PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 4, 1998)
$175,000,000
GMAC MORTGAGE CORPORATION
Seller and Servicer
GMACM REVOLVING HOME EQUITY LOAN TRUST 1998-2
Issuer
BEAR STEARNS ASSET BACKED SECURITIES, INC.
Depositor
HOME EQUITY LOAN-BACKED TERM NOTES, SERIES 1998-2
The GMACM Revolving Home Equity Loan Trust 1998-2 (the "ISSUER") will
be created and governed by a trust agreement to be dated as of September 25,
1998 (the "TRUST AGREEMENT"), between Bear Stearns Asset Backed Securities,
Inc., as depositor (the "DEPOSITOR"), and Wilmington Trust Company, as trustee
(the "OWNER TRUSTEE"). The Issuer will issue $175,000,000 aggregate principal
amount of Home Equity Loan-Backed Term Notes, Series 1998-2 (the "TERM NOTES"),
pursuant to an indenture to be dated as of September 25, 1998 (the "INDENTURE"),
between the Issuer and Norwest Bank Minnesota, National Association, as
indenture trustee (the "INDENTURE Trustee"). The Issuer will also issue an
aggregate amount up to the Maximum Variable Funding Balance (as defined herein)
of Home Equity Loan-Backed Variable Funding Notes, Series 1998-2 (the "VARIABLE
FUNDING NOTES" and, together with the Term Notes, the "NOTES"), pursuant to the
Indenture. The Term Notes and the Variable Funding Notes will have equal
priorities. In addition, pursuant to the Trust Agreement, the Issuer will issue
Home Equity Loan-Backed Certificates, Series 1998-2 (the "CERTIFICATES" and,
together with the Notes, the "SECURITIES").
Only the Term Notes are offered hereby.
The Notes will be secured primarily by certain adjustable rate home
equity revolving credit line loans (the "HELOCS") and fixed rate closed-end home
equity loans (the "HELS" and, together with the HELOCs, the "MORTGAGE LOANS")
made or to be made in the future and secured by first, second or subsequent
mortgages or deeds of trust on residential properties. In addition, the Notes
will have the benefit of an irrevocable and unconditional financial guaranty
insurance policy (the "POLICY") issued by Ambac Assurance Corporation (the
"ENHANCER") as described under "Description of the Policy" herein.
(cover continued on next page)
[AMBAC logo]
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THE TERM NOTES DO NOT REPRESENT AN OBLIGATION OF OR INTEREST IN THE
DEPOSITOR, THE SELLER, SERVICER, THE OWNER TRUSTEE, THE INDENTURE TRUSTEE OR ANY
OF THEIR RESPECTIVE AFFILIATES. NEITHER THE TERM NOTES NOR THE MORTGAGE LOANS
ARE INSURED OR GUARANTEED BY ANY OF THE FOREGOING PARTIES OR ANY OTHER PARTY
(OTHER THAN THE ENHANCER AS DESCRIBED HEREIN).
------------------
SEE "RISK FACTORS" HEREIN ON PAGE S-12 AND IN THE PROSPECTUS ON PAGE 18 FOR
CERTAIN FACTORS TO BE CONSIDERED IN PURCHASING THE TERM NOTES.
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.
------------------
The Term Notes will be offered by Bear, Stearns & Co. Inc. (the
"UNDERWRITER") from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. The proceeds to the
Depositor from the sale of the Term Notes, before deducting expenses payable by
the Depositor, will be approximately 99.75% of the aggregate initial principal
balance of the Term Notes.
The Term Notes are offered by the Underwriter when, as and if issued,
delivered to and accepted by the Underwriter and subject to certain other
conditions. The Underwriter reserves the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the Term Notes will be made in book-entry form only, through the
facilities of The Depository Trust Company, Cedel and Euroclear on or about
September 25, 1998.
------------------
BEAR, STEARNS & CO. INC.
The date of this Prospectus Supplement is September 10, 1998
<PAGE>
(cover continued from previous page)
On the Closing Date, the Original Pre-Funded Amount will be deposited
into the Pre-Funding Account (each as defined herein). The Seller may sell
additional Mortgage Loans to the Issuer and the Issuer will be obligated,
subject to the satisfaction of certain conditions, to purchase such additional
Mortgage Loans during the Pre-Funding Period. In addition, the Funding Account
(as defined herein) will be established with the Indenture Trustee on the
Closing Date. On each Payment Date during the Revolving Period (as defined
herein), Principal Collections for the related Collection Period will be
deposited into the Funding Account to be applied, first, to acquire Additional
Balances and thereafter to acquire Subsequent Mortgage Loans, to the extent
available.
Payments on the Term Notes will be made on the 18th day of each month
or, if such day is not a business day, then on the next business day, commencing
in October 1998. Interest will accrue on the Term Notes at a Note Rate (as
defined herein) during each Interest Period as described herein. See
"Description of the Securities--Interest Payments on the Notes" herein.
The Term Notes initially will be registered in the name of Cede & Co.,
as nominee of The Depository Trust Company ("DTC"), as further described herein.
The interests of beneficial owners of the Term Notes will be represented by book
entries on the records of DTC and the participating members of DTC. Definitive
certificates will be available for the Term Notes only under the limited
circumstances described herein. See "Description of the Securities--Book-Entry
Notes" herein.
It is a condition of the issuance of the Notes that they be rated "Aaa"
by Moody's Investors Service, Inc. ("MOODY'S") and "AAA" by Standard & Poor's, a
division of The McGraw-Hill Companies, Inc. ("STANDARD & POOR'S" and, together
with Moody's, the "RATING AGENCIES").
There is currently no secondary market for the Term Notes. The
Underwriter intends to establish a market in the Term Notes but is not obligated
to do so. There can be no assurance that a secondary market for the Term Notes
will develop, or if one does develop, that it will continue or offer sufficient
liquidity of investment.
The yield to maturity on the Term Notes will depend on the rate and
timing of principal payments (including payments in excess of required
installments, prepayments in full or terminations, liquidations and repurchases)
on the Mortgage Loans and the rate and timing of draws on the HELOCs. The
Mortgage Loans may be prepaid at any time without penalty. In addition, the
yield to investors on the Term Notes may also be adversely affected to the
extent of any Interest Shortfalls, as more fully described herein. See "Yield
and Prepayment Considerations" herein and "Description of the
Securities--Weighted Average Life of the Securities" 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.
This Prospectus Supplement does not contain complete information about
the offering of the Term Notes. Additional information is contained in the
accompanying Prospectus dated June 4, 1998, and prospective investors are urged
to read both this Prospectus Supplement and the Prospectus in full. Sales of the
Term Notes may not be consummated unless the purchaser has received both this
Prospectus Supplement and the Prospectus.
------------------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE TERM NOTES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS SUPPLEMENT AND A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein but not otherwise defined have the meanings
assigned thereto in the Prospectus.
Issuer............................... The GMACM Revolving Home Equity Loan
Trust 1998-2, a Delaware business trust,
will be formed pursuant to a Trust
Agreement. The assets of the Issuer (the
"TRUST ESTATE") will consist of the
HELOCs and the HELs transferred to the
Issuer on the Closing Date (the "INITIAL
HELOCS" and the "INITIAL HELS",
respectively), additional draws under
the HELOCs during the period from the
Closing Date to (but excluding) the
commencement of the Rapid Amortization
Period (the "ADDITIONAL BALANCES"),
mortgage loans sold to the Issuer
subsequent to the Closing Date (the
"SUBSEQUENT MORTGAGE LOANS") and certain
related assets.
The Term Notes ...................... $175,000,000 Home Equity Loan-Backed
Term Notes, Series 1998-2, are offered
hereby. The Term Notes will be issued
pursuant to an indenture to be dated as
of September 25, 1998, between the
Issuer and the Indenture Trustee (the
"INDENTURE").
The Variable Funding Notes........... Home Equity Loan-Backed Variable Funding
Notes, Series 1998-2. The Variable
Funding Notes are not offered hereby.
The Certificates .................... Home Equity Loan-Backed Certificates,
Series 1998-2. The Certificates are not
offered hereby.
Depositor ........................... Bear Stearns Asset Backed Securities,
Inc. See "The Depositor" in the
Prospectus.
Seller and Servicer ................. GMAC Mortgage Corporation, a
Pennsylvania corporation, will be the
seller and servicer (in such capacities,
the "SELLER" and "SERVICER",
respectively) of the Mortgage Loans. The
Servicer will be obligated to service
the Mortgage Loans pursuant to the
servicing agreement to be dated as of
September 25, 1998 (the "SERVICING
AGREEMENT"), among the Servicer, the
Issuer and the Indenture Trustee. See
"The Agreements--The Servicing
Agreement" and "The Seller and Servicer
--General" herein.
Owner Trustee ....................... Wilmington Trust Company. See "The Owner
Trustee" herein.
Indenture Trustee ................... Norwest Bank Minnesota, National
Association. See "The Indenture Trustee"
herein.
Cut-Off Date ........................ The close of business on August 31,
1998.
Closing Date ........................ On or about September 25, 1998.
Payment Date ........................ The 18th day of each month (or, if such
day is not a Business Day, the next
Business Day), commencing on October 19,
1998 (each, a "PAYMENT DATE").
Denominations and Registration ...... The Term Notes will be issued in minimum
denominations of $25,000 and integral
multiples of $1,000 in excess thereof.
The Term Notes will initially be issued
in book-entry form. Persons acquiring
beneficial ownership interests in the
Term Notes ("TERM NOTE OWNERS") may
elect to hold their Term Notes through
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. No Term Note Owner will be
entitled to receive a physical
certificate representing such person's
interest, except in the event that
Definitive Notes are issued under the
limited circumstances described herein.
All references in this Prospectus
Supplement to any Term Notes reflect the
rights of Term Note Owners only as such
rights may be exercised through DTC and
its participating organizations for so
long as such Term Notes are Book-Entry
Notes. See "Description of the
Securities--Book-Entry Notes" herein and
"Description of the
Securities--Book-Entry Securities" in
the Prospectus.
The Mortgage Pool ................... Unless otherwise indicated, the
statistical information presented in
this Prospectus Supplement reflects the
initial pool of Mortgage Loans (the
"INITIAL MORTGAGE LOANS") as of the
Cut-Off Date. The aggregate outstanding
principal balance of the Initial
Mortgage Loans as of the Cut-Off Date is
approximately $115,141,375.33 (the
"CUT-OFF DATE POOL PRINCIPAL BALANCE").
The outstanding principal balance of
each Initial Mortgage Loan as of the
Cut-Off Date is the "CUT-OFF DATE
BALANCE".
HELOCs to be sold to the Issuer will be
adjustable rate home equity revolving
credit line loans evidenced by the
related loan agreements (the "CREDIT
LINE AGREEMENTS") and secured by the
related mortgages or deeds of trust (the
"MORTGAGES") on residential properties
(the "MORTGAGED PROPERTIES"). No more
than approximately 90.02% of the Initial
HELOCs (by Cut-Off Date Balance) are
secured by second or subsequent
mortgages or deeds of trust and the
remainder are secured by first mortgages
or deeds of trust. The Trust Estate will
include the unpaid principal balance of
the Initial HELOCs as of the close of
business on the Cut-Off Date and the
unpaid principal balance of the
Subsequent HELOCs as of the Subsequent
Cut-Off Date (as defined herein) of such
loans and any additions to the HELOCs as
a result of draws or new advances of
money made pursuant to the applicable
Credit Line Agreement after the related
Cut-Off Date or Subsequent Cut-Off Date.
The unpaid principal balance of a HELOC
on any day is equal to its Cut-Off Date
Balance or Subsequent Cut-Off Date
Balance (as defined herein), as
applicable, plus (i) any Additional
Balances in respect of such HELOC
conveyed to the Issuer prior to such
day, minus (ii) all collections credited
against the Principal Balance of such
HELOC in accordance with the related
Credit Line Agreement since the Cut-Off
Date or Subsequent Cut-Off Date, as
applicable. The Principal Balance of a
liquidated HELOC after the final
recovery of related liquidation proceeds
shall be zero.
From time to time prior to the
expiration of the related Draw Period
(as defined herein), principal amounts
on the HELOCs may be drawn down, or may
be repaid. New draws under the HELOCs
will automatically become the property
of the Issuer prior to the commencement
of the Rapid Amortization Period. As a
result, the aggregate Principal Balance
of the Mortgage Loans will fluctuate
from day to day as new draws by
Mortgagors are transferred to the Issuer
and principal payments received are
applied in reduction of the Principal
Balances. Under the Credit Line
Agreements, during the related Draw
Period, the related Mortgagor is
obligated to pay the amount of interest
that accrues on the related HELOC during
the Billing Cycle and may also be
required to pay a portion of the
principal. In the case of HELOCs that
have a Repayment Period (as defined
herein), the interest only payment
obligation terminates at the end of the
related Draw Period, after which the
related Mortgagor is obligated to make
monthly payments consisting of principal
installments which would substantially
amortize the Principal Balance of the
HELOC by the related maturity date,
together with accrued interest. In the
case of HELOCs that have no Repayment
Period, the outstanding Principal
Balance is due and payable at the end of
the Draw Period.
The HELs to be sold to the Issuer will
be fixed rate closed-end home equity
loans evidenced by the related
promissory notes (the "MORTGAGE NOTES")
and secured by Mortgages on the related
Mortgaged Properties. No more than
approximately 96.60% of the Initial HELs
(by Cut-Off Date Balance) are secured by
second or subsequent mortgages or deeds
of trust and the remainder are secured
by first mortgages or deeds of trust.
The Trust Estate will include the
Principal Balances of the Initial HELs
as of the Cut-Off Date. The Initial HELs
provide for substantially equal payments
in an amount sufficient to amortize the
HELs over their terms.
Loan Rate ........................... The "LOAN RATE" of each Mortgage Loan is
the per annum interest rate required to
be paid by the Mortgagor under the terms
of the related Mortgage Note or Credit
Line Agreement, as the case may be. The
Loan Rate borne by each Mortgage Loan,
after the completion of any initial
teaser period during which the Loan Rate
may be fixed or set at a discounted
variable rate for a period of from three
to six months, is (i) in the case of a
HELOC, adjustable on the date specified
in the related Credit Line Agreement to
a rate based on an Index (as defined
herein) and (ii) in the case of a HEL,
fixed as of the date of its origination.
Interest on each HELOC is computed daily
and payable monthly on the average daily
outstanding Principal Balance of such
HELOC. After any initial teaser period
during which the Loan Rate may be fixed
or set at a discounted variable rate for
approximately three to six months, the
Loan Rate on each HELOC will be adjusted
on each Adjustment Date to a rate equal
to the sum of the Index and a fixed
percentage (the "GROSS MARGIN")
specified in the related Credit Line
Agreement, and is generally subject to a
maximum Loan Rate over the life of the
HELOC specified in such Credit Line
Agreement. As of the Cut-Off Date, the
weighted average Loan Rate for the
HELOCs, after the expiration of any
applicable teaser periods, is
approximately 10.188% and for the HELs
is approximately 10.187%.
After the expiration of any applicable
teaser periods, the Gross Margins for
the Initial HELOCs range from 0.000% to
4.500%, and the weighted average Gross
Margin is approximately 1.688%. As of
the Cut-Off Date, the Maximum Loan Rates
for the Initial HELOCs range from
15.500% to 19.000% per annum, and the
weighted average Maximum Loan Rate for
the Initial HELOCs is approximately
18.406% per annum. The Initial HELOCs
are subject to a maximum rate permitted
by applicable law. See " Mortgage
Loans--Initial HELOC Characteristics"
herein.
Pre-Funding Account ................. On the Closing Date, approximately
$60,000,000 (the "ORIGINAL PRE-FUNDED
AMOUNT") will be deposited into an
account (the "PRE-FUNDING ACCOUNT"),
which amount will be funded from the
proceeds of the sale of the Term Notes.
During the Pre-Funding Period funds on
deposit in the Pre-Funding Account will
be used by the Issuer to acquire
Subsequent Mortgage Loans from the
Seller from time to time. The
"PRE-FUNDING PERIOD" is the period
commencing on the Closing Date until the
earlier of (i) the date on which the
amount on deposit in the Pre-Funding
Account is less than $100,000 or (ii)
March 31, 1999. Subsequent Mortgage
Loans that are originated or acquired by
the Seller may be sold to the Depositor
and then sold by the Depositor to the
Issuer. The Subsequent Mortgage Loans,
as well as all Initial Mortgage Loans,
will conform to certain specified
characteristics. Following the end of
the Pre-Funding Period, Subsequent
Mortgage Loans will continue to be
acquired by the Issuer through the end
of the Revolving Period, subject to
certain conditions.
Any funds remaining on deposit in the
Pre-Funding Account at the end of the
Pre-Funding Period will be applied to
the purchase of any Additional Balances
then available and thereafter will be
deposited into the Funding Account.
Funds on deposit in the Pre-Funding
Account will be invested in Permitted
Investments. Permitted Investments (as
defined herein) are specified in the
Indenture and are generally limited to
investments that meet the criteria of
the Enhancer. See "Description of the
Mortgage Loans-Conveyance of Subsequent
Mortgage Loans, the Pre-Funding Account
and the Funding Account" herein.
Capitalized Interest Account ........ On the Closing Date, if required by the
Enhancer, a portion of the proceeds of
the sale of the Term Notes will be
deposited into an account held by the
Indenture Trustee (the "CAPITALIZED
INTEREST ACCOUNT"). Amounts on deposit
in the Capitalized Interest Account will
be withdrawn on each Payment Date during
the Pre-Funding Period to cover any
shortfall in Interest Payments on the
Notes attributable to the pre-funding
feature during the Pre-Funding Period.
Any amounts remaining in the Capitalized
Interest Account at the end of the
Pre-Funding Period will be paid to the
Seller. See "Description of the
Securities--Capitalized Interest
Account" herein.
Funding Account ..................... The Funding Account will be established
with the Indenture Trustee on the
Closing Date. On each Payment Date
during the Revolving Period, Principal
Collections for the related Collection
Period will be deposited into the
Funding Account and applied first to
acquire Additional Balances and
thereafter to acquire Subsequent
Mortgage Loans, to the extent available.
In the event that not all Principal
Collections on deposit in the Funding
Account have been applied to acquire
Additional Balances and Subsequent
Mortgage Loans at the end of the
Revolving Period, the amount remaining
on deposit in the Funding Account will
be distributed to Noteholders as a
payment of principal. During the
Revolving Period, it is expected that
Subsequent Mortgage Loans acquired with
amounts on deposit in the Funding
Account will consist primarily of
HELOCs. See "Description of the Mortgage
Loans--Conveyance of Subsequent Mortgage
Loans, the Pre-Funding Account and the
Funding Account" herein.
Interest Payments ................... Interest Payments on the Term Notes will
be paid monthly on each Payment Date,
commencing in October 1998, at the Note
Rate for the related Interest Period,
subject to the limitations set forth
below, which may result in Interest
Shortfalls, as described below. The
"NOTE RATE" for each Interest Period
will be a floating rate equal to the
least of (i) LIBOR plus 0.22% per annum
(or, on any Payment Date on which the
aggregate Term Note Balance is less than
10% of the initial aggregate Term Note
Balance, LIBOR plus 0.44% per annum),
(ii) the Net Loan Rate, as described
herein under "Description of the
Securities--Interest Payments on the
Notes", and (iii) 14.5% per annum.
However, on any Payment Date for which
the related Note Rate has been
determined pursuant to clause (ii)
above, the Interest Shortfall (as
defined herein) will be determined.
Interest Shortfalls and interest thereon
at the Note Rate (as adjusted from time
to time) will be paid on subsequent
Payment Dates to the extent that funds
are available therefor as set forth
herein under "Description of the
Securities--Priority of Distributions".
Interest Shortfalls will not be covered
by the Policy and may remain unpaid on
the Final Payment Date. Interest on the
Notes for each Payment Date will accrue
from the preceding Payment Date (or, in
the case of the first Payment Date, from
the Closing Date) through the day
preceding such Payment Date (each, an
"INTEREST PERIOD") on the basis of the
actual number of days in such Interest
Period and a 360-day year.
All interest payments on the Notes in
respect of any Payment Date will be
allocated to the Term Notes and the
Variable Funding Notes pro rata based on
their respective interest accruals. The
interest rate on the Variable Funding
Notes for any Payment Date shall not
exceed the Note Rate for the related
Interest Period.
Principal Payments .................. With respect to any Payment Date during
the Revolving Period, no principal will
be paid on the Notes, and all Principal
Collections will be deposited into the
Funding Account and used to purchase
Additional Balances and Subsequent
Mortgage Loans. On each Payment Date
during the Managed Amortization Period,
the aggregate amount payable in respect
of principal of the Notes will be equal
to Net Principal Collections for such
Payment Date. On each Payment Date
during the Rapid Amortization Period,
the aggregate amount payable in respect
of principal of the Notes will be equal
to Principal Collections for such
Payment Date. In addition, on each
Payment Date following the end of the
Revolving Period, to the extent of funds
available therefor, holders of the Term
Notes (the "TERM Noteholders") and the
holders of the Variable Funding Notes
(together with the Term Noteholders, the
"NOTEHOLDERS") will be entitled to
receive certain additional amounts to be
applied in reduction of the Note Balance
of the related Notes, generally equal to
Liquidation Loss Amounts (as defined
herein).
All principal payments due and payable
on the Notes will be allocated to the
Term Notes and the Variable Funding
Notes pro rata based on the outstanding
principal balances thereof until paid in
full. In no event will principal
payments on the Notes on any Payment
Date exceed the related Note Balance
thereof on such Payment Date. On the
Final Payment Date, principal will be
due and payable on the Notes in an
amount equal to the related Note Balance
remaining outstanding on such Payment
Date.
The "REVOLVING PERIOD" will be the
period beginning on the Closing Date and
ending on the earlier of (i) March 31,
2000 and (ii) the occurrence of a
Managed Amortization Event or a Rapid
Amortization Event. The "MANAGED
AMORTIZATION PERIOD" will be the period
beginning on the first Payment Date
following the end of the Revolving
Period and ending on the earlier of (i)
March 31, 2004 and (ii) the occurrence
of a Rapid Amortization Event. The
"RAPID AMORTIZATION PERIOD" (together
with the Managed Amortization Period,
the "Amortization Periods") will be the
period beginning on the earlier of (i)
the first Payment Date following the end
of the Managed Amortization Period and
(ii) the occurrence of a Rapid
Amortization Event, and ending upon the
termination of the Issuer.
Allocation of Payments on the
Mortgage Loans ...................... All collections on the Mortgage Loans
will generally be allocated by the
Servicer in accordance with the terms of
the related Credit Line Agreements or
Mortgage Notes between amounts collected
in respect of interest and principal.
See "The Agreements--The Servicing
Agreement--P & I Collections" herein,
which describes the calculation of
Principal Collections and Interest
Collections on the Mortgage Loans for
the Collection Period related to each
Payment Date. With respect to each
Payment Date, the portion of Interest
Collections and Principal Collections
available to be applied towards the
payment of interest and principal on the
Notes will equal, respectively, (i)
Interest Collections for such Payment
Date and (ii) (A) at any time during the
Revolving Period, zero, (B) at any time
during the Managed Amortization Period,
Net Principal Collections for such
Payment Date and (C) at any time during
the Rapid Amortization Period, Principal
Collections for such Payment Date.
During the Revolving Period, Principal
Collections will be applied to acquire
Subsequent Mortgage Loans and, during
the period from the Closing Date to the
commencement of the Rapid Amortization
Period, Principal Collections will be
applied to purchase Additional Balances,
in each case to the extent available.
Principal Collections will no longer be
applied to acquire Subsequent Mortgage
Loans following the end of the Revolving
Period and will no longer be applied to
acquire Additional Balances during the
Rapid Amortization Period. See
"Description of the Securities--Priority
of Distributions" herein for a
description of Rapid Amortization
Events.
Prior to the commencement of the Rapid
Amortization Period, the Variable
Funding Balance will be increased from
time to time, up to $35,000,000 (the
"MAXIMUM VARIABLE FUNDING BALANCE"), to
the extent Principal Collections and any
amounts on deposit in the Funding
Account are insufficient or unavailable
to cover Additional Balances and
Subsequent Mortgage Loans sold to the
Issuer.
Credit Enhancement .................. The Credit Enhancement provided for the
benefit of the Noteholders will consist
of (i) Excess Spread, (ii)
overcollateralization and (iii) the
Policy, in each case as described below.
Excess Spread: Noteholders will be
protected against Liquidation Loss
Amounts as a result of the preferential
allocation to the Notes of Excess Spread
(defined herein), which will be
deposited into the Funding Account
during the Revolving Period or used to
make principal payments on the Notes
during the Amortization Periods, in each
case to the extent necessary to cover
Liquidation Loss Amounts.
Overcollateralization: Excess Spread, if
any, that is deposited in the Funding
Account and applied to acquire
Additional Balances and/or Subsequent
Mortgage Loans or used to make principal
payments on the Notes during the
Amortization Periods may result in
overcollateralization. The "OUTSTANDING
OVERCOLLATERALIZATION AMOUNT" will
equal, at any time, the amount, if any,
by which the outstanding Principal
Balance of the Mortgage Loans and
related property of the Issuer
(including the Pre-Funded Amount and
amounts on deposit in the Funding
Account) exceeds the aggregate
outstanding principal balance of the
Securities. The Outstanding
Overcollateralization Amount will
initially be equal to $0, and will be
increased by Excess Spread, if any, that
is deposited in the Funding Account and
applied to acquire Additional Balances
and/or Subsequent Mortgage Loans or used
to make principal payments on the Notes
during the Amortization Periods. The
Outstanding Overcollateralization
Amount, if any, will be available to
absorb any Liquidation Loss Amounts that
are not covered by Excess Spread. Any
Liquidation Loss Amounts that are not
covered either by Excess Spread or by
the Outstanding Overcollateralization
Amount will be covered by draws on the
Policy to the extent provided herein.
Initially, the Overcollateralization
Target Amount will be at least 1.7% of
the Note Balance. Thereafter, the
Overcollateralization Target Amount may
increase or decrease from time to time
pursuant to the terms of the Indenture.
Policy: On the Closing Date, the
Enhancer will issue a Policy in favor of
the Indenture Trustee on behalf of the
Issuer. The Policy will unconditionally
and irrevocably guarantee interest on
the Notes at the Note Rate (exclusive of
any Interest Shortfalls) plus any
Liquidation Loss Amounts allocated to
the Notes. On each Payment Date, a draw
will be made on the Policy to cover (i)
any shortfall in amounts available to
make payments of interest on the Notes
at the Note Rate and (ii) any
Liquidation Loss Amount to the extent
not currently covered by Excess Spread
or by the availability of
overcollateralization. Interest
Shortfalls will not be covered by the
Policy. See "Description of the Policy"
herein and "Enhancement" in the
Prospectus.
The Enhancer ........................ Ambac Assurance Corporation, a
Wisconsin-domiciled stock insurance
corporation. See "The Enhancer" herein.
Optional Redemption ................. A principal payment may be made in
redemption of the Term Notes upon the
exercise by the Servicer of its option
to purchase the Mortgage Loans and
related assets of the Trust Estate after
the aggregate Term Note Balance is
reduced to an amount less than or equal
to 10% of the initial Term Note Balance.
The purchase price payable by the
Servicer for such Mortgage Loans will be
the sum of (i) the aggregate outstanding
Principal Balance of the Mortgage Loans,
plus accrued and unpaid interest thereon
at the weighted average of the net Loan
Rates of such Mortgage Loans through the
day preceding the Payment Date on which
such purchase occurs, (ii) an amount
equal to any Interest Shortfalls plus
accrued and unpaid interest thereon, and
(iii) all amounts due and owing the
Enhancer.
Final Payment of Principal
on the Notes ........................ The Notes will be payable in full on the
Payment Date in September 2028 (the
"FINAL PAYMENT DATE") to the extent of
the outstanding Note Balance on such
date, if any. In addition, the Issuer
will pay the Notes in full upon the
exercise by the Servicer of its option
to purchase all Mortgage Loans and all
property acquired in respect of such
Mortgage Loans. See "Description of the
Securities--Maturity and Optional
Redemption" herein and "The
Agreements--Termination--Indenture" in
the Prospectus.
Optional Removal of Certain
Mortgage Loans ...................... In certain instances in which a
Mortgagor either (i) requests an
increase in the credit limit on the
related HELOC above the limit stated on
the Credit Line Agreement, (ii) requests
to place a lien on the related Mortgaged
Property senior to the lien of the
related Mortgage Loan, or (iii)
refinances the senior lien resulting in
a Combined Loan-to-Value Ratio above the
previous Combined Loan-to-Value Ratio
for such loan, the Servicer will have
the option to purchase from the Trust
Estate the related HELOC at a price
equal to the Repurchase Price (as
defined herein).
ERISA Considerations ................ The Term Notes are eligible for purchase
by pension, profit-sharing or other
employee benefit plans as well as
individual retirement accounts and
certain types of Keogh Plans (each, a
"PLAN"). However, any fiduciary or other
investor of assets of a Plan that
proposes to acquire or hold the Term
Notes on behalf of or with assets of any
Plan should consult with its counsel
with respect to the potential
applicability of the fiduciary
responsibility provisions of ERISA and
the prohibited transaction provisions of
ERISA and the Code to the proposed
investment. See "ERISA Considerations"
herein and in the Prospectus.
Certain Federal Income
Tax Considerations .................. In the opinion of Brown & Wood LLP,
special tax counsel to the Depositor,
for federal income tax purposes, the
Term Notes will be characterized as
indebtedness, and the Issuer, as created
and governed pursuant to the terms and
conditions of the Trust Agreement, will
not be characterized as an association
(or a publicly traded partnership)
taxable as a corporation for federal
income tax purposes, or as a "taxable
mortgage pool" within the meaning of
Section 7701(i) of the Internal Revenue
Code of 1986, as amended. In addition,
each Noteholder, by its acceptance of a
Note, will agree to treat such Note as
debt for federal, state and local tax
purposes.
For further information regarding
certain income tax considerations in
respect of an investment in the Term
Notes, see "Certain Federal Income Tax
Considerations" herein and in the
Prospectus and "State Tax
Considerations" in the Prospectus.
Legal Investment .................... The Term Notes will not constitute
"mortgage related securities" for
purposes of the Secondary Mortgage
Market Enhancement Act of 1984, as
amended, because the Trust Estate
includes Mortgage Loans secured by
subordinate liens on the related
Mortgaged Properties. Institutions the
investment activities of which are
subject to legal investment laws and
regulations or to review by certain
regulatory authorities may be subject to
restrictions on investment in the Term
Notes. See "Legal Investment" herein.
Ratings ............................. It is a condition to the issuance of the
Term Notes that they be rated at least
"Aaa" by Moody's and "AAA" by Standard &
Poor's. 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 organization. A
security rating does not address the
frequency of prepayments of, or draws
on, the Mortgage Loans, the likelihood
of the receipt of any amounts in respect
of Interest Shortfalls or any
corresponding effect on the yield to
investors. See "Yield and Prepayment
Considerations" and "Ratings" herein.
<PAGE>
RISK FACTORS
Prospective Term Noteholders should consider, among other things, the
items discussed under "Risk Factors" beginning on page 18 of the Prospectus and
the following factors in connection with the purchase of the Term Notes.
ADEQUACY OF THE MORTGAGED PROPERTIES AS SECURITY FOR THE MORTGAGE LOANS
Although the Mortgage Loans are secured by liens on Mortgaged
Properties, such collateral may not provide assurance of repayment of the
Mortgage Loans comparable to that provided under many first lien lending
programs, and the Mortgage Loans (especially those with high CLTVs) may have
risk of repayment characteristics more similar to unsecured consumer loans.
Approximately 92.833% (by Cut-Off Date Pool Principal Balance) of the
Initial Mortgage Loans are secured by second or subsequent Mortgages that are
subordinate to the rights of the mortgagee under a senior mortgage or mortgages.
The proceeds from any liquidation, insurance or condemnation proceedings will be
available to satisfy the outstanding Principal Balance of such Mortgage Loans
secured by second or subsequent Mortgages only to the extent that the claims of
such senior mortgages have been satisfied in full, including any related
foreclosure costs. In circumstances where the Servicer determines that it would
be uneconomical to foreclose on the related Mortgaged Property, the Servicer may
write off the entire outstanding Principal Balance of the related Mortgage Loan.
The foregoing considerations will be particularly applicable to Mortgage Loans
secured by second or subsequent Mortgages that have high Combined Loan-to-Value
Ratios because, in such cases, the Servicer is more likely to determine that
foreclosure would be uneconomical. Any such losses will be borne by Noteholders
to the extent that the applicable credit enhancements were insufficient to
absorb such losses.
Defaults on Mortgage Loans are generally expected to occur with greater
frequency in their early years. The rate of default of Mortgage Loans secured by
junior Mortgages may be greater than that of Mortgage Loans secured by senior
Mortgages on comparable properties.
No assurance can be given that the values of the Mortgaged Properties
have remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in value, any such decline could extinguish the value of the
interest of a junior mortgagee in the Mortgaged Property before having any
adverse effect on the interest of the related senior mortgagees.
DEPENDENCY ON MORTGAGOR CREDIT
As a result of the foregoing considerations, the underwriting standards
and procedures applicable to the Mortgage Loans, as well as the repayment
prospects thereof, may be more dependent on the creditworthiness of the borrower
and less dependent on the adequacy of the Mortgaged Property as collateral than
would be the case under many first lien lending programs. As to the Mortgage
Loans, future changes in the borrower's economic circumstances will have a
significant effect on the likelihood of repayment, since additional draws on the
HELOCs may be made by the borrower in the future up to the applicable credit
limit. Although the HELOCs are generally subject to provisions whereby the
applicable credit limit may be reduced as a result of a material adverse change
in the borrower's economic circumstances, the Servicer generally will not
monitor for such changes and may not become aware of them until after the
borrower has defaulted. Under certain circumstances, a borrower with a HELOC may
draw his entire credit limit in response to personal financial needs resulting
from an adverse change in circumstances.
