel's conclusions
that the nature of the income of the Trust Fund will exempt it from the
rule that certain publicly traded partnerships are taxable as
corporations or the issuance of the Certificates has been structured as
a private placement under an IRS safe harbor, so that the Trust Fund
will not be characterized as a publicly traded partnership taxable as a
corporation.
If the Trust Fund were taxable as a corporation for federal income
tax purposes, in the opinion of Tax Counsel, the Trust Fund would be
subject to corporate income tax on its taxable income. The Trust Fund's
taxable income would include all its income, possibly reduced by its
interest expense on the Notes. Any such corporate income tax could
materially reduce cash available to make payments on the Notes and
distributions on the Certificates, and Certificateholders could be
liable for any such tax that is unpaid by the Trust Fund.
Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. The Trust Fund will agree,
and the Noteholders will agree by their purchase of Notes, to treat the
Notes as debt for federal income tax purposes. In such a circumstance,
Tax Counsel is, except as otherwise provided in the related Prospectus
Supplement, of the opinion that the Notes will be classified as debt
for federal income tax purposes. The discussion below assumes this
characterization of the Notes is correct.
OID, Indexed Securities, etc. The discussion below assumes that
all payments on the Notes are denominated in U.S. dollars, and that the
Notes are not Indexed Securities or Strip Notes. Moreover, the
discussion assumes that the interest formula for the Notes meets the
requirements for "qualified stated interest" under the OID Regulations,
and that any OID on the Notes (i.e., any excess of the principal amount
of the Notes over their issue price) does not exceed a de minimis
amount (i.e., 0.25% of their principal amount multiplied by the number
of full years included in their term), all within the meaning of the
OID regulations. If these conditions are not satisfied with respect to
any given series of Notes, additional tax considerations with respect
to such Notes will be disclosed in the applicable Prospectus
Supplement.
Interest Income on the Notes. Based on the above assumptions,
except as discussed in the following paragraph, in the opinion of Tax
Counsel, the Notes will not be considered issued with OID. The stated
interest thereon will be taxable to a Noteholder as ordinary interest
income when received or accrued in accordance with such Noteholder's
method of tax accounting. Under the OID Regulations, a Holder of a Note
issued with a de minimis amount of OID must include such OID in income,
on a pro rata basis, as principal payments are made on the Note. It is
believed that any prepayment premium paid as a result of a mandatory
redemption will be taxable as contingent interest when it becomes fixed
and unconditionally payable. A purchaser who buys a Note for more or
less than its principal amount will generally be subject, respectively,
to the premium amortization or market discount rules of the Code.
A Holder of a Note that has a fixed maturity date of not more than
one year from the issue date of such Note (a "Short-Term Note") may be
subject to special rules. An accrual basis Holder of a Short-Term Note
(and certain cash method Holders, including regulated investment
companies, as set forth in Section 1281 of the Code) generally would be
required to report interest income as interest accrues on a
straight-line basis over the term of each interest period. Other cash
basis Holders of a Short-Term Note would, in general, be required to
report interest income as interest is paid (or, if earlier, upon the
taxable disposition of the Short-Term Note). However, a cash basis
Holder of a Short-Term Note reporting interest income as it is paid may
be required to defer a portion of any interest expense otherwise
deductible on indebtedness incurred to purchase or carry the Short-Term
Note until the taxable disposition of the Short-Term Note. A cash basis
taxpayer may elect under Section 1281 of the Code to accrue interest
income on all nongovernment debt obligations with a term of one year or
less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to
the interest expense deferral rule referred to in the preceding
sentence. Certain special rules apply if a Short-Term Note is purchased
for more or less than its principal amount.
Sale or Other Disposition. In the opinion of Tax Counsel, if a
Noteholder sells a Note, the Holder will recognize gain or loss in an
amount equal to the difference between the amount realized on the sale
and the Holder's adjusted tax basis in the Note. The adjusted tax basis
of a Note to a particular Noteholder will equal the Holder's cost for
the Note, increased by any market discount, acquisition discount, OID
and gain previously included by such Noteholder in income with respect
to the Note and decreased by the amount of bond premium (if any)
previously amortized and by the amount of principal payments previously
received by such Noteholder with respect to such Note. Any such gain or
loss will be capital gain or loss if the Note was held as a capital
asset, except for gain representing accrued interest and accrued market
discount not previously included in income. Capital losses generally
may be used only to offset capital gains.
Foreign Holders. In the opinion of Tax Counsel, interest payments
made (or accrued) to a Noteholder who is a nonresident alien, foreign
corporation or other non-United States person (a "foreign person")
generally will be considered "portfolio interest," and generally will
not be subject to United States federal income tax and withholding tax,
if the interest is not effectively connected with the conduct of a
trade or business within the United States by the foreign person and
the foreign person (i) is not actually or constructively a "10 percent
shareholder" of the Trust Fund or the Seller (including a Holder of 10%
of the outstanding Certificates) or a "controlled foreign corporation"
with respect to which the Trust Fund or the Seller is a "related
person" within the meaning of the Code and (ii) provides the Trustee or
other person who is otherwise required to withhold U.S. tax with
respect to the Notes with an appropriate statement (on Form W-8 or a
similar form), signed under penalties of perjury, certifying that the
beneficial owner of the Note is a foreign person and providing the
foreign person's name and address. If a Note is held through a
securities clearing organization or certain other financial
institutions, the organization or institution may provide the relevant
signed statement to the withholding agent; in that case, however, the
signed statement must be accompanied by a Form W-8 or substitute form
provided by the foreign person that owns the Note. If such interest is
not portfolio interest, then it will be subject to United States
federal income and withholding tax at a rate of 30 percent, unless
reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or
other taxable disposition of a Note by a foreign person will be exempt
from United States federal income and withholding tax; provided, that
(i) such gain is not effectively connected with the conduct of a trade
or business in the United States by the foreign person and (ii) in the
case of an individual foreign person, the foreign person is not present
in the United States for 183 days or more in the taxable year.
Backup Withholding. Each Holder of a Note (other than an exempt
Holder such as a corporation, tax-exempt organization, qualified
pension and profit-sharing trust, individual retirement account or
nonresident alien who provides certification as to status as a
nonresident) will be required to provide, under penalties of perjury, a
certificate containing the Holder's name, address, correct federal
taxpayer identification number and a statement that the Holder is not
subject to backup withholding. Should a nonexempt Noteholder fail to
provide the required certification, the Trust Fund will be required to
withhold 31 percent of the amount otherwise payable to the Holder, and
remit the withheld amount to the IRS as a credit against the Holder's
federal income tax liability.
The New Regulations described herein make certain modifications to
the backup withholding and information reporting rules. The New
Regulations generally will be effective for payments made after
December 31, 1998, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
Possible Alternative Treatments of the Notes. If, contrary to the
opinion of Tax Counsel, the IRS successfully asserted that one or more
of the Notes did not represent debt for federal income tax purposes,
the Notes might be treated as equity interests in the Trust Fund. If so
treated, the Trust Fund might be taxable as a corporation with the
adverse consequences described above (and the taxable corporation would
not be able to reduce its taxable income by deductions for interest
expense on Notes recharacterized as equity). Alternatively, and most
likely in the view of Tax Counsel, the Trust Fund might be treated as a
publicly traded partnership that would not be taxable as a corporation
because it would meet certain qualifying income tests. Nonetheless,
treatment of the Notes as equity interests in such a publicly traded
partnership could have adverse tax consequences to certain Holders. For
example, income to certain tax-exempt entities (including pension
funds) would be "unrelated business taxable income," income to foreign
Holders generally would be subject to U.S. tax and U.S. tax return
filing and withholding requirements, and individual Holders might be
subject to certain limitations on their ability to deduct their share
of the Trust Fund's expenses.
Tax Consequences to Holders of the Certificates
Treatment of the Trust Fund as a Partnership. The Trust Fund and
the Servicer will agree, and the Certificateholders will agree by their
purchase of Certificates, to treat the Trust Fund as a partnership for
purposes of federal and state income tax, franchise tax and any other
tax measured in whole or in part by income, with the assets of the
partnership being the assets held by the Trust Fund, the partners of
the partnership being the Certificateholders, and the Notes being debt
of the partnership. However, the proper characterization of the
arrangement involving the Trust Fund, the Certificates, the Notes, the
Trust Fund and the Servicer is not clear because there is no authority
on transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For
example, because the Certificates have certain features characteristic
of debt, the Certificates might be considered debt of the Trust Fund.
Any such characterization would not result in materially adverse tax
consequences to Certificateholders as compared to the consequences from
treatment of the Certificates as equity in a partnership, described
below. The following discussion assumes that the Certificates represent
equity interests in a partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of
the Certificates are Indexed Securities or Strip Certificates, and that
a Series of Securities includes a single Class of Certificates. If
these conditions are not satisfied with respect to any given Series of
Certificates, additional tax considerations with respect to such
Certificates will be disclosed in the applicable Prospectus Supplement.
Partnership Taxation. If the Trust Fund is a partnership, in the
opinion of Tax Counsel, the Trust Fund will not be subject to federal
income tax. Rather, in the opinion of Tax Counsel, each
Certificateholder will be required to separately take into account such
Holder's allocated share of income, gains, losses, deductions and
credits of the Trust Fund. The Trust Fund's income will consist
primarily of interest and finance charges earned on the Loans
(including appropriate adjustments for market discount, OID and bond
premium) and any gain upon collection or disposition of Loans. The
Trust Fund's deductions will consist primarily of interest accruing
with respect to the Notes, servicing and other fees, and losses or
deductions upon collection or disposition of Loans.