Under the home equity program of the Seller (the "GMACM HOME EQUITY
PROGRAM") relating to the HELOCs, Mortgagors are generally qualified based on an
assumed payment that reflects a Loan Rate significantly lower than the related
Maximum Loan Rate. The repayment of any HELOC may thus be dependent on the
ability of the related Mortgagor to make larger interest payments following the
adjustment of the Loan Rate thereof during the life of such HELOC.
Future changes in a borrower's economic circumstances may result from a
variety of unforeseeable personal factors, including loss of employment,
reduction in income, illness and divorce. Any increase in prevailing market
interest rates may adversely affect a borrower by increasing debt service on the
related HELOC or other similar debt of the borrower. In addition, changes in the
payment terms of any related senior mortgage loan may adversely affect the
borrower's ability to pay principal and interest on such senior mortgage loan.
For example, such changes may result if the senior mortgage loan is an
adjustable rate loan and the interest rate thereon increases, which may occur
with or without an increase in prevailing market interest rates if the increase
is due to the phasing out of a reduced initial rate. Specific information about
such senior mortgage loans, other than the amount thereof at origination of the
corresponding Mortgage Loan, is not available and is not included in this
Prospectus Supplement.
General economic conditions, both on a national and regional basis,
will also have an impact on the ability of borrowers to repay their Mortgage
Loans. 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. For example, a region's economic
condition and housing market may be directly, or indirectly, adversely affected
by natural disasters or civil disturbances such as earthquakes, hurricanes,
floods, eruptions or riots. The economic impact of any of these types of events
may also be felt in areas beyond the region immediately affected by the disaster
or disturbance. The Mortgage Loans 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. Investors should note that approximately 28.49% and 15.53% (by
Cut-Off Date Pool Principal Balance) of the Initial Mortgage Loans are secured
by Mortgaged Properties located in the States of California and Michigan,
respectively. In addition, any change in the deductibility for federal income
tax purposes of interest payments on home equity loans may also have an impact
on the ability of borrowers to repay their Mortgage Loans.
INTEREST-ONLY FEATURE FOR HELOCS
As to approximately 83.73% (by Cut-Off Date Balance) of the Initial
HELOCs, borrowers are not required to make any principal payments until the
maturity of such loans (the "BALLOON LOANS"). As a result, a borrower generally
will be required to pay the entire remaining principal amount of the HELOC at
its maturity. The ability of a borrower to make such a payment may depend on the
ability of the borrower to obtain refinancing of the balance due on the HELOC or
to sell the related Mortgaged Property. An increase in interest rates over the
Loan Rate applicable at the time the HELOC was originated may have an adverse
effect on the borrower's ability to obtain refinancing, to pay the required
monthly payment or to pay the balance of the HELOC at its maturity. Collections
on the HELOCs may also vary due to seasonal purchasing and payment habits of
borrowers.
In the case of Balloon Loans, the required minimum monthly payments on
such HELOCs will not amortize the outstanding principal amount of such HELOCs
prior to maturity, which amount may include substantial draws recently made.
Furthermore, HELOCs generally have adjustable rates that are subject to much
higher maximum rates than typically apply to adjustable rate first mortgage
loans, and which may be as high as applicable usury limitations. Borrowers under
such HELOCs are generally qualified based on an assumed payment which reflects
either the initial interest rate or a rate significantly lower than the maximum
rate.
With respect to certain HELOCs, general credit risk may also be greater
to Noteholders than to holders of instruments representing interests solely in
level payment first mortgage loans since no payment of principal generally is
required until after either a five, ten or fifteen year Draw Period under the
related Credit Line Agreements. Minimum monthly payments will at least equal and
may exceed accrued interest. Even assuming that the Mortgaged Properties provide
adequate security for the HELOCs, substantial delays could be encountered in
connection with the liquidation of HELOCs that are delinquent and resulting
shortfalls in payments to Noteholders could occur if the credit support
described herein were insufficient to absorb such losses. Further, liquidation
expenses (such as legal fees, real estate taxes, and maintenance and
preservation expenses) will reduce the liquidation proceeds otherwise payable to
Noteholders. In the event any Mortgaged Property fails to provide adequate
security for the related Mortgage Loan, any losses in connection therewith will
be borne by Noteholders to the extent that the applicable credit enhancements
were insufficient to absorb such losses.
RISK OF LOAN RATES REDUCING THE NOTE RATE ON THE TERM NOTES
The Note Rate on the Term Notes will be a floating rate equal to the
least of (i) LIBOR plus 0.22% per annum (or, on any Payment Date on which the
aggregate Term Note Balance is less than 10% of the initial aggregate Term Note
Balance, LIBOR plus 0.44% per annum), (ii) the Net Loan Rate, as described
herein under "Description of the Securities--Interest Payments on the Notes",
and (iii) 14.5% per annum. The Loan Rates of the HELs are fixed and do not
adjust. As a result, if one-month LIBOR rises, the foregoing limitations on the
Note Rate could result in Term Noteholders receiving interest at a rate less
than LIBOR plus the specified margin. In addition, the weighted average Loan
Rate of the Mortgage Loans will change, and may decrease, over time due to
scheduled amortization of the Mortgage Loans, prepayments of Mortgage Loans,
transfers to the Issuer of Subsequent Mortgage Loans and removal of Mortgage
Loans by the Seller. There can be no assurance that the weighted average Loan
Rate of the Mortgage Loans will not decrease after the Closing Date.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of the Term Notes will depend on the rate and
timing of principal payments (including payments in excess of required
installments, prepayments or terminations, liquidations and repurchases) on the
Mortgage Loans, the rate and timing of draws on the related HELOCs, and the
price paid by the holders of the Term Notes. Such yield may be adversely
affected by a higher or lower than anticipated rate of principal payments or
draws on the related HELOCs. The Mortgage Loans may be prepaid in full or in
part without penalty. The yield to maturity of the Term Notes will also be
affected by the rate and timing of defaults on the Mortgage Loans.
During the Revolving Period, if the Seller does not sell a sufficient
amount of Additional Balances and/or Subsequent Mortgage Loans to the Issuer,
amounts on deposit in the Funding Account will not be fully applied to the
purchase of Additional Balances and Subsequent Mortgage Loans by the Issuer by
the end of the Revolving Period. Such remaining amounts will be paid to the
Noteholders as principal on the first Payment Date following the end of the
Revolving Period. See "Yield and Prepayment Considerations" herein.
LIMITATIONS ON REPURCHASE OR REPLACEMENT OF DEFECTIVE MORTGAGE LOANS BY THE
SELLER
No assurance can be given that, at any particular time, the Seller will
be capable, financially or otherwise, of repurchasing or replacing Defective
Mortgage Loans as described herein. If the Seller repurchases or is obligated to
repurchase defective mortgage loans from any other series of asset backed
securities, the financial ability of the Seller to repurchase Defective Mortgage
Loans from the Issuer may be adversely affected. In addition, other events
relating to the Seller and its operations could occur that would adversely
affect the financial ability of the Seller to repurchase Defective Mortgage
Loans from the Issuer, including, without limitation, the termination of
borrowing arrangements that provide the Seller with funding for its operations,
or the sale or other disposition of all or any significant portion of the
Seller's assets. If the Seller does not repurchase or replace a Defective
Mortgage Loan, then the Servicer, on behalf of the Issuer, will make other
customary and reasonable efforts to recover the maximum amount possible with
respect to such Defective Mortgage Loan, and any resulting delay or loss will be
borne by the Noteholders, to the extent not covered by the related credit
enhancements.
VARIATIONS IN SUBSEQUENT MORTGAGE LOANS FROM INITIAL MORTGAGE LOANS
Each Subsequent Mortgage Loan will satisfy the eligibility criteria
referred to herein at the time of its conveyance to the Issuer. However,
Subsequent Mortgage Loans may be originated or acquired by the Seller using
credit criteria different from those applied to the Initial Mortgage Loans and
may be of a different credit quality. Therefore, following the transfer of
Subsequent Mortgage Loans to the Issuer, the aggregate characteristics of the
Mortgage Loans then part of the Trust Estate may vary from those of the Initial
Mortgage Loans. See "Description of the Mortgage Loans--Conveyance of Subsequent
Mortgage Loans, the Pre-Funding Account and the Funding Account".
LEGAL CONSIDERATIONS
The Mortgage Loans are secured by Mortgages. With respect to Mortgage
Loans that are secured by first Mortgages, the Servicer has the power under
certain circumstances to consent to a new mortgage lien on the related Mortgaged
Property having priority over such Mortgage. Mortgage Loans secured by second or
subsequent Mortgages are entitled to proceeds that remain from the sale of the
related Mortgaged Property after any senior mortgage loans and prior statutory
liens have been satisfied. In the event that such proceeds are insufficient to
satisfy such senior loans and prior liens in the aggregate, the Issuer, and
accordingly, the Noteholders, bear (i) the risk of delay in distributions while
a deficiency judgment (to the extent available in the related state) against the
related Mortgagor 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.
In the event of an insolvency of the Seller, the receiver of the Seller
may attempt to recharacterize the Seller's sale of the Mortgage Loans as a
borrowing by the Seller secured by a pledge of the Mortgage Loans. If the
receiver decided to challenge such transfer, delays in payments on the Term
Notes and possible reductions in the amount thereof could occur. The Depositor
will warrant that the transfer of its interest in the Mortgage Loans to the
Issuer 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 insolvency of the Seller were to occur,
Additional Balances and Subsequent Mortgage Loans would no longer be transferred
by the Seller to the Depositor pursuant to the Purchase Agreement. In such an
event, an Event of Default under the Trust Agreement and the Indenture would
occur, and the Owner Trustee would attempt to sell the Mortgage Loans (unless
the Enhancer or Holders of Securities evidencing undivided interests aggregating
at least 51% of the aggregate outstanding principal balance of the Securities
instruct otherwise), thereby causing early payment of the Term Note Balance of
the Term Notes.
In the event of a bankruptcy or insolvency of the Servicer, the related
bankruptcy trustee or receiver may have the power to prevent the appointment of
a successor Servicer.
REPURCHASE OPTION OF THE SERVICER
In certain instances in which a Mortgagor either (i) requests an
increase in the credit limit on the related HELOC above the limit stated in the
Credit Line Agreement, (ii) requests to place a lien on the related Mortgaged
Property senior to the lien of the related Mortgage Loan, or (iii) refinances
the senior lien resulting in a Combined Loan-to-Value Ratio above the previous
Combined Loan-to-Value Ratio for such loan, the Servicer will have the option to
purchase from the Trust Estate the related Mortgage Loan at a price equal to the
Repurchase Price. There are no limitations on the frequency of such repurchases
or the characteristics of the Mortgage Loans so repurchased. Such repurchases
may lead to an increase in prepayments on the Mortgage Loans, which may reduce
the yield on the Term Notes. In addition, such repurchases may affect the
characteristics of the Mortgage Loans in the aggregate with respect to Loan
Rates and credit quality.
LIMITATIONS AND REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT
Credit enhancement will be provided for the Term Notes in the form of
(i) Excess Spread (representing excess interest collections, if available), (ii)
overcollateralization and (iii) the Policy, to the limited extent described
herein. None of the Seller, the Depositor, the Servicer or any of their
respective affiliates will be required to take any other action to maintain, or
have any obligation to replace or supplement, such credit enhancement or any
rating of the Term Notes. To the extent that losses are incurred on the Mortgage
Loans that are not covered by Excess Spread, overcollateralization or the
Policy, Securityholders (including the Term Noteholders) will bear the risk of
such losses.
SOCIAL, ECONOMIC AND OTHER FACTORS
The ability of the Issuer to purchase Subsequent Mortgage Loans is
largely dependent upon whether mortgagors perform their payment and other
obligations required by the related mortgage loans in order that such mortgage
loans meet the specified requirements for transfer on a Subsequent Transfer Date
as a Subsequent Mortgage Loan. The performance by such mortgagors may be
affected as a result of 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. However, no prediction can
be made whether or to what extent economic or social factors will affect the
performance by such mortgagors and the availability of Subsequent Mortgage
Loans.
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
The statistical information presented in this Prospectus Supplement
relates to the Initial Mortgage Loans only as of the Cut-Off Date. Unless
otherwise indicated, all percentages set forth in this Prospectus Supplement are
based upon the Cut-Off Date Balances. The Subsequent Mortgage Loans will be
selected using generally the same criteria as that used to select the Initial
Mortgage Loans, and generally the same representations and warranties will be
made with respect thereto. See "Description of the Mortgage Loans--Conveyance of
Subsequent Mortgage Loans, the Pre-Funding Account and the Funding Account"
herein
With respect to each HELOC, the "COMBINED LOAN-TO-VALUE RATIO" or
"CLTV" generally will be the ratio, expressed as a percentage, of the sum of (i)
the Credit Limit and (ii) any outstanding principal balance, at origination of
such HELOC, of all other mortgage loans, if any, secured by senior or
subordinate liens on the related Mortgaged Property, to the Appraised Value, or,
when not available, the Stated Value. With respect to each HELOC, the "JUNIOR
RATIO" generally will be the ratio, expressed as a percentage, of the Credit
Limit of such HELOC to the sum of (i) the greater of the Cut-Off Date Balance or
the Credit Limit, if applicable, of such HELOC and (ii) the principal balance of
any related senior mortgage loan at origination of such HELOC. The "CREDIT
UTILIZATION RATE" is determined by dividing the Cut-Off Date Balance of a HELOC
by the Credit Limit of the related Credit Line Agreement. The "APPRAISED VALUE"
for any HELOC will be the appraised value of the related Mortgaged Property
determined in the appraisal used in the origination of such HELOC (which may
have been obtained at an earlier time); provided that if such HELOC was
originated simultaneously with or not more than twelve months after a senior
lien on the related Mortgaged Property, the Appraised Value shall be the lesser
of the appraised value at the origination of the senior lien and the sales price
for such Mortgaged Property; provided, that with respect to any HELOC originated
not more than twelve months after a senior lien was originated on the related
Mortgaged Property, the Appraised Value will be the appraised value at the time
of origination of the senior lien. However, with respect to not more than 9.38%
of the Initial HELOCs for which the documentation type is known, the "STATED
VALUE" will be based on the stated value of the Mortgaged Property given by the
related Mortgagor in his or her application. See "Description of the Mortgage
Loans--Underwriting Standards" herein.
With respect to each HEL, the Combined Loan-to-Value Ratio generally
will be the ratio, expressed as a percentage, of the sum of (i) the initial
principal balance of such HEL and (ii) any outstanding principal balance, at
origination of such HEL, of all other mortgage loans, if any, secured by senior
or subordinate liens on the related Mortgaged Property, to the Appraised Value,
or, when not available, the Stated Value. The Appraised Value for any HEL will
be the appraised value of the related Mortgaged Property determined in the
appraisal used in the origination of such HEL (which may have been obtained at
an earlier time); provided, that if such HEL was originated simultaneously with
a senior lien on the related Mortgaged Property, the Appraised Value shall be
the lesser of the appraised value at the origination of the senior lien and the
sales price for such Mortgaged Property; and provided, further that with respect
to any HEL originated not more than twelve months after a senior lien was
originated on the related Mortgaged Property, the Appraised Value will be the
appraised value at the time of origination of the senior lien. However, with
respect to not more than 25.37% of the Initial HELs for which the documentation
type is known, the Stated Value will be based on the stated value of the
Mortgaged Property given by the related Mortgagor in his or her application. See
"Description of the Mortgage Loans--Underwriting Standards" herein.
INITIAL HELOCS
The Initial HELOCs were originated or acquired by the Seller, no more
than 90.02% (by Cut-Off Date Balance) of which are secured by second or
subsequent mortgages or deeds of trust and the remainder of which by first
mortgages or deeds of trust. The Mortgaged Properties securing the Initial
HELOCs consist primarily of residential properties. As to 100.00% of the Initial
HELOCs, the borrower represented at the time of origination that the related
Mortgaged Property would be owner occupied as a primary or second home.
All percentages of the Initial HELOCs described herein are approximate
percentages determined (except as otherwise indicated) by the aggregate Cut-Off
Date Balance of the Initial HELOCs.
The Cut-Off Date Balance of the Initial HELOCs is $65,888,193.28. As of
the Cut-Off Date, no Initial HELOC will be 30 days or more delinquent. With
respect to the Initial HELOCs, the average Cut-Off Date Balance is approximately
$23,641.26, the minimum Cut-Off Date Balance is $1,000.00, the maximum Cut-Off
Date Balance is $350,000.00, the lowest Loan Rate and the highest Loan Rate on
the Cut-Off Date is 4.160% and 13.000% per annum, respectively, and the weighted
average Loan Rate on the Cut-Off Date is approximately 8.008% per annum. The
maximum Combined Loan-to-Value Ratio as of the Cut-Off Date is 100.00% and the
weighted average Combined Loan-to-Value Ratio based on the Cut-Off Date Balance
of the Initial HELOCs will be approximately 80.49% as of the Cut-Off Date. The
weighted average Credit Utilization Rate based on the Cut-Off Date Balance of
the Initial HELOCs is approximately 60.02% as of the Cut-Off Date. The weighted
average Junior Ratio based on the Cut-Off Date Balance of the Initial HELOCs is
approximately 25.48% as of the Cut-Off Date. The latest scheduled maturity of
any Initial HELOC is December 2023. With respect to 27.20% and 20.65% of the
Initial HELOCs, the related Mortgaged Properties are located in the States of
California and Michigan, respectively.
LOAN TERMS OF THE HELOCS
Interest on each HELOC is calculated based on the average daily balance
outstanding during the Billing Cycle, and with respect to each HELOC, the
"BILLING CYCLE" is the calendar month preceding the related due date.
Each HELOC has a Loan Rate that is subject to adjustment on each day
(each such day, an "ADJUSTMENT Date") to equal the sum of (a) an index (the
"INDEX") which is the prime rate (or high point in a range of prime rates)
published in the "Money Rate" column of The Wall Street Journal and (b) the
Gross Margin specified in the related Credit Line Agreement, provided, however,
that the Loan Rate on each Initial HELOC will in no event be greater than the
maximum Loan Rate (the "MAXIMUM LOAN RATE") set forth in the related Credit Line
Agreement (subject to the maximum rate permitted by applicable law).
As of the Cut-Off Date, 80.14% of the Initial HELOCs have a Loan Rate
below the rate equal to the sum of the related Index and the Gross Margin (such
rate, the "TEASER RATE"), which is in effect during the first 6 months of the
term of the loan. With respect to 73.38% of the Initial HELOCs, the Teaser Rate
will be equal to the Prime Rate less 1.00%.
With respect to 8.25% of the Initial HELOCs, the Gross Margin is
adjustable from time to time based on the then outstanding balance and Combined
Loan-to-Value Ratio generally as follows:
GROSS MARGINS
CLTV NOT CLTV
OUTSTANDING BALANCE MORE THAN 80% MORE THAN 80%
------------------- ------------- -------------
$25,000 or less 2.00% 3.00%
$25,001 to $50,000 1.75% 2.75%
$50,001 or more 1.50% 2.50%
The Gross Margins with respect to the Initial HELOCs may be reduced
below the applicable levels indicated above by 0.25% or by 0.50% in certain
instances based on specific employee status with General Motors Corporation
("GM") or its subsidiaries at the time of origination of the Initial HELOC (with
no adjustment in the event of any change in such status of the borrower).
Each Initial HELOC had a term to maturity from the date of origination
of not more than 300 months (the "25-YEAR LOANS"), 180 months (the "15-YEAR
LOANS"), 120 months (the "10-YEAR LOANS") or 60 months (the "5-YEAR LOANS"). The
related mortgagor (the "MORTGAGOR") for each Initial HELOC may make a draw at
any time during the period stated in the related Credit Line Agreement (the
"DRAW PERIOD"). In addition, with respect to certain of the Initial HELOCs, the
related Mortgagor will not be permitted to make any draw during the time period
stated in the related Credit Line Agreement (the "REPAYMENT PERIOD"). The Draw
Period and the Repayment Period vary for the Initial HELOCs based on such loan's
Combined Loan-to-Value ratio at origination, State of origination and original
term to maturity. The 25-Year Loans have a Draw Period of 15 years and a
Repayment Period of 10 years. With respect to 15-Year Loans and 10-Year Loans
with Combined Loan-to-Value Ratios of 90% or less, the Draw Period will be at
any time during the term of the loan and there will be no Repayment Period,
except with respect to 2.33% of the Initial HELOCs, all of which were originated
in the Commonwealth of Massachusetts, and except with respect to 0.04% of the
Initial HELOCs, all of which were originated in the State of Connecticut prior
to January 1996, which will have a Draw Period of the first 5 years of the loan
and will have a Repayment Period for the last 5 years of the loan with respect
to such 10-Year Loans and a Draw Period for the first 10 years of the loan and a
Repayment Period for the last 5 years with respect to such 15-Year Loans. With
respect to 0.004% of the Initial HELOCs, all of which are 10-Year Loans with
Combined Loan-to-Value Ratios greater than 90%, and all of which were originated
prior to September 3, 1997, the Draw Period will be the first 5 years of the
term of the loan, and the Repayment Period will be the final 5 years of the
loan. With respect to 2.644% of the 10-Year Loans with Combined Loan-to-Value
Ratios greater than 90%, all of which were originated on or after September 3,
1997, the Draw Period will be 10 years and there will be no Repayment Period.
With respect to the 5-Year Loans, the Draw Period will be 5 years and there will
be no Repayment Period.
The maximum amount of each draw with respect to any HELOC is equal to
the excess, if any, of the Credit Limit over the outstanding principal balance
under such Credit Line Agreement at the time of such draw. Each HELOC may be
prepaid in full or in part at any time and without penalty, but with respect to
each HELOC, the related Mortgagor will have the right during the related Draw
Period to make a draw in the amount of any prepayment theretofore made with
respect to such HELOC. Each Mortgagor generally will have access to make draws
by check, subject to applicable law. Generally, the Credit Line Agreement or
Mortgage related to each HELOC will, subject to applicable law, contain a
customary "due-on-sale" clause.
As to each HELOC, the Mortgagor's right to receive draws during the
Draw Period may be suspended, or the Credit Limit may be reduced, for cause
under a number of circumstances, including, but not limited to: a materially
adverse change in the Mortgagor's financial circumstances; a decline in the
value of the Mortgaged Property significantly below its appraised value at
origination; or a payment default by the Mortgagor. However, generally such
suspension or reduction will not affect the payment terms for previously drawn
balances. The Servicer will have no obligation to investigate as to whether any
such circumstances have occurred and may have no knowledge thereof; therefore
there can be no assurance that any Mortgagor's ability to receive draws will be
suspended or reduced in the event that the foregoing circumstances occur. In the
event of default under a HELOC, the HELOC may be terminated and declared
immediately due and payable in full. For this purpose, a default includes, but
is not limited to: the Mortgagor's failure to make any payment as required; any
action or inaction by the Mortgagor that adversely affects the Mortgaged
Property or the rights in the Mortgaged Property; or fraud or material
misrepresentation by a Mortgagor in connection with the HELOC.
Prior to the related Repayment Period or prior to the date of maturity
for loans without Repayment Periods, the Mortgagor for each HELOC will be
obligated to make monthly payments thereon in a minimum amount that generally
will be equal to the Finance Charge (as defined below) for such Billing Cycle.
Except as described below, if such loan has a Repayment Period, during such
period, the Mortgagor will be obligated to make monthly payments consisting of
principal installments which would substantially amortize the Principal Balance
by the maturity date, plus current Finance Charges and Additional Charges (as
defined below). In addition, certain Mortgagors will be required to pay an
annual fee of up to $35.
Notwithstanding the foregoing, with respect to the Balloon Loans,
representing 83.73% of the Initial HELOCs, the Mortgagor will be obligated to
make a payment on the related maturity date in an amount equal to the related
Account Balance (as defined below). Such Balloon Loans will not have a Repayment
Period and prior to the related maturity date, the related Mortgagors will be
obligated to make minimum monthly payments generally similar to those described
in the first sentence of the preceding paragraph. See "Risk
Factors--Interest-Only Feature for HELOCs" herein.
With respect to each HELOC, (a) the "FINANCE CHARGE" for any Billing
Cycle will be an amount equal to the aggregate of, as calculated for each day in
the Billing Cycle, the then-applicable Loan Rate divided by 365 multiplied by
the daily Principal Balance and (b) the "ACCOUNT BALANCE" on any day generally
will be the aggregate of the unpaid principal of the HELOC outstanding at the
beginning of such day, plus the sum of any unpaid fees, insurance premiums and
other charges, if any (collectively, "ADDITIONAL CHARGES") and any unpaid
Finance Charges that are due on such HELOC, plus the aggregate of all related
draws funded on such day, minus the aggregate of all payments and credits that
are applied to the repayment of any such draws on such day. Payments made by or
on behalf of the Mortgagor for each HELOC will be applied to any unpaid Finance
Charges that are due thereon, prior to application, to any unpaid principal
outstanding.
0.04% of the Initial HELOCs are insured by mortgage insurance policies
covering all or a portion of any losses on each such loan, subject to certain
limitations.
INITIAL HELOC CHARACTERISTICS
Set forth below is a description of certain additional characteristics
of the Initial HELOCs as of the Cut-Off Date. Unless otherwise specified, all
principal balances of the Initial HELOCs are as of the Cut-Off Date and are
rounded to the nearest dollar. All percentages are approximate percentages by
the aggregate Cut-Off Date Balance of the Initial HELOCs (except as indicated
otherwise).
<PAGE>
<TABLE>
<CAPTION>
PROPERTY TYPE
<S> <C> <C> <C>
PERCENT OF
NUMBER OF CUT-OFF INITIAL HELOCS BY
PROPERTY TYPE INITIAL HELOCS DATE BALANCE CUT-OFF DATE BALANCE
- ------------- -------------- ------------ --------------------
Single-Family Dwelling.................... 2,495 $59,312,375.09 90.02%
Planned Unit Development.................. 157 4,033,571.69 6.12
Condominium............................... 108 1,948,438.92 2.96
Two to Four Family........................ 22 505,305.27 0.77
Multi-Family.............................. 1 45,000.00 0.07
Manufactured.............................. 4 43,502.31 0.07
----- -------------- ------
Totals............. 2,787 $65,888,193.28 100.00%
===== ============== ======
</TABLE>
<TABLE>
<CAPTION>
OCCUPANCY TYPES
<S> <C> <C> <C>
PERCENT OF
OCCUPANCY NUMBER OF CUT-OFF INITIAL HELOCS BY
(AS INDICATED BY BORROWER) INITIAL HELOCS DATE BALANCE CUT-OFF DATE BALANCE
- -------------------------- -------------- ------------ --------------------
Owner occupied............................ 2,761 $65,045,588.57 98.72%
Non-owner occupied........................ 26 842,604.71 1.28
----- -------------- ------
Totals............. 2,787 $65,888,193.28 100.00%
===== ============== ======
</TABLE>
<TABLE>
<CAPTION>
DOCUMENTATION TYPE
<S> <C> <C> <C>
PERCENT OF
NUMBER OF CUT-OFF INITIAL HELOCS BY
DOCUMENTATION INITIAL HELOCS DATE BALANCE CUT-OFF DATE BALANCE
- ------------- -------------- ------------ --------------------
Standard................................... 1,892 $44,007,286.43 66.79%
Family First Direct........................ 310 7,372,186.03 11.19
Select..................................... 116 4,097,223.14 6.22
No Income No Appraisal..................... 120 2,082,096.04 3.16
No Income Verification..................... 62 1,608,496.11 2.44
Super Express.............................. 54 1,327,491.95 2.01
Quick...................................... 9 317,608.03 0.48
Other...................................... 224 5,075,805.55 7.70
------ ---------------- --------
Totals...................... 2,787 $65,888,193.28 100.00%
===== ============== ======
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES
<S> <C> <C> <C>
PERCENT OF
NUMBER OF CUT-OFF INITIAL HELOCS BY
RANGE OF PRINCIPAL BALANCES ($) INITIAL HELOCS DATE BALANCE CUT-OFF DATE BALANCE
- ------------------------------- -------------- ------------ --------------------
0.00 to 25,000.00............ 1,918 $24,264,600.52 36.83%
25,000.01 to 50,000.00............ 638 22,537,803.30 34.21
50,000.01 to 75,000.00............ 140 8,525,117.50 12.94
75,000.01 to 100,000.00............ 56 4,986,920.09 7.57
100,000.01 to 125,000.00............ 15 1,695,132.54 2.57
125,000.01 to 150,000.00............ 6 844,685.72 1.28
150,000.01 to 175,000.00............ 4 656,359.08 1.00
175,000.01 to 200,000.00............ 5 972,574.53 1.48
200,000.01 to 225,000.00............ 1 217,000.00 0.33
225,000.01 to 250,000.00............ 2 488,000.00 0.74
325,000.01 to 350,000.00............ 2 700,000.00 1.06
-------- ------------------ --------
Totals.............. 2,787 $65,888,193.28 100.00%
===== ============== ======
The average Principal Balance as of the Cut-Off Date is approximately $23,641.26.
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHICAL DISTRIBUTIONS
<S> <C> <C> <C>
PERCENT OF
NUMBER OF CUT-OFF INITIAL HELOCS BY
STATE INITIAL HELOCS DATE BALANCE CUT-OFF DATE BALANCE
- ----- -------------- ------------ --------------------
California.................................... 615 $17,924,081.95 27.20%
Michigan...................................... 609 13,608,058.59 20.65
New Jersey.................................... 136 3,246,343.65 4.93
Illinois...................................... 100 2,339,794.15 3.55
New York...................................... 98 2,336,501.03 3.55
Pennsylvania.................................. 116 2,320,692.97 3.52
Washington.................................... 97 2,073,955.63 3.15
Other......................................... 1,016 22,038,765.31 33.45
----- ---------------- -------
Totals.................. 2,787 $65,888,193.28 100.00%
===== ============== ======
</TABLE>
<TABLE>
<CAPTION>
COMBINED LOAN-TO-VALUE RATIOS
<S> <C> <C> <C>
PERCENT OF
RANGE OF COMBINED NUMBER OF CUT-OFF INITIAL HELOCS BY
LOAN-TO-VALUE RATIOS(%) INITIAL HELOCS DATE BALANCE CUT-OFF DATE BALANCE
- ----------------------- -------------- ------------ --------------------
0.000 to 50.000.................... 123 $ 3,265,342.40 4.96%
50.001 to 55.000.................... 27 676,600.42 1.03
55.001 to 60.000.................... 47 1,288,693.56 1.96
60.001 to 65.000.................... 65 1,646,311.28 2.50
65.001 to 70.000.................... 113 3,086,821.20 4.68
70.001 to 75.000.................... 185 4,612,678.96 7.00
75.001 to 80.000.................... 616 15,773,212.49 23.94
80.001 to 85.000.................... 155 3,473,408.87 5.27
85.001 to 90.000.................... 1,292 27,446,964.33 41.66
90.001 to 95.000.................... 76 2,350,480.12 3.57
95.001 to 100.000.................... 88 2,267,679.65 3.44
------- ---------------- --------
Totals................. 2,787 $65,888,193.28 100.00%
===== ============== ======
The minimum and maximum Combined Loan-to-Value Ratios of the HELOCs as of the Cut-Off Date are
approximately 6.67% and 100.00%, respectively, and the weighted average Combined Loan-to-Value Ratio of the HELOCs
as of the Cut-Off Date is approximately 80.49%.
</TABLE>
<TABLE>
<CAPTION>
JUNIOR RATIOS(1)(2)(3)
<S> <C> <C> <C>
PERCENT OF
NUMBER OF CUT-OFF INITIAL HELOCS BY
RANGE OF JUNIOR RATIOS (%) INITIAL HELOCS DATE BALANCE CUT-OFF DATE BALANCE
- -------------------------- -------------- ------------ --------------------
0.01 to 9.99...................... 210 $ 2,798,420.53 4.25%
10.00 to 19.99...................... 1,354 25,988,288.44 39.44
20.00 to 29.99...................... 530 13,115,487.92 19.91
30.00 to 39.99...................... 266 7,713,408.33 11.71
40.00 to 49.99...................... 145 4,428,023.27 6.72
50.00 to 59.99...................... 61 2,312,524.64 3.51
60.00 to 69.99...................... 35 1,475,423.09 2.24
70.00 to 79.99...................... 15 611,555.36 0.93
80.00 to 89.99...................... 10 626,255.37 0.95
90.00 to 99.99...................... 7 241,884.29 0.37
-------- ----------------- ------
Totals.................. 2,633 $59,311,271.24 90.02%
===== ============== =====
(1) The Junior Ratio of a HELOC is the ratio (expressed as a percentage) of the credit limit of such HELOC
to the sum of such credit limit and the outstanding balance of any senior mortgage computed as of the date such
HELOC is underwritten.
(2) The weighted average Junior Ratio of the HELOCs as of the Cut-Off Date is approximately 25.48%.
(3) The Junior Ratio table (and the weighted average Junior Ratio of the Initial HELOCs) does not include
any HELOCs secured by first mortgage liens.
</TABLE>
<TABLE>
<CAPTION>
LOAN RATES
<S> <C> <C> <C>
PERCENT OF
NUMBER OF CUT-OFF INITIAL HELOCS BY
RANGE OF LOAN RATES(%) INITIAL HELOCS DATE BALANCE CUT-OFF DATE BALANCE
- ---------------------- -------------- ------------ --------------------
4.001 to 6.000.................... 129 $ 3,756,946.55 5.70%
6.001 to 7.000.................... 4 69,453.86 0.11%
7.001 to 8.000.................... 2,004 48,668,499.57 73.87%
8.001 to 9.000.................... 43 1,279,115.94 1.94%
9.001 to 10.000.................... 204 3,795,275.87 5.76%
10.001 to 11.000.................... 251 4,979,696.75 7.56%
11.001 to 12.000.................... 128 2,683,996.03 4.07%
12.001 to 13.000.................... 24 655,208.71 0.99%
------- ------------------ --------
Totals................ 2,787 $65,888,193.28 100.00%
===== ============== ======
The weighted average Loan Rate of the Initial HELOCs as of the Cut-Off Date is approximately 8.008%.