In the opinion of Tax Counsel, the tax items of a partnership are
allocable to the partners in accordance with the Code, Treasury
regulations and the partnership agreement (here, the Trust Agreement
and related documents). The Trust Agreement will provide, in general,
that the Certificateholders will be allocated taxable income of the
Trust Fund for each month equal to the sum of (i) the interest that
accrues on the Certificates in accordance with their terms for such
month, including interest accruing at the Pass-Through Rate for such
month and interest on amounts previously due on the Certificates but
not yet distributed; (ii) any Trust Fund income attributable to
discount on the Loans that corresponds to any excess of the principal
amount of the Certificates over their initial issue price (iii)
prepayment premium payable to the Certificateholders for such month;
and (iv) any other amounts of income payable to the Certificateholders
for such month. Such allocation will be reduced by any amortization by
the Trust Fund of premium on Loans that corresponds to any excess of
the issue price of Certificates over their principal amount. All
remaining taxable income of the Trust Fund will be allocated to the
Depositor. Based on the economic arrangement of the parties, in the
opinion of Tax Counsel, this approach for allocating Trust Fund income
should be permissible under applicable Treasury regulations, although
no assurance can be given that the IRS would not require a greater
amount of income to be allocated to Certificateholders. Moreover, in
the opinion of Tax Counsel, even under the foregoing method of
allocation, Certificateholders may be allocated income equal to the
entire Pass-Through Rate plus the other items described above even
though the Trust Fund might not have sufficient cash to make current
cash distributions of such amount. Thus, cash basis Holders will in
effect be required to report income from the Certificates on the
accrual basis and Certificateholders may become liable for taxes on
Trust Fund income even if they have not received cash from the Trust
Fund to pay such taxes. In addition, because tax allocations and tax
reporting will be done on a uniform basis for all Certificateholders
but Certificateholders may be purchasing Certificates at different
times and at different prices, Certificateholders may be required to
report on their tax returns taxable income that is greater or less than
the amount reported to them by the Trust Fund.
In the opinion of Tax Counsel, all of the taxable income allocated
to a Certificateholder that is a pension, profit sharing or employee
benefit plan or other tax-exempt entity (including an individual
retirement account) will constitute "unrelated business taxable income"
generally taxable to such a Holder under the Code.
In the opinion of Tax Counsel, an individual taxpayer's share of
expenses of the Trust Fund (including fees to the Servicer but not
interest expense) would be miscellaneous itemized deductions. Such
deductions might be disallowed to the individual in whole or in part
and might result in such Holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such Holder over the
life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to
income and allocations to Certificateholders on an aggregate basis. If
the IRS were to require that such calculations be made separately for
each Loan, the Trust Fund might be required to incur additional expense
but it is believed that there would not be a material adverse effect on
Certificateholders.
Discount and Premium. It is believed that the Loans were not
issued with OID, and, therefore, the Trust Fund should not have OID
income. However, the purchase price paid by the Trust Fund for the
Loans may be greater or less than the remaining Principal Balance of
the Loans at the time of purchase. If so, in the opinion of Tax
Counsel, the Loan will have been acquired at a premium or discount, as
the case may be. (As indicated above, the Trust Fund will make this
calculation on an aggregate basis, but might be required to recompute
it on a Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or
premium, the Trust Fund will elect to include any such discount in
income currently as it accrues over the life of the Loans or to offset
any such premium against interest income on the Loans. As indicated
above, a portion of such market discount income or premium deduction
may be allocated to Certificateholders.
Section 708 Termination. In the opinion of Tax Counsel, under
Section 708 of the Code, the Trust Fund will be deemed to terminate for
federal income tax purposes if 50% or more of the capital and profits
interests in the Trust Fund are sold or exchanged within a 12-month
period. Pursuant to final Treasury regulations issued May 9, 1997 under
Section 708 of the Code, if such a termination occurs, the Trust Fund
(the "old partnership") would be deemed to contribute its assets to a
new partnership (the "new partnership") in exchange for interests in
the new partnership. Such interests would be deemed distributed to the
partners of the old partnership in liquidation thereof, which would not
constitute a sale or exchange.
Disposition of Certificates. Generally, in the opinion of Tax
Counsel, capital gain or loss will be recognized on a sale of
Certificates in an amount equal to the difference between the amount
realized and the seller's tax basis in the Certificates sold. A
Certificateholder's tax basis in a Certificate will generally equal the
Holder's cost increased by the Holder's share of Trust Fund income
(includible in income) and decreased by any distributions received with
respect to such Certificate. In addition, both the tax basis in the
Certificates and the amount realized on a sale of a Certificate would
include the Holder's share of the Notes and other liabilities of the
Trust Fund. A Holder acquiring Certificates at different prices may be
required to maintain a single aggregate adjusted tax basis in such
Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the
Certificates sold (rather than maintaining a separate tax basis in each
Certificate for purposes of computing gain or loss on a sale of that
Certificate).
Any gain on the sale of a Certificate attributable to the Holder's
share of unrecognized accrued market discount on the Loans would
generally be treated as ordinary income to the Holder and would give
rise to special tax reporting requirements. The Trust Fund does not
expect to have any other assets that would give rise to such special
reporting requirements. Thus, to avoid those special reporting
requirements, the Trust Fund will elect to include market discount in
income as it accrues.
If a Certificateholder is required to recognize an aggregate
amount of income (not including income attributable to disallowed
itemized deductions described above) over the life of the Certificates
that exceeds the aggregate cash distributions with respect thereto,
such excess will generally give rise to a capital loss upon the
retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the
Trust Fund's taxable income and losses will be determined monthly and
the tax items for a particular calendar month will be apportioned among
the Certificateholders in proportion to the principal amount of
Certificates owned by them as of the close of the last day of such
month. As a result, a Holder purchasing Certificates may be allocated
tax items (which will affect its tax liability and tax basis)
attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by
existing regulations. If a monthly convention is not allowed (or only
applies to transfers of less than all of the partner's interest),
taxable income or losses of the Trust Fund might be reallocated among
the Certificateholders. The Trust Fund's method of allocation between
transferors and transferees may be revised to conform to a method
permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells
its Certificates at a profit (loss), the purchasing Certificateholder
will have a higher (lower) basis in the Certificates than the selling
Certificateholder had. The tax basis of the Trust Fund's assets will
not be adjusted to reflect that higher (or lower) basis unless the
Trust Fund were to file an election under Section 754 of the Code. In
order to avoid the administrative complexities that would be involved
in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust Fund will not make such
election. As a result, Certificateholders might be allocated a greater
or lesser amount of Trust Fund income than would be appropriate based
on their own purchase price for Certificates.
Administrative Matters. The Trustee is required to keep or have
kept complete and accurate books of the Trust Fund. Such books will be
maintained for financial reporting and tax purposes on an accrual basis
and the fiscal year of the Trust Fund will be the calendar year. The
Trustee will file a partnership information return (IRS Form 1065) with
the IRS for each taxable year of the Trust Fund and will report each
Certificateholder's allocable share of items of Trust Fund income and
expense to Holders and the IRS on Schedule K-1. The Trust Fund will
provide the Schedule K-l information to nominees that fail to provide
the Trust Fund with the information statement described below and such
nominees will be required to forward such information to the beneficial
owners of the Certificates. Generally, Holders must file tax returns
that are consistent with the information return filed by the Trust Fund
or be subject to penalties unless the Holder notifies the IRS of all
such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates
as a nominee at any time during a calendar year is required to furnish
the Trust Fund with a statement containing certain information on the
nominee, the beneficial owners and the Certificates so held. Such
information includes (i) the name, address and taxpayer identification
number of the nominee and (ii) as to each beneficial owner (a) the
name, address and identification number of such person, (b) whether
such person is a United States person, a tax-exempt entity or a foreign
government, an international organization or any wholly owned agency or
instrumentality of either of the foregoing, and (c) certain information
on Certificates that were held, bought or sold on behalf of such person
throughout the year. In addition, brokers and financial institutions
that hold Certificates through a nominee are required to furnish
directly to the Trust Fund information as to themselves and their
ownership of Certificates. A clearing agency registered under Section
17A of the Exchange Act is not required to furnish any such information
statement to the Trust Fund. The information referred to above for any
calendar year must be furnished to the Trust Fund on or before the
following January 31. Nominees, brokers and financial institutions that
fail to provide the Trust Fund with the information described above may
be subject to penalties.
The Depositor will be designated as the tax matters partner in the
related Trust Agreement and, as such, will be responsible for
representing the Certificateholders in any dispute with the IRS. The
Code provides for administrative examination of a partnership as if the
partnership were a separate and distinct taxpayer. Generally, the
statute of limitations for partnership items does not expire before
three years after the date on which the partnership information return
is filed. Any adverse determination following an audit of the return of
the Trust Fund by the appropriate taxing authorities could result in an
adjustment of the returns of the Certificateholders, and, under certain
circumstances, a Certificateholder may be precluded from separately
litigating a proposed adjustment to the items of the Trust Fund. An
adjustment could also result in an audit of a Certificateholder's
returns and adjustments of items not related to the income and losses
of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear
whether the Trust Fund would be considered to be engaged in a trade or
business in the United States for purposes of federal withholding taxes
with respect to non-U.S. persons because there is no clear authority
dealing with that issue under facts substantially similar to those
described herein. Although it is not expected that the Trust Fund would
be engaged in a trade or business in the United States for such
purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a
failure to withhold. The Trust Fund expects to withhold on the portion
of its taxable income that is allocable to foreign Certificateholders
pursuant to Section 1446 of the Code, as if such income were
effectively connected to a U.S. trade or business, at a rate of 35% for
foreign Holders that are taxable as corporations and 39.6% for all
other foreign Holders. Subsequent adoption of Treasury regulations or
the issuance of other administrative pronouncements may require the
Trust Fund to change its withholding procedures. In determining a
Holder's withholding status, the Trust Fund may rely on IRS Form W-8,
IRS Form W-9 or the Holder's certification of nonforeign status signed
under penalties of perjury.