</TABLE>
<TABLE>
<CAPTION>
FULLY INDEXED GROSS MARGIN
<S> <C> <C> <C>
PERCENT OF
RANGE OF FULLY INDEXED NUMBER OF CUT-OFF INITIAL HELOCS BY
GROSS MARGINS(%) INITIAL HELOCS DATE BALANCE CUT-OFF DATE BALANCE
- ---------------------- -------------- ------------ --------------------
0.000 to 1.000..................... 1,049 $27,463,764.50 41.68%
1.001 to 2.000..................... 1,379 28,694,360.70 43.55
2.001 to 3.000..................... 187 4,898,939.13 7.44
3.001 to 4.000..................... 165 4,618,461.89 7.01
Greater than 4.000..................... 7 212,667.06 0.32
-------- ----------------- --------
Totals............... 2,787 $65,888,193.28 100.00%
===== ============== ======
The weighted average fully indexed margin of the Initial HELOCs as of the Cut-Off Date is approximately
1.688% per annum.
</TABLE>
<TABLE>
<CAPTION>
CREDIT UTILIZATION RATES
<S> <C> <C> <C>
PERCENT OF
RANGE OF CREDIT NUMBER OF CUT-OFF INITIAL HELOCS BY
UTILIZATION RATES (%) INITIAL HELOCS DATE BALANCE CUT-OFF DATE BALANCE
- --------------------- -------------- ------------ --------------------
0.01 to 5.00...................... 40 $ 96,673.90 0.15%
5.01 to 10.00...................... 84 387,812.79 0.59
10.01 to 15.00...................... 119 815,587.99 1.24
15.01 to 20.00...................... 111 985,768.47 1.50
20.01 to 25.00...................... 108 1,006,311.76 1.53
25.01 to 30.00...................... 112 1,361,195.65 2.07
30.01 to 35.00...................... 100 1,499,296.94 2.28
35.01 to 40.00...................... 103 1,718,361.29 2.61
40.01 to 45.00...................... 86 1,299,371.11 1.97
45.01 to 50.00...................... 117 2,505,672.67 3.80
50.01 to 55.00...................... 90 1,574,897.64 2.39
55.01 to 60.00...................... 93 1,792,499.48 2.72
60.01 to 65.00...................... 85 1,966,090.17 2.98
65.01 to 70.00...................... 115 2,868,552.49 4.35
70.01 to 75.00...................... 96 2,378,345.46 3.61
75.01 to 80.00...................... 102 2,659,661.94 4.04
80.01 to 85.00...................... 91 2,665,392.92 4.05
85.01 to 90.00...................... 98 3,119,239.80 4.73
90.01 to 95.00...................... 145 3,911,301.54 5.94
95.01 to 100.00...................... 884 30,841,674.87 46.81
Greater than 100% 8 434,484.40 0.66
-------- ------------------ --------
Totals.................. 2,787 $65,888,193.28 100.00%
===== ============== ======
The weighted average Credit Utilization Rate based on the Cut-Off Date Credit Limit of the Initial HELOCs
as of the Cut-Off Date is approximately 60.02%.
</TABLE>
<TABLE>
<CAPTION>
CREDIT LIMITS
<S> <C> <C> <C>
PERCENT OF
NUMBER OF CUT-OFF INITIAL HELOCS BY
RANGE OF CREDIT LIMITS ($) INITIAL HELOCS DATE BALANCE CUT-OFF DATE BALANCE
- -------------------------- -------------- ------------ --------------------
0.01 to 25,000.00............. 1,178 $14,610,700.83 22.17%
25,000.01 to 50,000.00............. 1,074 25,392,643.77 38.54
50,000.01 to 75,000.00............. 235 9,083,774.73 13.79
75,000.01 to 100,000.00............. 219 9,200,425.54 13.96
100,000.01 to 125,000.00............. 20 1,315,389.13 2.00
125,000.01 to 150,000.00............. 21 1,800,501.33 2.73
150,000.01 to 175,000.00............. 12 1,064,780.24 1.62
175,000.01 to 200,000.00............. 6 559,699.85 0.85
200,000.01 to 225,000.00............. 9 793,985.79 1.21
225,000.01 to 250,000.00............. 9 1,130,238.76 1.72
325,000.01 to 350,000.00............. 2 700,000.00 1.06
425,000.01 to 450,000.00............. 1 47,209.84 0.07
Greater than $450,000.00............. 1 188,843.47 0.29
-------- ----------------- --------
Totals.............. 2,787 $65,888,193.28 100.00%
===== ============== ======
The weighted average of the Credit Limits of the Initial HELOCs as of the Cut-Off Date is approximately
$63,454.92.
</TABLE>
<TABLE>
<CAPTION>
MAXIMUM LOAN RATES
<S> <C> <C> <C>
PERCENT OF
NUMBER OF CUT-OFF INITIAL HELOCS BY
MAXIMUM LOAN RATES (%) INITIAL HELOCS DATE BALANCE CUT-OFF DATE BALANCE
- ---------------------- -------------- ------------ --------------------
15.001 to 16.000.................... 15 $ 337,482.33 0.51%
16.001 to 17.000.................... 9 245,361.94 0.37
17.001 to 18.000.................... 339 9,458,719.25 14.36
18.001 to 19.000.................... 2,417 55,723,598.16 84.57
Uncapped............................. 7 123,031.60 0.19
-------- ---------------- --------
Totals............... 2,787 $65,888,193.28 100.00%
===== ============== ======
The weighted average Maximum Loan Rate of the Initial HELOCs as of the Cut-Off Date is approximately
18.406%. For purposes of calculating the weighted average Maximum Loan Rate, uncapped HELOCs were excluded.
</TABLE>
<TABLE>
<CAPTION>
MONTHS REMAINING TO SCHEDULED MATURITY
<S> <C> <C> <C>
PERCENT OF
NUMBER OF CUT-OFF INITIAL HELOCS BY
RANGE OF MONTHS INITIAL HELOCS DATE BALANCE CUT-OFF DATE BALANCE
- --------------- -------------- ------------ --------------------
0 to 120............................ 2,450 $56,421,833.29 85.63%
121 to 180............................ 68 1,971,314.90 2.99
Greater than 180........................ 269 7,495,045.09 11.38
------ ---------------- -------
Totals......................... 2,787 $65,888,193.28 100.00%
===== ============== ======
The weighted average months remaining to scheduled maturity of the Initial HELOCs as of the Cut-Off Date
is approximately 138 months.
</TABLE>
<TABLE>
<CAPTION>
ORIGINATION YEAR
<S> <C> <C> <C>
PERCENT OF
ORIGINATION NUMBER OF CUT-OFF INITIAL HELOCS BY
YEAR INITIAL HELOCS DATE BALANCE CUT-OFF DATE BALANCE
- ----------- -------------- ------------ --------------------
1988........................................... 1 $ 10,000.00 0.02%
1990........................................... 3 44,843.03 0.07
1991........................................... 2 77,646.56 0.12
1992........................................... 7 210,676.48 0.32
1993........................................... 10 214,967.17 0.33
1994........................................... 9 137,554.48 0.21
1995........................................... 23 340,092.24 0.52
1996........................................... 39 772,491.35 1.17
1997........................................... 182 3,001,283.57 4.56
1998........................................... 2,511 $61,078,638.40 92.70
----- --------------- ------
Totals............................. 2,787 $65,888,193.28 100.00%
===== ============== ======
</TABLE>
<TABLE>
<CAPTION>
LIEN PRIORITY
<S> <C> <C> <C>
PERCENT OF
NUMBER OF CUT-OFF INITIAL HELOCS BY
LIEN POSITION INITIAL HELOCS DATE BALANCE CUT-OFF DATE BALANCE
- ------------- -------------- ------------ --------------------
First........................................ 154 $ 6,576,922.04 9.98%
Second....................................... 2,633 59,311,271.24 90.02
----- --------------- -------
Totals............................ 2,787 $65,888,193.28 100.00%
===== ============== ======
</TABLE>
<TABLE>
<CAPTION>
DEBT-TO-INCOME RATIOS
<S> <C> <C> <C>
PERCENT OF
RANGE OF DEBT-TO-INCOME NUMBER OF CUT-OFF INITIAL HELOCS BY
RATIOS (%) INITIAL HELOCS DATE BALANCE CUT-OFF DATE BALANCE
----------------------- -------------- ------------ --------------------
0.00 to 9.99....................... 13 $ 448,721.68 0.68%
10.00 to 19.99....................... 130 3,307,442.67 5.02
20.00 to 29.99....................... 595 13,913,817.09 21.12
30.00 to 39.99....................... 998 21,986,272.30 33.37
40.00 to 49.99....................... 848 20,839,329.32 31.63
50.00 to 59.99....................... 162 4,118,623.90 6.25
60.00 to 69.99....................... 41 1,273,986.32 1.93
------- ----------------- --------
Totals................ 2,787 $65,888,193.28 100.00%
===== ============== ======
</TABLE>
INITIAL HELS
The Initial HELs were originated by the Seller generally in accordance
with the underwriting standards of the Seller. The Initial HELs are fixed rate,
closed-end home equity loans evidenced by the related Mortgage Notes and secured
by Mortgages on the related Mortgaged Properties. No more than 96.60% of the
Initial HELs (by aggregate Cut-Off Date Balance) are secured by second or
subsequent mortgages or deeds of trust and the remainder are secured by first
mortgages or deeds of trust. The Mortgaged Properties securing the Initial HELs
consist primarily of residential properties. As to 99.98% of the Initial HELs,
the borrower represented at the time of origination that the related Mortgaged
Property would be owner occupied as a primary or second home.
All percentages of the Initial HELs described herein are approximate
percentages determined (except as otherwise indicated) by the aggregate Cut-Off
Date Balance of the Initial HELs.
The Cut-Off Date Balance of the Initial HELs is $49,253,182.05. As of
the Cut-Off Date, no Initial HEL will be 30 days or more delinquent. With
respect to the Initial HELs, the average Cut-Off Date Balance is approximately
$23,554.85, the minimum Cut-Off Date Balance is $1,912.56, the maximum Cut-Off
Date Balance is $150,636.65, the lowest Loan Rate and the highest Loan Rate on
the Cut-Off Date is 5.500% and 12.450% per annum, respectively, and the weighted
average Loan Rate on the Cut-Off Date is approximately 10.187% per annum. The
maximum Combined Loan-to-Value Ratio as of the Cut-Off Date is 100.00% and the
weighted average Combined Loan-to-Value Ratio based on the Cut-Off Date Balance
of the Initial HELs is approximately 77.51% as of the Cut-Off Date. The latest
scheduled maturity of any Initial HEL is June 2023. With respect to 30.21% and
8.67% of the Initial HELs, the related Mortgaged Properties are located in the
States of California and Michigan, respectively.
LOAN TERMS OF THE HELS
The Loan Rate of each Initial HEL is the per annum interest rate
required to be paid by the Mortgagor under the terms of the related Mortgage
Note. The Loan Rate borne by each Initial HEL is fixed as of the date of
origination of such Initial HEL.
Interest on each HEL is charged on that part of the principal which has
not been paid. Interest is charged from the date the loan is advanced until the
full amount of the principal has been paid. Interest on each HEL is calculated
on a daily basis. The amount of the daily interest is equal to the annual
interest rate divided by the number of days in the year times the outstanding
principal balance.
Each Initial HEL had a term to maturity from the date of origination of
not more than 300 months. The initial HELs provide for substantially equal
payments in an amount sufficient to amortize the HELs over their terms.
INITIAL HEL CHARACTERISTICS
Set forth below is a description of certain additional characteristics
of the Initial HELs as of the Cut-Off Date. Unless otherwise specified, all
principal balances of the Initial HELs are as of the Cut-Off Date and are
rounded to the nearest dollar. All percentages are approximate percentages by
the aggregate Cut-Off Date Balance of the Initial HELs (except as indicated
otherwise).
<TABLE>
<CAPTION>
PROPERTY TYPE
<S> <C> <C> <C>
PERCENT OF
NUMBER OF CUT-OFF INITIAL HELS BY
PROPERTY TYPE INITIAL HELS DATE BALANCE CUT-OFF DATE BALANCE
- ------------- ------------ ------------ --------------------
Single-Family Dwelling...................... 1,905 $44,842,163.88 91.04%
PUD......................................... 79 2,187,260.05 4.44
Condominium................................. 78 1,575,564.39 3.20
2-4 Family.................................. 18 385,827.08 0.78
2-4 Unit (duplex)........................... 5 167,545.93 0.34
Manufactured................................ 6 94,820.72 0.19
-------- --------------- -------
Totals............... 2,091 $49,253,182.05 100.00%
===== ============== ======
</TABLE>
<TABLE>
<CAPTION>
OCCUPANCY TYPES
<S> <C> <C> <C>
PERCENT OF
OCCUPANCY NUMBER OF CUT-OFF INITIAL HELS BY
(AS INDICATED BY BORROWER) INITIAL HELS DATE BALANCE CUT-OFF DATE BALANCE
- -------------------------- ------------ ------------ --------------------
Owner Occupied.............................. 2,085 $49,132,146.64 99.75%
Non-Owner Occupied.......................... 5 111,883.86 0.23
Investment.................................. 1 9,151.55 0.02
-------- --------------- --------
Totals............... 2,091 $49,253,182.05 100.00%
===== ============== ======
</TABLE>
<TABLE>
<CAPTION>
DOCUMENTATION TYPE
<S> <C> <C> <C>
PERCENT OF
NUMBER OF CUT-OFF INITIAL HELS BY
DOCUMENTATION INITIAL HELS DATE BALANCE CUT-OFF DATE BALANCE
- ------------- ------------ ------------ --------------------
Standard...................................... 959 $23,803,202.27 48.33%
No Income No Appraisal........................ 593 11,757,310.06 23.87
No Income Verification........................ 186 4,964,996.61 10.08
Family First Direct........................... 147 3,337,190.37 6.78
Super Express................................. 32 779,043.56 1.58
Select........................................ 19 738,722.57 1.50
Quick......................................... 2 73,107.42 0.15
Other......................................... 153 3,799,609.19 7.71
------ ---------------- -------
Totals................. 2,091 $49,253,182.05 100.00%
===== ============== ======
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES
<S> <C> <C> <C>
PERCENT OF
NUMBER OF CUT-OFF INITIAL HELS BY
RANGE OF PRINCIPAL BALANCES ($) INITIAL HELS DATE BALANCE CUT-OFF DATE BALANCE
- ------------------------------- ------------ ------------ --------------------
0.00 to 25,000.00............ 1,351 $21,258,611.42 43.16%
25,000.01 to 50,000.00............ 669 23,017,990.27 46.73
50,000.01 to 75,000.00............ 49 2,941,739.49 5.97
75,000.01 to 100,000.00............ 20 1,781,269.95 3.62
100,000.01 to 125,000.00............ 1 102,934.27 0.21
150,000.01 to 175,000.00............ 1 150,636.65 0.31
-------- ------------------ --------
Totals.................... 2,091 $49,253,182.05 100.00%
===== ============== ======
The average Principal Balance as of the Cut-Off Date is approximately $23,554.85.
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHICAL DISTRIBUTIONS
<S> <C> <C> <C>
PERCENT OF
NUMBER OF CUT-OFF INITIAL HELS BY
STATE INITIAL HELS DATE BALANCE CUT-OFF DATE BALANCE
- ----- ------------ ------------ --------------------
California....................................... 546 $14,881,249.42 30.21%
Michigan......................................... 188 4,272,269.02 8.67
New Jersey....................................... 94 2,294,618.20 4.66
Arizona.......................................... 94 1,926,775.21 3.91
Pennsylvania..................................... 94 1,805,131.34 3.67
New York......................................... 65 1,790,944.42 3.64
Florida.......................................... 80 1,705,890.79 3.46
Massachusetts.................................... 76 1,667,774.44 3.39
Other............................................ 854 18,908,529.21 38.39
------ ---------------- -------
Totals..................... 2,091 $49,253,182.05 100.00%
===== ============== ======
</TABLE>
<TABLE>
<CAPTION>
COMBINED LOAN-TO-VALUE RATIOS
<S> <C> <C> <C>
PERCENT OF
RANGE OF COMBINED NUMBER OF CUT-OFF INITIAL HELS BY
LOAN-TO-VALUE RATIOS(%) INITIAL HELS DATE BALANCE CUT-OFF DATE BALANCE
- ----------------------- ------------ ------------ --------------------
0.000 to 50.000...................... 162 $ 3,365,096.87 6.83%
50.001 to 55.000...................... 47 986,867.60 2.00
55.001 to 60.000...................... 63 1,714,583.59 3.48
60.001 to 65.000...................... 87 2,068,405.94 4.20
65.001 to 70.000...................... 108 2,644,186.00 5.37
70.001 to 75.000...................... 182 4,443,301.42 9.02
75.001 to 80.000...................... 402 9,997,720.76 20.30
80.001 to 85.000...................... 217 5,025,352.54 10.20
85.001 to 90.000...................... 722 16,752,010.48 34.01
90.001 to 95.000...................... 37 629,626.34 1.28
95.001 to 100.000...................... 64 1,626,030.51 3.30
------- ----------------- --------
Totals.................. 2,091 $49,253,182.05 100.00%
===== ============== ======
The minimum and maximum Combined Loan-to-Value Ratios of the Initial HELs as of the Cut-Off Date are
approximately 2.00% and 100.00%, respectively, and the weighted average Combined Loan-to-Value Ratio of the Initial
HELs as of the Cut-Off Date is approximately 77.51%.
</TABLE>
<TABLE>
<CAPTION>
JUNIOR RATIOS(1)(2)(3)
<S> <C> <C> <C>
PERCENT OF
NUMBER OF CUT-OFF INITIAL HELS BY
RANGE OF JUNIOR RATIOS (%) INITIAL HELS DATE BALANCE CUT-OFF DATE BALANCE
- -------------------------- ------------ ------------ --------------------
0.001 to 9.999........................ 275 $ 3,363,188.43 6.83%
10.000 to 19.999......................... 890 18,866,320.54 38.30
20.000 to 29.999......................... 492 13,502,408.84 27.41
30.000 to 39.999......................... 212 6,560,862.31 13.32
40.000 to 49.999......................... 88 3,032,491.66 6.16
50.000 to 59.999......................... 26 934,370.54 1.90
60.000 to 69.999......................... 13 423,909.64 0.86
70.000 to 79.999......................... 16 474,588.90 0.96
80.000 to 89.999......................... 10 255,271.81 0.52
90.000 to 99.999......................... 6 164,550.11 0.33
-------- ----------------- ------
Totals..................... 2,028 $47,577,962.78 96.60%
===== ============== =====
(1) The Junior Ratio of a HEL is the ratio (expressed as a percentage) of the credit limit of such HEL to
the sum of such credit limit and the outstanding balance of any senior mortgage computed as of the date such HEL is
underwritten.
(2) The weighted average Junior Ratio of the HELs as of the Cut-Off Date is approximately 24.20%.
(3) The Junior Ratio table (and the weighted average Junior Ratio of the Initial HELs) does not include
any HELs secured by first mortgage liens.
</TABLE>
<TABLE>
<CAPTION>
LOAN RATES
<S> <C> <C> <C>
PERCENT OF
NUMBER OF CUT-OFF INITIAL HELS BY
RANGE OF LOAN RATES(%) INITIAL HELS DATE BALANCE CUT-OFF DATE BALANCE
- ---------------------- ------------ ------------ --------------------
5.001 to 6.000....................... 3 $ 29,245.37 0.06%
6.001 to 7.000....................... 32 261,557.18 0.53
7.001 to 8.000....................... 33 231,785.69 0.47
8.001 to 9.000....................... 7 234,209.23 0.48
9.001 to 10.000....................... 868 22,934,403.78 46.56
10.001 to 11.000....................... 872 20,822,467.59 42.28
11.001 to 12.000....................... 256 4,432,109.67 9.00
12.001 to 13.000....................... 20 307,403.54 0.62
------- ---------------- --------
Totals..................... 2,091 $49,253,182.05 100.00%
===== ============== ======
The weighted average Loan Rate as of the Cut-Off Date is approximately 10.187%.
</TABLE>
<TABLE>
<CAPTION>
MONTHS REMAINING TO SCHEDULED MATURITY
<S> <C> <C> <C>
PERCENT OF
NUMBER OF CUT-OFF INITIAL HELS BY
RANGE OF MONTHS INITIAL HELS DATE BALANCE CUT-OFF DATE BALANCE
- --------------- ------------ ------------ --------------------
24 to 47........................ 10 $ 134,074.59 0.27%
48 to 71........................ 362 6,138,365.91 12.46
72 to 95........................ 1 17,769.19 0.04
96 to 119........................ 729 15,796,725.70 32.07
120 to 143........................ 1 19,973.70 0.04
144 to 167........................ 5 126,253.53 0.26
168 to 191........................ 954 26,192,686.77 53.18
216 to 239........................ 25 721,166.92 1.46
288 to 311........................ 4 106,165.74 0.22
-------- ------------------ --------
Totals............... 2,091 $49,253,182.05 100.00%
===== ============== ======
The weighted average months remaining to scheduled maturity of the Initial HELs as of the Cut-Off Date is
approximately 140 months.
</TABLE>
<TABLE>
<CAPTION>
LIEN PRIORITY
<S> <C> <C> <C>
PERCENT OF
NUMBER OF CUT-OFF INITIAL HELS BY
LIEN POSITION INITIAL HELS DATE BALANCE CUT-OFF DATE BALANCE
- ------------- ------------ ------------ --------------------
First..................................... 63 $ 1,675,219.27 3.40%
Second.................................... 2,028 47,577,962.78 96.60
----- --------------- -------
Totals.............. 2,091 $49,253,182.05 100.00%
===== ============== ======
</TABLE>
<TABLE>
<CAPTION>
DEBT-TO-INCOME RATIOS
<S> <C> <C> <C>
PERCENT OF
RANGE OF DEBT-TO-INCOME NUMBER OF CUT-OFF INITIAL HELS BY
RATIOS (%) INITIAL HELS DATE BALANCE CUT-OFF DATE BALANCE
- ----------------------- ------------ ------------ --------------------
0.00 to 9.99........................ 5 $ 82,227.17 0.17%
10.00 to 19.99........................ 90 1,843,706.22 3.74
20.00 to 29.99........................ 395 8,518,495.38 17.30
30.00 to 39.99........................ 869 20,739,120.93 42.11
40.00 to 49.99........................ 657 16,215,673.90 32.92
50.00 to 59.99........................ 64 1,551,817.10 3.15
60.00 to 69.99........................ 11 302,141.35 0.61
------- ------------------ --------
Totals.................. 2,091 $49,253,182.05 100.00%
----- ============== ======
</TABLE>
The information set forth in the preceding sections is based upon
information provided by the Seller and tabulated by the Depositor. The Depositor
makes no representation as to the accuracy or completeness of such information.
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS, THE PRE-FUNDING ACCOUNT AND THE FUNDING
ACCOUNT
The Purchase Agreement permits the Issuer to acquire Subsequent
Mortgage Loans. Accordingly, the statistical characteristics of the Mortgage
Loans upon the acquisition of the Subsequent Mortgage Loans may vary somewhat
from the statistical characteristics of the Initial Mortgage Loans as of the
Cut-Off Date as presented in this Prospectus Supplement. During the Revolving
Period, it is expected that Subsequent Mortgage Loans acquired with amounts
withdrawn from the Pre-Funding Account or the Funding Account will consist
primarily of HELOCs.
Each Subsequent Mortgage Loan will have been underwritten substantially
in accordance with the criteria set forth herein under "Description of the
Mortgage Loans--Underwriting Standards." Subsequent Mortgage Loans will be
transferred to the Issuer pursuant to subsequent transfer instruments (the
"SUBSEQUENT TRANSFER AGREEMENTS") between the Seller and the Issuer. In
connection with the purchase of Subsequent Mortgage Loans on such dates of
transfer (the "SUBSEQUENT TRANSFER DATES"), the Issuer will be required to pay
to the Seller from amounts on deposit in the Pre-Funding Account or the Funding
Account a cash purchase price of 100% of the Principal Balance thereof. In each
instance in which Subsequent Mortgage Loans are transferred to the Trust Estate
pursuant to a Subsequent Transfer Agreement, the Issuer will designate a cut-off
date (such cut-off date, the "SUBSEQUENT CUT-OFF DATE") with respect to the
Subsequent Mortgage Loans acquired on such date. The amount paid from the
Pre-Funding Account or Funding Account, as applicable, on each Subsequent
Transfer Date will not include accrued interest on the Subsequent Mortgage
Loans. Following each Subsequent Transfer Date, the aggregate Principal Balance
of the Mortgage Loans will increase by an amount equal to the aggregate
Principal Balance of the Subsequent Mortgage Loans so acquired and the amount in
the Pre-Funding Account or Funding Account, as applicable, will decrease
accordingly.
Any conveyance of Subsequent Mortgage Loans on a Subsequent Transfer
Date is subject to certain conditions including, but not limited to: (a) each
such Subsequent Mortgage Loan must satisfy the representations and warranties
specified in the related Subsequent Transfer Agreement and the Purchase
Agreement; (b) the Seller will select such Subsequent Mortgage Loans in a manner
that it reasonably believes is not adverse to the interests of the Noteholders
or the Enhancer; (c) the Seller will deliver certain opinions of counsel
acceptable to the Enhancer and the Indenture Trustee with respect to the
validity of the conveyance of such Subsequent Mortgage Loans; and (d) as of each
Subsequent Cut-off Date, each Subsequent Mortgage Loan will satisfy the
following criteria: (i) such Subsequent Mortgage Loan may not be 30 or more days
contractually delinquent as of the related Subsequent Cut-off Date; (ii) the
original stated term to maturity of such Subsequent Mortgage Loan will not
exceed 360 months; (iii) the lien securing any such Subsequent Mortgage Loan
must be a first, second or subsequent lien priority; (iv) such Subsequent
Mortgage Loan must have an outstanding Principal Balance of at least $1,000 and
no more than $511,000 as of the Subsequent Cut-off Date; (v) such Subsequent
Mortgage Loan will be underwritten substantially in accordance with the criteria
set forth under "Description of the Mortgage Loans--Underwriting Standards"
herein; (vi) such Subsequent Mortgage Loan must have a Combined-Loan-to-Value
Ratio at origination of no more than 100%; (vii) such Subsequent Mortgage Loan
shall not provide for negative amortization; and (viii) following the purchase
of such Subsequent Mortgage Loan by the Issuer, the Mortgage Loans included in
the Trust Estate must have a weighted average Loan Rate, a weighted average
remaining term to maturity and a weighted average Combined Loan-to-Value Ratio
at origination, as of each respective Subsequent Cut-off Date, which would not
vary materially from the Initial Mortgage Loans included initially in the Trust
Estate. In addition, the Indenture Trustee will not agree to any transfer of
Subsequent Mortgage Loans without the approval of the Enhancer, which approval
shall not be unreasonably withheld; provided, however that the Enhancer will
provide notice of approval or disapproval within 5 Business Days or such
Subsequent Mortgage Loans will be deemed approved by the Enhancer. Subsequent
Mortgage Loans with characteristics materially varying from those set forth
above may be purchased by the Issuer and included in the Trust Estate with the
approval of the Enhancer; provided, however, that the addition of such
Subsequent Mortgage Loans will not materially affect the aggregate
characteristics of the entire pool of Mortgage Loans.
The Pre-Funding Account. The Servicer will establish the Pre-Funding
Account in the name of the Indenture Trustee, and will deposit the Original
Pre-Funded Amount therein on the Closing Date from the net proceeds of the sale
of the Securities. Monies in the Pre-Funding Account will be applied during the
Pre-Funding Period to purchase Subsequent Mortgage Loans from the Seller. The
Pre-Funding Account will be part of the Trust Estate, but monies on deposit
therein will not be available to cover losses on or in respect of the Mortgage
Loans. Any portion of the Original Pre-Funded Amount remaining on deposit in the
Pre-Funding Account at the end of the Pre-Funding Period will be applied first
to acquire any Additional Balances and thereafter will be deposited into the
Funding Account. Monies on deposit in the Pre-Funding Account may be invested in
Permitted Investments as provided in the Servicing Agreement. Net income on
investment of funds in the Pre-Funding Account will be deposited into or
credited to the Capitalized Interest Account. There can be no assurance that a
sufficient number of Subsequent Mortgage Loans will be available for application
of the entire Original Pre-Funded Amount.
The Funding Account. The Term Notes will be subject to redemption in
part on the Payment Date immediately succeeding the date on which the Revolving
Period ends, in the event that any amounts remain on deposit in the Funding
Account, exclusive of any investment earnings thereon, after giving effect to
the purchase by the Issuer of all Subsequent Mortgage Loans and Additional
Balances, including any such purchase on the date on which the Revolving Period
ends.
NON-RECORDATION OF ASSIGNMENTS
Subject to the consent of the Enhancer, the Seller will not be required
to record assignments of the Mortgages to the Indenture Trustee in the real
property records of the states in which the related Mortgaged Properties are
located. The Seller will retain record title to such Mortgages on behalf of the
Indenture Trustee and the Securityholders. Although the recordation of the
assignments of the Mortgages in favor of the Indenture Trustee is not necessary
to effect a transfer of the Mortgage Loans to the Indenture Trustee, if the
Seller were to sell, assign, satisfy or discharge any Mortgage Loan prior to
recording the related assignment in favor of the Indenture Trustee, the other
parties to such sale, assignment, satisfaction or discharge may have rights
superior to those of the Indenture Trustee. In some states, in the absence of
such recordation of the assignments of the Mortgages, the transfer to the
Indenture Trustee of the Mortgage Loans may not be effective against certain
creditors or purchasers from the Seller or a trustee in bankruptcy thereof. If
such other parties, creditors or purchasers have rights to the Mortgage Loans
that are superior to those of the Indenture Trustee, Securityholders could lose
the right to future payments of principal and interest to the extent that such
rights are not otherwise enforceable in favor of the Indenture Trustee under the
applicable Mortgage Documents.
AMENDMENTS TO MORTGAGE DOCUMENTS
Subject to applicable law, the Servicer may change the terms of the
Mortgage Documents at any time, provided that such changes (i) do not adversely
affect the interests of the Securityholders or the Enhancer and (ii) are
consistent with prudent business practice. In addition, the Servicing Agreement
will permit the Servicer, with certain limitations described therein, to
increase the credit limit or reduce the margin of a HELOC and to reduce the Loan
Rate on a HEL.
OPTIONAL REMOVAL OF MORTGAGE LOANS
In certain instances in which a Mortgagor either (i) requests an
increase in the credit limit on the related HELOC above the limit stated on the
Credit Line Agreement, (ii) requests to place a lien on the related Mortgaged
Property senior to the lien of the related Mortgage Loan, or (iii) refinances
the senior lien resulting in a Combined Loan-to-Value Ratio above the previous
Combined Loan-to-Value Ratio for such loan, the Servicer will have the option to
purchase from the Trust Estate the related HELOC at a price equal to the
Repurchase Price (as defined herein).
UNDERWRITING STANDARDS
All of the Mortgage Loans will be acquired by the Depositor from the
Seller. The following is a brief description of the various underwriting
standards and procedures applicable to the Mortgage Loans.
The Seller's underwriting standards with respect to the Mortgage Loans
generally will conform to those published in the GMACM Underwriting Guidelines
(as modified from time to time, the "GMACM UNDERWRITING GUIDE"), including the
provisions of the GMACM Underwriting Guide applicable to the GMAC Mortgage Home
Equity Program. The underwriting standards as set forth in the GMACM
Underwriting Guide are continually revised based on prevailing conditions in the
residential mortgage market and the market for mortgage securities.
The underwriting standards set forth in the GMACM Underwriting Guide
with respect to Mortgage Loans originated or acquired under the GMAC Mortgage
Home Equity Program provide for varying levels of documentation. For standard
documented loans, a prospective borrower is required to fill out a detailed
application providing pertinent credit information, including tax returns if
they are self-employed or received income from dividends and interest, rental
properties or other income which can be verified via tax returns, and a credit
report is obtained. In addition, a borrower may demonstrate income and
employment directly by providing alternative documentation in the form of a pay
stub and a W-2. These loans require drive-by appraisals for property values of
$500,000 or less, and full appraisals for property values of more than $500,000.
Under the GMACM Underwriting Guide, loans may also be originated under
the "Quick Program," a no income verification program for self-employed
borrowers. For such loans, only a credit check and an appraisal are required.
Such loans are generally limited to a loan amount of $50,000 or less, and are
limited to primary residences. In addition, the borrower may be qualified under
a "No Income/No Appraisal" program. Under such a program, a credit check is
required, and the Combined Loan-to-Value Ratio is limited to 80%, or 90% in the
case of GM and GM subsidiary employees under the "Family First Direct" program.
The borrower is qualified on his or her stated income in the application, the
Combined Loan-to-Value Ratio is based on the borrower's stated value of the
property and no appraisal is made, except that with respect to Combined
Loan-to-Value Ratios over 80% under the "Family First Direct" program, the
borrower must supply evidence of value. The maximum loan under such program is
generally limited to $40,000 ($250,000 under the "Family First Direct" program).
In addition, the borrower may be qualified under a "No Income Verification"
program. Under such program, a credit check is required, and the Combined
Loan-to-Value Ratio is limited to 90%. The borrower is qualified based on the
income stated on the application. Such loans are generally limited to an amount
of $100,000 or less, and are limited to primary residences. These loans require
drive-by appraisals for property values of $500,000 or less, and full appraisals
for property values of more than $500,000.
In addition, the GMACM Underwriting Guide provides for loans under its
"Select" program to employees and retirees of GM. Such loans are made to
executives of GM or affiliates of GM, dealer principals and general managers
with a minimum annual base salary of $75,000 or to GM or GM affiliate retirees
with a minimum base retirement annual income of $60,000. Underwriting is subject
to a maximum Combined Loan-to-Value Ratio of 100% for primary residences and a
maximum Combined Loan-to-Value Ratio of 75% for second homes, and a maximum loan
amount of $250,000. The Combined Loan-to-Value Ratio is based on the borrower's
stated value and no appraisal is made for Combined Loan-to-Value Ratios of 80%
or less. The borrower must supply evidence of value when the property value is
under $500,000 and the Combined Loan-to-Value Ratio is between 80% and 90%. A
drive-by appraisal is required for a Combined Loan-to-Value of Ratio greater
than 90% and a property value under $500,000. A full appraisal is required for a
Combined Loan-to-Value Ratio greater than 90% with property values of $500,000
and above.
The HELOCs included in the Mortgage Pool generally were originated
subject to a maximum Combined Loan-to-Value Ratio of 100.00%, and the HELs
included in the Mortgage Pool generally were originated subject to a maximum
Combined Loan-to-Value Ratio of 100.00%. Additionally, loans were generally
originated with a maximum total monthly debt to income ratio of 45%, although
variances are permitted based on compensating factors. There can be no assurance
that the Combined Loan-to-Value Ratio or the debt to income ratio for any
Mortgage Loans will not increase from the levels established at origination.
The underwriting standards set forth in the GMACM Underwriting Guide
with respect to Mortgage Loans originated under the GMACM Home Equity Program
may be varied in appropriate cases. There can be no assurance that every
Mortgage Loan was originated in conformity with the applicable underwriting
standards in all material respects, or that the quality or performance of the
Mortgage Loans will be equivalent under all circumstances.
GMAC Mortgage's underwriting standards include a set of specific
criteria pursuant to which the underwriting evaluation is made. However, the
application of such underwriting standards does not imply that each specific
criterion was satisfied individually. Rather, a Mortgage Loan will be considered
to be originated in accordance with a given set of underwriting standards if,
based on an overall qualitative evaluation, the loan is in substantial
compliance with such underwriting standards. For example, a Mortgage Loan may be
considered to comply with a set of underwriting standards, even if one or more
specific criteria included in such underwriting standards were not satisfied, if
other factors compensated for the criteria that were not satisfied or if the
Mortgage Loan is considered to be in substantial compliance with the
underwriting standards.
Conformity with the applicable underwriting standards will vary
depending on a number of factors relating to the specific Mortgage Loan,
including the principal amount or Credit Limit, the Combined Loan-to-Value
Ratio, the loan type or loan program, and the applicable credit score of the
related borrower used in connection with the origination of the Mortgage Loan
(as determined based on a credit scoring model acceptable to GMAC Mortgage).
Credit scores are not used to deny loans. However, credit scores are used as a
"tool" to analyze a borrower's credit. Generally, such credit scoring models
provide a means for evaluating the information about a prospective borrower that
is available from a credit reporting agency. The underwriting criteria
applicable to any program under which the Mortgage Loans may be originated may
provide that qualification for the loan, the level of review of the loan's
documentation, or the availability of certain loan features (such as maximum
loan amount, maximum Combined Loan-to-Value Ratio, property type and use, and
documentation level) may depend on the borrower's credit score.
The following is a brief description of the underwriting standards under
the GMACM Home Equity Program for standard documentation loan programs.
Initially, a prospective borrower (other than a trust if the trust is the
borrower) is required to fill out a detailed application providing pertinent
credit information. As part of the application, the borrower is required to
provide a statement of income and expenses, as well as an authorization to apply
for a credit report which summarizes the borrower's credit history with
merchants and lenders and any record of bankruptcy. The borrower generally must
show, among other things, a minimum of one year credit history reported on the
credit report and that no mortgage delinquencies (thirty days or greater) in the
past 12 months existed. Borrowers who have less than a 12 month first mortgage
payment history may be subject to certain additional lending restrictions. In
addition, under the GMACM Home Equity Program, generally borrowers with a
previous foreclosure or bankruptcy within the past five years may not be allowed
and a borrower generally must satisfy all judgments, liens and other legal
actions with an original amount of $1,000 or greater prior to closing. Borrowers
with a previous foreclosure or bankruptcy generally do not qualify for a loan
unless extenuating credit circumstances beyond their control are documented. In
addition, an income verification is obtained. If a prospective borrower is
self-employed, the borrower may be required to submit copies of signed tax
returns. The borrower may also be required to authorize verification of deposits
at financial institutions where the borrower has accounts. In the case of a
Mortgage Loan secured by a property owned by a trust, the foregoing procedures
may be waived where the Credit Line Agreement is executed on behalf of the
trust.
An appraisal may be made of the Mortgaged Property securing each
Mortgage Loan. Such appraisals may be performed by appraisers independent from
or affiliated with the GMAC Mortgage or their affiliates. Such appraisals,
however, will not establish that the Mortgaged Properties provide assurance of
repayment of the Mortgage Loans. See "Risk Factors-Adequacy of the Mortgaged
Properties as Security for the Mortgage Loans" herein. The appraiser may be
required to inspect the property and verify that it is in good condition and
that construction, if new, has been completed. In certain circumstances, the
appraiser is only required to perform an exterior inspection of the property.
The appraisal is based on various factors, including the market value of
comparable homes and the cost of replacing the improvements. Each appraisal is
required to be dated no more than 180 days prior to the date of origination of
the Mortgage Loan; provided, that depending on the Credit Limit an earlier
appraisal may be utilized if such appraisal was made not earlier than two years
prior to the date of origination of the mortgage loan and the related appraiser
certifies that the value of the related mortgaged property has not declined
since the date of the original appraisal or if a field review or statistical
property valuation is obtained. Title searches are undertaken in most cases, and
title insurance is required on all Mortgage Loans with Credit Limits in excess
of $100,000.
Under the GMACM Home Equity Program, the Combined Loan-to-Value Ratio is
generally calculated by reference to the lower of the appraised value as so
determined or the sales price, if the Mortgage Loan is originated concurrently
with the origination of a first mortgage loan. In all other cases, the value
used is generally the appraised value as so determined.
Once all applicable employment, credit and property information is
received, a determination is made as to whether the prospective borrower has
sufficient monthly income available to meet the borrower's monthly obligations
on the proposed mortgage loan and other expenses related to the home (such as
property taxes and hazard insurance) and other financial obligations (including
debt service on any related mortgage loan secured by a senior lien on the
related Mortgaged Property). For qualification purposes the monthly payment is
based solely on the payment of interest only on the loan. The Loan Rate in
effect from the origination date of a Mortgage Loan to the first adjustment date
generally will be lower, and may be significantly lower, than the sum of the
then applicable Index and Gross Margin. The Mortgage Loans will not provide for
negative amortization. Payment of the full outstanding principal balance at
maturity may depend on the borrower's ability to obtain refinancing or to sell
the Mortgaged Property prior to the maturity of the mortgage loan, and there can
be no assurance that such refinancing will be available to the borrower or that
such a sale will be possible.
The underwriting standards set forth in the GMACM Underwriting Guide may
be varied in appropriate cases, including in "limited" or "reduced loan
documentation" mortgage loan programs. Limited documentation programs generally
permit fewer supporting documents to be obtained or waive income, appraisals,
asset and employment documentation requirements, and limited documentation
programs generally compensate for increased credit risk by placing greater
emphasis on either the review of the property to be financed or the borrower's
ability to repay the Mortgage Loan. Generally, in order to be eligible for a
reduced loan documentation program, a borrower must have a good credit history,
and other compensating factors (such as a relatively low Combined Loan-to-Value
Ratio, or other favorable underwriting factors) must be present and the
borrower's eligibility for such program may be determined by use of a credit
scoring model.
THE SELLER AND SERVICER
GENERAL
GMAC Mortgage Corporation is the Seller and Servicer for all of the
Mortgage Loans. The Seller is an indirect wholly-owned subsidiary of General
Motors Acceptance Corporation and is one of the nation's largest mortgage
bankers. The Seller is engaged in the mortgage banking business, including the
origination, purchase, sale and servicing of residential loans.
The Notes do not represent an interest in or an obligation of the
Seller or the Servicer. The Seller's only obligations with respect to the Notes
will be pursuant to certain limited representations and warranties made by the
Seller or as otherwise provided herein.
The Seller maintains its executive and principal offices at 100 Witmer
Road, Horsham, Pennsylvania 19044. Its telephone number is (215) 682-1000.
The Servicer will be responsible for servicing the Mortgage Loans in
accordance with the its program guide and the terms of the Servicing Agreement.
The Custodian will be The Bank of Maryland.
Billing statements for HELOCs are mailed monthly by the Servicer. The
statement details the monthly activity on the related HELOC and specifies the
minimum payment due to the Servicer and the available credit line. Notice of
changes in the applicable Loan Rate are provided by the Servicer to the
Mortgagor with such statements. All payments are due by the applicable due date.
For information regarding foreclosure procedures, see "--Realization
Upon Defaulted Loans" below. 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 portfolio of real estate secured revolving
credit line loans that it services for its clients and applicable laws and
regulations, and other considerations.
COLLECTION AND OTHER SERVICING PROCEDURES
The Servicer will make reasonable efforts to collect all payments
called for under the Mortgage Loans and will, consistent with the Servicing
Agreement, follow such collection procedures which shall be normal and usual in
its general mortgage servicing activities with respect to mortgage loans
comparable to the Mortgage Loans. Consistent with the foregoing, the Servicer
may in its discretion waive any prepayment charge in connection with the
prepayment of a Mortgage Loan or extend the due dates for payments due on a
Mortgage Loan, provided that the insurance coverage for such Mortgage Loan or
any coverage provided by any alternative credit enhancement will not be
adversely affected thereby.
In certain instances in which a Mortgage Loan is in default (or if
default is reasonably foreseeable), and if determined by the Servicer to be in
the best interests of the Enhancer and the Noteholders, the Servicer may permit
certain modifications of the Mortgage Loan or make forbearances on the Mortgage
Loan rather than proceeding with foreclosure or repossession (if applicable). In
making such determination, the loss that might result if such Mortgage Loan were
liquidated would be taken into account. Such modifications may have the effect
of reducing the Loan Rate or extending the final maturity date of the Mortgage
Loan. Any such modified Mortgage Loan may remain in the Trust Estate, and the
reduction in collections resulting from such modification may result in reduced
distributions of interest (or other amounts) on, or may extend the final
maturity of, the Notes.
In addition, in certain instances in which a Mortgagor either (i)
requests an increase in the credit limit on the related HELOC above the limit
stated on the Credit Line Agreement, (ii) requests to place a lien on the
related Mortgaged Property senior to the lien of the related Mortgage Loan, or
(iii) refinances the senior lien resulting in a Combined Loan-to-Value Ratio
above the previous Combined Loan-to-Value Ratio for such loan, the Servicer will
have the option to purchase from the Issuer the related Mortgage Loan at a price
equal to the Repurchase Price.
In any case in which Mortgaged Property subject to a Mortgage Loan is
being conveyed by the Mortgagor, the Servicer shall in general be obligated, to
the extent it has knowledge of such conveyance, to exercise its rights to
accelerate the maturity of such Mortgage Loan under any due-on-sale clause
applicable thereto, but only if the exercise of such rights is permitted by
applicable law and only to the extent it would not adversely affect or
jeopardize coverage under any applicable credit enhancement arrangements. If the
Servicer is prevented from enforcing such due-on-sale clause under applicable
law or if the Servicer determines that it is reasonably likely that a legal
action would be instituted by the related Mortgagor to avoid enforcement of such
due-on-sale clause, the Servicer will enter into an assumption and modification
agreement with the person to whom such property has been or is about to be
conveyed, pursuant to which such person will become liable under the Credit Line
Agreement subject to certain specified conditions. The original Mortgagor may be
released from liability on a Mortgage Loan if the Servicer shall have determined
in good faith that such release will not adversely affect the ability to make
full and timely collections on the related Mortgage Loan. Any fee collected by
the Servicer for entering into an assumption or substitution of liability
agreement will be retained by the Servicer as additional servicing compensation.
In connection with any such assumption, the Loan Rate borne by the related
Credit Line Agreement may not be altered.
Mortgagors may, from time to time, request partial releases of the
Mortgaged Properties, easements, consents to alteration or demolition and other
similar matters. The Servicer may approve such a request if it has determined,
exercising its good faith business judgment in the same manner as it would if it
were the owner of the related Mortgage Loan, that such approval will not
adversely affect the security for, and the timely and full collectability of,
the related Mortgage Loan. Any fee collected by the Servicer for processing such
request will be retained by the Servicer as additional servicing compensation.
The Servicer is required to maintain a fidelity bond and errors and
omissions policy with respect to its officers and employees and other persons
acting on behalf of the Servicer in connection with its activities under the
Servicing Agreement. The Servicer may be subject to certain restrictions under
the Servicing Agreement with respect to the refinancing of a lien senior to a
Mortgage Loan secured by a lien on the related Mortgaged Property.
REALIZATION UPON DEFAULTED LOANS
With respect to a Mortgage Loan secured by a lien on a Mortgaged
Property in default, the Servicer will decide whether to foreclose upon the
Mortgaged Property or with respect to any such Mortgage Loan, write off the
principal balance of the Mortgage Loan as a bad debt or take an unsecured note.
In connection with such decision, the Servicer will, following usual practices
in connection with senior and junior mortgage servicing activities or
repossession and resale activities, estimate the proceeds expected to be
received and the expenses expected to be incurred in connection with such
foreclosure or repossession and resale to determine whether a foreclosure
proceeding or a repossession and resale is appropriate. To the extent that a
Mortgage Loan secured by a lien on a Mortgaged Property is junior to another
lien on the related Mortgaged Property, following any default thereon, unless
foreclosure proceeds for such Mortgage Loan are expected to at least satisfy the
related senior mortgage loan in full and to pay foreclosure costs, it is likely
that such Mortgage Loan will be written off as bad debt with no foreclosure
proceeding. See "Risk Factors--Special Features of the Mortgage Loans" herein.
In the event that title to any Mortgaged Property is acquired in foreclosure or
by deed in lieu of foreclosure, the deed or certificate of sale will be issued
to the Indenture Trustee or to its nominee on behalf of Noteholders.
Notwithstanding any such acquisition of title and cancellation of the related
Mortgage Loan, such Mortgage Loan secured by a lien on a Mortgaged Property (an
"REO LOAN") will be considered for most purposes to be an outstanding Mortgage
Loan held in the Trust Estate until such time as the Mortgaged Property is sold
and all recoverable Liquidation Proceeds and Insurance Proceeds have been
received with respect to such defaulted Mortgage Loan (a "LIQUIDATED LOAN"). Any
income (net of expenses and fees and other than gains described below) received
by the Servicer on such Mortgaged Property, prior to its disposition will be
deposited in the Custodial Account upon receipt and will be available at such
time for making payments to Noteholders.
With respect to a Mortgage Loan secured by a lien on a Mortgaged
Property in default, the Servicer may pursue foreclosure (or similar remedies)
subject to any senior lien positions and certain other restrictions pertaining
to junior loans concurrently with pursuing any remedy for a breach of a
representation and warranty made by the Seller. However, the Servicer is not
required to continue to pursue both such remedies if it determines that one such
remedy is more likely to result in a greater recovery. Upon the first to occur
of final liquidation and a repurchase or substitution pursuant to a breach of a
representation and warranty, such Mortgage Loan will be removed from the Trust
Estate. The Servicer may elect to treat a defaulted Mortgage Loan as having been
finally liquidated if substantially all amounts expected to be received in
connection therewith have been received. Any additional liquidation expenses
relating to such Mortgage Loan thereafter incurred will be reimbursable to the
Servicer from any amounts otherwise payable to the Noteholders, or may be offset
by any subsequent recovery related to such Mortgage Loan. Alternatively, for
purposes of determining the amount of related Liquidation Proceeds to be paid to
Noteholders, the amount of any loss or the amount required to be drawn under any
applicable form of credit enhancement, the Servicer may take into account
minimal amounts of additional receipts expected to be received, as well as
estimated additional liquidation expenses expected to be incurred in connection
with such defaulted Mortgage Loan.
The Servicer has the option to purchase from the Trust Estate any
defaulted Mortgage Loan after 60 days at the Repurchase Price. If a defaulted
Mortgage Loan or REO Loan is not so removed from the Trust Estate, then, upon
the final liquidation thereof, if a loss is realized which is not covered by any
applicable form of credit enhancement or other insurance, the Noteholders will
bear such loss. However, if a gain results from the final liquidation of an REO
Loan which is not required by law to be remitted to the related Mortgagor, the
Servicer will be entitled to retain such gain as additional servicing
compensation.
DELINQUENCY AND LOSS EXPERIENCE OF THE SERVICER'S PORTFOLIO
The following tables summarize the delinquency and loss experience for
all home equity lines of credit loans originated by the Seller. The data
presented in the following tables is for illustrative purposes only, and there
is no assurance that the delinquency and loss experience of the Mortgage Loans
will be similar to that set forth below.
The information in the tables below has not been adjusted to eliminate
the effect of the significant growth in the size of the Servicer's HELOC loan
portfolio during the periods shown. Accordingly, loss and delinquency as
percentages of aggregate principal balance of such HELOC loans serviced for each
period would be higher than those shown if certain of such home equity loans
were artificially isolated at a point in time and the information showed the
activity only with respect to such HELOC loans.
<TABLE>
<CAPTION>
GMAC MORTGAGE CORPORATION DELINQUENCY EXPERIENCE
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
FOR THE EIGHT
MONTHS ENDED
1994 1995 1996 1997 AUGUST 31, 1998
---- ---- ---- ---- ---------------
<S> <C> <C> <C> <C> <C>
Number of Accounts with
Balances Managed .......... 8,280 11,577 17,344 20,159 23,044
Aggregate Amount ............. $276,617,622 $348,925,061 $496,073,600 $568,400,751 $617,815,357
Loan Balance of Mortgage Loans
30-59 Days Past Due(1) .... $ 4,896,105 $ 6,155,371 $ 7,472,812 $ 8,475,141 $ 4,534,046
Loan Balance of Mortgage Loans
60-89 Days Past Due(1) .... $ 1,118,243 $ 1,147,721 $ 1,052,747 $ 1,169,433 $ 989,780
Loan Balance of Mortgage Loans
90+ Days Past Due(1) ...... $ 684,166 $ 1,114,707 $ 2,018,333 $ 2,008,257 $ 1,737,621
Loan Balance of Mortgage Loans
30+ Days Past Due(1) ...... $ 6,698,514 $ 8,417,799 $ 10,543,892 $ 11,652,831 $ 7,261,447
Loan Balance of Mortgage Loans
30+ Days Past Due as a
Percentage of Aggregate
Amount Outstanding(1) ..... 2.42% 2.41% 2.13% 2.05% 1.18%
Foreclosures and Bankruptcies $ 3,382,048 $ 2,647,576 $ 2,808,028 $ 3,533,381 $ 3,283,302
Real Estate Owned ............ $ 183,921 $ 1,545,197 $ 1,749,156 $ 1,730,913 $ 329,743
(1) Contractually past due excluding loans in the process of foreclosure and loans where the borrower has filed
for bankruptcy.
</TABLE>
<TABLE>
<CAPTION>
GMAC MORTGAGE CORPORATION LOSS EXPERIENCE
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
FOR THE EIGHT
MONTHS ENDED
1994 1995 1996 1997 AUGUST 31, 1998
---- ---- ---- ---- ---------------
<S> <C> <C> <C> <C> <C>
Aggregate Amount
Outstanding ................ $276,617,622 $348,925,061 $496,073,600 $568,400,751 $617,815,357
Net Charge-offs(1) ............ $ 518,197 $ 522,013 $ 1,553,129 $ 1,332,166 $ 694,298
Net Charge-offs as a Percentage
of Aggregate Amount
Outstanding at Year-End .... 0.19% 0.15% 0.31% 0.23% 0.11%
(1) Net Charge-offs refers to writedowns on properties prior to liquidation and the actual liquidated loss
incurred on a mortgaged property when sold net of recoveries.
</TABLE>
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicing Fees for each Mortgage Loan are payable out of the
interest payments on such Mortgage Loan. The weighted average Servicing Fee as
of the Cut-Off Date will be approximately 0.50% per annum. The Servicing Fees
consist of (a) servicing compensation payable to the Servicer in respect of its
servicing activities and (b) other related compensation. The Servicer is
obligated to pay certain ongoing expenses associated with its servicing
activities and incurred by the Servicer in connection with its responsibilities
under the Servicing Agreement.
THE ISSUER
The GMACM Revolving Home Equity Loan Trust 1998-2 is a business trust
established under the laws of the State of Delaware, and will be created and
governed by a Trust Agreement dated as of September 25, 1998, between the
Depositor and the Owner Trustee, for the purposes described in this Prospectus
Supplement. The Trust Agreement will constitute the "governing instrument" of
the Issuer under the laws of the State of Delaware relating to business trusts.
The Issuer will not engage in any activity other than (i) acquiring and holding
the Mortgage Loans and the other assets comprising the Trust Estate 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 Issuer's principal offices are at Rodney Square North, 1100 North
Market Street, Wilmington, Delaware 19890, in care of Wilmington Trust Company,
as Owner Trustee.
THE OWNER TRUSTEE
Wilmington Trust Company is the Owner Trustee. The Owner Trustee is a
Delaware banking corporation, and its principal offices are located in
Wilmington, Delaware.
Neither the Owner Trustee nor any director, officer or employee of the
Owner Trustee will be under any liability to the Issuer or the Securityholders
for taking any action or for refraining from the taking of any action in good
faith pursuant to the Trust Agreement, or for errors in judgment; provided, that
none of the Owner Trustee or any director, officer or employee thereof will be
protected against any liability that would otherwise be imposed upon them by
reason of their willful malfeasance, bad faith or negligence in the performance
of their duties, or by reason of their reckless disregard of their obligations
and duties under the Trust Agreement. All persons into which the Owner Trustee
may be merged or with which it may be consolidated, or any entity resulting from
such merger or consolidation, will be the successor Owner Trustee under the
Trust Agreement.
The commercial bank or trust company serving as Owner Trustee may have
normal banking relationships with the Depositor, the Seller and/or their
respective affiliates.
The Owner Trustee may resign at any time, in which event the Indenture
Trustee will be obligated to appoint a successor owner trustee as set forth in
the Trust Agreement and the Indenture. The Indenture Trustee may also remove the
Owner Trustee if the Owner Trustee ceases to be eligible to continue as such
under the Trust Agreement or if the Owner Trustee becomes insolvent. Upon
becoming aware of such circumstances, the Indenture Trustee will be obligated to
appoint a successor Owner Trustee after consultation with the Servicer. Any
resignation or removal of the Owner Trustee and appointment of a successor Owner
Trustee will not become effective until acceptance of the appointment by the
successor Owner Trustee.
THE INDENTURE TRUSTEE
Norwest Bank Minnesota, National Association, will be the Indenture
Trustee under the Indenture. The principal offices of the Indenture Trustee are
located at Norwest Center, Sixth and Marquette, Minneapolis, Minnesota
55479-0070, with administrative offices located in Columbia, Maryland.
The commercial bank or trust company serving as Indenture Trustee may
have normal banking relationships with the Depositor, the Seller and/or their
respective affiliates.
The Indenture Trustee may resign at any time, in which event the Owner
Trustee will be obligated to appoint a successor indenture trustee as set forth
in the Indenture. The Owner Trustee as set forth in the Indenture may also
remove the Indenture Trustee if the Indenture Trustee ceases to be eligible to
continue as such under the Indenture or if the Indenture Trustee becomes
insolvent. Upon becoming aware of such circumstances, the Owner Trustee will be
obligated to appoint a successor Indenture Trustee after consultation with the
Servicer. If so specified in the Indenture, the Indenture Trustee may also be
removed at any time by the Enhancer or by the holders of a majority principal
balance of the Notes. Any resignation or removal of the Indenture Trustee and
appointment of a successor Indenture Trustee will not become effective until
acceptance of the appointment by the successor Indenture Trustee.
THE ENHANCER
The following information has been supplied by Enhancer for inclusion
in this Prospectus Supplement. No representation is made by the Seller, the
Depositor, the Servicer, the Owner Trustee, the Indenture Trustee, the
Underwriter or any of their respective affiliates as to the accuracy or
completeness of such information.
The Enhancer is a Wisconsin-domiciled stock insurance corporation
regulated by the Office of the Commissioner of Insurance of the State of
Wisconsin and licensed to do business in 50 states, the District of Columbia,
the Commonwealth of Puerto Rico and Guam. The Enhancer primarily insures
newly-issued municipal and structured finance obligations. The Enhancer is a
wholly-owned subsidiary of Ambac Financial Group, Inc. (formerly AMBAC Inc.), a
100% publicly-held company. Moody's, Standard & Poor's and Fitch IBCA, Inc. have
each assigned a triple-A claims-paying ability rating to the Enhancer.
The consolidated financial statements of the Enhancer and its
subsidiaries as of December 31, 1997 and December 31, 1996 and for the three
years ended December 31, 1997 prepared in accordance with generally accepted
accounting principles, included in the Annual Report on Form 10-K of Ambac
Financial Group, Inc. (which was filed with the Securities and Exchange
Commission (the "COMMISSION") on March 31, 1998; Commission File No. 1-10777)
and the consolidated financial statements of the Enhancer and its subsidiaries
as of June 30, 1998 and for the periods ending June 30, 1998 and June 30, 1997,
included in the Quarterly Report on Form 10-Q of Ambac Financial Group, Inc. for
the Period ended June 30, 1998 (which was filed with the Commission on August
14, 1998) are hereby incorporated by reference into this Prospectus Supplement
and shall be deemed to be a part hereof. Any statement contained in a document
incorporated herein by reference shall be modified or superseded for the
purposes of this Prospectus Supplement to the extent that a statement contained
herein by reference herein also modified or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus Supplement.
All financial statements of the Enhancer and its subsidiaries included
in documents filed by Ambac Financial Group, Inc. with the Commission pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Term Notes shall be deemed to be incorporated
by reference into this Prospectus Supplement and to be a part hereof from the
respective dates of filing such documents.
The following table sets forth the capitalization of the Enhancer as of
December 31, 1995, December 31, 1996, December 31, 1997 and June 30, 1998,
respectively, in conformity with generally accepted accounting principles.
<TABLE>
<CAPTION>
AMBAC ASSURANCE CORPORATION
CONSOLIDATED CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997 1998
------------ ------------ ------------ --------
(UNAUDITED)
---------
<S> <C> <C> <C> <C>
Unearned premiums ................................ $ 906 $ 995 $1,184 $1,228
Other liabilities ................................ 295 259 562 657
------ ------ ------ ------
$1,201 $1,254 $1,746 $1,885
------ ------ ------ ------
Stockholder's equity(1)
Common stock ................................. $ 82 $ 82 $ 82 $ 82
Additional paid-in capital ................... 481 515 521 526
Accumulated other comprehensive income ....... 87 66 118 124
Retained earnings ............................ 907 992 1,180 1,290
------ ------ ------ ------
Total stockholder's equity ....................... $1,557 $1,655 $1,901 $2,022
------ ------ ------ ------
Total liabilities and stockholders' equity ....... $2,758 $2,909 $3,647 $3,907
====== ====== ====== ======
- ----------
(1) Components of stockholder's equity have been restated for all periods presented to reflect
"Accumulated other comprehensive income" in accordance with the Statement of Financial accounting
Standards No. 130 "Reporting Comprehensive Income" adopted by the Enhancer effective January 1, 1998.
As this new standard only requires additional information in the financial statements, it does not
affect the Enhancer's financial position or results of operations.
</TABLE>
For additional financial information concerning the Enhancer, see the
audited and unaudited financial statements of the Enhancer incorporated by
reference herein. Copies of the financial statements of the Enhancer
incorporated by reference and copies of the Enhancer's annual statement for the
year ended December 31, 1997 prepared in accordance with statutory accounting
standards are available, without charge, from the Enhancer. The address of the
Enhancer's administrative offices and its telephone number are One State Street
Plaza, 17th Floor, New York, New York 10004 and (212) 668-0340.
The Enhancer makes no representation regarding the Term Notes or the
advisability of investing in the Term Notes and makes no representation
regarding, nor has it participated in the preparation of, this Prospectus
Supplement other than the information supplied by the Enhancer and presented
under the headings "Description of the Policy" and "The Enhancer" and in the
financial statements incorporated herein by reference.
Each rating of the Enhancer should be evaluated independently. The
ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Enhancer and its ability to pay claims on its policies
of insurance. Any further explanation as to the significance of the above
ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the Term
Notes, and such ratings may be subject to revision or withdrawal at any time by
the rating agencies. Any downward revision or withdrawal of any of the above
ratings may have an adverse effect on the market price of the Term Notes. The
Enhancer does not guaranty the market price of the Term Notes nor does it
guaranty that the ratings on the Term Notes will not be revised or withdrawn.
DESCRIPTION OF THE SECURITIES
GENERAL
The Notes will be issued pursuant to an Indenture dated as of September
25, 1998, between the Issuer and Norwest Bank Minnesota, National Association,
as Indenture Trustee. 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 agreements. Only the Term Notes are being
offered hereby.
The Notes will be secured by the Trust Estate, which will be pledged by
the Issuer to the Indenture Trustee pursuant to the Indenture. The Trust Estate
will consist of, without limitation, (i) the Mortgage Loans (including all
Additional Balances and any Subsequent Mortgage Loans), (ii) all amounts on
deposit in the Custodial Account, the Note Payment Account, the Distribution
Account, the Capitalized Interest Account, the Pre-Funding Account and the
Funding Account, (iii) the Policy and (iv) all proceeds of the foregoing.
The Variable Funding Notes will be issued to the Seller. The Variable
Funding Balance will be increased from time to time until the commencement of
the Rapid Amortization Period in consideration for Additional Balances and, in
some cases, Subsequent Mortgage Loans sold to the Issuer, if Principal
Collections in respect of the related Collection Period (and, during the
Revolving Period, funds on deposit in the Funding Account) are insufficient or
unavailable to cover the full consideration therefor. In addition, the Seller
may, at its option, sell Subsequent Mortgage Loans to the Issuer from time to
time until the commencement of the Managed Amortization Period. The
consideration for any such sale will be, after the application of amounts, if
any, on deposit in the Funding Account, an increase in the Variable Funding
Balance. Notwithstanding any of the foregoing, the Variable Funding Balance may
not exceed the Maximum Variable Funding Balance. Initially, the Variable Funding
Balance will be zero.
BOOK-ENTRY NOTES
The Term Notes will initially be issued as Book-Entry Notes. Term Note
Owners may elect to hold their Term Notes 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 Notes will be issued in one or more securities that equal the
aggregate Term Note Balance of the Term Notes, and will initially be registered
in the name of Cede & Co., the nominee of DTC. Cedel and Euroclear will hold
omnibus positions on behalf of their Participants through customers' securities
accounts in the names of Cedel and Euroclear 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. Investors may hold such
beneficial interests in the Book-Entry Notes in minimum denominations
representing Term Note Balances of $25,000 and in integral multiples of $1,000
in excess thereof. Except as described below, no Term Note Owner will be
entitled to receive a physical certificate representing such security (each, a
"DEFINITIVE NOTE"). Unless and until Definitive Notes are issued, it is
anticipated that the only "Holder" of the Term Notes will be Cede & Co., as
nominee of DTC. Term Note Owners will not be "Holders" or "Noteholders" as such
terms are used in the Indenture.
A Term Note Owner's ownership of a Book-Entry Note will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "FINANCIAL INTERMEDIARY") that maintains such Term Note
Owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Notes will be recorded on the records of DTC (or of
a Participating firm that acts as agent for the Financial Intermediary, the
interest of which will in turn be recorded on the records of DTC, if such Term
Note Owner's Financial Intermediary is not a DTC Participant, and on the records
of Cedel or Euroclear, as appropriate).
Term Note Owners will receive all payments of principal of and interest
on the Term Notes from the Indenture Trustee through DTC and DTC Participants.
While the Term Notes are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "DTC RULES"), DTC is required to make book-entry
transfers among Participants on whose behalf it acts with respect to the Term
Notes and is required to receive and transmit payments of principal of and
interest on the Term Notes. Participants and Indirect Participants with which
Term Note Owners have accounts with respect to Term Notes are similarly required
to make book-entry transfers and receive and transmit such payments on behalf of
their respective Term Note Owners. Accordingly, although Term Note Owners will
not possess physical certificates, the DTC Rules provide a mechanism by which
Term Note Owners will receive payments and will be able to transfer their
interests.
Term Note Owners will not receive or be entitled to receive Definitive
Notes representing their respective interests in the Term Notes, except under
the limited circumstances described below. Unless and until Definitive Notes are
issued, Term Note Owners that are not Participants may transfer ownership of
their Term Notes only through Participants and Indirect Participants by
instructing such Participants and Indirect Participants to transfer the Term
Notes, by book-entry transfer, through DTC for the account of the purchasers of
such Term Notes, which account is maintained with the related Participants.
Under the DTC Rules and in accordance with DTC's normal procedures, transfers of
ownership of the Term Notes will be executed through DTC, and the accounts of
the respective Participants at DTC will be debited and credited. Similarly, the
Participants and Indirect Participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing Term Note
Owners.
Under a book-entry format, Term Note Owners of the Book-Entry Notes may
experience some delay in their receipt of payments, since such payments will be
forwarded by the Indenture Trustee to Cede & Co. Payments with respect to Term
Notes held through Cedel or Euroclear will be credited to the cash accounts of
Cedel Participants or Euroclear Participants in accordance with the relevant
system's rules and procedures, to the extent received by the related Depositary.
Such payments will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. Because DTC can only act on behalf of
Financial Intermediaries, the ability of a Term Note Owner to pledge Book-Entry
Notes to persons or entities that do not participate in the Depositary system,
or otherwise take actions in respect of such Book-Entry Notes, may be limited
due to the lack of physical certificates for such Book-Entry Notes. In addition,
the issuance of the Term Notes in book-entry form may reduce the liquidity
thereof in the secondary market, since certain potential investors may be
unwilling to purchase securities for which they cannot obtain physical
certificates.