Each foreign Holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation,
the branch profits tax) on its share of the Trust Fund's income. Each
foreign Holder must obtain a taxpayer identification number from the
IRS and submit that number to the Trust Fund on Form W-8 in order to
assure appropriate crediting of the taxes withheld. A foreign Holder
generally would be entitled to file with the IRS a claim for refund
with respect to taxes withheld by the Trust Fund taking the position
that no taxes were due because the Trust Fund was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a
Certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without
regard to the income of the Trust Fund. If these interest payments are
properly characterized as guaranteed payments, then the interest will
not be considered "portfolio interest." As a result, Certificateholders
will be subject to United States federal income tax and withholding tax
at a rate of 30 percent, unless reduced or eliminated pursuant to an
applicable treaty. In such case, a foreign Holder would only be
entitled to claim a refund for that portion of the taxes in excess of
the taxes that should be withheld with respect to the guaranteed
payments.
Backup Withholding. Distributions made on the Certificates and
proceeds from the sale of the Certificates will be subject to a
"backup" withholding tax of 31% if, in general, the Certificateholder
fails to comply with certain identification procedures, unless the
Holder is an exempt recipient under applicable provisions of the Code.
The New Regulations described herein make certain modifications to the
backup withholding and information reporting rules. The New Regulations
will generally be effective for payments made after December 31, 1998,
subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
STATE TAX CONSIDERATIONS
In addition to the federal income tax considerations described in
"Certain Federal Income Tax Considerations," potential investors should
consider the state and local income tax consequences of the
acquisition, ownership, and disposition of the Securities. State and
local income tax law may differ substantially from the corresponding
federal law, and this discussion does not purport to describe any
aspect of the income tax laws of any state or locality. Therefore,
potential investors should consult their own tax advisors with respect
to the various state and local tax consequences of an investment in the
Securities.
FASIT SECURITIES
General. The FASIT provisions of the Code were enacted by the
Small Business Job Protection Act of 1996 and create a new elective
statutory vehicle for the issuance of mortgage-backed and asset-backed
securities ("FASIT Securities"). Although the FASIT provisions of the
Code became effective on September 1, 1997, no Treasury regulations or
other administrative guidance has been issued with respect to those
provisions. Accordingly, definitive guidance cannot be provided with
respect to many aspects of the tax treatment of Holders of FASIT
Securities. Investors also should note that the FASIT discussions
contained herein constitutes only a summary of the federal income tax
consequences to Holders of FASIT Securities. With respect to each
Series of FASIT Securities, the related Prospectus Supplement will
provide a detailed discussion regarding the federal income tax
consequences associated with the particular transaction.
FASIT Securities will be classified as either FASIT Regular
Securities, which generally will be treated as debt for federal income
tax purposes, or FASIT Ownership Securities, which generally are not
treated as debt for such purposes, but rather as representing rights
and responsibilities with respect to the taxable income or loss of the
related Series. The Prospectus Supplement for each Series of Securities
will indicate whether one or more FASIT elections will be made for such
Series, and which Securities of such Series will be designated as
Regular Securities, and which, if any, will be designated as Ownership
Securities.
Qualification as a FASIT. The Trust Fund underlying a Series (or
one or more designated pools of assets held in the Trust Fund) will
qualify under the Code as a FASIT in which the FASIT Regular Securities
and the FASIT Ownership Securities will constitute the "regular
interests" and the "ownership interests," respectively, if (i) a FASIT
election is in effect, (ii) certain tests concerning (a) the
composition of the FASIT's assets and (b) the nature of the Holders'
interest in the FASIT are met on a continuing basis and (iii) the Trust
Fund is not a regulated company as defined in Section 851(a) of the
Code.
Asset Composition. In order for a Trust Fund (on one or more
designated pools of assets held by a Trust Fund) to be eligible for
FASIT status, substantially all of the assets of the Trust Fund (or the
designated pool) must consist of "permitted assets" as of the close of
the third month beginning after the Closing Date and at all times
thereafter (the "FASIT Qualification Test"). Permitted assets include
(i) cash or cash equivalents, (ii) debt instruments with fixed terms
that would qualify as REMIC regular interests if issued by a REMIC
(generally, instruments that provide for interest at a fixed rate, a
qualifying variable rate, or a qualifying interest-only ("IO") type
rate, (iii) foreclosure property, (iv) certain hedging instruments
(generally, interest and currency rate swaps and credit enhancement
contracts) that are reasonably required to guarantee or hedge against
the FASIT's risks associated with being the obligor on FASIT interests,
(v) contract rights to acquire qualifying debt instruments or
qualifying hedging instruments, (vi) FASIT regular interests and (vii)
REMIC regular interests. Permitted assets do not include any debt
instruments issued by the Holder of the FASIT's ownership interest or
by any person related to such Holder.
Interests in a FASIT. In addition to the foregoing asset
qualification requirements, the interests in a FASIT also must meet
certain requirements. All of the interests in a FASIT must belong to
either of the following: (i) one or more Classes of regular interests
or (ii) a single Class of ownership interest that is held by a fully
taxable domestic corporation. In the case of Series that include FASIT
Ownership Securities, the ownership interest will be represented by the
FASIT Ownership Securities.
A FASIT interest generally qualifies as a regular interest if (i)
it is designated as a regular interest, (ii) it has a stated maturity
no greater than thirty years, (iii) it entitles its Holder to a
specified principal amount, (iv) the issue price of the interest does
not exceed 125% of its stated principal amount, (v) the yield to
maturity of the interest is less than the applicable Treasury rate
published by the IRS plus 5% and (vi) if it pays interest, such
interest is payable at either (a) a fixed rate with respect to the
principal amount of the regular interest or (b) a permissible variable
rate with respect to such principal amount. Permissible variable rates
for FASIT regular interests are the same as those for REMIC regular
interest (i.e., certain qualified floating rates and weighted average
rates). See "Certain Federal Income Tax Considerations--Taxation of
Debt Securities--Variable Rate Debt Securities."
If a FASIT Security fails to meet one or more of the requirements
set out in clauses (iii), (iv) or (v) above, but otherwise meets the
above requirements, it may still qualify as a type of regular interest
known as a "High-Yield Interest." In addition, if a FASIT Security
fails to meet the requirements of clause (vi), but the interest payable
on the Security consists of a specified portion of the interest
payments on permitted assets and that portion does not vary over the
life of the Security, the Security also will qualify as a High-Yield
Interest. A High-Yield Interest may be held only by domestic
corporations that are fully subject to corporate income tax ("Eligible
Corporations"), other FASITs and dealers in securities who acquire such
interests as inventory, rather than for investment. In addition,
Holders of High-Yield Interests are subject to limitations on offset of
income derived from such interest. See "Certain Federal Income Tax
Considerations--FASIT Securities--Tax Treatment of FASIT Regular
Securities--Treatment of High-Yield Interests."
Consequences of Disqualification. If a Series of FASIT Securities
fails to comply with one or more of the Code's ongoing requirements for
FASIT status during any taxable year, the Code provides that its FASIT
status may be lost for that year and thereafter. If FASIT status is
lost, the treatment of the former FASIT and the interests therein for
federal income tax purposes is uncertain. The former FASIT might be
treated as a grantor trust, as a separate association taxed as a
corporation, or as a partnership. The FASIT Regular Securities could be
treated as debt instruments for federal income tax purposes or as
equity interests. Although the Code authorizes the Treasury to issue
regulations that address situations where a failure to meet the
requirements for FASIT status occurs inadvertently and in good faith,
such regulations have not yet been issued. It is possible that
disqualification relief might be accompanied by sanctions, such as the
imposition of a corporate tax on all or a portion of the FASIT's income
for a period of time in which the requirements for FASIT status are not
satisfied.
Tax Treatment of FASIT Regular Securities. Payments received by
Holders of FASIT Regular Securities generally should be accorded the
same tax treatment under the Code as payments received on other taxable
corporate debt instruments and on REMIC Regular Securities. As in the
case of Holders of REMIC Regular Securities, Holders of FASIT Regular
Securities must report income from such Securities under an accrual
method of accounting, even if they otherwise would have used the case
receipts and disbursements method. Except in the case of FASIT Regular
Securities issued with original issue discount or acquired with market
discount or premium, interest paid or accrued on a FASIT Regular
Security generally will be treated as ordinary income to the Holder and
a principal payment on such Security will be treated as a return of
capital to the extent that the Holder's basis is allocable to that
payment. FASIT Regular Securities issued with original issue discount
or acquired with market discount or premium generally will treat
interest and principal payments on such Securities in the same manner
described for REMIC Regular Securities. See "Certain Federal Income Tax
Considerations--Taxation of Debt Securities," "--Market Discount," and
"--Premium" above. High-Yield Securities may be held only by fully
taxable domestic corporations, other FASITs, and certain securities
dealers. Holders of High-Yield Securities are subject to limitations on
their ability to use current losses or net operating loss carryforwards
or carrybacks to offset any income derived from those Securities.