DTC has advised the Indenture Trustee that, unless and until Definitive
Notes are issued, DTC will take any action permitted to be taken by the holders
of the Book-Entry Notes under the Indenture only at the direction of one or more
Financial Intermediaries to the DTC accounts of which the Book-Entry Notes are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries the holdings of which include such Book-Entry Notes. Cedel or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by Term Note Owners under the Indenture on behalf of a Cedel
Participant or Euroclear Participant only in accordance with its relevant rules
and procedures and subject to the ability of the related Depositary to effect
such actions on its behalf through DTC.
Definitive Notes will be issued to Term Note Owners or their nominees,
rather than to DTC, if (a) the Indenture Trustee determines that the DTC is no
longer willing, qualified or able to properly discharge its responsibilities as
nominee and depository with respect to the Book-Entry Notes and the Indenture
Trustee is unable to locate a qualified successor, (b) the Indenture Trustee
elects to terminate the book-entry system through DTC or (c) after the
occurrence of an Event of Default, Term Note Owners representing Percentage
Interests aggregating at least a majority of the Term Note Balances of the Term
Notes advise DTC through the Financial Intermediaries and the DTC Participants
in writing that the continuation of the book-entry system through DTC (or a
successor thereto) is no longer in the best interests of Term Note Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Indenture Trustee will be required to notify all Term
Note Owners of the occurrence of such event and the availability through DTC of
Definitive Notes. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Notes and instructions for
re-registration, the Indenture Trustee will issue and authenticate Definitive
Notes, and thereafter the Indenture Trustee will recognize the holders of such
Definitive Notes as "Holders" and "Noteholders" under the Indenture.
Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Term Notes between and among
Participants of DTC, Cedel and Euroclear, they will be under no obligation to
perform or continue to perform such procedures, and such procedures may be
discontinued at any time. See "Risk Factors--Book-Entry Registration" and "The
Agreements--Book-Entry Securities" in the Prospectus.
PAYMENTS ON THE NOTES
Payments on the Notes will be made by the Indenture Trustee or the
Paying Agent on the 18th day of each month or, if such day is not a Business
Day, then the next succeeding Business Day, commencing in October 1998. Payments
on the Notes will be made to the persons in the names of which such Notes are
registered at the close of business on the day prior to each Payment Date (or,
in the case of the Term Notes, if the Term Notes are no longer Book-Entry Notes,
at the related Record Date). See "The Agreements--Book-Entry Securities" in the
Prospectus. Payments will be made by check or money order mailed (or, upon the
request of a Holder of Notes having denominations aggregating at least
$1,000,000, by wire transfer or otherwise) to the address of the person entitled
thereto (which, in the case of Book-Entry Notes, will be DTC or its nominee) as
it appears on the Note Register, in the amounts calculated as described herein
on the related Determination Date. However, the final payment in respect of the
Notes will be made only upon presentation and surrender thereof at the office or
the agency of the Indenture Trustee specified in the notice to Noteholders of
such final payment. A "BUSINESS DAY" is any day other than (i) a Saturday or
Sunday or (ii) a day on which banking institutions in the States of Minnesota,
Pennsylvania, New York, Maryland or Delaware are required or authorized by law
or government decree to be closed. The "PAYING AGENT" will initially be the
Indenture Trustee.
INTEREST PAYMENTS ON THE NOTES
Interest payments will be made on the Notes on each Payment Date at the
Note Rate for the related Interest Period, subject to the limitations set forth
below, which may result in Interest Shortfalls.
However, on any Payment Date for which the related Note Rate has been
determined pursuant to clause (ii) of the definition of Note Rate, the excess of
(a) the amount of interest that would have accrued on the Notes during the
related Interest Period had such amount been determined pursuant to clause (i)
of the definition of Note Rate (but not at a rate in excess of 14.5% per annum)
over (b) the interest actually accrued on the Notes during such Interest Period
(such excess, an "INTEREST SHORTFALL") will accrue interest at the Note Rate (as
adjusted from time to time) and will be paid on subsequent Payment Dates to the
extent funds are available therefor. Interest Shortfalls will not be covered by
the Policy and may remain unpaid on the Final Payment Date.
The "NET LOAN RATE" will be, with respect to any Payment Date, the
weighted average of (i) the Loan Rates on the HELOCs and (ii) the Loan Rates on
the HELs, in each case as of the first day of the calendar month in which the
related Interest Period begins, net of the premium rate on the Policy, the rate
of the fee of each of the Servicer, the Owner Trustee and the Indenture Trustee,
and, beginning on the thirteenth Payment Date, 50 basis points, adjusted to an
effective rate reflecting interest calculated on the basis of a 360-day year
assumed to consist of twelve 30-day months.
Interest on the Notes in respect of any Payment Date will accrue during
the related Interest Period on the basis of the actual number of days in such
Interest Period and a 360-day year. Interest payments on the Notes will be
funded from Interest Collections on the Mortgage Loans and, if necessary, from
draws on the Policy.
All interest payments on the Notes in respect of any Payment Date will
be allocated to the Term Notes and the Variable Funding Notes pro rata based on
their respective interest accruals. The interest rate on the Variable Funding
Notes for any Payment Date shall not exceed the Note Rate for the related
Interest Period.
On each Payment Date, LIBOR will be established by the Indenture
Trustee. As to any Interest Period, "LIBOR" will equal, for any Interest Period
other than the first Interest Period, the rate for United States dollar deposits
for one month that appears on the Telerate Screen Page 3750 as of 11:00 a.m.,
London, England time, on the second LIBOR Business Day prior to the first day of
such Interest Period. With respect to the first Interest Period, LIBOR will
equal the rate for United States dollar deposits for one month that appears on
the Telerate Screen Page 3750 as of 11:00 a.m., London, England time, two LIBOR
Business Days prior to the Closing Date. If such rate does not appear on such
page (or such other page as may replace such page on such service, or if such
service is no longer offered, such other service for displaying LIBOR or
comparable rates as may be reasonably selected by the Indenture Trustee after
consultation with the Servicer), the rate will be the Reference Bank Rate. If no
such quotations can be obtained and no Reference Bank Rate is available, LIBOR
will be LIBOR applicable to the preceding Payment Date.
"TELERATE PAGE 3750" means the display page so designated on the
Telerate Service (or such other page as may replace page 3750 on such service
for the purpose of displaying London interbank offered rates of major banks). If
such rate does not appear on such page (or such other page as may replace such
page on such service, or if such service is no longer offered, such other
service for displaying LIBOR or comparable rates as may be selected by the
Indenture Trustee after consultation with the Servicer), the rate will be the
Reference Bank Rate.
The "REFERENCE BANK RATE" will be, with respect to any Interest Period,
as follows: the arithmetic mean (rounded upwards, if necessary, to the nearest
one sixteenth of one percent) of the offered rates for United States dollar
deposits for one month which are offered by the Reference Banks as of 11:00
a.m., London, England time, on the second LIBOR Business Day prior to the first
day of such Interest Period to prime banks in the London interbank market for a
period of one month in amounts approximately equal to the sum of the outstanding
Note Balance of the Notes; provided, that at least two such Reference Banks
provide such rate. If fewer than two offered rates appear, the Reference Bank
Rate will be the arithmetic mean of the rates quoted by one or more major banks
in New York City, selected by the Indenture Trustee after consultation with the
Servicer, as of 11:00 a.m., New York time, on such date for loans in U.S.
Dollars to leading European Banks for a period of one month in amounts
approximately equal to the aggregate Note Balance of the Notes. If no such
quotations can be obtained, the Reference Bank Rate will be the Reference Bank
Rate applicable to the preceding Interest Period.
"LIBOR BUSINESS DAY" means any day other than (i) a Saturday or a
Sunday or (ii) a day on which banking institutions in the city of London,
England are required or authorized by law to be closed.
The establishment of LIBOR as to each Interest Period by the Indenture
Trustee and the Indenture Trustee's calculation of the rate of interest
applicable to the Notes for the related Interest Period will, in the absence of
manifest error, be final and binding.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date, if required by the Enhancer, a cash deposit will
be made into the Capitalized Interest Account from the proceeds of the sale of
the Term Notes. On each Payment Date during the Pre-Funding Period, the
Indenture Trustee will transfer from the Capitalized Interest Account to the
Note Payment Account an amount equal to the Capitalized Interest Requirement, if
any, for such Payment Date.
The "CAPITALIZED INTEREST REQUIREMENT" will be, with respect to each
Payment Date during the Pre-Funding Period, the excess, if any of (i) the sum of
(A) the amount of interest accrued at the Note Rate on the amount on deposit in
the Pre-Funding Account as of the preceding Payment Date (or as of the Closing
Date, in the case of the first Payment Date) and (B) the amount of fees paid to
the Enhancer, the Owner Trustee and the Indenture Trustee over (ii) the amount
of reinvestment earnings on funds on deposit in the Pre-Funding Account.
On the Payment Date following the end of the Pre-Funding Period, the
Indenture Trustee will distribute to the Seller any amounts remaining in the
Capitalized Interest Account after taking into account withdrawals therefrom on
such Payment Date. The Capitalized Interest Account will be closed following
such payment.
PRINCIPAL PAYMENTS ON THE NOTES
No principal will be payable on the Notes during the Revolving Period.
On each Payment Date during the Managed Amortization Period, principal will be
payable on the Notes in an amount equal to Net Principal Collections for the
related Collection Period. On each Payment Date during the Rapid Amortization
Period, principal will be payable on the Notes in an amount equal to Principal
Collections for the related Collection Period. In addition, on each Payment Date
following the end of the Revolving Period, to the extent of funds available
therefor, Noteholders will be entitled to receive certain additional amounts to
be applied in reduction of the related Note Balances equal to Liquidation Loss
Amounts, as described herein.
All principal payments due and payable on the Notes will be allocated
to the Term Notes and the Variable Funding Notes pro rata based on the
outstanding principal balances thereof until paid in full. In no event will
principal payments on the Notes on any Payment Date exceed the related Note
Balance thereof on such Payment Date. On the Final Payment Date, principal will
be due and payable on the Notes in an amount equal to the related Note Balance
remaining outstanding on such Payment Date.
PRIORITY OF DISTRIBUTIONS
On each Payment Date, from amounts withdrawn from the Custodial
Account, the following payments will be made in the following order of priority:
(i) to the Note Payment Account, for payment to the Holders of
the Term Notes and the Variable Funding Notes, pro rata, interest for the
related Interest Period at the Note Rate on the related Note Balance immediately
prior to such Payment Date, other than any Interest Shortfalls;
(ii) during the Amortization Periods, to the Note Payment Account,
for payment to the Holders of the Term Notes and the Variable Funding Notes, pro
rata, the Principal Distribution Amount for such Payment Date;
(iii) to the Enhancer, the amount of the premium for the Policy,
with interest thereon, as provided in the insurance agreement, dated as of the
Closing Date, among the Enhancer, the Seller, the Depositor, the Servicer, the
Indenture Trustee and the Issuer (the "INSURANCE AGREEMENT");
(iv) to the Enhancer, to reimburse it for prior draws made on the
Policy, with interest thereon, as provided in the Insurance Agreement;
(v) during the Revolving Period, to the Funding Account, the
amount (but not in excess of the amount, if any, of Excess Spread) necessary to
be applied on such Payment Date so that the Outstanding Overcollateralization
Amount for such Payment Date is not less than the Overcollateralization Target
Amount;
(vi) during the Amortization Periods, to the Note Payment Account,
the amount (but not in excess of the amount, if any, of Excess Spread) necessary
to be applied on such Payment Date for payment to the Holders of the Term Notes
and the Variable Funding Notes, pro rata, so that the Outstanding
Overcollateralization Amount for such Payment Date is not less than the
Overcollateralization Target Amount;
(vii) to the Enhancer, any other amounts owed the Enhancer pursuant
to the Insurance Agreement;
(viii) to the Note Payment Account, for payment to the Holders of
the Term Notes and the Variable Funding Notes, pro rata, any Interest Shortfalls
not previously paid, together with interest thereon at the Note Rate (as
adjusted from time to time), based on the amount remaining unpaid with respect
thereto;
(ix) during the Amortization Periods, to the Indenture Trustee,
certain other amounts owing to the
Indenture Trustee pursuant to the Indenture to the extent remaining unpaid; and
(x) any remaining amount, to the Distribution Account, for
distribution to the Certificateholders (or, under certain circumstances during
the Revolving Period, to the Funding Account in connection with the optional
removal of certain Mortgage Loans);
provided, that on the Final Payment Date, the amount to be paid pursuant to
clause (ii) above will be equal to the sum of the Term Note Balance and the
Variable Funding Balance immediately prior to such Payment Date. For purposes of
the foregoing, the Note Balance of the Notes on each Payment Date during the
Amortization Periods will be reduced by the pro rata portion allocable to the
related Notes of all Liquidation Loss Amounts for such Payment Date, but only to
the extent that such Liquidation Loss Amounts are not otherwise covered by
payments made pursuant to clause (ii) above or by a draw on the Policy and the
Outstanding Overcollateralization Amount for such Payment Date is zero. In the
event of any such reduction of the Note Balance of the Notes, the amount of the
principal reductions allocated to the Notes will be payable to the Noteholders
on later Payment Dates only to the extent of any excess cashflow remaining on
such later Payment Dates.
"AGGREGATE BALANCE DIFFERENTIAL" means, with respect to any Payment
Date and any Variable Funding Note, the sum of the Balance Differentials that
have been added to the Variable Funding Balance of such Variable Funding Note
prior to such Payment Date. "BALANCE DIFFERENTIAL" means, with respect to any
Payment Date, the amount, if any, by which the sum of the aggregate Principal
Balance of all Subsequent Mortgage Loans and the amount of any Additional
Balances transferred to the Trust Estate during the related Collection Period
exceeds the Principal Collections for the previous Collection Period.
"EXCESS SPREAD" means, with respect to any Payment Date, the excess, if
any, of (i) Interest Collections for the related Collection Period over (ii) the
sum of the related Servicing Fee and the amounts specified in clauses (i) and
(iii) above for such Payment Date.
"LIQUIDATION LOSS AMOUNT" means, with respect to any Liquidated
Mortgage Loan, the unrecovered Principal Balance thereof at the end of the
related Collection Period in which such Mortgage Loan became a Liquidated
Mortgage Loan, after giving effect to the Net Liquidation Proceeds in connection
therewith.
"LIQUIDATED MORTGAGE LOAN" means, with respect to any Payment Date, any
Mortgage Loan in respect of which the Servicer has determined, in accordance
with the servicing procedures specified in the Servicing Agreement, as of the
end of the related Collection Period that substantially all Liquidation Proceeds
it reasonably expects to recover, if any, with respect to the disposition of the
related Mortgaged Property have been recovered.
A "MANAGED AMORTIZATION EVENT" will be deemed to occur on any date on
which the amount on deposit in the Funding Account equals or exceeds
$10,000,000.
"NOTE BALANCE" means the Term Note Balance and/or the Variable Funding
Balance, as the context requires.
"OVERCOLLATERALIZATION TARGET AMOUNT" will be, as to any Payment Date
prior to the thirtieth (30th) Payment Date, an amount equal to at least 1.7% of
the Note Balance, and thereafter will be adjusted from time to time pursuant to
the terms of the Indenture.
"PRINCIPAL DISTRIBUTION AMOUNT" means, for any Payment Date (i) during
the Revolving Period, zero, (ii) during the Managed Amortization Period, Net
Principal Collections, and (iii) during the Rapid Amortization Period, Principal
Collections; provided, that on any Payment Date during the Amortization Periods,
the Principal Distribution Amount shall also include an amount equal to the
Liquidation Loss Amounts for such Payment Date.
A "RAPID AMORTIZATION EVENT" will be deemed to occur upon the
occurrence of any one of the following events:
(a) the failure on the part of the Seller (i) to make any payment
or deposit required to be made under the Purchase Agreement within five Business
Days after the date such payment or deposit is required to be made; or (ii) to
observe or perform in any material respect any other covenants or agreements of
the Seller set forth in the Purchase Agreement, which failure continues
unremedied for a period of 60 days after written notice thereof to the Seller,
and such failure materially and adversely affects the interests of the Enhancer
or the Securityholders; provided, that a Rapid Amortization Event will not be
deemed to occur if the Seller has repurchased or caused to be repurchased or
substituted for the related Mortgage Loans or all Mortgage Loans, as applicable,
during such period in accordance with the provisions of the Indenture;
(b) any representation or warranty made by the Seller in the
Purchase Agreement shall prove to have been incorrect in any material respect
when made and shall continue to be incorrect in any material respect for the
related cure period specified in the Servicing Agreement after written notice
and as a result of which the interests of the Enhancer or the Securityholders
are materially and adversely affected ; provided, that a Rapid Amortization
Event will not be deemed to occur if the Seller has repurchased or caused to be
repurchased or substituted for the related Mortgage Loans or all Mortgage Loans,
as applicable, during such period in accordance with the provisions of the
Indenture;
(c) the entry against the Seller of a decree or order by a court
or agency or supervisory authority having jurisdiction in the premises for the
appointment of a trustee, conservator, receiver or liquidator in any insolvency,
conservatorship, receivership, readjustment of debt, marshalling of assets and
liabilities or similar proceedings, or for the winding up or liquidation of its
affairs, and the continuance of any such decree or order unstayed and in effect
for a period of 60 consecutive days;
(d) the Seller shall voluntarily go into liquidation, consent to
the appointment of a conservator, receiver, liquidator or similar person in any
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings of or relating to the Seller or the Issuer or of or relating
to all or substantially all of its property, or a decree or order of a court,
agency or supervisory authority having jurisdiction in the premises for the
appointment of a conservator, receiver, liquidator or similar person in any
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings, or for the winding-up or liquidation of its affairs, shall
have been entered against the Seller or the Issuer and such decree or order
shall remain in force undischarged, unbonded or unstayed for a period of 60 days
or the Seller or the Issuer shall admit in writing its inability to pay its
debts generally as they become due, file a petition to take advantage of any
applicable insolvency or reorganization statute, make an assignment for the
benefit of its creditors or voluntarily suspend payment of its obligations;
(e) the Issuer becomes subject to regulation by the Commission as
an investment company within the meaning of the Investment Company Act of 1940,
as amended;
(f) a Servicing Default occurs and is unremedied under the
Servicing Agreement and a qualified successor Servicer has not been appointed;
(g) the aggregate of all draws under the Policy exceeds 1% of the
initial Note Balance;
(h) the Issuer is determined to be an association (or a publicly
traded partnership) taxable as a corporation for federal income tax purposes; or
(i) an event of default under the Insurance Agreement (except for
a default by the Enhancer, unless such Enhancer cannot be replaced without
additional expense).
In the case of any event described in (a), (b), (f), (g) or (i), a
Rapid Amortization Event will be deemed to have occurred only if, after any
applicable grace period described in such clauses, either the Indenture Trustee,
the Enhancer or Securityholders evidencing not less than 51% of the aggregate
Securities Balance, by written notice to the Depositor, the Servicer and the
Owner Trustee (and to the Indenture Trustee, if given by the Securityholders),
declare that a Rapid Amortization Event has occurred as of the date of such
notice. In the case of any event described in clauses (c), (d), (e) or (h), a
Rapid Amortization Event will be deemed to have occurred without any notice or
other action on the part of the Indenture Trustee, the Enhancer or the
Securityholders immediately upon the occurrence of such event; provided, that
any Rapid Amortization Event may be waived and deemed of no effect with the
written consent of the Enhancer and each Rating Agency, subject to the
satisfaction of any conditions to such waiver.
"TERM NOTE BALANCE" means, with respect to any Payment Date and any
Term Note, the initial Term Note Balance thereof reduced by all payments of
principal of such Term Note prior to such Payment Date.
"VARIABLE FUNDING BALANCE" means, with respect to any Payment Date and
any Variable Funding Note, the initial Variable Funding Balance thereof (i)
increased by the Aggregate Balance Differential for such Variable Funding Note
immediately prior to such Payment Date and (ii) reduced by all distributions of
principal thereon prior to such Payment Date.
OVERCOLLATERALIZATION
The cashflow mechanics of the Trust Estate are intended to create
overcollateralization by depositing the Excess Spread in the Funding Account and
applying it to acquire Additional Balances and/or Subsequent Mortgage Loans and
by using a portion or all of the Excess Spread to make principal payments on the
Notes during the Amortization Periods. Such application of Excess Spread will
continue until the Outstanding Overcollateralization Amount equals the
Overcollateralization Target Amount at which point such application will cease
unless necessary on a later Payment Date to increase the amount of
overcollateralization to the target level. In addition, the
Overcollateralization Target Amount may be permitted to step down in the future
in which case a portion of the Excess Spread will not be used to acquire
Additional Balances and/or Subsequent Mortgage Loans or paid to the holders of
the Notes but will instead be distributed to the holders of the Certificates. As
a result of these mechanics, the weighted average lives of the Notes will be
different than they would have been in the absence of such mechanics.
To the extent that the protection provided by the application of Excess
Spread and the availability of overcollateralization are exhausted and if
payments are not made under the Policy as required, Noteholders may incur a loss
on their investments.
THE PAYING AGENT
The Paying Agent will initially be the Indenture Trustee. The Paying
Agent will have the revocable power to withdraw funds from the Note Payment
Account for the purpose of making payments to the Noteholders.
MATURITY AND OPTIONAL REDEMPTION
The Notes will be payable in full on the Final Payment Date, to the
extent of the aggregate outstanding Note Balance on such date, if any. In
addition, a principal payment may be made in redemption of the Notes upon the
exercise by the Servicer of its option to purchase the Mortgage Loans and
related assets of the Trust Estate after the aggregate Term Note Balance is
reduced to an amount less than or equal to 10% of the initial Term Note Balance.
The purchase price of such Mortgage Loans will be the sum of the outstanding
Pool Balance and accrued and unpaid interest thereon (including Interest
Shortfalls and interest thereon) at the weighted average of the Loan Rates of
such Mortgage Loans through the day preceding the Payment Date on which such
purchase occurs, together with all amounts due and owing the Enhancer.
DESCRIPTION OF THE POLICY
On the Closing Date, the Enhancer will issue the Policy in favor of the
Owner Trustee on behalf of the Issuer. The Policy will unconditionally and
irrevocably guarantee certain payments on the Notes. On each Payment Date, a
draw will be made on the Policy in an amount (the "INSURED AMOUNT"), if any,
equal to the sum of (i) the amount by which interest accrued on the Note
Balances, at the Note Rate during the related Interest Period (exclusive of any
Interest Shortfalls) exceeds the amount on deposit in the Note Payment Account
available for interest payments in respect of the Notes on such Payment Date and
(ii) any Liquidation Loss Amount not currently covered by Excess Spread or the
availability of overcollateralization. Interest Shortfalls will not be covered
by the Policy. Pursuant to the terms of the Indenture, draws on the Policy will
be paid to the Noteholders by the Paying Agent pro rata between the Term Notes
and the Variable Funding Notes based on the respective Note Balances thereof;
provided, however, that to the extent any such draw represents amounts specified
in clause (ii) above during the Revolving Period, such amount will be deposited
into the Funding Account rather than being paid to the Noteholders. In the
absence of payments under the Policy, to the extent not covered by Excess Spread
or the availability of overcollateralization, Noteholders could incur a loss on
their investment.
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND
SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of a Note will depend on the price paid by the
related Noteholder for such Note, the Note Rate, the rate and timing of
principal payments (including payments in excess of the Monthly Payment,
prepayments in full or terminations, liquidations and repurchases) on the
Mortgage Loans and, in the case of the HELOCs, the rate and timing of draws and
the allocations thereof.
In general, if a Term Note is purchased at a premium over its face
amount and payments of principal of such Term Note occur at a rate faster than
that assumed at the time of purchase, the purchaser's actual yield to maturity
will be lower than that anticipated at the time of purchase. Conversely, if a
Term Note is purchased at a discount from its face amount and payments of
principal of such Term Note occur at a rate that is slower than that assumed at
the time of purchase, the purchaser's actual yield to maturity will be lower
than originally anticipated.
With respect to certain HELOCs, the Loan Rate at origination may be
below the rate that would result from the sum of the then-applicable Index and
Gross Margin. Under the GMACM Underwriting Guide, Mortgagors are generally
qualified based on an assumed payment which reflects a rate significantly lower
than the maximum rate. The repayment of any such HELOC may thus be dependent on
the ability of the borrower to make larger interest payments following the
adjustment of the Loan Rate.
As discussed under "Risk Factors--Interest-Only Feature for HELOCs"
herein, a significant portion of the HELOCs are not expected to significantly
amortize prior to maturity. As a result, a borrower will generally be required
to pay a substantial principal amount at the maturity of such a HELOC. Such
HELOCs pose a greater risk of default than fully-amortizing Mortgage Loans, such
as the HELs, because the Mortgagor's ability to make such a substantial payment
at maturity will generally depend on the Mortgagor's ability to obtain
refinancing of such HELOCs or to sell the Mortgaged Property prior to the
maturity of the HELOC. The ability to obtain refinancing will depend on a number
of factors prevailing at the time refinancing or sale is required, including,
without limitation, the Mortgagor's personal economic circumstances, the
Mortgagor's equity in the related Mortgaged Property, real estate values,
prevailing market interest rates, tax laws and national and regional economic
conditions. For a general discussion of factors that may affect a Mortgagor's
personal economic circumstances, see "Risk Factors--Dependency on Mortgagor
Credit" herein. Neither the Depositor nor the Seller nor any of their affiliates
will be obligated to refinance or repurchase any Mortgage Loan or to sell any
Mortgaged Property.
For any Mortgage Loans secured by junior mortgages, any inability of
the Mortgagor to pay off the balance thereof may also affect the ability of the
Mortgagor to obtain refinancing at any time of any related senior mortgage loan,
thereby preventing a potential improvement in the Mortgagor's circumstances.
Under the Servicing Agreement the Servicer may be restricted or prohibited from
consenting to any refinancing of any related senior mortgage loan, which in turn
could adversely affect the Mortgagor's circumstances or result in a prepayment
or default under the corresponding junior Mortgage Loan.
In addition to the Mortgagor's personal economic circumstances, a
number of factors, including homeowner mobility, job transfers, changes in the
Mortgagor's housing needs, the Mortgagor's net equity in the Mortgaged Property,
changes in the value of the Mortgaged Property, national and regional economic
conditions, enforceability of due-on-sale clauses, prevailing market interest
rates, servicing decisions, solicitations and the availability of mortgage
funds, seasonal purchasing and payment habits of borrowers or changes in the
deductibility for federal income tax purposes of interest payments on home
equity loans, may affect the rate and timing of principal payments on the
Mortgage Loans or draws on the HELOCs. There can be no assurance as to the rate
of principal payments on the Mortgage Loans or draws on the HELOCs. The Mortgage
Loans may be prepaid in full or in part without penalty. The rate of principal
payments and the rate of draws may fluctuate substantially from time to time.
Generally, home equity loans are not viewed by borrowers as permanent financing.
Due to the unpredictable nature of both principal payments and draws on the
HELOCs, the rates of principal payments net of draws on the HELOCs may be much
more volatile than for typical first lien mortgage loans.
The yield to maturity of the Term Notes, and the rate and timing of
principal payments on the Mortgage Loans or draws on the HELOCs, may also be
affected by a wide variety of specific terms and conditions applicable to the
respective programs under which the Mortgage Loans were originated. For example,
the HELOCs may provide for future draws to be made only in specified minimum
amounts, or alternatively may permit draws to be made by check in any amount. A
pool of Mortgage Loans including HELOCs subject to the latter provisions may be
likely to remain outstanding longer with a higher aggregate principal balance
than a pool of Mortgage Loans including HELOCs with the former provisions,
because of the relative ease of making new draws. Furthermore, the HELOCs may
provide for interest rate changes on a daily or monthly basis, or may have Gross
Margins that may vary under certain circumstances over the term of the loan. In
extremely high market interest rate scenarios, Term Notes backed by Mortgage
Loans including HELOCs with adjustable rates subject to substantially higher
maximum rates than typically apply to adjustable rate first mortgage loans may
experience rates of default and liquidation substantially higher than those that
have been experienced on other adjustable rate mortgage loan pools.
As a result of the payment terms of the HELOCs, there may be no
principal payments on the Term Notes in any given month. In addition, it is
possible that the aggregate draws on HELOCs may exceed the aggregate payments
with respect to principal on the Mortgage Loans for the related period. The Term
Notes provide for a period during which all or a portion of the principal
collections on the Mortgage Loans are reinvested in Additional Balances and/or
Subsequent Mortgage Loans or are accumulated in a trust account pending
commencement of an amortization period with respect to the Term Notes.
The Mortgage Loans generally will contain due-on-sale provisions
permitting the mortgagee to accelerate the maturity of such Mortgage Loan upon
sale or certain transfers by the Mortgagor of the underlying Mortgaged Property.
The Servicer will generally enforce any due-on-sale clause to the extent it has
knowledge of the conveyance or proposed conveyance of the underlying Mortgaged
Property and it is entitled to do so under applicable law. The extent to which
Mortgage Loans are assumed by purchasers of the Mortgaged Properties rather than
prepaid by the related Mortgagors in connection with the sales of the Mortgaged
Properties will affect the weighted average life of the Term Notes. See "The
Seller and Servicer--Collection and Other Servicing Procedures" herein for a
description of certain provisions of the Servicing Agreement that may affect the
prepayment experience on the Mortgage Loans.
The Servicer may allow the refinancing of a Mortgage Loan in the Trust
Estate by accepting prepayments thereon and permitting a new loan to the same
borrower secured by a mortgage on the same property, which may be originated by
the Servicer or by an unrelated entity. In the event of such a refinancing, the
new loan would not be included in the Trust Estate and, therefore, such
refinancing would have the same effect as a prepayment in full of the related
Mortgage Loan. The Servicer may, from time to time, implement programs designed
to encourage refinancing. Such programs may include, without limitation,
modifications of existing loans, general or targeted solicitations, the offering
of pre-approved applications, reduced origination fees or closing costs, or
other financial incentives. Targeted solicitations may be based on a variety of
factors, including the credit of the borrower or the location of the Mortgaged
Property. In addition, the Servicer may encourage refinancing of Mortgage Loans,
including defaulted Mortgage Loans, under which creditworthy borrowers assume
the outstanding indebtedness of such Mortgage Loans which may be removed from
the Trust Estate. As a result of such programs, (i) the rate of principal
prepayments of the Mortgage Loans may be higher than would otherwise be the
case, and (ii) in some cases, the average credit or collateral quality of the
Mortgage Loans remaining in the Trust Estate may decline.
Investors in the Term Notes should note that in certain instances in
which a Mortgagor either (i) requests an increase in the credit limit on the
related HELOC above the limit stated on the Credit Line Agreement, (ii) requests
to place a lien on the related Mortgaged Property senior to the lien of the
related Mortgage Loan, or (iii) refinances the senior lien resulting in a
Combined Loan-to-Value Ratio above the previous Combined Loan-to-Value Ratio for
such loan, the Servicer will have the option to purchase from the Trust Estate
the related Mortgage Loan at the Repurchase Price. There are no limitations on
the frequency of such repurchases or the characteristics of the Mortgage Loans
so repurchased. In addition, on any Payment Date the Seller, in its capacity as
the holder of the Certificates, may designate certain Mortgage Loans for removal
from the Trust Estate. Such repurchases may lead to an increase in prepayments
on the Mortgage Loans in the Trust Estate, which may reduce the yield on the
Term Notes. In addition, such repurchases may affect the characteristics of the
Mortgage Loans in the Trust Estate in the aggregate with respect to Loan Rates
and credit quality.
Although the Loan Rates on the HELOCs are subject to periodic
adjustments, such adjustments generally (i) will not increase the Loan Rates
over a fixed maximum rate during the life of any HELOC and (ii) will be based on
an Index (which may not rise and fall consistently with prevailing market
interest rates) plus the related Gross Margin (which may vary under certain
circumstances, and which may be different from margins being used at the time
for newly originated adjustable rate mortgage loans). As a result, the Loan
Rates on the HELOCs at any time may not equal the prevailing rates for similar,
newly originated adjustable rate home equity mortgage loans and accordingly the
rate of principal payments, if any, and draws on the HELOCs may be lower or
higher than would otherwise be anticipated. There can be no certainty as to the
rate of principal payments on the Mortgage Loans or draws on the HELOCs during
any period or over the life of the Term Notes.
The yield to investors on the Term Notes will be sensitive to
fluctuations in the level of LIBOR and the Note Rate will be capped. See "Risk
Factors--Risk of Loan Rates Reducing the Note Rate on the Term Notes" herein.
With respect to the indices used in determining the Note Rate for the
Term Notes or the Loan Rates of the underlying Mortgage Loans, a number of
factors affect the performance of each such index and may cause such index to
move in a manner different from other indices. To the extent that such index may
reflect changes in the general level of interest rates less quickly than other
indices, in a period of rising interest rates, increases in the yield to the
Term Noteholders due to such rising interest rates may occur later than that
which would be produced by other indices, and in a period of declining rates,
such index may remain higher than other market interest rates which may result
in a higher level of prepayments of the Mortgage Loans, which, in the case of
HELOCs, adjust in accordance with such index, than of mortgage loans which
adjust in accordance with other indices.
The timing of changes in the rate of principal payments on a Term Note
may significantly affect an investor's actual yield to maturity, even if the
average rate of principal payments experienced over time is consistent with an
investor's expectation. In general, the earlier a payment of principal on a Term
Note, the greater will be the effect on an investor's yield to maturity. As a
result, the effect on an investor's yield of principal payments occurring at a
rate higher (or lower) than the rate anticipated by the investor during the
period immediately following the issuance of the Term Notes would not be fully
offset by a subsequent like reduction (or increase) in the rate of principal
payments.