If a FASIT Regular Security is sold or exchanged, the Holder
generally will recognize gain or loss upon the sale in the manner
described above for REMIC Regular Securities. See "Certain Federal
Income Tax Considerations--Sale or Exchange." In addition, if a FASIT
Regular Security becomes wholly or partially worthless as a result of
Default and Delinquencies of the underlying assets, the Holder of such
Security should be allowed to deduct the loss sustained (or
alternatively be able to report a lesser amount of income). See
"Certain Federal Income Tax Considerations--Taxation of Debt
Instruments--Effects of Default and Delinquencies."
FASIT Regular Securities held by a REIT will qualify as "real
estate assets" within the meaning of section 856(c)(4)(A) of the Code,
and interest on such Securities will be considered Qualifying REIT
Interest to the same extent that REMIC Securities would be so
considered. FASIT Regular Securities held by a Thrift Institution taxed
as a "domestic building and loan association" will represent qualifying
assets for purposes of the qualification requirements set forth in Code
Section 7701(a)(19) to the same extent that REMIC Securities would be
so considered. See "Certain Federal Income Tax Considerations--Taxation
of Debt Securities--Status as Real Property Loans." In addition, FASIT
Regular Securities held by a financial institution to which Section 585
of the Code applies will be treated as evidences of indebtedness for
purposes of Section 582(c)(1) of the Code. FASIT Securities will not
qualify as "Government Securities" for either REIT or RIC qualification
purposes.
Treatment of High-Yield Interests. High-Yield Interests are
subject to special rules regarding the eligibility of Holders of such
interests, and the ability of such Holders to offset income derived
from their FASIT Security with losses. High-Yield Interests may be held
only by Eligible Corporations other FASITs, and dealers in securities
who acquire such interests as inventory. If a securities dealer (other
than an Eligible Corporation) initially acquires a High-Yield Interest
as inventory, but later begins to hold it for investment, the dealer
will be subject to an excise tax equal to the income from the
High-Yield Interest multiplied by the highest corporate income tax
rate. In addition, transfers of High-Yield Interests to disqualified
Holders will be disregarded for federal income tax purposes, and the
transferor still will be treated as the Holder of the High-Yield
Interest.
The Holder of a High-Yield Interest may not use non-FASIT current
losses or net operating loss carryforwards or carrybacks to offset any
income derived from the High-Yield Interest, for either regular federal
income tax purposes or for alternative minimum tax purposes. In
addition, the FASIT provisions contain an anti-abuse rule that imposes
corporate income tax on income derived from a FASIT Regular Security
that is held by a pass-through entity (other than another FASIT) that
issues debt or equity securities backed by the FASIT Regular Security
and that have the same features as High-Yield Interests.
Tax Treatment of FASIT Ownership Securities. A FASIT Ownership
Security represents the residual equity interest in a FASIT. As such,
the Holder of a FASIT Ownership Security determines its taxable income
by taking into account all assets, liabilities and items of income,
gain, deduction, loss and credit of a FASIT. In general, the character
of the income to the Holder of a FASIT Ownership Interest will be the
same as the character of such income of the FASIT, except that any
tax-exempt interest income taken into account by the Holder of a FASIT
Ownership Interest is treated as ordinary income. In determining that
taxable income, the Holder of a FASIT Ownership Security must determine
the amount of interest, original issue discount, market discount and
premium recognized with respect to the FASIT's assets and the FASIT
Regular Securities issued by the FASIT according to a constant yield
methodology and under an accrual method of accounting. In addition,
Holders of FASIT Ownership Securities are subject to the same
limitations on their ability to use losses to offset income from their
FASIT Security as are the Holders of High-Yield Interests. See "Certain
Federal Income Tax Considerations--Treatment of High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Securities. Accordingly,
losses on dispositions of a FASIT Ownership Security generally will be
disallowed where, within six months before or after the disposition,
the seller of such Security acquires any other FASIT Ownership Security
or, in the case of a FASIT holding mortgage assets, any interest in a
Taxable Mortgage Pool that is economically comparable to a FASIT
Ownership Security. In addition, if any security that is sold or
contributed to a FASIT by the Holder of the related FASIT Ownership
Security was required to be marked-to-market under Code section 475 by
such Holder, then section 475 will continue to apply to such
securities, except that the amount realized under the mark-to-market
rules will be a greater of the securities' value under present law or
the securities' value after applying special valuation rules contained
in the FASIT provisions. Those special valuation rules generally
require that the value of debt instruments that are not traded on an
established securities market be determined by calculating the present
value of the reasonably expected payments under the instrument using a
discount rate of 120% of the applicable federal rate, compounded
semiannually.
The Holder of a FASIT Ownership Security will be subject to a tax
equal to 100% of the net income derived by the FASIT from any
"prohibited transactions." Prohibited transactions include (i) the
receipt of income derived from assets that are not permitted assets,
(ii) certain dispositions of permitted assets, (iii) the receipt of any
income derived from any loan originated by a FASIT and (iv) in certain
cases, the receipt of income representing a servicing fee or other
compensation. Any Series for which a FASIT election is made generally
will be structured in order to avoid application of the prohibited
transaction tax.
Backup Withholding, Reporting and Tax Administration. Holders of
FASIT Securities will be subject to backup withholding to the same
extent Holders of REMIC Securities would be subject. See "Certain
Federal Income Tax Considerations--Miscellaneous Tax Aspects--Backup
Withholding." For purposes of reporting and tax administration, Holders
of record of FASIT Securities generally will be treated in the same
manner as Holders of REMIC Securities.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
HOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO
MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR
OWN TAX ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION,
OWNERSHIP, AND DISPOSITION OF THE SECURITIES.
ERISA CONSIDERATIONS
The following describes certain considerations under ERISA and the
Code, which apply only to Securities of a Series that are not divided
into subclasses. If Securities are divided into subclasses, the related
Prospectus Supplement will contain information concerning
considerations relating to ERISA and the Code that are applicable to
such Securities and such subclasses of Securities.
ERISA imposes requirements on employee benefit plans (and on
certain other retirement plans and arrangements, including individual
retirement accounts and annuities, Keogh plans and collective
investment funds and separate accounts in which such plans, accounts or
arrangements are invested) (collectively "Plans") subject to ERISA and
on persons who are fiduciaries with respect to such Plans. Generally,
ERISA applies to investments made by Plans. Among other things, ERISA
requires that the assets of Plans be held in trust and that the
trustee, or other duly authorized fiduciary, have exclusive authority
and discretion to manage and control the assets of such Plans. ERISA
also imposes certain duties on persons who are fiduciaries of Plans.
Under ERISA, any person who exercises any authority or control
respecting the management or disposition of the assets of a Plan is
considered to be a fiduciary of such Plan (subject to certain
exceptions not here relevant). Certain employee benefit plans, such as
governmental plans (as defined in ERISA Section 3(32)) and, if no
election has been made under Section 410(d) of the Code, church plans
(as defined in ERISA Section 3(33)), are not subject to ERISA
requirements. Accordingly, assets of such plans may be invested in
Securities without regard to the ERISA considerations described above
and below, subject to the provisions of applicable state law. Any such
plan that is qualified and exempt from taxation under Code Sections
401(a) and 501(a), however, is subject to the prohibited transaction
rules set forth in Code Section 503.
On November 13, 1986, the United States Department of Labor (the
"DOL") issued final regulations concerning the definition of what
constitutes the assets of a Plan. (Labor Reg. Section 2510.3-101) Under
this regulation, the underlying assets and properties of corporations,
partnerships and certain other entities in which a Plan acquires an
"equity" interest could be deemed for purposes of ERISA to be assets of
the investing Plan in certain circumstances.
Under the Plan Asset Regulation, the term "equity" interest is
defined as any interest in an entity other than an instrument that is
treated as indebtedness under "applicable local law" and which has no
"substantial equity features." If the Trust Fund issues Notes that are
not treated as equity interests in the Trust Fund for purposes of the
Plan Asset Regulation, a Plan's investment in such Notes would not
cause the assets of the Trust to be deemed Plan assets. However, the
Seller, the Servicer, the Special Servicer, the Backup Servicer, the
Indenture Trustee, the Owner Trustee and the Depositor may be the
sponsor of or investment advisor with respect to one or more Plans.
Because such parties may receive certain benefits in connection with
the sale of the Notes, the purchase of Notes using Plan assets over
which any such parties (or any affiliates thereof) has investment
authority might be deemed to be a violation of the prohibited
transaction rules of ERISA and the Code for which no exemption may be
available. Accordingly, Notes may not be purchased using the assets of
any Plan if the Seller, the Servicer, the Special Servicer, the
Indenture Trustee, the Owner Trustee, the Depositor or any of their
affiliates (a) has investment or administrative discretion with respect
to such Plan assets; (b) has authority or responsibility to give, or
regularly gives, investment advice with respect to such Plan assets for
a fee and pursuant to an agreement of understanding that such advice
(i) will serve as a primary basis for investment decisions with respect
to such Plan assets and (ii) will be based on the particular investment
needs for such Plan; or (c) is an employer maintaining or contributing
to such Plan.
In addition, certain affiliates of the Seller might be considered
or might become Parties in Interest with respect to a Plan. Also, any
holder of Notes, because of its activities or the activities of its
respective affiliates, may be deemed to be a Party in Interest with
respect to certain Plans, including but not limited to Plans sponsored
by such holder. In either case, the acquisition or holding of Notes by
or on behalf of such a Plan could be considered to give rise to an
indirect prohibited transaction within the meaning of ERISA and the
Code, unless it is subject to one or more exemptions such as:
Prohibited Transaction Class Exemption ("PTCE") 84-14, which exempts
certain transactions effected on behalf of a Plan by a "qualified
professional asset manager"; PTCE 90-1, which exempts certain
transactions involving insurance company pooled separate accounts; PTCE
91-38, which exempts certain transactions involving bank collective
investment funds; PTCE 95-60, which exempts certain transactions
involving insurance company general accounts; or PTCE 96-23, which
exempts certain transactions effected on behalf of a Plan by certain
"in-house asset managers." Each prospective purchaser or transferee of
a Note that is a Plan or a person acting on behalf or investing the
assets of a Plan shall be required to represent (or, with respect to
any transfer of a beneficial interest in a Global Note, shall be deemed
to represent) to the Indenture Trustee and the Note Registrar that the
relevant conditions for exemptive relief under at least one of the
foregoing exemptions have been satisfied.
However, the regulation provides that, generally, the assets of a
corporation or partnership in which a Plan invests will not be deemed
for purposes of ERISA to be assets of such Plan if the equity interest
acquired by the investing Plan is a publicly-offered security. A
publicly-offered security, as defined in the Labor Reg. Section
2510.3-101, is a security that is widely held, freely transferable and
registered under the Exchange Act.
In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA prohibits a broad range
of transactions involving Plan assets and persons ("Parties in
Interest") having certain specified relationships to a Plan and imposes
additional prohibitions where Parties in Interest are fiduciaries with
respect to such Plan. Because the Loans may be deemed Plan assets of
each Plan that purchases Securities, an investment in the Securities by
a Plan might be a prohibited transaction under ERISA Sections 406 and
407 and subject to an excise tax under Code Section 4975 unless a
statutory or administrative exemption applies.
In Prohibited Transaction Class Exemption 83-1 ("PTCE 83-1"),
which amended Prohibited Transaction Class Exemption 81-7, the DOL
exempted from ERISA's prohibited transaction rules certain transactions
relating to the operation of residential mortgage pool investment
trusts and the purchase, sale and holding of "mortgage pool
pass-through certificates" in the initial issuance of such
certificates. PTCE 83-1 permits, subject to certain conditions,
transactions that might otherwise be prohibited between Plans and
Parties in Interest with respect to those Plans related to the
origination, maintenance and termination of mortgage pools consisting
of mortgage loans secured by first or second mortgages or deeds of
trust on single-family residential property, and the acquisition and
holding of certain mortgage pool pass-through certificates representing
an interest in such mortgage pools by Plans. If the general conditions
(discussed below) of PTCE 83-1 are satisfied, investments by a Plan in
Securities that represent interests in a Pool consisting of Loans
("Single Family Securities") will be exempt from the prohibitions of
ERISA Sections 406(a) and 407 (relating generally to transactions with
Parties in Interest who are not fiduciaries) if the Plan purchases the
Single Family Securities at no more than fair market value and will be
exempt from the prohibitions of ERISA Sections 406(b)(1) and (2)
(relating generally to transactions with fiduciaries) if, in addition,
the purchase is approved by an independent fiduciary, no sales
commission is paid to the pool sponsor, the Plan does not purchase more
than 25% of all Single Family Securities, and at least 50% of all
Single Family Securities are purchased by persons independent of the
pool sponsor or pool trustee. PTCE 83-1 does not provide an exemption
for transactions involving Subordinated Securities. Accordingly, unless
otherwise provided in the related Prospectus Supplement, no transfer of
a Subordinated Security or a Security that is not a Single Family
Security may be made to a Plan.
The discussion in this and the next succeeding paragraph applies
only to Single Family Securities. The Depositor believes that, for
purposes of PTCE 83-1, the term "mortgage pass-through certificate"
would include: (i) Securities issued in a Series consisting of only a
single Class of Securities; and (ii) Securities issued in a Series in
which there is only one Class of those particular Trust Securities;
provided, that the Securities in the case of clause (i), or the
Securities in the case of clause (ii), evidence the beneficial
ownership of both a specified percentage of future interest payments
(greater than 0%) and a specified percentage (greater than 0%) of
future principal payments on the Loans. It is not clear whether a Class
of Securities that evidences the beneficial ownership in a Trust Fund
divided into Loan groups, beneficial ownership of a specified
percentage of interest payments only or principal payments only, or a
notional amount of either principal or interest payments, or a Class of
Securities entitled to receive payments of interest and principal on
the Loans only after payments to other Classes or after the occurrence
of certain specified events would be a "mortgage pass-through
certificate" for purposes of PTCE 83-1.
PTCE 83-1 sets forth three general conditions that must be
satisfied for any transaction to be eligible for exemption: (i) the
maintenance of a system of insurance or other protection for the pooled
mortgage loans and property securing such loans, and for indemnifying
Holders against reductions in pass-through payments due to property
damage or defaults in loan payments in an amount not less than the
greater of one percent of the aggregate principal balance of all
covered pooled mortgage loans or the principal balance of the largest
covered pooled mortgage loan; (ii) the existence of a pool trustee who
is not an affiliate of the pool sponsor; and (iii) a limitation on the
amount of the payment retained by the pool sponsor, together with other
funds inuring to its benefit, to not more than adequate consideration
for selling the mortgage loans plus reasonable compensation for
services provided by the pool sponsor to the Pool. The Depositor
believes that the first general condition referred to above will be
satisfied with respect to the Securities in a Series issued without a
subordination feature, or the unsubordinated Securities only in a
Series issued with a subordination feature; provided, that the
subordination and Reserve Account, subordination by shifting of
interests, the pool insurance or other form of credit enhancement
described herein (such subordination, pool insurance or other form of
credit enhancement being the system of insurance or other protection
referred to above) with respect to a Series of Securities is maintained
in an amount not less than the greater of one percent of the aggregate
Principal Balance of the Loans or the Principal Balance of the largest
Loan. See "Description of the Securities" herein. In the absence of a
ruling that the system of insurance or other protection with respect to
a Series of Securities satisfies the first general condition referred
to above, there can be no assurance that these features will be so
viewed by the DOL. The Trustee will not be affiliated with the
Depositor.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold Single
Family Securities must make its own determination as to whether the
first and third general conditions, and the specific conditions
described briefly in the preceding paragraph, of PTCE 83-1 have been
satisfied, or as to the availability of any other prohibited
transaction exemptions. Each Plan fiduciary should also determine
whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the Securities is appropriate for
the Plan, taking into account the overall investment policy of the Plan
and the composition of the Plan's investment portfolio.
The DOL issued to Bear, Stearns & Co. Inc., an individual exemp-
tion (Prohibited Transaction Exemption 90-30; Exemption Application
No. D-8207, 55 Fed. Reg. 21461 (1990)) (the "Underwriter Exemption"),
which applies to certain sales and servicing of "certificates" that are
obligations of a "trust" with respect to which Bear, Stearns & Co.
Inc. is the underwriter, manager or co-manager of an underwriting
syndicate. The Underwriter Exemption provides relief generally similar
to that provided by PTCE 83-1, but is broader in several respects.
The Underwriter Exemption contains several requirements, some of
which differ from those in PTCE 83-l. The Underwriter Exemption
contains an expanded definition of "certificate," which includes an
interest that entitles the Holder to pass-through payments of
principal, interest and/or other payments. The Underwriter Exemption
contains an expanded definition of "trust," which permits the trust
corpus to consist of secured consumer receivables. The definition of
"trust," however, does not include any investment pool unless, inter
alia, (i) the investment pool consists only of assets of the type that
have been included in other investment pools, (ii) certificates
evidencing interests in such other investment pools have been purchased
by investors other than Plans for at least one year prior to the Plan's
acquisition of certificates pursuant to the Underwriter Exemption and
(iii) certificates in such other investment pools have been rated in
one of the three highest generic rating categories of the four credit
rating agencies noted below. Generally, the Underwriter Exemption holds
that the acquisition of the certificates by a Plan must be on terms
(including the price for the certificates) that are at least as
favorable to the Plan as they would be in an arm's length transaction
with an unrelated party. The Underwriter Exemption requires that the
rights and interests evidenced by the certificates not be
"subordinated" to the rights and interests evidenced by other
certificates of the same trust. The Underwriter Exemption requires that
certificates acquired by a Plan have received a rating at the time of
their acquisition that is in one of the three highest generic rating
categories of Standard & Poor's, a division of The McGraw-Hill
Companies, Inc., Moody's Investors Service, Inc., Duff & Phelps Credit
Rating Co. or Fitch IBCA, Inc. The Underwriter Exemption specifies that
the pool trustee must not be an affiliate of the pool sponsor, nor an
affiliate of the Underwriter, the pool servicer, any obligor with
respect to mortgage loans included in the trust constituting more than
five percent of the aggregate unamortized principal balance of the
assets in the trust, or any affiliate of such entities. Finally, the
Underwriter Exemption stipulates that any Plan investing in the
certificates must be an "accredited investor" as defined in Rule
501(a)(1) of Regulation D of the Commission under the Securities Act.