The rate and timing of defaults on the Mortgage Loans will also affect
the rate and timing of principal payments on the Mortgage Loans and thus the
yield on the Term Notes. There can be no assurance as to the rate of losses or
delinquencies on any of the Mortgage Loans, however, the rate of such losses and
delinquencies are likely to be higher than those of traditional first lien
mortgage loans, particularly in the case of Mortgage Loans with high Combined
Loan-to-Value Ratios or low Junior Ratios. To the extent that any losses are
incurred on any of the Mortgage Loans that are not covered by the applicable
credit enhancements, holders of the Term Notes will bear all risk of such losses
resulting from default by Mortgagors. Even where the Policy covers all losses
incurred on the Mortgage Loans, the effect of losses may be to increase
prepayment rates on the Mortgage Loans, thus reducing the weighted average life
and affecting the yield to maturity.
Amounts on deposit in the Funding Account may be used during the
Revolving Period to acquire Additional Balances and Subsequent Mortgage Loans.
In the event that, at the end of the Revolving Period, any amounts on deposit in
the Funding Account have not been used to acquire Subsequent Mortgage Loans or
Additional Balances, then the Notes will be prepaid in part on the following
Payment Date.
Weighted average life refers to the average amount of time that will
elapse from the date of issuance of a security to the date of distribution to
the investor thereof of each dollar distributed in reduction of principal of
such security (assuming no losses). The weighted average life of the Term Notes
will be influenced by, among other factors, the rate of principal payments (and,
with respect to the HELOCs, the rate of draws) on the Mortgage Loans.
The primary source of information available to investors concerning the
Term Notes will be the monthly statements discussed herein under "The
Agreements--The Trust Agreement and the Indenture--Reports to Noteholders",
which will include information as to the outstanding Term Note Balance. There
can be no assurance that any additional information regarding the Term Notes
will be available through any other source. In addition, the Depositor is not
aware of any source through which price information about the Term Notes will be
generally available on an ongoing basis. The limited nature of such information
regarding the Term Notes may adversely affect the liquidity of the Term Notes,
even if a secondary market for the Term Notes becomes available.
The Constant Prepayment Rate ("CPR") model is used herein. The CPR
model assumes that the outstanding principal balance of a pool of mortgage loans
prepays at a specified constant annual rate of CPR. In generating monthly cash
flows, this rate is converted to an equivalent constant monthly rate. To assume
35% CPR or any other CPR percentage is to assume that the stated percentage of
the Pool Balance is prepaid over the course of a year. No representation is made
that the Mortgage Loans will prepay at that or any other rate.
The tables set forth below are based on a CPR, constant draw rate (in
the case of the HELOCs, and which, for purposes of the assumptions, is the
amount of Additional Balances drawn each month as an annualized percentage of
the Pool Balance outstanding at the beginning of such month) and optional
termination assumptions as indicated in the tables below. The Mortgage Loans are
assumed to consist of eight (8) sub-pools of Mortgage Loans with the
characteristics set forth below in the table captioned "Assumed Mortgage Loan
Characteristics".
In addition, it was assumed that (i) payments are made in accordance
with the description set forth under "Description of the Securities--Priority of
Distributions", (ii) payments on the Notes will be made on the 18th day of each
calendar month regardless of the day on which the Payment Date actually occurs
commencing in October 1998, (iii) no extension past the scheduled maturity date
of a Mortgage Loan is made, (iv) no delinquencies or defaults occur, (v) in the
case of the HELOCs, monthly draws are calculated under each of the assumptions
as set forth in the tables below before giving effect to prepayments, (vi) the
Mortgage Loans pay on the basis of a 30-day month and a 360-day year, (vii)
there is no restriction on the Maximum Variable Funding Balance, (viii) no Rapid
Amortization Event or Managed Amortization Event occurs, (ix) each Mortgage Loan
is payable monthly, (x) the Closing Date is September 25, 1998, (xi) for each
Payment Date, LIBOR is equal to 5.625% per annum and (xii) the initial Term Note
Balance is as set forth on the cover page hereof.
The actual characteristics and performance of the Mortgage Loans will
likely differ from the assumptions used in constructing the tables set forth
below, which are hypothetical in nature and are provided only to give a general
sense of how the principal cash flows might behave under varying prepayment and
(in the case of the HELOCs) draw scenarios. For example, it is very unlikely
that the Mortgage Loans will prepay and/or experience draws at a constant rate
until maturity or that all Mortgage Loans will prepay and/or experience draws at
the same rate. Moreover, the diverse remaining terms to stated maturity of the
Mortgage Loans could produce slower or faster principal distributions than
indicated in the tables at the various assumptions specified, even if the
weighted average remaining term to stated maturity of the Mortgage Loans is as
assumed. Any difference between such assumptions and the actual characteristics
and performance of the Mortgage Loans, or actual prepayment experience, will
affect the percentages of initial Term Note Balances outstanding over time and
the weighted average life of the Term Notes. Neither the CPR model nor any other
prepayment model or assumption purports to be an historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of mortgage loans, including the Mortgage Loans. Variations in the
actual prepayment experience and the Principal Balances of the Mortgage Loans
that prepay may increase or decrease each weighted average life shown in the
following tables. Such variations may occur even if the average prepayment
experience of all Mortgage Loans equals the CPR.
<TABLE>
<CAPTION>
ASSUMED MORTGAGE LOAN CHARACTERISTICS(1)
- --------------------------------------------------------------------------------------------------------------
LOAN
RATE REMAINING TERM
INITIAL LOAN (AFTER TO STATED NUMBER OF
OUTSTANDING RATE TEASER) MATURITY MONTHS
SUB-POOL PRINCIPAL BALANCE (%) (%) (MONTHS) PRE-FUNDED
-------- ----------------- -------- ------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
HELS
- ----
1 $32,565,170.35 9.960 9.960 96 0
2 $41,034,829.65 10.383 10.383 175 0
3 $ 553,607.90 9.960 9.960 96 7
4 $ 697,592.10 10.383 10.383 175 7
SUB-TOTAL $74,851,200.00 10.196 10.196 140
- --------- -------------- ------ ------ ---
HELOCS CREDIT LIMIT
- ------ ------------
1 $74,568,117.60 7.880 10.072 117 0 $75,313,798.78
2 $11,831,882.40 9.050 9.947 273 0 $11,950,201.22
3 $ 1,267,658.00 7.880 10.072 117 7 $ 1,280,334.58
4 $ 201,142.00 9.050 9.947 273 7 $ 203,153.42
SUB-TOTAL $87,868,800.00 8.040 10.055 138 $88,747,488.00
- --------- -------------- ----- ------ --- --------------
TOTAL $162,720,000.00 9.032 10.120 139
===== =============== ===== ====== ===
- ----------
(1) Assumes (i) an 18 month Revolving Period and a 48 month Managed Amortization Period, (ii) during
the Revolving Period, all HELOC and HEL principal collections are reinvested in HELOCs and (iii) new HELOCs
reflect the same assumptions as the HELOCs above, but will mature one month later.
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL TERM NOTE BALANCE (1)(2)
PAYMENT DATE CPR
- ------------ ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
HEL CPR 0% 20% 25% 30% 35% 40% 45%
-- --- --- --- --- --- ---
HELOC Gross CPR 0% 20% 25% 30% 35% 40% 45%
-- --- --- --- --- --- ---
Initial........................................ 100 100 100 100 100 100 100
September 1999................................. 100 100 100 100 100 100 100
September 2000................................. 99 92 90 87 84 80 77
September 2001................................. 95 79 72 65 59 52 46
September 2002................................. 92 68 58 49 41 34 28
September 2003................................. 88 59 47 38 29 23 17
September 2004................................. 84 48 37 27 20 14 10
September 2005................................. 79 37 27 19 13 8 0
September 2006................................. 74 29 19 13 8 0 0
September 2007................................. 72 23 14 9 0 0 0
September 2008................................. 21 0 0 0 0 0 0
September 2009................................. 18 0 0 0 0 0 0
September 2010................................. 16 0 0 0 0 0 0
September 2011................................. 13 0 0 0 0 0 0
September 2012................................. 10 0 0 0 0 0 0
September 2013................................. 0 0 0 0 0 0 0
Weighted Average Life to 10% call (years)...... 9.22 5.94 5.22 4.63 4.08 3.64 3.31
Weighted Average Life to maturity (years)...... 9.91 6.11 5.30 4.66 4.16 3.76 3.43
- -------------
(1) Assumes (i) that an optional termination is exercised on the first Payment Date on which the Term Note
Balance as of the last date of the related Collection Period is less than or equal to 10% of the Initial Term Note
Balance and (ii) in the case of the HELOCs, a constant draw rate of 12%.
(2) All percentages are rounded to the nearest 1%.
</TABLE>
THE AGREEMENTS
THE PURCHASE AGREEMENT
The Initial Mortgage Loans to be transferred to the Issuer by the
Depositor were or will be purchased by the Depositor from the Seller pursuant to
the Mortgage Loan Purchase Agreement (the "PURCHASE AGREEMENT"). The following
summary describes certain terms of the Purchase Agreement among the Seller, the
Depositor, the Issuer and the Indenture Trustee. The summary does not purport to
be complete and is subject to, and qualified in its entirety by reference to,
the provisions of the Purchase Agreement. See "The Agreements" in the
Prospectus.
Under the Purchase Agreement, the Seller has agreed to transfer to the
Depositor the Initial Mortgage Loans and related Additional Balances. Pursuant
to an assignment by the Depositor executed on the Closing Date, upon such
transfer to the Depositor, the Initial Mortgage Loans will be transferred by the
Depositor to the Issuer, as well as the Depositor's rights in, to and under the
Purchase Agreement, which will include the right to purchase Additional Balances
relating to the Initial Mortgage Loans. Subsequent Mortgage Loans are intended
to be purchased by the Issuer from the Seller on or before March 31, 1999, as
set forth in the Purchase Agreement, from funds on deposit in the Pre-Funding
Account. Subsequent Mortgage Loans are also intended to be purchased, under
certain circumstances, by the Issuer from the Seller from funds on deposit in
the Funding Account. The Purchase Agreement will provide that the Subsequent
Mortgage Loans must conform to certain specified characteristics described above
under "Description of the Mortgage Loans-Conveyance of Subsequent Mortgage
Loans, the Pre-Funding Account and the Funding Account." For a general
description of the Seller, see "The Seller and Servicer" herein.
Transfer of Mortgage Loans. Pursuant to the Purchase Agreement, the
Seller will transfer and assign to the Depositor all of its right, title and
interest in and to the Initial Mortgage Loans, the related Credit Line
Agreements, the related Mortgage Notes, the Mortgages and other related
documents (collectively, the "RELATED DOCUMENTS") and all of the Additional
Balances thereafter created prior to the commencement of the Rapid Amortization
Period. The purchase price of the Initial Mortgage Loans is a specified
percentage of the face amount thereof as of the time of transfer and is payable
by the Depositor, as provided in the Purchase Agreement. The Purchase Price paid
for any Subsequent Mortgage Loans by the Indenture Trustee, at the direction of
the Issuer, from amounts on deposit in the Pre-Funding Account shall be
one-hundred percent (100%) of the aggregate Principal Balances of the Subsequent
Mortgage Loans as of the date so transferred (as identified on the Mortgage Loan
Schedule attached to the related Subsequent Transfer Agreement provided by the
Seller). The purchase price of each Additional Balance is the amount of the
related new advance and is payable by the Issuer, either in cash or in the form
of an increase in the Variable Funding Balance of the Variable Funding Notes
(and, in certain circumstances, the issuance of additional Certificates), as
provided in the Purchase Agreement and the Indenture.
The Purchase Agreement will require that, within the time period
specified therein, the Seller deliver to the Indenture Trustee (as the Issuer's
agent for such purpose) the Mortgage Loans 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.
Representations and Warranties. The Seller will represent and warrant
to the Depositor, and to the Issuer with respect to any Subsequent Mortgage
Loans, that, among other things, (a) the information with respect to the
Mortgage Loans set forth in the schedule attached to the Purchase Agreement is
true and correct in all material respects and (b) immediately prior to the sale
of the Initial Mortgage Loans to the Depositor and the Subsequent Mortgage Loans
to the Issuer, the Seller was the sole owner and holder of the Mortgage Loans
free and clear of any and all liens and security interests. The Seller will also
represent and warrant to the Depositor, and to the Issuer with respect to any
Subsequent Mortgage Loans, that, among other things, as of the Closing Date and
the related Subsequent Transfer Date with respect to any Subsequent Mortgage
Loans, (i) the Purchase Agreement constitutes a legal, valid and binding
obligation of the Seller and (ii) the Purchase Agreement constitutes a valid
transfer and assignment of all right, title and interest of the Seller in and to
the Initial Mortgage Loans or the Subsequent Mortgage Loans, as applicable, and
the proceeds thereof.
Within 90 days of the Closing Date and one Business Day prior to the
related Subsequent Transfer Date with respect to any Subsequent Mortgage Loans,
the Custodian will review or cause to be reviewed the Mortgage Loans and the
Related Documents and if any Mortgage Loan or Related Document is found to be
defective in any material respect which may materially and adversely affect the
value of the related Mortgage Loan or the interests of the Indenture Trustee (as
pledgee of the Trust Estate), the Securityholders or the Enhancer in such
Mortgage Loan and such defect is not cured within 90 days following notification
thereof to the Seller and the Issuer by the Custodian, the Seller will be
obligated under the Purchase Agreement to deposit the Repurchase Price into the
Custodial Account. In lieu of any such deposit, the Seller may substitute an
Eligible Substitute Loan. Any such purchase or substitution will result in the
removal of the defective Mortgage Loan from the Trust Estate (each such Mortgage
Loan, a "DELETED LOAN"). The obligation of the Seller to remove a Deleted Loan
from the Trust Estate is the sole remedy regarding any defects in the Mortgage
Loans and Related Documents available to the Issuer, the Certificateholders (or
the Owner Trustee on behalf of the Certificateholders) and the Noteholders (or
the Indenture Trustee on behalf of the Noteholders) against the Seller.
With respect to any Mortgage Loan, the "REPURCHASE PRICE" is equal to
the Principal Balance of such Mortgage Loan at the time of any removal plus
accrued and unpaid interest thereon to the date of removal. In connection with
the substitution of an Eligible Substitute Loan, the Seller will be required to
deposit in the Custodial Account an amount (the "SUBSTITUTION ADJUSTMENT
AMOUNT") equal to the excess of the Principal Balance of the related Deleted
Loan over the Principal Balance of such Eligible Substitute Loan.
An "ELIGIBLE SUBSTITUTE LOAN" is a mortgage loan substituted by the
Seller for a Deleted Loan, which mortgage loan 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 Deleted Loan, an aggregate
outstanding Principal Balance) not in excess of the Principal Balance of such
Deleted Loan; (ii) have a Loan Rate, Net Loan Rate and Gross Margin no lower
than and not more than 1% in excess of the Loan Rate, Net Loan Rate and Gross
Margin, respectively, of such Deleted Loan; (iii) have a Combined Loan-to-Value
Ratio at the time of substitution no higher than that of the Deleted Loan at the
time of substitution; (iv) have a remaining term to maturity not more than one
year earlier and not later than the remaining term to maturity of the Deleted
Loan; (v) comply with each representation and warranty as to the Mortgage Loans
set forth in the Purchase Agreement (deemed to be made as of the date of
substitution); and (vi) satisfy certain other conditions specified in the
Indenture.
In addition, the Seller will be obligated to deposit the Repurchase
Price or substitute an Eligible Substitute Loan with respect to a Mortgage Loan
as to which there is a material breach of a representation or warranty in the
Purchase Agreement and such breach is not cured by the Seller within the time
provided in the Purchase Agreement.
In addition, the Seller has made representations and warranties to the
Depositor with respect to the Initial Mortgage Loans and will make certain
representations and warranties to the Issuer with respect to any Subsequent
Mortgage Loans. The representations and warranties of the Seller will be
assigned to the Indenture Trustee for the benefit of the Noteholders, and
therefore a breach of the representations and warranties of the Seller will be
enforceable on behalf of the Trust Estate.
The representations and warranties will generally include, among other
things, that: (i) as of the Cut-Off Date (or related Subsequent Transfer Date,
with respect to any Subsequent Mortgage Loans), the information set forth in a
schedule of the related Mortgage Loans is true and correct in all material
respects as of the date or dates respecting which such information is furnished;
(ii) the Seller was the sole holder and owner of the Mortgage Loans free and
clear of any and all liens and security interests; (iii) to the best of Seller's
knowledge, each Mortgage Loan complied in all material respects with all
applicable local, state and federal laws; (iv) no Mortgage Loan is one month or
more delinquent in payment of principal and interest; and (v) to the best of
Seller's knowledge, there is no delinquent recording or other tax or fee or
assessment lien against any related Mortgaged Property.
The Depositor will assign to the Owner Trustee all of its right, title
and interest in the Purchase Agreement, insofar as the Purchase Agreement
relates to the representations and warranties made by the Seller in respect of
the Initial Mortgage Loans and any remedies provided for with respect to any
breach of such representations and warranties. If the Seller cannot cure a
breach of any representation or warranty made by it in respect of a Mortgage
Loan which materially and adversely affects the interests of the Noteholders or
the Enhancer in such Mortgage Loan, within 90 days after notice from the
Servicer, the Seller will be obligated to repurchase such Mortgage Loan at the
Repurchase Price.
As to any such Mortgage Loan required to be purchased by the Seller as
provided above, rather than purchase the Mortgage Loan, the Seller may, at its
sole option, remove such Deleted Loan from the Trust Estate and substitute in
its place an Eligible Substitute Loan.
Assignment of the Mortgage Loans. On the Closing Date, the Depositor
will cause the Initial Mortgage Loans to be assigned without recourse to the
Trust Estate and on any Subsequent Transfer Date the Seller will cause the
related Subsequent Mortgage Loans to be assigned without recourse to the
Indenture Trustee, as assignee of the Owner Trustee, on behalf of the Trust
Estate, together with all principal and interest received on or with respect to
such Mortgage Loans after the Cut-Off Date or related Subsequent Cut-Off Date
with respect to any Subsequent Mortgage Loans (other than principal and interest
due on or before the Cut-Off Date or related Subsequent Cut-Off Date). The Owner
Trustee will, concurrently with such assignment, grant a security interest in
the Trust Estate to the Indenture Trustee to secure the Notes. Each Initial
Mortgage Loan will be identified in a schedule appearing as an exhibit to the
Purchase Agreement and each Subsequent Mortgage Loan will be identified in a
schedule appearing as an exhibit to the related Subsequent Transfer Agreement.
Such schedules will include, among other things, information as to the Principal
Balance of each Initial Mortgage Loan as of the Cut-Off Date or of any
Subsequent Mortgage Loans as of the Subsequent Cut-Off Date, as well as
information respecting the Loan Rate, the currently scheduled monthly payment of
principal and interest, the maturity of the Credit Line Agreement or Mortgage
Note, as applicable, and the Combined Loan-to-Value Ratio at origination or
modification.
The Seller will, as to each Mortgage Loan, deliver to the Custodian the
legal documents relating to such Mortgage Loan that are in possession of the
Seller, which will include the following: (i) the Credit Line Agreement or
Mortgage Note, as applicable (and any modification or amendment thereto),
endorsed without recourse in blank; (ii) the Mortgage (except for any Mortgage
not returned from the public recording office) with evidence of recording
indicated thereon; (iii) an assignment in recordable form of the Mortgage; and
(iv) if applicable, any riders or modifications to such Credit Line Agreement or
Mortgage Note, as applicable, and Mortgage, together with certain other
documents at such times as set forth in the related Agreement. Such assignments
may be blanket assignments covering Mortgages secured by Mortgaged Properties
located in the same county, if permitted by law. The Seller may not be required
to deliver one or more of such documents if such documents are missing from the
files of the party from whom such Mortgage Loans were purchased.
Review of Mortgage Loans. The Bank of Maryland will be the custodian
(the "CUSTODIAN") with respect to the Mortgage Loans pursuant to a custodial
agreement (the "CUSTODIAL AGREEMENT"), and will maintain possession of and
review documents relating to the Mortgage Loans as the agent of the Indenture
Trustee or, following payment in full of the Notes and discharge of the
Indenture, the Owner Trustee.
The Custodian will hold such documents in trust for the benefit of the
holders of the Securities and will review such documents within 90 days. If any
such document is found to be defective in any material respect, the Custodian
will be required to notify the Indenture Trustee, as pledgee of the Issuer. The
Indenture Trustee will be required to then notify the Seller. If the Seller
cannot cure such defect 90 days after notice of the defect is given to the
Seller, the Seller will be required to, within 90 days, either repurchase the
related Mortgage Loan or any property acquired in respect thereof from the
Indenture Trustee, or substitute for such Mortgage Loan a new Mortgage Loan in
accordance with the standards set forth herein. The Depositor will not be
obligated to purchase or substitute for such Mortgage Loan if the Seller
defaults on its obligation to do so. The obligation to repurchase or substitute
for a Mortgage Loan constitutes the sole remedy available to the Noteholders or
the Indenture Trustee for a material defect in a constituent document. Any
Mortgage Loan not so purchased or substituted for shall remain in the Trust
Estate.
THE SERVICING AGREEMENT
The following summary describes certain terms of the Servicing
Agreement among the Issuer, the Indenture Trustee and the Servicer. The summary
does not purport to be complete and is subject to, and qualified in its entirety
by reference to, the provisions of the Servicing Agreement. See "The Agreements"
in the Prospectus.
All of the Mortgage Loans will initially be serviced by the Servicer,
but may be subserviced by one or more subservicers designated by the Servicer
pursuant to subservicing agreements between the Servicer and any future
subservicers. For a general description of the Servicer and its activities, and
certain information concerning the Servicer's delinquency experience on
residential mortgage loans, see "The Seller and Servicer--Delinquency and Loss
Experience of the Servicer's Portfolio" herein.
P&I Collections. The Servicer will be required to establish and
maintain an account (the "CUSTODIAL ACCOUNT") in which the Servicer will be
required to deposit or cause to be deposited any amounts representing payments
on and any collections received in respect of the Mortgage Loans received by it
subsequent to the Cut-Off Date or related Subsequent Cut-Off Date with respect
to any Subsequent Mortgage Loans. The Custodial Account must be an Eligible
Account. An "ELIGIBLE ACCOUNT" is either (i) maintained with a depository
institution whose debt obligations at the time of any deposit therein are rated
by the Rating Agencies in their highest rating category, (ii) an account or
accounts the deposits in which are fully insured to the limits established by
the FDIC, provided that any deposits not so insured shall be otherwise
maintained such that, as evidenced by an opinion of counsel, the Noteholders
have a claim with respect to the funds in such accounts or a perfected first
priority security interest in any collateral securing such funds that is
superior to the claims of any other depositors or creditors of the depository
institution with which such accounts are maintained, (iii) in the case of the
Custodial Account, a trust account or accounts maintained in either the
corporate trust department or the corporate asset services department of a
financial institution which has debt obligations that meet certain rating
criteria, (iv) in the case of the Note Payment Account, a trust account or
accounts maintained with the Indenture Trustee, or (v) such other account or
accounts acceptable to the Rating Agencies. On the 13th day of each month, or if
such day is not a Business Day, the next succeeding Business Day (the
"DETERMINATION DATE"), the Servicer will determine the aggregate amounts
required to be withdrawn from the Custodial Account and deposited into the Note
Payment Account and the Distribution Account prior to the close of business on
the Business Day next succeeding each Determination Date.
"PERMITTED INVESTMENTS" are specified in the Indenture 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 Notes.
The Servicer will make withdrawals from the Custodial Account,
including but not limited to the following, and deposit such amounts as follows:
(i) to the Note Payment Account and the Distribution Account, an amount
equal to the P&I Collections on the Business Day prior to each Payment Date; and
(ii) to pay to itself or the Seller various reimbursement amounts and
other amounts as provided in the Servicing Agreement.
As to any Payment Date, "P&I COLLECTIONS" will equal the sum of (a)
Interest Collections for such Payment Date and (b) prior to the commencement of
the Rapid Amortization Period, "NET PRINCIPAL COLLECTIONS" for such Payment
Date, which are the excess, if any, of Principal Collections for such Payment
Date over the aggregate amount of Additional Balances created during the related
Collection Period and conveyed to the Issuer, or, during the Rapid Amortization
Period, Principal Collections for such date. After the commencement of the Rapid
Amortization Period, Principal Collections for a Collection Period will no
longer be applied to acquire Additional Balances during such Collection Period.
All collections on the Mortgage Loans will generally be allocated in
accordance with the Credit Line Agreements or Mortgage Notes, as applicable,
between amounts collected in respect of interest and amounts collected in
respect of principal. As to any Payment Date, "INTEREST COLLECTIONS" will be
equal to the sum of (i) the amounts collected during the related Collection
Period, including Net Liquidation Proceeds (as defined below), allocated to
interest pursuant to the terms of the Credit Line Agreements or Mortgage Notes,
as applicable (exclusive of the pro rata portion thereof attributable to
Additional Balances not conveyed to the Trust Estate during the Rapid
Amortization Period), reduced by the Servicing Fees for such Collection Period
and (ii) the interest portion of (A) the Repurchase Price for any Deleted Loans
and (B) the cash purchase price paid in connection with any optional purchase of
the Mortgage Loans by the Servicer. As to any Payment Date, "PRINCIPAL
COLLECTIONS" will be equal to the sum of (i) the amount collected during the
related Collection Period, including Net Liquidation Proceeds allocated to
principal pursuant to the terms of the Credit Line Agreements or Mortgage Notes,
as applicable (exclusive of the pro rata portion thereof attributable to
Additional Balances not conveyed to the Trust Estate during the Rapid
Amortization Period) and (ii) the principal portion of the Repurchase Price for
any Deleted Loans, any Substitution Adjustment Amounts and the cash purchase
price paid in connection with any optional purchase of the Mortgage Loans by the
Servicer.
As to any Payment Date, the "COLLECTION PERIOD" is the calendar month
preceding the month of such Payment Date.
"NET LIQUIDATION PROCEEDS" with respect to any Mortgage Loan are the
proceeds (excluding amounts drawn on the Policy) received in connection with the
liquidation of such Mortgage Loan, whether through trustee's sale, foreclosure
sale or otherwise, reduced by related expenses, but not including the portion,
if any, of such amount that exceeds the Principal Balance of the Mortgage Loan
at the end of the Collection Period immediately preceding the Collection Period
in which such Mortgage Loan became a Liquidated Mortgage Loan.
With respect to any date, the "POOL BALANCE" will be equal to the
aggregate of the sum of the Principal Balances of all Mortgage Loans as of such
date and the Pre-Funded Amount, if any, on deposit in the Pre-Funding Account.
The "PRINCIPAL BALANCE" of a Mortgage Loan (other than a Liquidated Mortgage
Loan) on any day is equal to the related Cut-Off Date Balance thereof, plus (i)
any Additional Balances in respect of such Mortgage Loan conveyed to the Trust
Estate minus (ii) all collections credited against the Principal Balance of such
Mortgage Loan in accordance with the related Credit Line Agreement or Mortgage
Note, as applicable, prior to such day (exclusive of the pro rata portion
thereof attributable to Additional Balances not conveyed to the Trust Estate
during the Rapid Amortization Period). The Principal Balance of a Liquidated
Mortgage Loan after final recovery of substantially all of the related
Liquidation Proceeds which the Servicer reasonably expects to receive will be
zero.
Events of Default; Rights Upon Event of Default. A "SERVICING DEFAULT"
under the Servicing Agreement generally will include: (i) any failure by the
Servicer to deposit to the Custodial Account or the Note Payment Account any
required payment which continues unremedied for five (5) business days after the
date upon which written notice of such failure shall have been given to the
Servicer by the Issuer or the Indenture Trustee, or to the Servicer, the Issuer
and the Indenture Trustee by the Enhancer; (ii) any failure by the Servicer duly
to observe or perform in any material respect any other of its covenants or
agreements in the Servicing Agreement which continues unremedied for 45 days
after the date upon which written notice of such failure shall have been given
to the Servicer by the Issuer or the Indenture Trustee, or to the Servicer, the
Issuer and the Indenture Trustee by the Enhancer; and (iii) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings regarding the Servicer and certain actions by the Servicer
indicating its insolvency or inability to pay its obligations.
So long as a Servicing Default remains unremedied, either the
Depositor, the Enhancer or the Indenture Trustee may, by written notification to
the Servicer and to the Issuer or the Indenture Trustee, as applicable,
terminate all of the rights and obligations of the Servicer under the Servicing
Agreement (other than any right of the Servicer as Securityholder and other than
the right to receive servicing compensation and expenses for servicing the
Mortgage Loans during any period prior to the date of such termination, and such
other reimbursement of amounts the Servicer is entitled to withdraw from the
Custodial Account) whereupon the Indenture Trustee will succeed to all
responsibilities, duties and liabilities of the Servicer under the Servicing
Agreement (other than the obligation to purchase Mortgage Loans under certain
circumstances) and will be entitled to similar compensation arrangements. In the
event that the Indenture Trustee would be obligated to succeed the Servicer but
is unwilling so to act, it may appoint (or if it is unable so to act, it shall
appoint) or petition a court of competent jurisdiction for the appointment of an
approved mortgage servicing institution with a net worth of at least $10,000,000
to act as successor to the Servicer under the Servicing Agreement; provided that
any such successor Servicer shall be acceptable to the Enhancer, as evidenced by
the Enhancer's prior written consent (which consent shall not be unreasonably
withheld) and provided further that the appointment of any such successor
Servicer will not result in the qualification, reduction or withdrawal of the
ratings assigned to the Notes by the Rating Agencies, if determined without
regard to the Policy. Pending such appointment, the Indenture Trustee is
obligated to act in such capacity. The Indenture Trustee and such successor may
agree upon the servicing compensation to be paid, which in no event may be
greater than the compensation to the initial Servicer under the Servicing
Agreement.
Servicing Compensation and Payment of Expenses. The principal servicing
compensation to be paid to the Servicer in respect of its servicing activities
will be equal to 0.50% per annum, based on the aggregate Principal Balance of
the Mortgage Loans. The Servicer will retain all assumption fees and late
payment charges, to the extent collected from Mortgagors, and any benefit which
may accrue as a result of the investment of funds in the Custodial Account, the
Note Payment Account or the Distribution Account.
The Servicer (or, if specified in the Servicing Agreement, the
Indenture Trustee on behalf of the Trust Estate) will pay or cause to be paid
certain ongoing expenses associated with the Trust Estate and incurred by it in
connection with its responsibilities under the Servicing Agreement, including,
without limitation, payment of the fees of the Enhancer, payment of the fees and
disbursements of the Indenture Trustee, the Owner Trustee, the Custodian, the
Note Registrar and any Paying Agent, and payment of expenses incurred in
enforcing the obligations of the Seller. The Servicer will be entitled to
reimbursement of expenses incurred in enforcing the obligations of the Seller
under certain limited circumstances. In addition, as indicated in the preceding
section, the Servicer will be entitled to reimbursements for certain expenses
incurred by it in connection with Liquidated Loans and in connection with the
restoration of Mortgaged Properties, such right of reimbursement being prior to
the rights of Noteholders to receive any related Liquidation Proceeds (including
Insurance Proceeds).
Evidence as to Compliance. The Servicing Agreement provides for
delivery (on or before a specified date in each year) to the Depositor and the
Indenture Trustee of an annual statement signed by an officer of the Servicer to
the effect that the Servicer has fulfilled in all material respects the minimum
servicing standards set forth in the Uniform Single Attestation Program for
Mortgage Bankers (the "AUDIT GUIDE") throughout the preceding year or, if there
has been a material default in the fulfillment of any such obligation, such
statement shall specify each such known default and the nature and status
thereof. Such statement may be provided as a single form making the required
statements as to the Servicing Agreement along with other similar agreements.
The Servicing Agreement also provides that on or before a specified
date in each year, beginning the first such date that is at least a specified
number of months after the Cut-Off Date, a firm of independent public
accountants will furnish a statement to the Depositor and the Indenture Trustee
to the effect that, on the basis of an examination by such firm conducted
substantially in compliance with the standards established by the American
Institute of Certified Public Accountants, the servicing of mortgage loans under
agreements (including the Servicing Agreement) was conducted substantially in
compliance with the minimum servicing standards set forth in the Audit Guide (to
the extent that procedures in the Audit Guide are applicable to the servicing
obligations set forth in such agreements) except for such significant exceptions
or errors in records that shall be reported in such statement.
Copies of the annual statement of an officer of the Servicer may be
obtained by Noteholders without charge upon written request to the Servicer, at
the address indicated in the monthly statement to Noteholders.
Certain Matters Regarding the Servicer. The Servicing Agreement
provides that the Servicer may not resign from its obligations and duties
thereunder except upon a determination that performance of such duties is no
longer permissible under applicable law or except in connection with a permitted
transfer of servicing. No such resignation will become effective until the
Indenture Trustee or a successor servicer has assumed the Servicer's obligations
and duties under the Servicing Agreement.
The Servicing Agreement also provides that, except as set forth below,
neither the Servicer nor any director, officer, employee or agent of the
Servicer will be under any liability to the Trust Estate or the Noteholders for
any action taken or for refraining from the taking of any action in good faith
pursuant to the Servicing Agreement, or for errors in judgment; provided,
however, that neither the Servicer nor any such person will be protected against
any liability which would otherwise be imposed by reason of willful misfeasance,
bad faith or gross negligence in the performance of duties or by reason of
reckless disregard of obligations and duties thereunder. The Servicing Agreement
further provides that the Servicer and any director, officer, employee or agent
of the Servicer is entitled to indemnification by the Trust Estate and will be
held harmless against any loss, liability or expense incurred in connection with
any legal action relating to the Servicing Agreement, other than any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
gross negligence in the performance of duties thereunder or by reason of
reckless disregard of obligations and duties thereunder. In addition, the
Servicing Agreement provides that the Servicer will not be under any obligation
to appear in, prosecute or defend any legal or administrative action that is not
incidental to its respective duties under the Servicing Agreement and which in
its opinion may involve it in any expense or liability. The Servicer may,
however, in its discretion undertake any such action which it may deem necessary
or desirable with respect to the Servicing Agreement and the rights and duties
of the parties thereto and the interests of the Noteholders thereunder. In such
event, the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the Trust Estate and the
Servicer will be entitled to be reimbursed therefor out of funds otherwise
payable to Noteholders.