On July 21, 1997, the DOL published in the Federal Register an
amendment to the Exemption, which extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions using
pre-funding accounts for trusts issuing pass-through certificates. The
amendment generally allows mortgage loans or other secured receivables
(the "Obligations") supporting payments to certificateholders, and
having a value equal to no more than twenty-five percent (25%) of the
total principal amount of the certificates being offered by the trust,
to be transferred to the trust within a 90-day or three-month period
following the closing date (the "Specified Funding Period"), instead of
requiring that all such Obligations be either identified or transferred
on or before the Closing Date. The relief is available when the
following conditions are met:
(1) The ratio of the amount allocated to the pre-funding
account to the total principal amount of the certificates
being offered (the "Specified Funding Limit") must not exceed
twenty-five percent (25%).
(2) All Obligations transferred after the Closing Date
(the "Additional Obligations") must meet the same terms and
conditions for eligibility as the original Obligations used to
create the trust, which terms and conditions have been
approved by an Exemption Rating Agency.
(3) The transfer of such Additional Obligations to the
trust during the Specified Funding Period must not result in
the certificates to be covered by the Exemption receiving a
lower credit rating from an Exemption Rating Agency upon
termination of the Specified Funding Period than the rating
that was obtained at the time of the initial issuance of the
certificates by the trust.
(4) Solely as a result of the use of pre-funding, the
weighted average annual percentage interest rate for all of
the Obligations in the trust at the end of the Specified
Funding Period must not be more than 100 basis points lower
than the average interest rate for the Obligations transferred
to the trust on the Closing Date.
(5) In order to insure that the characteristics of the
Additional Obligations are substantially similar to the
original Obligations which were transferred to the Trust Fund:
(i) the characteristics of the Additional
Obligations must be monitored by an insurer or other
credit support provider that is independent of the
depositor; or
(ii) an independent accountant retained by
the depositor must provide the depositor with a
letter (with copies provided to each Exemption Rating
Agency rating the certificates, the related
underwriter and the related trustee) stating whether
or not the characteristics of the Additional
Obligations conform to the characteristics described
in the related prospectus or prospectus supplement
and/or pooling and servicing agreement. In preparing
such letter, the independent accountant must use the
same type of procedures as were applicable to the
Obligations transferred to the trust as of the
Closing Date.
(6) The period of pre-funding must end no later than three
months or 90 days after the Closing Date or earlier in certain
circumstances if the pre-funding account falls below the
minimum level specified in the pooling and servicing agreement
or an Event of Default occurs.
(7) Amounts transferred to any pre-funding account and/or
capitalized interest account used in connection with the
pre-funding may be invested only in certain permitted
investments ("Permitted Investments").
(8) The related prospectus or prospectus supplement must
describe:
(i) any pre-funding account and/or
capitalized interest account used in connection
with a pre-funding account;
(ii) the duration of the period of
pre-funding;
(iii) the percentage and/or dollar amount of
the Specified Funding Limit for the trust; and
(iv) that the amounts remaining in the
pre-funding account at the end of the Specified
Funding Period will be remitted to certificateholders
as repayments of principal.
(9) The related pooling and servicing agreement must
describe the Permitted Investments for the pre-funding account
and/or capitalized interest account and, if not disclosed in
the related prospectus or prospectus supplement, the terms and
conditions for eligibility of Additional Obligations.
Neither PTCE 83-1 nor the Underwriter Exemption applies to a trust
which contains unsecured obligations.
Any Plan fiduciary that proposes to cause a Plan to purchase
Securities should consult with their counsel concerning the impact of
ERISA and the Code, the applicability of PTCE 83-1 and the Underwriter
Exemption, and the potential consequences in their specific
circumstances, prior to making such investment. Moreover, each Plan
fiduciary should determine whether under the general fiduciary
standards of investment procedure and diversification an investment in
the Securities is appropriate for the Plan, taking into account the
overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
LEGAL MATTERS
The legality of the Securities of each Series, including certain
material federal income tax consequences with respect thereto, will be
passed upon for the Depositor by Brown & Wood LLP, One World Trade
Center, New York, New York 10048.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of
Securities, and no Trust Fund will engage in any business activities or
have any assets or obligations prior to the issuance of the related
Series of Securities. Accordingly, no financial statements with respect
to any Trust Fund will be included in this Prospectus or in the related
Prospectus Supplement.
RATING
It is a condition to the issuance of the Securities of each Series
offered hereby and by the Prospectus Supplement that they shall have
been rated in one of the four highest rating categories by the
nationally recognized statistical rating agency or agencies (each, a
"Rating Agency") specified in the related Prospectus Supplement.
Any such rating would be based on, among other things, the
adequacy of the value of the Trust Fund assets and any credit
enhancement with respect to the related Class and will reflect such
Rating Agency's assessment solely of the likelihood that the related
Holders will receive payments to which such Holders are entitled under
the related Agreement. Such rating will not constitute an assessment of
the likelihood that principal prepayments on the related Loans will be
made, the degree to which the rate of such prepayments might differ
from that originally anticipated or the likelihood of early optional
termination of the Series of Securities. Such rating should not be
deemed a recommendation to purchase, hold or sell Securities, inasmuch
as it does not address market price or suitability for a particular
investor. Such rating will not address the possibility that prepayment
at higher or lower rates than anticipated by an investor may cause such
investor to experience a lower than anticipated yield or that an
investor purchasing a Security at a significant premium might fail to
recoup its initial investment under certain prepayment scenarios.
There is also no assurance that any such rating will remain in
effect for any given period of time or that it may not be lowered or
withdrawn entirely by the Rating Agencies in the future if in their
judgment circumstances so warrant. In addition to being lowered or
withdrawn due to any erosion in the adequacy of the value of the Trust
Fund assets or any credit enhancement with respect to a Series, such
rating might also be lowered or withdrawn because of, among other
reasons, an adverse change in the financial or other condition of a
credit enhancement provider or a change in the rating of such credit
enhancement provider's long term debt.
The amount, type and nature of credit enhancement, if any,
established with respect to a Series of Securities will be determined
on the basis of criteria established by each Rating Agency rating
Classes of such Series. Such criteria are sometimes based upon an
actuarial analysis of the behavior of mortgage loans in a larger group.
Such analysis is often the basis upon which each Rating Agency
determines the amount of credit enhancement required with respect to
each such Class. There can be no assurance that the historical data
supporting any such actuarial analysis will accurately reflect future
experience nor any assurance that the data derived from a large pool of
mortgage loans accurately predicts the delinquency, foreclosure or loss
experience of any particular pool of Loans. No assurance can be given
that values of any Properties have remained or will remain at their
levels on the respective dates of origination of the related Loans. If
the residential real estate markets should experience an overall
decline in property values such that the Principal Balances of the
Loans in a particular Trust Fund and any secondary financing on the
related Properties become equal to or greater than the value of such
Properties, the rates of delinquencies, foreclosures and losses could
be higher than those now generally experienced in the mortgage lending
industry. In additional, adverse economic conditions (which may or may
not affect real property values) may affect the timely payment by
mortgagors of scheduled payments of principal of and interest on the
Loans and, accordingly, the rates of delinquencies, foreclosures and
losses with respect to any Trust Fund. To the extent that such losses
are not covered by credit enhancement, such losses will be borne, at
least in part, by the Holders of one or more Classes of the Securities
of the related Series.
LEGAL INVESTMENT
Unless otherwise specified in the related Prospectus Supplement,
the Securities will not constitute "mortgage-related securities" within
the meaning of SMMEA. Accordingly, investors whose investment authority
is subject to legal restrictions should consult their own legal
advisors to determine whether and to what extent the Securities
constitute legal investments for them.
PLAN OF DISTRIBUTION
The Depositor may offer each Series of Securities through Bear,
Stearns & Co. Inc. ("Bear Stearns") or one or more other firms that may
be designated at the time of each offering of such Securities. The
participation of Bear Stearns in any offering will comply with Schedule
E to the By-Laws of the National Association of Securities Dealers,
Inc. The Prospectus Supplement relating to each Series of Securities
will set forth the specific terms of the offering of such Series of
Securities and of each Class within such Series, the names of the
underwriters, the purchase price of the Securities, the proceeds to the
Depositor from such sale, any securities exchange on which the
Securities may be listed, and, if applicable, the initial public
offering prices, the discounts and commissions to the underwriters and
any discounts and concessions allowed or reallowed to certain dealers.
The place and time of delivery of each Series of Securities will also
be set forth in the Prospectus Supplement relating to such Series. Bear
Stearns is an affiliate of the Depositor.
GLOSSARY OF TERMS
The following are abbreviated definitions of certain capitalized
terms used in this Prospectus. Unless otherwise provided in a
"Supplemental Glossary" in the Prospectus Supplement for a Series, such
definitions shall apply to capitalized terms used in such Prospectus
Supplement. The definitions may vary from those in the related
Agreement for a Series and the related Agreement for a Series generally
provides a more complete definition of certain of the terms. Reference
should be made to the related Agreement for a Series for a more
complete definition of such terms.
"Advance" means cash advanced by the Servicer in respect of
delinquent payments of principal of and interest on a Loan, and for any
other purposes specified in the related Prospectus Supplement.
"Agreement" means, with respect to a Series of Certificates, the
Pooling and Servicing Agreement or Trust Agreement, and, with respect
to a Series of Notes, the Indenture and the Servicing Agreement, as the
context requires.
"Asset Group" means, with respect to the Primary Assets and other
assets comprising the Trust Fund of a Series, a group of such Primary
Assets and other assets having the characteristics described in the
related Prospectus Supplement.
"Bankruptcy Code" means the federal bankruptcy code, 11 United
States Code 101 et seq., and related rules and regulations promulgated
thereunder.
"Business Day" means a day that, in the City of New York or in the
city or cities in which the corporate trust office of the applicable
Trustee is located, is neither a legal holiday nor a day on which
banking institutions are authorized or obligated by law, regulations or
executive order to be closed.
"Closing Date" means, with respect to a Series, the date specified
in the related Prospectus Supplement as the date on which Securities of
such Series are first issued.
"Combined Loan-to-Value Ratio" means, with respect to a Loan, the
ratio determined as set forth in the related Prospectus Supplement
taking into account the amounts of any related senior mortgage loans on
the related Mortgaged Property.
"Compound Interest Security" means any Security of a Series on
which all or a portion of the interest accrued thereon is added to the
principal balance of such Security on each Distribution Date, through
the Accrual Termination Date, and with respect to which no interest
shall be payable until such Accrual Termination Date, after which
interest payments will be made on the Compound Value thereof.
"Compound Value" means, with respect to a Class of Compound
Interest Securities, the original principal balance of such Class, plus
all accrued and unpaid interest, if any, previously added to the
principal balance thereof and reduced by any payments of principal
previously made on such Class of Compound Interest Securities.
"Condominium" means a form of ownership of real property wherein
each owner is entitled to the exclusive ownership and possession of his
or her individual Condominium Unit and also owns a proportionate
undivided interest in all parts of the Condominium Building (other than
the individual Condominium Units) and all areas or facilities, if any,
for the common use of the Condominium Units.
"Condominium Building" means a multi-unit building or buildings,
or a group of buildings whether or not attached to each other, located
on property subject to Condominium ownership.
"Condominium Unit" means an individual
housing unit in a Condominium Building.
"Cooperative" means a corporation owned by tenant-stockholders
who, through the ownership of stock, shares or membership securities in
the corporation, receives proprietary leases or occupancy agreements
that confer exclusive rights to occupy specific units and that is
described in Section 216 of the Code.
"Cooperative Dwelling" means an individual housing unit in a
building owned by a Cooperative.
"Cut-off Date" means the date designated as such in the related
Prospectus Supplement for a Series.
"Deferred Interest" means the excess of the interest accrued on
the Principal Balance of a Loan during a specified period over the
amount of interest required to be paid by an obligor on such Loan on
the related Due Date.
"Deposit Agreement" means a guaranteed investment contract or
reinvestment agreement providing for the investment of funds held in a
fund or account, guaranteeing a minimum or a fixed rate of return on
the investment of moneys deposited therein.
"Disqualified Organization" means the United States, any State or
political subdivision thereof, any possession of the United States, any
foreign government, any international organization, or any agency or
instrumentality of any of the foregoing, a rural electric or telephone
cooperative described in section 1381(a)(2)(C) of the Code, or any
entity exempt from the tax imposed by sections 1-1399 of the Code, if
such entity is not subject to tax on its unrelated business income.
"Distribution Date" means, with respect to a Series or Class of
Securities, each date specified as a distribution date for such Series
or Class in the related Prospectus Supplement.
"Due Date" means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest
is due and payable by the obligor on any Primary Asset pursuant to the
terms thereof.
"Eligible Investments" means any one or more of the obligations or
securities described as such in the related Agreement.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
"Event of Default" means an event of default under and as
specified in the related Agreement.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"Final Scheduled Distribution Date" means, with respect to a Class
of Notes of a Series, the date no later than which principal thereof
will be fully paid and with respect to a Class of Certificates of a
Series, the date after which no Certificates of such Class will remain
outstanding, in each case based on the assumptions set forth in the
related Prospectus Supplement.
"Holder" means the person or entity in whose name a Security is
registered.
"Insurance Policies" means certain mortgage insurance, hazard
insurance and other insurance policies maintained with respect to the
Loans.
"Insurance Proceeds" means amount paid by the insurer under any of
the Insurance Policies covering any Loan or Mortgaged Property.
"Interest Only Securities" means a Class of Securities entitled
solely or primarily to distributions of interest and that is identified
as such in the related Prospectus Supplement.
"Lifetime Rate Cap" means the lifetime limit if any, on the Loan
Rate during the life of each adjustable rate Loan.
"Loan Rate" means, unless otherwise indicated herein or in the
Prospectus Supplement, the interest rate borne by a Loan.
"Loan-to-Value Ratio" means, with respect to a Loan, the ratio
determined as set forth in the related Prospectus Supplement.
"Minimum Principal Payment Agreement" means a minimum principal
payment agreement with an entity meeting the criteria of the Rating
Agencies.
"Mortgage" means the mortgage, deed of trust or other similar
security instrument securing a Mortgage Note, as the context may
require.
"Mortgage Note" means the note or other evidence of indebtedness
of a Mortgagor under the Loan.
"Mortgaged Property" means the related property subject to a
Mortgage.
"Mortgagor" means the obligor on a Mortgage Note.
"1986 Act" means the Tax Reform Act of 1986.
"Notional Amount" means the amount set forth in the related
Prospectus Supplement for a Class of Interest Only Securities.
"PAC" ("Planned Amortization Class Securities") means a Class of
Securities of a Series on which payments of principal are made in
accordance with a schedule specified in the related Prospectus
Supplement, based on certain assumptions stated therein.
"Participating Securities" means Securities entitled to receive
payments of principal and interest and an additional return on
investment as described in the related Prospectus Supplement.
"Person" means any individual, corporation, partnership, joint
venture, association, joint stock company, trust (including any
beneficiary thereof), unincorporated organization, or government or any
agency or political subdivision thereof.
"Primary Assets" means the Private Securities and/or Loans, as the
case may be, that are included in the Trust Fund for such Series. A
Primary Asset refers to a specific Private Security or Loan, as the
case may be.
"Principal Balance" means, with respect to a Primary Asset and as
of a Due Date, the original principal amount of the Primary Asset, plus
the amount of any Deferred Interest added to such principal amount,
reduced by all payments, both scheduled or otherwise, received on such
Primary Asset prior to such Due Date and applied to principal in
accordance with the terms of the Primary Asset.
"Principal Only Securities" means a Class of Securities entitled
solely or primarily to distributions of principal and identified as
such in the Prospectus Supplement.
"Private Security" means a participation or pass-through
certificate representing a fractional, undivided interest in Underlying
Loans or collateralized obligations secured by Underlying Loans.
"Property" means either a Home Improvement or a Mortgaged Property
securing a Loan, as the context requires.
"Regular Interest" means a regular interest in a REMIC.
"REMIC Administrator" means the Person, if any, specified in the
related Prospectus Supplement for a Series for which a REMIC election
is made, to serve as administrator of the Series.
"REO Property" means real property that secured a defaulted Loan,
beneficial ownership of which has been acquired upon foreclosure, deed
in lieu of foreclosure, repossession or otherwise.
"Residual Interest" means a residual interest in a REMIC.
"Retained Interest" means, with respect to a Primary Asset, the
amount or percentage specified in the related Prospectus Supplement
that is not included in the Trust Fund for the related Series.
"Scheduled Payments" means the scheduled payments of principal and
interest to be made by the borrower on a Primary Asset.
"Senior Securities" means a Class of Securities as to which the
Holders' rights to receive distributions of principal and interest are
senior to the rights of Subordinated Securityholders, to the extent
specified in the related Prospectus Supplement.
"Series" means a separate series of Securities sold pursuant to
this Prospectus and the related Prospectus Supplement.
"Servicer" means, with respect to a Series relating to Loans, the
Person if any, designated in the related Prospectus Supplement to
service Loans for that Series, or the successors or assigns of such
Person.
"Single Family Property" means property securing a Loan consisting
of one- to four-family attached or detached residential housing,
including Cooperative Dwellings.
"Stripped Securities" means Pass-Through Securities representing
interests in Primary Assets with respect to which all or a portion of
the principal payments have been separated from all or a portion of the
interest payments.
"Subordinated Securityholder" means a Holder of a Subordinated
Security.
"Subordinated Securities" means a Class of Securities as to which
the rights of Holders to receive distributions of principal, interest
or both is subordinated to the rights of Holders of Senior Securities,
and may be allocated losses and shortfalls prior to the allocation
thereof to other Classes of Securities, to the extent and under the
circumstances specified in the related Prospectus Supplement.
"Trustee" means the trustee under the applicable Agreement, and
its successors.
"Trust Fund" means, with respect to any Series of Securities, the
trust holding all money, instruments, securities and other property,
including all proceeds thereof, held, with respect to a Series of
Certificates, for the benefit of the Holders by the Trustee under the
Pooling and Servicing Agreement or Trust Agreement or, with respect to
a Series of Notes, pledged to the Indenture Trustee as security for
such Notes, including, without limitation, the Primary Assets (except
any Retained Interests), all amounts in the Distribution Account(s),
Collection Account or Reserve Funds, distributions on the Primary
Assets (net of servicing fees), and reinvestment earnings on such net
distributions and any Enhancement and all other property and interest
held by or pledged to the Trustee pursuant to the related Agreement for
such Series.