Any person into which the Servicer may be merged or consolidated, any
person resulting from any merger or consolidation to which the Servicer is a
party or any person succeeding to the business of the Servicer will be the
successor of the Servicer under the Servicing Agreement, provided that such
person meets the requirements set forth in the Servicing Agreement. In addition,
notwithstanding the prohibition on its resignation, the Servicer may assign its
rights and delegate its duties and obligations under the Servicing Agreement to
any person reasonably satisfactory to the Enhancer and meeting the requirements
set forth in the Servicing Agreement; provided, that such consent to assignment
may not be unreasonably withheld. In the case of any such assignment, the
Servicer will be released from its obligations under the Servicing Agreement,
exclusive of liabilities and obligations incurred by it prior to the time of
such assignment.
Amendment. The Servicing Agreement may be amended by the parties
thereto, provided that any amendment be accompanied by a letter from each Rating
Agency that such amendment will not result in the qualification, reduction or
withdrawal of the rating then assigned to the Notes, if determined without
regard to the Policy, and provided further, that the consent of the Enhancer and
the Indenture Trustee shall be obtained.
THE TRUST AGREEMENT AND THE INDENTURE
The following summary describes certain terms of the Trust Agreement
and the Indenture. Such summary does not purport to be complete and is subject
to, and qualified in its entirety by reference to, the respective provisions of
the Trust Agreement and the Indenture. See "The Agreements" in the Prospectus.
The Trust Estate. Simultaneously with the issuance of the Notes, the
Issuer will pledge the Trust Estate to the Indenture Trustee as collateral for
the Notes. As pledgee of the Mortgage Loans, the Indenture Trustee will be
entitled to direct the Issuer in the exercise of all rights and remedies of the
Trust Estate against the Seller under the Purchase Agreement and against the
Servicer under the Servicing Agreement.
Reports To Noteholders. The Indenture Trustee will, to the extent such
information is provided to it by the Servicer pursuant to the terms of the
Servicing Agreement, mail to each Term Noteholder, at its address listed on the
Note Register maintained with the Indenture Trustee, and each Rating Agency, the
Enhancer and the Depositor, a report setting forth certain amounts relating to
the Term Notes for each Payment Date, including, among other things:
(i) the amount of principal, if any, payable on such Payment Date
to the Term Noteholders;
(ii) the amount of interest payable on such Payment Date to the
Term Noteholders and the amount, if any, of Interest Shortfalls;
(iii) the Term Note Balance after giving effect to any payment of
principal on such Payment Date;
(iv) the P & I Collections for the related Collection Period;
(v) the aggregate Principal Balance of the Mortgage Loans as of
the end of the preceding Collection Period;
(vi) the balance of the Pre-Funding Account as of the end of the
preceding Collection Period;
(vii) the balance of the Funding Account as of the end of the
preceding Collection Period; (viii) the balance of the Capitalized Interest
Account as of the end of the preceding Collection Period;
(ix) the aggregate Principal Balance of all Subsequent Mortgage Loans
transferred pursuant to a Subsequent Transfer Agreement since the Closing Date;
(x) the Outstanding Overcollateralization Amount as of the end of the
preceding Collection Period; and
(xi) the amount paid, if any, under the Policy for such Payment Date.
In the case of information furnished pursuant to clauses (i) and (ii)
above, the amounts will be expressed as a dollar amount per $1,000 in face
amount of Term Notes.
Certain Covenants. The Indenture will provide that the Issuer may not
consolidate or merge with or 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, by an indenture supplemental
to the Indenture, the Issuer's obligation to make due and punctual payments upon
the Notes and the performance or observance of any agreement and covenant of the
Issuer under the Indenture;
(iii) no Event of Default (as defined herein) shall have occurred
and be continuing immediately after such merger or consolidation;
(iv) the Issuer has received consent of the Enhancer and has been
advised that the ratings of the Notes (without regard to the Policy) then in
effect would not be reduced or withdrawn by any Rating Agency as a result of
such merger or consolidation;
(v) any action that is necessary to maintain the lien and
security interest created by the Indenture has been taken;
(vi) the Issuer has received an Opinion of Counsel to the effect
that such consolidation or merger would have no material adverse tax consequence
to the Issuer or to any Noteholder or Certificateholder; and
(vii) the Issuer has delivered to the Indenture Trustee an
officer's certificate and an Opinion of Counsel each stating that such
consolidation or merger and such supplemental indenture comply with the
Indenture and that all conditions precedent, as provided in the Indenture,
relating to such transaction have been complied with.
The Issuer 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 Issuer, (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 holder of Notes because of the payment of taxes levied or
assessed upon the Issuer, (iii) 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 (iv) 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 Issuer or any part thereof,
or any interest therein or the proceeds thereof. The Issuer may not engage in
any activity other than as specified under "The Issuer" herein.
Events of Default; Rights Upon Event of Default. An "EVENT OF DEFAULT"
under the Indenture includes:
(i) a default for five (5) days or more in the payment of any
principal of or interest on any Note;
(ii) there occurs a default in the observance or performance in
any material respect of any covenant or agreement of the Issuer made in the
Indenture, or any representation or warranty of the Issuer made in the Indenture
or in any certificate delivered pursuant hereto or in connection herewith
proving to have been incorrect in any material respect as of the time when the
same shall have been made that has a material adverse effect on the Noteholders
or the Enhancer, and such default shall continue or not be cured, or the
circumstance or condition in respect of which such representation or warranty
was incorrect shall not have been eliminated or otherwise cured, for a period of
30 days after there shall have been given, by registered or certified mail, to
the Issuer by the Indenture Trustee or to the Issuer and the Indenture Trustee
by the Holders of at least 25% of the outstanding principal balance of the Notes
or the Enhancer, a written notice specifying such default or incorrect
representation or warranty and requiring it to be remedied and stating that such
notice is a notice of default hereunder;
(iii) there occurs the filing of a decree or order for relief by a
court having jurisdiction in the premises in respect of the Issuer or any
substantial part of the Trust Estate in an involuntary case under any applicable
federal or state bankruptcy, insolvency or other similar law now or hereafter in
effect, or appointing a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Issuer or for any substantial part of
the Trust Estate, or ordering the winding-up or liquidation of the Issuer's
affairs, and such decree or order shall remain unstayed and in effect for a
period of 60 consecutive days; or
(iv) there occurs the commencement by the Issuer of a voluntary
case under any applicable federal or state bankruptcy, insolvency or other
similar law now or hereafter in effect, or the consent by the Issuer to the
entry of an order for relief in an involuntary case under any such law, or the
consent by the Issuer to the appointment or taking possession by a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official of
the Issuer or for any substantial part of the assets of the Trust Estate, or the
making by the Issuer of any general assignment for the benefit of creditors, or
the failure by the Issuer generally to pay its debts as such debts become due,
or the taking of any action by the Issuer in furtherance of any of the
foregoing.
If an Event of Default with respect to the Notes at the time
outstanding occurs and is continuing, either the Indenture Trustee, the Enhancer
or the holders of Notes representing a majority of the aggregate Note Balance,
with the written consent of the Enhancer, may declare all Notes to be due and
payable immediately. Such declaration may, under certain circumstances, be
rescinded and annulled by the Enhancer or the holders of Notes representing a
majority of the aggregate Note Balance, with the written consent of the
Enhancer.
If, following an Event of Default with respect to the Notes, the Notes
have been declared to be due and payable, the Indenture Trustee, with the
consent of the Enhancer, may in its discretion, notwithstanding such
acceleration, elect to maintain possession of the collateral securing the Notes
and to continue to apply payments 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 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 following an Event of Default, unless (i) all Noteholders consent to
such sale, (ii) 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 and to reimburse the Enhancer at the date of such sale or
(iii) 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 Notes
representing 66 2/3% of the then aggregate Note Balance and the Enhancer.
In the event that the Indenture Trustee liquidates the collateral in
connection with an Event of Default, 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 payments to the Noteholders would 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.
In the event the principal of the Notes 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.
No Noteholder generally will have any right under the Indenture to
institute any proceeding with respect to the Indenture unless (a) such holder
previously has given to the Indenture Trustee written notice of default and the
continuance thereof, (b) the holders of any Note evidencing not less than 25% of
the aggregate Percentage Interests constituting such Note (i) have made written
request upon the Indenture Trustee to institute such proceeding in its own name
as Indenture Trustee thereunder and (ii) have offered to the Indenture Trustee
reasonable indemnity, (c) the Indenture Trustee has neglected or refused to
institute any such proceeding for 60 days after receipt of such request and
indemnity and (d) no direction inconsistent with such written request has been
given to the Indenture Trustee during such 60 day period by the Holders of a
majority of the outstanding principal balances of such Note (except as otherwise
provided for in the related Agreement with respect to the Enhancer). However,
the Indenture Trustee will be under no obligation to exercise any of the trusts
or powers vested in it by the Indenture or to institute, conduct or defend any
litigation thereunder or in relation thereto at the request, order or direction
of any of the holders of the Notes, unless such Noteholders have offered to the
Indenture Trustee reasonable security or indemnity against the costs, expenses
and liabilities which may be incurred therein or thereby.
Amendment and Modification of Trust Agreement and Indenture. The Trust
Agreement may be amended from time to time by the parties thereto provided that
any amendment be accompanied by an opinion of counsel addressed to the Owner
Trustee to the effect that such amendment (i) complies with the provisions of
the Trust Agreement and (ii) will not cause the Trust to be subject to an entity
level tax.
With the consent of the holders of a majority of each of the
outstanding Term Notes and Variable Funding Notes and the Enhancer, the Issuer
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 and
the Enhancer, however, no supplemental indenture will: (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 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 Note Balance 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 Issuer,
the Depositor or an affiliate of any of them; (v) decrease the percentage of the
aggregate Note Balance required to amend the sections of the Indenture which
specify the applicable percentage of the Note Balance necessary to amend the
Indenture or certain other related agreements; (vi) modify any of the provisions
of the Indenture in such manner as to affect the calculation of the amount of
any payment of interest or principal due on any Note (including the calculation
of any of the individual components of such calculation); or (vii) permit the
creation of any lien ranking prior to or, except as otherwise contemplated by
the Indenture, 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 Issuer and the Indenture Trustee may also enter into supplemental
indentures, with the consent of the Enhancer and without obtaining the consent
of the Noteholders, for the purpose of, among other things, curing any ambiguity
or correcting or supplementing any provision in the Indenture that may be
inconsistent with any other provision therein.
Termination; Redemption of Term Notes. The obligations created by the
Trust Agreement (other than certain limited payment and notice obligations of
the Owner Trustee and the Depositor, respectively) will terminate upon the
payment to the related Securityholders (including the Notes issued pursuant to
the Indenture) of all amounts held by the Servicer and required to be paid to
such Securityholders following the earliest of (i) the final distribution of all
moneys or other property or proceeds of the Trust Estate in accordance with the
terms of the Indenture and the Trust Agreement, (ii) the Final Payment Date or
(iii) the purchase by the Servicer of all Mortgage Loans pursuant to the
Servicing Agreement. See "Description of the Securities--Maturity and Optional
Redemption" herein.
The Indenture will be discharged (except with respect to certain
continuing rights specified in the Indenture) upon the distribution to
Noteholders of all amounts required to be distributed pursuant to the Indenture.
Certain Matters Regarding the Indenture Trustee and the Issuer. Neither
the Indenture Trustee nor any director, officer or employee of the Indenture
Trustee will be under any liability to the Issuer or the 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 and any director, officer or employee thereof will
be protected against any liability which 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 Issuer 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 negligence in the performance of its duties under such
Indenture or by reason of reckless disregard of its obligations and duties under
the Indenture. 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 will be the successor of the Indenture Trustee under the
Indenture.
USE OF PROCEEDS
The proceeds from the sale of the Term Notes will be used, together
with the proceeds from the sale of the Variable Funding Notes and the
Certificates to the Seller, to purchase the Initial Mortgage Loans from the
Depositor and, subsequently, to purchase certain Subsequent Mortgage Loans as
described herein.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Brown & Wood LLP, special tax counsel to the
Depositor, for federal income tax purposes, the Term Notes will be characterized
as indebtedness, and the Issuer will not be characterized as an association (or
a publicly traded partnership) taxable as a corporation or as a taxable mortgage
pool within the meaning of Section 7701(i) of the Code.
For federal income tax purposes, the Term Notes will not be treated as
having been issued with "original issue discount" as defined in the Prospectus.
Prospective investors in the Term Notes should see "Certain Federal
Income Tax Considerations" and "State Tax Considerations" in the Prospectus for
a discussion of the application of certain federal, state and local tax laws to
the Issuer and purchasers of the Term Notes.
ERISA CONSIDERATIONS
The Term Notes are eligible for purchase by pension, profit-sharing or
other employee benefit plans as well as individual retirement accounts and
certain types of Keogh Plans. Any fiduciary or other investor of Plan assets
that proposes to acquire or hold the Term Notes on behalf of or with assets of
any Plan should consult with its counsel with respect to the potential
applicability of the fiduciary responsibility provisions of ERISA and the
prohibited transaction provisions of ERISA and the Code to the proposed
investment. See "ERISA Considerations" in the Prospectus.
LEGAL INVESTMENT
The Term Notes will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended.
Accordingly, many institutions with legal authority to invest in
mortgage-related securities may not be legally authorized to invest in the Term
Notes. No representation is made herein as to whether the Term Notes constitute
legal investments for any entity under any applicable statute, law, rule,
regulation or order. Prospective purchasers are urged to consult with their
counsel concerning the status of the Term Notes as legal investments for such
purchasers prior to investing in the Term Notes. See "Legal Investment" in the
Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting
agreement dated September 10, 1998 (the "UNDERWRITING AGREEMENT"), between the
Underwriter and the Depositor, the Underwriter has agreed to purchase, and the
Depositor has agreed to sell, the Term Notes. It is expected that delivery of
the Term Notes will be made only in book-entry form through the facilities of
DTC, Cedel or Euroclear.
The Underwriting Agreement provides that the obligation of the
Underwriter to pay for and accept delivery of the Term Notes is subject to,
among other things, the receipt of certain legal opinions and to the conditions,
among others, that no stop order suspending the effectiveness of the Depositor's
Registration Statement will be in effect and that no proceedings for such
purpose will be pending before or threatened by the Commission.
The distribution of the Term Notes by the Underwriter may be effected
from time to time in one or more negotiated transactions or otherwise, at
varying prices to be determined at the time of sale. Proceeds to the Depositor
from the sale of the Term Notes, before deducting expenses payable by the
Depositor, will be approximately 99.75% of the aggregate Term Note Balance as of
the Closing Date.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriter, and that under limited circumstances the Underwriter will
indemnify the Depositor, for certain civil liabilities under the Securities Act,
or contribute to payments required to be made in respect thereof.
EXPERTS
The consolidated financial statements of the Enhancer, Ambac Assurance
Corporation, as of December 31, 1997 and 1996 and for each of the years in the
three-year period ended December 31, 1997, are incorporated by reference herein
and in the Registration Statement in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing.
LEGAL MATTERS
Certain legal matters with respect to the Servicer and the Seller will
be passed upon for the Servicer and the Seller by the General Counsel to GMAC
Mortgage Corporation. Certain legal matters with respect to the Term Notes will
be passed upon for the Depositor and Bear, Stearns & Co. Inc. by Brown & Wood
LLP, New York, New York.
RATINGS
It is a condition to issuance thereof that the Term Notes be rated
"Aaa" by Moody's and "AAA" by Standard & Poor's. The Depositor has not requested
a rating on the Term Notes by any Rating Agency other than Moody's and Standard
& Poor's. However, there can be no assurance as to whether any other Rating
Agency will rate the Term Notes or, if it does, what rating would be assigned by
any such other Rating Agency. Any rating on the Term Notes by another Rating
Agency could be lower than the ratings assigned to the Term Notes by Moody's and
Standard & Poor's. A securities rating addresses the likelihood of the receipt
by the Term Noteholders of distributions on the Mortgage Loans. The rating takes
into consideration the structural, legal and tax aspects associated with the
Certificates and the Term Notes, but does not address Interest Shortfalls. The
ratings on the Term Notes do not constitute statements regarding the possibility
that the Term Noteholders 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.
<PAGE>
INDEX OF DEFINED TERMS
<PAGE>
25-Year Loans...............................................................S-18
10-Year Loans...............................................................S-18
15-Year Loans...............................................................S-18
5-Year Loans................................................................S-18
Account Balance.............................................................S-19
Additional Balances..........................................................S-3
Adjustment Date.............................................................S-17
Aggregate Balance Differential..............................................S-50
Appraised Value.............................................................S-16
Audit Guide.................................................................S-63
Balance Differential........................................................S-50
Balloon Loans...............................................................S-13
Billing Cycle...............................................................S-17
Business Day................................................................S-46
Capitalized Interest Account.................................................S-6
Capitalized Interest Requirement............................................S-48
Cedel........................................................................S-4
Certificates...............................................................Cover
Collection Period...........................................................S-63
Combined Loan-to-Value Ratio................................................S-16
Commission..................................................................S-43
CPR.........................................................................S-56
Credit Line Agreements.......................................................S-4
Credit Utilization Rate.....................................................S-16
Custodial Account...........................................................S-62
Custodial Agreement.........................................................S-61
Custodian...................................................................S-61
Cut-Off Date Balance.........................................................S-4
Cut-Off Date Pool Principal Balance..........................................S-4
Definitive Note.............................................................S-45
Deleted Loan................................................................S-60
Depositor..................................................................Cover
Determination Date..........................................................S-62
Draw Period.................................................................S-18
DTC..........................................................................S-2
DTC Rules...................................................................S-44
Eligible Account............................................................S-62
Eligible Substitute Loan....................................................S-60
Enhancer...................................................................Cover
Euroclear....................................................................S-4
Event of Default............................................................S-67
Excess Spread...............................................................S-49
Final Payment Date..........................................................S-10
Finance Charge..............................................................S-19
Financial Intermediary......................................................S-44
GMACM Home Equity Program...................................................S-12
GMACM Underwriting Guide....................................................S-34
Gross Margin.................................................................S-5
HELOCs.....................................................................Cover
HELs.......................................................................Cover
Indenture....................................................................S-3
Indenture Trustee..........................................................Cover
Index.......................................................................S-17
Initial HELOCs...............................................................S-3
Initial HELs.................................................................S-3
Initial Mortgage Loans.......................................................S-4
Insurance Agreement.........................................................S-49
Insured Amount..............................................................S-52
Interest Collections........................................................S-62
Interest Period..............................................................S-7
Interest Shortfall..........................................................S-47
Issuer.....................................................................Cover
Junior Ratio................................................................S-16
LIBOR.......................................................................S-46
LIBOR Business Day..........................................................S-48
Liquidated Loan.............................................................S-39
Liquidated Mortgage Loan....................................................S-50
Liquidation Loss Amount.....................................................S-50
Loan Rate....................................................................S-5
Managed Amortization Event..................................................S-50
Managed Amortization Period..................................................S-8
Maximum Loan Rate...........................................................S-17
Maximum Variable Funding Balance.............................................S-9
Moody's......................................................................S-2
Mortgage Loans.............................................................Cover
Mortgage Notes...............................................................S-5
Mortgaged Properties.........................................................S-4
Mortgages....................................................................S-4
Mortgagor...................................................................S-18
Net Liquidation Proceeds....................................................S-63
Net Loan Rate...............................................................S-47
Net Principal Collections...................................................S-62
Note Balance................................................................S-50
Note Rate....................................................................S-7
Noteholders..................................................................S-8
Notes......................................................................Cover
Original Pre-Funded Amount...................................................S-6
Outstanding Overcollateralization Amount.....................................S-9
Overcollateralization Target Amount.........................................S-50
Owner Trustee..............................................................Cover
P&I Collections.............................................................S-62
Paying Agent................................................................S-47
Payment Date.................................................................S-4
Permitted Investments.......................................................S-62
Plan........................................................................S-11
Pool Balance................................................................S-63
Pre-Funding Account..........................................................S-6
Pre-Funding Period...........................................................S-6
Principal Balance...........................................................S-63
Principal Collections.......................................................S-63
Principal Distribution Amount...............................................S-50
Purchase Agreement..........................................................S-58
Rapid Amortization Event....................................................S-50
Rapid Amortization Period....................................................S-8
Rating Agencies..............................................................S-2
Reference Bank Rate.........................................................S-48
Related Documents...........................................................S-59
REO Loan....................................................................S-39
Repayment Period............................................................S-18
Repurchase Price............................................................S-60
Revolving Period.............................................................S-8
Securities.................................................................Cover
Seller.......................................................................S-3
Servicer.....................................................................S-3
Servicing Agreement..........................................................S-3
Servicing Default...........................................................S-63
Standard & Poor's............................................................S-2
Stated Value................................................................S-16
Subsequent Cut-off Date.....................................................S-32
Subsequent Mortgage Loans....................................................S-3
Subsequent Transfer Agreements..............................................S-32
Subsequent Transfer Dates...................................................S-32
Substitution Adjustment Amount..............................................S-59
Teaser Rate.................................................................S-17
Telerate Page 3750..........................................................S-48
Term Note Balance...........................................................S-52
Term Note Owners.............................................................S-4
Term Noteholders.............................................................S-8
Term Notes.................................................................Cover
Trust Agreement............................................................Cover
Trust Estate.................................................................S-3
Underwriter..................................................................S-2
Underwriting Agreement......................................................S-69
Variable Funding Balance....................................................S-52
Variable Funding Notes.....................................................Cover
<PAGE>
<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 UNDERWRITER. 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 $175,000,000
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.
GMACM REVOLVING HOME EQUITY
LOAN TRUST 1998-2
TABLE OF CONTENTS HOME EQUITY LOAN-BACKED TERM NOTES,
Page SERIES 1998-2
----
PROSPECTUS SUPPLEMENT
Summary......................................................... S-3 GMAC MORTGAGE CORPORATION
Risk Factors....................................................S-12 Seller and Servicer
Description of the Mortgage Loans...............................S-16
The Seller and Servicer.........................................S-36 GMACM REVOLVING HOME EQUITY
The Issuer......................................................S-40 LOAN TRUST 1998-2
The Owner Trustee...............................................S-40 Issuer
The Indenture Trustee...........................................S-40
The Enhancer....................................................S-41 BEAR STEARNS ASSET BACKED
Description of the Securities...................................S-42 SECURITIES, INC.
Description of the Policy.......................................S-50 Depositor
Yield and Prepayment Considerations.............................S-50
The Agreements..................................................S-53
Use of Proceeds.................................................S-61
Certain Federal Income Tax Considerations.......................S-61
ERISA Considerations............................................S-61
Legal Investment................................................S-61
Underwriting....................................................S-62
Experts.........................................................S-62
Legal Matters...................................................S-62
Ratings.........................................................S-62
PROSPECTUS
PROSPECTUS SUPPLEMENT
Prospectus Supplement..............................................3 SEPTEMBER 10, 1998
Reports to Holders.................................................3
Available Information..............................................3
Incorporation of Certain Documents
by Reference.....................................................4
Summary of Terms...................................................5 BEAR, STEARNS & CO. INC.
Risk Factors......................................................15
Description of the Securities.....................................20
The Trust Funds...................................................24
Enhancement.......................................................31
Servicing of Loans................................................33
The Agreements....................................................39
Certain Legal Aspects of the Loans................................47
The Depositor.....................................................57
Use of Proceeds...................................................57
Certain Federal Income Tax Considerations.........................57
State Tax Considerations..........................................77
FASIT Securities..................................................77
ERISA Considerations..............................................80
Legal Matters.....................................................84
Financial Information.............................................84
Rating............................................................84
Legal Investment..................................................85
Plan of Distribution..............................................85
Glossary of Terms.................................................86
=================================================================== ===============================================================
</TABLE>
PROSPECTUS
ASSET-BACKED CERTIFICATES
ASSET-BACKED NOTES
(Issuable in Series)
BEAR STEARNS ASSET BACKED SECURITIES, INC.
(DEPOSITOR)
Bear Stearns Asset Backed Securities, Inc. (the "Depositor") may offer
from time to time under this Prospectus and related Prospectus Supplements the
Asset-Backed Certificates (the "Certificates") and the Asset-Backed Notes (the
"Notes" and, together with the Certificates, the "Securities"), which may be
sold from time to time in one or more series (each, a "Series").
As specified in the related Prospectus Supplement, the Certificates of
a Series will evidence undivided interests in certain assets deposited into a
trust (each, a "Trust Fund") by the Depositor pursuant to a Pooling and
Servicing Agreement or a Trust Agreement, as described herein. As specified in
the related Prospectus Supplement, the Notes of a Series will be issued and
secured pursuant to an Indenture and will represent indebtedness of the related
Trust Fund. The Trust Fund for a Series of Securities will include assets
purchased from the seller or sellers specified in the related Prospectus
Supplement (collectively, the "Seller") composed of (a) Primary Assets, which
may include one or more pools of (i) closed-end and/or revolving home equity
loans (the "Mortgage Loans"), secured generally by subordinate liens on one- to
four-family residential or mixed-use properties, (ii) home improvement
installment sales contracts and installment loan agreements (the "Home
Improvement Contracts"), which are either unsecured or secured generally by
subordinate liens on one- to four-family residential or mixed-use properties, or
by purchase money security interests in the home improvements financed thereby
(the "Home Improvements") and (iii) securities backed or secured by Mortgage
Loans and/or Home Improvement Contracts, (b) all monies due thereunder net, if
and as provided in the related Prospectus Supplement, of certain amounts payable
to the servicer of the Mortgage Loans and/or Home Improvement Contracts
(collectively, the "Loans"), which servicer may also be the Seller, specified in
the related Prospectus Supplement (the "Servicer"), (c) if specified in the
related Prospectus Supplement, funds on deposit in one or more pre-funding
accounts and/or capitalized interest accounts and (d) reserve funds, letters of
credit, surety bonds, insurance policies or other forms of credit support as
described herein and in the related Prospectus Supplement.
(cover continued on next page)
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF, AND CERTIFICATES OF A GIVEN
SERIES EVIDENCE BENEFICIAL INTERESTS IN, THE RELATED TRUST FUND ONLY AND ARE
NOT GUARANTEED BY ANY GOVERNMENTAL AGENCY OR BY THE DEPOSITOR, THE SEL-
LER, THE TRUSTEES,THE SERVICER OR BY ANY OF THEIR RESPECTIVE AFFILIATES
OR, UNLESS OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT,
BY ANY OTHER PERSON OR ENTITY. THE DEPOSITOR'S ONLY OBLIGATIONS
WITH RESPECT TO ANY SERIES OF SECURITIES WILL BE PURSUANT TO
CERTAIN REPRESENTATIONS AND WARRANTIES SET FORTH IN
THE RELATED AGREEMENT AS DESCRIBED HEREIN
OR IN THE RELATED PROSPECTUS SUPPLEMENT.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR CERTAIN FACTORS TO BE
CONSIDERED IN PURCHASING THE SECURITIES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE PROSPECTUS SUPPLEMENT. ANY REPRE-
SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The Securities offered by this Prospectus and by the related Prospectus
Supplement are offered by Bear, Stearns & Co. Inc. and the other underwriters
set forth in the related Prospectus Supplement, if any, subject to prior sale,
to withdrawal, cancellation or modification of the offer without notice, to
delivery to and acceptance by Bear, Stearns & Co. Inc. and the other
underwriters, if any, and certain further conditions. Retain this Prospectus for
future reference. This Prospectus may not be used to consummate sales of the
Securities offered hereby unless accompanied by a Prospectus Supplement.
------------------------
BEAR, STEARNS & CO. INC.
June 4, 1998
<PAGE>
(continued from previous page)
Each Series of Securities will be issued in one or more classes (each,
a "Class"). Interest on and principal of the Securities of a Series will be
payable on each Distribution Date specified in the related Prospectus Supplement
at the times, at the rates, in the amounts and in the order of priority set
forth in the related Prospectus Supplement.
If a Series includes multiple Classes, such Classes may vary with
respect to the amount, percentage and timing of distributions of principal,
interest or both and one or more Classes may be subordinated to other Classes
with respect to distributions of principal, interest or both as described herein
and in the related Prospectus Supplement. If so specified in the related
Prospectus Supplement, the Primary Assets and other assets comprising the Trust
Fund may be divided into one or more Asset Groups and each Class of the related
Series will evidence beneficial ownership of the corresponding Asset Group, as
applicable.
The rate of reduction of the aggregate principal balance of each Class
of a Series may depend upon the rate of payment (including prepayments) with
respect to the Loans or, in the case of Private Securities, Underlying Loans, as
applicable. In such a case, a rate of prepayment lower or higher than
anticipated will affect the yield on the Securities of a Series in the manner
described herein and in the related Prospectus Supplement. Under certain limited
circumstances described herein and in the related Prospectus Supplement, a
Series of Securities may be subject to termination or redemption under the
circumstances described herein and in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, an election may be
made to treat certain assets comprising the Trust Fund for a Series as a "real
estate mortgage investment conduit" (a "REMIC") for federal income tax purposes.
See "Certain Federal Income Tax Considerations" herein.
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Securities to be
offered hereunder will, among other things, set forth with respect to such
Series of Securities: (i) the aggregate principal amount, interest rate and
authorized denominations of each Class of such Securities; (ii) certain
information concerning the Primary Assets, the Seller and any Servicer; (iii)
the terms of any Enhancement with respect to such Series; (iv) the terms of any
insurance related to the Primary Assets; (v) information concerning any other
assets in the related Trust Fund, including any Reserve Fund; (vi) the Final
Scheduled Distribution Date of each Class of such Securities; (vii) the method
to be used to calculate the amount of principal required to be applied to the
Securities of each Class of such Series on each Distribution Date, the timing of
the application of principal and the order of priority of the application of
such principal to the respective Classes and the allocation of principal to be
so applied; (viii) the Distribution Dates and any Assumed Reinvestment Rate;
(ix) additional information with respect to the plan of distribution of such
Securities; and (x) whether a REMIC election will be made with respect to some
or all of the assets included in the Trust Fund for such Series.
REPORTS TO HOLDERS
Periodic and annual reports concerning the related Trust Fund for a
Series of Securities are required under the related Agreement to be forwarded to
Holders. Unless otherwise specified in the related Prospectus Supplement, such
reports will not be examined and reported on by an independent public
accountant. If so specified in the Prospectus Supplement for a Series of
Securities, such Series or one or more Classes of such Series will be issued in
book-entry form. In such event, (i) owners of beneficial interests in such
Securities will not be considered "Holders" under the related Agreements and
will not receive such reports directly with respect to the related Trust Fund;
rather, such reports will be furnished to such owners through the participants
and indirect participants of the applicable book-entry system, and (ii)
references herein to the rights of "Holders" shall refer to the rights of such
owners as they may be exercised indirectly through such participants. See "The
Agreements--Reports to Holders" herein.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the Securities. This Prospectus,
which forms a part of the Registration Statement, and the Prospectus Supplement
relating to each Series of Securities contain summaries of the material terms of
the documents referred to herein and therein, but do not contain all of the
information set forth in the Registration Statement pursuant to the Rules and
Regulations of the Commission. For further information, reference is made to
such Registration Statement and the exhibits thereto. Such Registration
Statement and exhibits can be inspected and copied at prescribed rates at the
public reference facilities maintained by the Commission at its Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional
Office located as follows: Midwest Regional Office, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and Northeast Regional
Office, 7 World Trade Center, Suite 1300, New York, New York 10048. The
Commission also maintains a Web site at http://www.sec.gov from which such
Registration Statement and exhibits may be obtained.
Each Trust Fund will be required to file certain reports with the
Commission pursuant to the requirements of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). The Depositor intends to cause each Trust Fund
to suspend filing such reports if and when such reports are no longer required
under the Exchange Act.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Securities offered
hereby and thereby nor an offer of the Securities to any person in any state or
other jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus at any time does not imply that information herein is correct as of
any time subsequent to its date.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the Trust Fund
referred to in the accompanying Prospectus Supplement with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date
of this Prospectus and prior to the termination of any offering of the
Securities issued by such Trust Fund shall be deemed to be incorporated by
reference in this Prospectus and to be a part of this Prospectus from the date
of the filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for all purposes of this Prospectus to the extent that
a statement contained herein or in the accompanying Prospectus Supplement or in
any other subsequently filed document that also is or is deemed to be
incorporated by reference modifies or replaces such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Depositor on behalf of any Trust Fund will provide without charge
to each person to whom this Prospectus is delivered, on the written or oral
request of such person, a copy of any or all of the documents referred to above
that have been or may be incorporated by reference in this Prospectus (not
including exhibits to the information that is incorporated by reference unless
such exhibits are specifically incorporated by reference into the information
that this Prospectus incorporates). Such requests should be directed to the
Depositor at 245 Park Avenue, New York, New York 10167.
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each Series of Securities contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of Securities of such Series. Capitalized terms used and not otherwise
defined herein or in the related Prospectus Supplement shall have the meanings
set forth in the "Glossary of Terms" herein.
SECURITIES OFFERED .................. Asset-Backed Certificates (the
"Certificates") and/or Asset-Backed
Notes (the "Notes"). Certificates are
issuable from time to time in Series
pursuant to a Pooling and Servicing
Agreement or Trust Agreement, as the
case may be. Each Certificate of a
Series will evidence an interest in the
Trust Fund for such Series, or in an
Asset Group specified in the related
Prospectus Supplement. Notes are
issuable from time to time in Series
pursuant to an Indenture. Each Series of
Securities will consist of one or more
Classes, one or more of which may be
Classes of Compound Interest Securities,
Planned Amortization Class ("PAC")
Securities, Variable Interest
Securities, Zero Coupon Securities,
Principal Only Securities, Interest Only
Securities, Participating Securities,
Senior Securities or Subordinated
Securities. Each Class may differ in,
among other things, the amounts
allocated to and the priority of
principal and interest payments, Final
Scheduled Distribution Dates,
Distribution Dates and interest rates.