"Variable Interest Security" means a Security on which interest
accrues at a rate that is adjusted, based upon a predetermined index,
at fixed periodic intervals, all as set forth in the related Prospectus
Supplement.
"Zero Coupon Security" means a Security entitled to receive
payments of principal only.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.*
The following table sets forth the estimated expenses to be incurred in
connection with the offering of the Securities, other than underwriting
discounts and commissions:
<TABLE>
<S> <C>
SEC Registration Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 295,000**
Trustee's Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Printing and Engraving . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Legal Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000
Blue Sky Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Accounting Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Rating Agency Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250,000
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,185,000
==========
</TABLE>
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* All amounts, except the SEC Registration Fee, are estimates of expenses
incurred or to be incurred.
** Of this amount, $295.00 has been previously paid.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article TWELFTH of the Certificate of Incorporation of the Issuer
provides for the indemnification of any person who is or was an officer or
director of the Issuer with respect to actions taken or omitted by such
person in any capacity in which such person serves or served the Issuer, to
the full extent authorized or permitted by Section 145 of the Delaware
General Corporation Law.
ITEM 16. EXHIBITS.
(a) FINANCIAL STATEMENTS:
NONE.
(b) EXHIBITS:
1.1 --Form of Underwriting Agreement.*
4.1 --Form of Indenture.*
4.2 --Form of Pooling and Servicing Agreement.*
4.3 --Form of Purchase Agreement.*
4.4 --Form of Trust Agreement.*
5.1 --Opinion of Brown & Wood LLP with respect to the securities
being registered.
8.1 --Opinion of Brown & Wood LLP with respect to tax matters
(included as part of Exhibit 5.1).
10.1 --Form of Sale and Servicing Agreement.*
23.1 --Consent of Brown & Wood LLP (included as
part of Exhibit 5.1).
24.1 --Powers of Attorney of Directors and
Officers of Issuer (included on signature
page).
25.1 --Statement of Eligibility and Qualification of Trustee.**
- -----------------
* Incorporated by reference to Registration Statement No. 33-93574.
** To be filed by amendment.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933, as amended;
(ii) To reflect in the Prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933 as amended, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended (and, where
applicable, each filing of an employee benefit plan's annual report pursuant
to Section 15(d) of the Securities Exchange Act of 1934, as amended) that is
incorporated by reference in the registration statement shall be deemed a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
For purposes of determining any liability under the Securities Act of
1933, as amended, the information omitted from the form of prospectus filed
as part of this registration statement in reliance on Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to part of
this registration statement as of the time it was declared effective.
For the purpose of determining any liability under the Securities Act of
1933, as amended, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and has duly caused this
Amendment No. 1 to Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York, State of
New York, on the 11th day of May, 1998.
BEAR STEARNS ASSET BACKED
SECURITIES, INC.
By: /s/ Patricia A. Jehle
--------------------------------
Patricia A. Jehle
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
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<S> <C> <C>
/s/Patricia A. Jehle President, Chief Executive Officer May 11, 1998
- ------------------------ and Director (Principal Executive
Patricia A. Jehle Officer)
* Executive Vice President and May 11, 1998
- ------------------------ Treasurer (Principal Financial and
William J. Montgoris Accounting Officer)
* Director May 11, 1998
- ------------------------
Warren J. Spector
* May 11, 1998
- ------------------------ Director
Juliana C. Johnson
</TABLE>
* By: /s/ Patricia A. Jehle
---------------------
Attorney-in-Fact
May __, 1998
Bear Stearns Asset Backed
Securities, Inc.
245 Park Avenue
New York, New York 10167
Re: Bear Stearns Asset Backed Securities, Inc.
Registration Statement on Form S-3
------------------------------------------
Ladies and Gentlemen:
We have acted as special tax counsel for Bear Stearns Asset Backed
Securities, Inc., a Delaware corporation (the "Company"), in connection with
the preparation of the registration statement on Form S-3 (the "Registration
Statement") relating to the Securities (defined below) and with the
authorization and issuance from time to time in one or more series (each, a
"Series") of up to $1,000,000,000 aggregate principal amount of asset-backed
securities (the "Securities"). The Registration Statement is being filed
with the Securities and Exchange Commission under the Securities Act of 1933,
as amended. As set forth in the Registration Statement, each Series of
Securities will be issued under and pursuant to the conditions of a separate
pooling and servicing agreement, master pooling and servicing agreement,
pooling agreement, trust agreement or indenture (each an "Agreement") among
the Company, a trustee (the "Trustee") and, where appropriate, a servicer
(the "Servicer"), each to be identified in the prospectus supplement for such
Series of Securities.
We have examined the prospectus and forms of prospectus supplement
related thereto contained in the Registration Statement (each, a
"Prospectus") and such other documents, records and instruments as we have
deemed necessary for the purposes of this opinion.
In arriving at the opinion expressed below, we have assumed that each
Agreement will be duly authorized by all necessary corporate action on the
part of the Company, the Trustee, the Servicer (where applicable) and any
other party thereto for such Series of Securities and will be duly executed
and delivered by the Company, the Trustee, the Servicer and any other party
thereto substantially in the applicable form incorporated by reference as an
exhibit to the Registration Statement, that each Series of Securities will be
duly executed and delivered in substantially the forms set forth in the related
Agreement incorporated by reference as an exhibit to the Registration Statement,
and that Securities will be sold as described in the Registration Statement.
As special tax counsel to the Company, we have advised the Company with
respect to certain material federal income tax aspects of the proposed
issuance of each Series of Securities pursuant to the related Agreement.
Such advice has formed the basis for the description of selected federal
income tax consequences for holders of such Securities that appear under the
heading "Certain Federal Income Tax Considerations" in each Prospectus
forming a part of the Registration Statement. Such description does not
purport to discuss all possible federal income tax ramifications of the
proposed issuance of the Securities, but with respect to those federal income
tax consequences described therein, such description is accurate in all
material respects.
This opinion is based on the facts and circumstances set forth in the
Registration Statement and in the other documents reviewed by us. Our
opinion as to the matters set forth herein could change with respect to a
particular Series of Securities as a result of changes in facts or
circumstances, changes in the terms of the documents reviewed by us, or
changes in the law subsequent to the date hereof. Because the Prospectuses
contemplate Series of Securities with numerous different characteristics, you
should be aware that the particular characteristics of each Series of
Securities must be considered in determining the applicability of this
opinion to a particular Series of Securities.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the references to this firm under the heading
"Certain Federal Income Tax Considerations" in each Prospectus forming a part
of the Registration Statement, without admitting that we are "experts" within
the meaning of the Securities Act of 1933, as amended, or the Rules and
Regulations of the Commission issued thereunder, with respect to any part of
the Registration Statement, including this exhibit.
Very truly yours,
May __, 1998
Bear Stearns Asset Backed
Securities, Inc.
245 Park Avenue
New York, New York 10167
Re: Bear Stearns Asset Backed Securities, Inc.
Registration Statement on Form S-3
------------------------------------------
Ladies and Gentlemen:
We have acted as counsel for Bear Stearns Asset Backed Securities, Inc.,
a Delaware corporation (the "Company"), in connection with the preparation of
the registration statement on Form S-3 (the "Registration Statement")
relating to the Securities (defined below) and with the authorization and
issuance from time to time in one or more series (each, a "Series") of up to
$1,000,000,000 aggregate principal amount of asset-backed securities (the
"Securities"). As set forth in the Registration Statement, each Series of
Securities will be issued under and pursuant to the conditions of a separate
pooling and servicing agreement, master pooling and servicing agreement,
pooling agreement, trust agreement or indenture (each, an "Agreement") among
the Company, a trustee (the "Trustee") and, where appropriate, a servicer
(the "Servicer"), each to be identified in the prospectus supplement for such
Series of Securities.
We have examined copies of the Company's Certificate of Incorporation,
the Company's By-laws and forms of each Agreement, as incorporated by
reference as exhibits to the Registration Statement, and the forms of
Securities included in any Agreement so incorporated by reference in the
Registration Statement and such other records, documents and statutes as we
have deemed necessary for purposes of this opinion.
Based upon the foregoing, we are of the opinion that:
1. When any Agreement relating to a Series of Securities has been duly
authorized by all necessary action on the part of the Company and has been
duly executed and delivered by the Company, the Servicer, if any, the Trustee
and any other party thereto, such Agreement will constitute a legal, valid
and binding agreement of the Company, enforceable against the Company in
accordance with its terms, except as enforcement thereof may be limited by
bankruptcy, insolvency or other laws relating to or affecting creditors'
rights generally or by general equity principles.
2. When a Series of Securities has been duly authorized by all
necessary action on the part of the Company (subject to the terms thereof
being otherwise in compliance with applicable law at such time), duly
executed and authenticated by the Trustee for such Series in accordance with
the terms of the related Agreement and issued and delivered against payment
therefor as described in the Registration Statement, such Series of
Securities will be legally issued, fully paid and nonassessable, and the
holders thereof will be entitled to the benefits of the related Agreement.
In rendering the foregoing opinions, we express no opinion as to the
laws of any jurisdiction other than the laws of the State of New York
(excluding choice of law principles therein) and the federal laws of the
United States of America.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the references to this firm under the heading
"Legal Matters" in each Prospectus forming a part of the Registration
Statement, without admitting that we are "experts" within the meaning of the
Securities Act of 1933, as amended, or the Rules and Regulations of the
Commission issued thereunder, with respect to any part of the Registration
Statement, including this exhibit.
Very truly yours,