The Securities of each Class will be
issued in fully registered form in the
denominations specified in the related
Prospectus Supplement. If so specified
in the related Prospectus Supplement,
the Securities or certain Classes of
such Securities offered thereby may be
available in book-entry form only.
DEPOSITOR ........................... Bear Stearns Asset Backed Securities,
Inc. (the "Depositor") was incorporated
in the State of Delaware in June 1995,
and is a wholly-owned, special purpose
subsidiary of The Bear Stearns Companies
Inc. None of The Bear Stearns Companies
Inc., the Depositor, the Servicer, any
Trustee, the Seller or any affiliate of
the foregoing has guaranteed or is
otherwise obligated with respect to the
Securities of any Series. See "The
Depositor."
INTEREST PAYMENTS ................... Interest payments on the Securities of a
Series entitled by their terms to
receive interest will be made on each
Distribution Date, to the extent set
forth in, and at the applicable rate
specified in (or determined in the
manner set forth in), the related
Prospectus Supplement. The interest rate
on Securities of a Series may be
variable or change with changes in the
rates of interest on the related Loans
or Underlying Loans relating to the
Private Securities, as applicable,
and/or as prepayments occur with respect
to such Loans or Underlying Loans, as
applicable. Interest Only Securities may
be assigned a Notional Amount set forth
in the related Prospectus Supplement,
which is used solely for convenience in
expressing the calculation of interest
and for certain other purposes and does
not represent the right to receive any
distributions allocable to principal.
Principal Only Securities may not be
entitled to receive any interest
payments or may be entitled to receive
only nominal interest payments. Interest
payable on the Securities of a Series on
a Distribution Date will include all
interest accrued during the period
specified in the related Prospectus
Supplement. See "Description of the
Securities--Payments of Interest."
PRINCIPAL PAYMENTS .................. All payments of principal of a Series of
Securities will be made in an aggregate
amount determined as set forth in the
related Prospectus Supplement, and will
be paid at the times, allocated among
the Classes of such Series in the order
and amounts and applied either on a pro
rata or a random lot basis among all
Securities of any such Class, all as
specified in the related Prospectus
Supplement.
FINAL SCHEDULED
DISTRIBUTION DATE
OF THE SECURITIES ................. The Final Scheduled Distribution Date
with respect to (i) each Class of Notes
is the date not later than which
principal of the Notes will be fully
paid and (ii) each Class of Certificates
is the date after which no Certificates
of such Class are expected to remain
outstanding, in each case calculated on
the basis of the assumptions applicable
to such Series described in the related
Prospectus Supplement. The Final
Scheduled Distribution Date of a Class
may equal the maturity date of the
Primary Asset in the related Trust Fund
that has the latest stated maturity, or
will be determined as described herein
and in the related Prospectus
Supplement.
The actual final Distribution Date of
the Securities of a Series will, to the
extent described in the related
Prospectus Supplement, depend upon the
rate of payment (including prepayments,
liquidations due to default, the receipt
of proceeds from casualty Insurance
Policies and repurchases) of the Loans
or Underlying Loans relating to the
Private Securities, as applicable, in
the related Trust Fund. Unless otherwise
specified in the related Prospectus
Supplement, the actual final
Distribution Date of any Security is
likely to occur earlier and may occur
substantially earlier or may occur later
than its Final Scheduled Distribution
Date as a result of the application of
prepayments to the reduction of the
principal balances of the Securities and
as a result of defaults on the Primary
Assets. The rate of payments on the
Loans or Underlying Loans relating to
the Private Securities, as applicable,
in the Trust Fund for a Series will
depend on a variety of factors,
including certain characteristics of
such Loans or Underlying Loans, as
applicable, and the prevailing level of
interest rates from time to time, as
well as on a variety of economic,
demographic, tax, legal, social and
other factors. No assurance can be given
as to the actual prepayment experience
with respect to a Series. See "Risk
Factors--Yield May Vary" and
"Description of the Securities--Weighted
Average Life of the Securities" herein.
OPTIONAL TERMINATION ................ One or more Classes of Securities of any
Series may be redeemed or repurchased in
whole or in part, at the Depositor's or
the Servicer's option, at such time and
under the circumstances specified in the
related Prospectus Supplement, at the
price set forth therein. If so specified
in the related Prospectus Supplement for
a Series of Securities, the Depositor,
the Servicer or such other entity that
is specified in the related Prospectus
Supplement may, at its option, cause an
early termination of the related Trust
Fund by repurchasing all of the Primary
Assets remaining in the Trust Fund on or
after a specified date, or on or after
such time as the aggregate principal
balance of the Securities of the Series
or the Primary Assets relating to such
Series, as specified in the related
Prospectus Supplement, is less than the
amount or percentage specified in the
related Prospectus Supplement. See
"Description of the Securities--Optional
Redemption, Purchase or Termination."
In addition, the related Prospectus
Supplement may provide other
circumstances under which Holders of
Securities of a Series could be fully
paid significantly earlier than would
otherwise be the case if payments or
distributions were solely based on the
activity of the related Primary Assets.
THE TRUST FUND ...................... The Trust Fund for a Series of
Securities will consist of one or more
of the assets described below, as
described in the related Prospectus
Supplement.
A. PRIMARY ASSETS ................ The Primary Assets for a Series may
consist of any combination of the
following assets, to the extent and as
specified in the related Prospectus
Supplement. The Primary Assets will be
purchased from the Seller or may be
purchased by the Depositor in the open
market or in privately negotiated
transactions, including transactions
with entities affiliated with the
Depositor.
(1) LOANS ....................... Primary Assets for a Series will
consist, in whole or in part, of Loans.
Some Loans may be delinquent or
non-performing as specified in the
related Prospectus Supplement. Loans may
be originated by or acquired from an
affiliate of the Depositor, and an
affiliate of the Depositor may be an
obligor with respect to any such Loan.
The Loans will be conventional contracts
or contracts insured by the Federal
Housing Administration (the "FHA") or
partially guaranteed by the Veterans
Administration (the "VA"). See "The
Trust Funds--The Loans" for a discussion
of such guarantees. To the extent
provided in the related Prospectus
Supplement, additional Loans may be
periodically added to the Trust Fund, or
may be removed from time to time if
certain asset value tests are met, as
described in the related Prospectus
Supplement.
The "Loans" for a Series will consist of
(i) closed-end home equity loans (the
"Closed-End Loans") and/or revolving
home equity loans or certain balances
therein (the "Revolving Credit Line
Loans" and, together with the Closed-End
Loans, the "Mortgage Loans") and (ii)
home improvement installment sales
contracts and installment loan
agreements (the "Home Improvement
Contracts"). The Mortgage Loans and the
Home Improvement Contracts are
collectively referred to herein as the
"Loans." The Loans may, as specified in
the related Prospectus Supplement, have
various payment characteristics,
including balloon or other irregular
payment features, and may accrue
interest at a fixed rate or an
adjustable rate.
As specified in the related Prospectus
Supplement, the Mortgage Loans will, and
the Home Improvement Contracts may, be
secured by mortgages and deeds of trust
or other similar security instruments
creating a lien on the related Mortgaged
Property, which may be subordinated to
one or more senior liens on the
Mortgaged Property as described in the
related Prospectus Supplement. As
specified in the related Prospectus
Supplement, Home Improvement Contracts
may be unsecured or secured by purchase
money security interests in the Home
Improvements financed thereby. The
Mortgaged Properties and the Home
Improvements are collectively referred
to herein as the "Properties."
The related Prospectus Supplement will
describe certain characteristics of the
Loans for a Series including, without
limitation and to the extent relevant:
(i) the aggregate unpaid Principal
Balance of the Loans (or the aggregate
unpaid Principal Balance included in the
Trust Fund for the related Series); (ii)
the range and weighted average Loan Rate
on the Loans and in the case of
adjustable rate Loans, the range and
weighted average of the Current Loan
Rates and the Lifetime Rate Caps, if
any; (iii) the range and the average
outstanding Principal Balance of the
Loans; (iv) the weighted average
original and remaining term-to-stated
maturity of the Loans and the range of
original and remaining terms-to-stated
maturity, if applicable; (v) the range
and Combined Loan-to-Value Ratios or
Loan-to-Value Ratios, as applicable, of
the Loans, computed in the manner
described in the related Prospectus
Supplement; (vi) the percentage (by
Principal Balance as of the Cut-off
Date) of Loans that accrue interest at
adjustable or fixed interest rates;
(vii) any enhancement relating to the
Loans; (viii) the percentage (by
Principal Balance as of the Cut-off
Date) of Loans that are secured by
Mortgaged Properties or Home
Improvements, or that are unsecured;
(ix) the geographic distribution of any
Mortgaged Properties securing the Loans;
(x) the use and type of each Property
securing a Loan; (xi) the lien priority
of the Loans; (xii) the delinquency
status and year of origination of the
Loans; (xiii) whether such Loans are
Closed-End Loans and/or Revolving Credit
Line Loans; and (xiv) in the case of
Revolving Credit Line Loans, the general
payment and credit line features of such
Loans and other pertinent features
thereof.
(2) PRIVATE SECURITIES ......... Primary Assets for a Series may consist,
in whole or in part, of Private
Securities, which include (i)
pass-through certificates representing
beneficial interests in loans of the
type that would otherwise be eligible to
be Loans (the "Underlying Loans") or
(ii) collateralized obligations secured
by Underlying Loans. Such pass-through
certificates or collateralized
obligations will have previously been
(i) offered and distributed to the
public pursuant to an effective
registration statement or (ii) purchased
in a transaction not involving any
public offering from a person who is not
an affiliate of the issuer of such
securities at the time of sale (nor an
affiliate thereof at any time during the
three preceding months); provided, that
a period of three years has elapsed
since the later of the date such
securities were acquired from the
related issuer or an affiliate thereof.
Although individual Underlying Loans may
be insured or guaranteed by the United
States or an agency or instrumentality
thereof, they need not be, and the
Private Securities themselves will not
be, so insured or guaranteed. See "The
Trust Funds--Private Securities." Unless
otherwise specified in the Prospectus
Supplement relating to a Series of
Securities, payments on the Private
Securities will be distributed directly
to the related PS Trustee as registered
owner of such Private Securities.
The related Prospectus Supplement for a
Series will specify (on an approximate
basis, as described above, and as of the
date specified in the related Prospectus
Supplement), to the extent relevant and
to the extent such information is
reasonably available to the Depositor
and the Depositor reasonably believes
such information to be reliable: (i) the
aggregate approximate principal amount
and type of any Private Securities to be
included in the Trust Fund for such
Series; (ii) certain characteristics of
the Underlying Loans, including (a) the
payment features of such Underlying
Loans (i.e., whether they are Closed-End
Loans and/or Revolving Credit Line
Loans, whether they are fixed rate or
adjustable rate and whether they provide
for fixed level payments, negative
amortization or other payment features),
(b) the approximate aggregate principal
amount of such Underlying Loans that are
insured or guaranteed by a governmental
entity, (c) the servicing fee or range
of servicing fees with respect to such
Underlying Loans (d) the minimum and
maximum stated maturities of such
Underlying Loans at origination, (e) the
lien priority of such Underlying Loans
and (f) the delinquency status and year
of origination of such Underlying Loans;
(iii) the maximum original
term-to-stated maturity of the Private
Securities; (iv) the weighted average
term-to-stated maturity of the Private
Securities; (v) the pass-through or
certificate rate or ranges thereof for
the Private Securities; (vi) the sponsor
or depositor of the Private Securities
(the "PS Sponsor"), the servicer of the
Private Securities (the "PS Servicer")
and the trustee of the Private
Securities (the "PS Trustee"); (vii)
certain characteristics of enhancement,
if any, such as reserve funds, insurance
policies, letters of credit or
guarantees, relating to the Loans
underlying the Private Securities, or to
such Private Securities themselves;
(viii) the terms on which the Underlying
Loans may or are required to be
repurchased prior to stated maturity;
and (ix) the terms on which substitute
Underlying Loans may be delivered to
replace those initially deposited with
the PS Trustee. See "The Trust
Funds--Additional Information" herein.
B. COLLECTION AND
DISTRIBUTION ACCOUNTS ......... Unless otherwise provided in the related
Prospectus Supplement, all payments on
or in respect of the Primary Assets for
a Series will be remitted directly to an
account (each, a "Collection Account")
to be established for such Series with
the Trustee or the Servicer, in the name
of the Trustee. Unless otherwise
provided in the related Prospectus
Supplement, the applicable Trustee shall
be required to apply a portion of the
amount in the Collection Account,
together with reinvestment earnings from
eligible investments specified in the
related Prospectus Supplement, to the
payment of certain amounts payable to
the Servicer under the related Agreement
and any other person specified in the
Prospectus Supplement, and to deposit a
portion of the amount in the Collection
Account into a separate account (each, a
"Distribution Account") to be
established for such Series, each in the
manner and at the times specified in the
related Prospectus Supplement. All
amounts deposited into such Distribution
Account(s) will be available, unless
otherwise specified in the related
Prospectus Supplement, for (i)
application to the payment of principal
of and interest on such Series of
Securities on the next Distribution
Date, (ii) the making of adequate
provision for future payments on certain
Classes of Securities and (iii) any
other purpose specified in the related
Prospectus Supplement. After applying
the funds in the Collection Account as
described above, any funds remaining in
the Collection Account may be paid over
to the Servicer, the Depositor, any
provider of Enhancement with respect to
such Series (an "Enhancer") or any other
person entitled thereto in the manner
and at the times specified in the
related Prospectus Supplement.
C. PRE-FUNDING AND
CAPITALIZED INTEREST
ACCOUNTS ...................... If specified in the related Prospectus
Supplement, a Trust Fund will include
one or more segregated trust accounts
(each, a "Pre-Funding Account")
established and maintained with the
Trustee of the Trust Fund for the
related Series (the "Trustee"). If so
specified, on the Closing Date for such
Series, a portion of the proceeds of the
sale of the Securities of such Series
(such amount, the "Pre-Funded Amount")
will be deposited into the Pre-Funding
Account and may be used to purchase
additional Primary Assets during the
period of time specified in the related
Prospectus Supplement (the "Pre-Funding
Period"). The Primary Assets to be so
purchased generally will be selected on
the basis of the same criteria as those
used to select the initial Primary
Assets, and the same representations and
warranties will be made with respect
thereto. If any Pre-Funded Amount
remains on deposit in the Pre-Funding
Account at the end of the Pre-Funding
Period, such amount will be applied in
the manner specified in the related
Prospectus Supplement to prepay the
Notes and/or the Certificates of the
applicable Series.
If a Pre-Funding Account is established,
one or more segregated trust accounts
(each, a "Capitalized Interest Account")
may be established and maintained with
the Trustee for the related Series. On
the related Closing Date, a portion of
the proceeds of the sale of the
Securities of such Series will be
deposited into the Capitalized Interest
Account and used to fund the excess, if
any, of (i) the sum of (a) the amount of
interest accrued on the Securities of
such Series and (b) if specified in the
related Prospectus Supplement, certain
fees or expenses during the Pre-Funding
Period such as trustee fees and credit
enhancement fees, over (ii) the amount
of interest available therefor from the
Primary Assets in the Trust Fund. Any
amounts on deposit in the Capitalized
Interest Account at the end of the
Pre-Funding Period that are not
necessary for such purposes will be
distributed as specified in the related
Prospectus Supplement.
ENHANCEMENT ......................... If stated in the Prospectus Supplement
relating to a Series, the Depositor will
obtain an irrevocable letter of credit,
surety bond, insurance policy (each, a
"Security Policy") or other form of
credit support (collectively,
"Enhancement") in favor of the
applicable Trustee on behalf of the
Holders of such Series and any other
person specified in such Prospectus
Supplement from an institution
acceptable to the rating agency or
agencies identified in the related
Prospectus Supplement as rating such
Series of Securities (each, a "Rating
Agency") for the purposes specified in
such Prospectus Supplement. The
Enhancement will support the payments on
the Securities and may be used for other
purposes, to the extent and under the
conditions specified in such Prospectus
Supplement. See "Enhancement."
Enhancement for a Series may include one
or more of the following types of
Enhancement, or such other type of
Enhancement specified in the related
Prospectus Supplement.
A. SUBORDINATE
SECURITIES .................... If stated in the related Prospectus
Supplement, Enhancement for a Series may
consist of one or more Classes of
Subordinated Securities. The rights of
the related Subordinated Securityholders
to receive distributions on any
Distribution Date will be subordinate in
right and priority to the rights of
Holders of Senior Securities of the
Series, but only to the extent described
in the related Prospectus Supplement.
B. INSURANCE ..................... If stated in the related Prospectus
Supplement, Enhancement for a Series may
consist of special hazard Insurance
Policies, bankruptcy bonds and other
types of insurance supporting payments
on the Securities.
C. RESERVE FUNDS ................. If stated in the Prospectus Supplement,
the Depositor may deposit cash, a letter
or letters of credit, short-term
investments, or other instruments
acceptable to the Rating Agencies in one
or more reserve funds to be established
in the name of the applicable Trustee
(each, a "Reserve Fund"), which will be
used, as specified in such Prospectus
Supplement, by such Trustee to make
required payments of principal of or
interest on the Securities of such
Series, to make adequate provision for
future payments on such Securities, or
for any other purpose specified in the
Agreement with respect to such Series,
to the extent that funds are not
otherwise available. In the alternative
or in addition to such deposit, a
Reserve Fund for a Series may be funded
through application of all or a portion
of the excess cash flow from the Primary
Assets for such Series, to the extent
described in the related Prospectus
Supplement.
D. MINIMUM PRINCIPAL
PAYMENT AGREEMENT ............. If stated in the Prospectus Supplement
relating to a Series of Securities, the
Depositor will enter into a minimum
principal payment agreement (the
"Minimum Principal Payment Agreement")
with an entity meeting the criteria of
the Rating Agencies, pursuant to which
such entity will provide funds in the
event that aggregate principal payments
on the Primary Assets for such Series
are not sufficient to make certain
payments, as provided in the related
Prospectus Supplement. See
"Enhancement--Minimum Principal Payment
Agreement."
E. DEPOSIT AGREEMENT ............. If stated in the related Prospectus
Supplement, the Depositor and the
applicable Trustee will enter into a
guaranteed investment contract or an
investment agreement (the "Deposit
Agreement") pursuant to which all or a
portion of the amounts held in the
Collection Account, the Distribution
Account(s) or in any Reserve Fund will
be invested with the entity specified in
such Prospectus Supplement. Such Trustee
will be entitled to withdraw amounts so
invested, plus interest at a rate equal
to the Assumed Reinvestment Rate, in the
manner specified in such Prospectus
Supplement. See "Enhancement--Deposit
Agreement."
SERVICING ........................... The Servicer will be responsible for
servicing, managing and making
collections on the Loans for a Series.
In addition, the Servicer, if so
specified in the related Prospectus
Supplement, will act as custodian and
will be responsible for maintaining
custody of the Loans and related
documentation on behalf of the Trustee.
Advances with respect to delinquent
payments of principal of or interest on
a Loan will be made by the Servicer only
to the extent described in the related
Prospectus Supplement. Such advances
will be intended to provide liquidity
only and, unless otherwise specified in
the related Prospectus Supplement, will
be reimbursable to the Servicer from
scheduled payments of principal and
interest, late collections, the proceeds
of liquidation of the related Loans or
other recoveries relating to such Loans
(including any Insurance Proceeds or
payments from other credit support). In
performing these functions, the Servicer
will exercise the same degree of skill
and care that it customarily exercises
with respect to similar receivables or
Loans owned or serviced by it. Under
certain limited circumstances, the
Servicer may resign or be removed, in
which event either the Trustee or a
third-party servicer will be appointed
as successor servicer. The Servicer will
receive a periodic fee as servicing
compensation (the "Servicing Fee") and
may, as specified herein and in the
related Prospectus Supplement, receive
certain additional compensation. See
"Servicing of Loans--Servicing
Compensation and Payment of Expenses"
herein.
FEDERAL INCOME
TAX CONSIDERATIONS
A. DEBT SECURITIES AND
REMIC RESIDUAL
SECURITIES .................... If (i) an election is made to treat all
or a portion of a Trust Fund for a
Series as a "real estate mortgage
investment conduit" (a "REMIC") or (ii)
so provided in the related Prospectus
Supplement, a Series of Securities will
include one or more Classes of taxable
debt obligations under the Internal
Revenue Code of 1986, as amended (the
"Code"). Stated interest with respect to
such Classes of Securities will be
reported by the related Holder in
accordance with such Holder's method of
accounting except that, in the case of
Securities constituting "regular
interests" in a REMIC ("Regular
Interests"), such interest will be
required to be reported on the accrual
methods regardless of such Holder's
usual method of accounting. Securities
that are Compound Interest Securities,
Zero Coupon Securities or Interest Only
Securities will, and certain other
Classes of Securities may, be issued
with original issue discount that is not
de minimis. In such cases, the related
Holder will be required to include
original issue discount in gross income
as it accrues, which may be prior to the
receipt of cash attributable to such
income. If a Security is issued at a
premium, such Holder may be entitled to
make an election to amortize such
premium on a constant yield method.
In the case of a REMIC election, a Class
of Securities may be treated as a REMIC
"residual interest" (each, a "Residual
Interest"). A Holder of a Residual
Interest will be required to include in
its income its pro rata share of the
taxable income of the REMIC. In certain
circumstances, the Holder of a Residual
Interest may have REMIC taxable income
or tax liability attributable to REMIC
taxable income for a particular period
in excess of cash distributions for such
period or have an after-tax return that
is less than the after-tax return on
comparable debt instruments. In
addition, a portion (or, in some cases,
all) of the income from a Residual
Interest (i) may not be subject to
offset by losses from other activities
or investments, (ii) for a Holder that
is subject to tax under the Code on
unrelated business taxable income, may
be treated as unrelated business taxable
income and (iii) for a foreign Holder,
may not qualify for exemption from or
reduction of withholding. In addition,
(i) Residual Interests are subject to
transfer restrictions and (ii) certain
transfers of Residual Interests will not
be recognized for federal income tax
purposes. Further, individual Holders
are subject to limitations on the
deductibility of expenses of the REMIC.
See "Certain Federal Income Tax
Considerations."
B. NON-REMIC
PASS-THROUGH
SECURITIES .................... If so specified in the related
Prospectus Supplement, the Trust Fund
for a Series will be treated as a
grantor trust and will not be classified
as an association taxable as a
corporation for federal income tax
purposes, and Holders of Securities of
such Series ("Pass-Through Securities")
will be treated as owning directly
rights to receive certain payments of
interest or principal, or both, on the
Primary Assets held in the Trust Fund
for such Series. All income with respect
to a Stripped Security will be accounted
for as original issue discount and,
unless otherwise specified in the
related Prospectus Supplement, will be
reported by the applicable Trustee on an
accrual basis, which may be prior to the
receipt of cash associated with such
income.
C. OWNER TRUST
SECURITIES .................... If so specified in the Prospectus
Supplement, the Trust Fund will be
treated as a partnership for purposes of
federal and state income tax. Each
Noteholder, by the acceptance of a Note
of a given Series, will agree to treat
such Note as indebtedness; and each
Certificateholder, by the acceptance of
a Certificate of a given Series, will
agree to treat the related Trust Fund as
a partnership in which such
Certificateholder is a partner for
federal income and state tax purposes.
Alternative characterizations of such
Trust Fund and such Certificates are
possible, but would not result in
materially adverse tax consequences to
Certificateholders. See "Certain Federal
Income Tax Considerations."
ERISA CONSIDERATIONS ................ A fiduciary of any employee benefit plan
or other retirement plan or arrangement
subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or the Code should carefully
review with its own legal advisors
whether the purchase or holding of
Securities could give rise to a
transaction prohibited or otherwise
impermissible under ERISA or the Code.
Certain Classes of Securities may not be
transferred unless the applicable
Trustee and the Depositor are furnished
with a letter of representation or an
opinion of counsel to the effect that
such transfer will not result in a
violation of the prohibited transaction
provisions of ERISA and the Code and
will not subject the applicable Trustee,
the Depositor or the Servicer to
additional obligations. See "Description
of the Securities--General" and "ERISA
Considerations."
LEGAL INVESTMENT .................... Unless otherwise specified in the
related Prospectus Supplement,
Securities of each Series offered by
this Prospectus and the related
Prospectus Supplement will not
constitute "mortgage related securities"
under the Secondary Mortgage Market
Enhancement Act of 1984, as amended
("SMMEA"). Investors whose investment
authority is subject to legal
restrictions should consult their own
legal advisors to determine whether and
to what extent the Securities constitute
legal investments for them. See "Legal
Investment."
USE OF PROCEEDS ..................... The Depositor will use the net proceeds
from the sale of each Series for one or
more of the following purposes: (i) to
purchase the related Primary Assets,
(ii) to repay indebtedness incurred to
obtain funds to acquire such Primary
Assets, (iii) to establish any Reserve
Funds described in the related
Prospectus Supplement and (iv) to pay
costs of structuring and issuing such
Securities, including the costs of
obtaining Enhancement, if any. If so
specified in the related Prospectus
Supplement, the purchase of the Primary
Assets for a Series will be effected by
an exchange of Securities with the
Seller of such Primary Assets. See "Use
of Proceeds."
RATINGS ............................. It will be a requirement for issuance of
any Series that the Securities offered
by this Prospectus and the related
Prospectus Supplement be rated by at
least one Rating Agency in one of its
four highest applicable rating
categories. The rating or ratings
applicable to Securities of each Series
offered hereby and by the related
Prospectus Supplement will be as set
forth in the related Prospectus
Supplement. A securities rating should
be evaluated independently of similar
ratings on different types of
securities. A securities rating is not a
recommendation to buy, hold or sell
securities, and does not address the
effect that the rate of prepayments on
Loans or Underlying Loans relating to
Private Securities, as applicable, for a
Series may have on the yield to
investors in the Securities of such
Series. See "Risk Factors--Ratings Are
Not Recommendations."
<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
No Secondary Market. There will be no market for the Securities of any
Series prior to the issuance thereof, and there can be no assurance that a
secondary market will develop or, if it does develop, that it will provide
Holders with liquidity of investment or will continue for the life of the
Securities of such Series. The underwriter(s) specified in the related
Prospectus Supplement (the "Underwriters") expect to make a secondary market in
the related Securities, but will have no obligation to do so.
Primary Assets Are Only Source of Repayment. The Depositor does not
have, nor is it expected to have, any significant assets. The Securities of a
Series will be payable solely from the assets of the Trust Fund for such
Securities. There will be no recourse to the Depositor or any other person for
any default on or any failure to receive distributions on the Securities.
Further, unless otherwise stated in the related Prospectus Supplement, at the
times set forth in such Prospectus Supplement, certain Primary Assets and/or any
balance remaining in the Collection Account or Distribution Account(s)
immediately after making all payments due on the Securities of such Series and
other payments specified in Securities Prospectus Supplement, may be promptly
released or remitted to the Depositor, the Servicer, the Enhancer or any other
person entitled thereto, and will no longer be available for making payments to
Holders. Consequently, Holders of Securities of each Series must rely solely
upon payments with respect to the Primary Assets and the other assets
constituting the Trust Fund for a Series of Securities, including, if
applicable, any amounts available pursuant to any Enhancement for such Series,
for the payment of principal of and interest on the Securities of such Series.
Holders of Notes will be required under the Indenture to proceed only
against the Primary Assets and other assets constituting the related Trust Fund
in the case of a default with respect to such Notes and may not proceed against
any assets of the Depositor. There is no assurance that the market value of the
Primary Assets or any other assets for a Series will at any time be equal to or
greater than the aggregate principal amount of the Securities of such Series
then outstanding, plus accrued interest thereon. Moreover, upon an Event of
Default under the Indenture for a Series of Notes and a sale of the assets in
the Trust Fund or upon a sale of the assets of a Trust Fund for a Series of
Certificates, the Trustee under the related Indenture (the "Indenture Trustee"),
the Servicer, if any, the Enhancer and any other service provider specified in
the related Prospectus Supplement generally will be entitled to receive the
proceeds of any such sale to the extent of unpaid fees and other amounts owing
to such persons under the related Agreement prior to distributions to Holders of
Securities. Upon any such sale, the proceeds thereof may be insufficient to pay
in full the principal of and interest on the Securities of such Series.
The only obligations, if any, of the Depositor with respect to the
Securities of any Series will be pursuant to certain representations and
warranties. See "The Agreements--Assignment of Primary Assets" herein. The
Depositor does not have, and is not expected in the future to have, any
significant assets with which to meet any obligation to repurchase Primary
Assets with respect to which there has been a breach of any representation or
warranty. If, for example, the Depositor were required to repurchase a Primary
Asset, its only source of funds from which to make such repurchase would be from
funds obtained from the enforcement of a corresponding obligation, if any, on
the part of the originator of the Primary Assets, the Servicer or the Seller, as
the case may be, or from a Reserve Fund established to provide funds for such
repurchases.
Limited Protection Against Losses. Although any Enhancement is intended
to reduce the risk of delinquent payments or losses to Holders of Securities
entitled to the benefit thereof, the amount of such Enhancement will be limited,
as set forth in the related Prospectus Supplement, and will decline and could be
depleted under certain circumstances prior to the payment in full of the related
Series of Securities, and as a result, Holders may suffer losses. See
"Enhancement."
Yield May Vary; Subordination. The yield to maturity experienced by a
Holder of Securities may be affected by the rate of payment of principal of the
Loans or Underlying Loans relating to the Private Securities, as applicable. The
timing of principal payments on the Securities of a Series will be affected by a
number of factors, including the following: (i) the extent of prepayments of the
Loans or Underlying Loans relating to the Private Securities, as applicable,
which prepayments may be influenced by a variety of factors; (ii) the manner of
allocating principal payments among the Classes of Securities of a Series as
specified in the related Prospectus Supplement; (iii) the exercise by the party
entitled thereto of any right of optional termination; and (iv) in the case of
Trust Funds comprised of Revolving Credit Line Loans, any provisions in the
related Agreement described in the applicable Prospectus Supplement respecting
any non-amortization, early amortization or scheduled amortization period. See
"Description of the Securities--Weighted Average Life of Securities."
Prepayments may also result from repurchases of Loans or Underlying Loans, as
applicable, due to material breaches of the Seller's or the Depositor's
warranties.
Interest payable on the Securities of a Series on a Distribution Date
will include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues during the calendar month
prior to a Distribution Date, the effective yield to Holders will be reduced
from the yield that would otherwise be obtainable if interest payable on the
Security were to accrue through the day immediately preceding each Distribution
Date, and the effective yield (at par) to Holders will be less than the
indicated coupon rate. See "Description of the Securities--Payments of
Interest."
The rights of Subordinated Securityholders to receive distributions to
which they would otherwise be entitled with respect to the Trust Fund will be
subordinate to the rights of the Servicer and the Holders of Senior Securities,
to the extent described in the related Prospectus Supplement. As a result of the
foregoing, investors must be prepared to bear the risk that they may be subject
to delays in payment and may not recover their initial investments in the
Subordinated Securities.
Balloon Payments. Certain of the Loans as of the related Cut-off Date
may not be fully amortizing over their terms to maturity, and thus will require
substantial principal payments (i.e., balloon payments) at their stated
maturity. Loans with balloon payments involve a greater degree of risk because
the ability of a borrower to make a balloon payment typically will depend upon
such borrower's ability either to timely refinance the related Loan or to timely
sell the related Property. The ability of a borrower to accomplish either of
these goals will be affected by a number of factors, including the level of
available mortgage rates at the time of sale or refinancing, the borrower's
equity in the related Property, the financial condition of the borrower and tax
laws. Losses on such Loans that are not otherwise covered by the credit
enhancement described in the applicable Prospectus Supplement will be borne by
the Holders of one or more Classes of Securities of the related Series.
Property Values May Be Insufficient. If the Mortgage Loans in a Trust
Fund are primarily junior liens subordinate to the rights of the mortgagee under
the related senior mortgage or mortgages, the proceeds from any liquidation,
insurance or condemnation proceedings will be available to satisfy the
outstanding balance of such junior mortgage only to the extent that the claims
of such senior mortgagees have been satisfied in full, including any related
foreclosure costs. In addition, a junior mortgagee may not foreclose on the
Property securing a junior mortgage unless it forecloses subject to the senior
mortgages, in which case it must either pay the entire amount due on the senior
mortgages to the senior mortgagees at or prior to the foreclosure sale or
undertake the obligation to make payments on the senior mortgages in the event
the mortgagor is in default thereunder. The Trust Fund will not have any source
of funds to satisfy the senior mortgages or make payments due to the senior
mortgagees.
There are several factors that could adversely affect the value of
Properties such that the outstanding balance of the related Loan, together with
any senior financing on the Properties, would equal or exceed the value of the
Properties. Among the factors that could adversely affect the value of the
Properties are an overall decline in the residential real estate market in the
areas in which the Properties are located or a decline in the general condition
of the Properties as a result of failure of borrowers to maintain adequately the
Properties or of natural disasters that are not necessarily covered by
insurance, such as earthquakes and floods. Any such decline could extinguish the
value of a junior interest in a Property before having any effect on the related
senior interest therein. If such a decline occurs, the actual rates of
delinquencies, foreclosure and losses on the junior Loans could be higher than
those currently experienced in the mortgage lending industry in general.
Risks relating to Certain Geographic Regions where Mortgage Loans may
be Concentrated. Certain geographic regions of the United States from time to
time will experience weaker regional economic conditions and housing markets,
and, consequently, will experience higher rates of loss and delinquency than
will be experienced on mortgage loans generally. The Mortgage Loans underlying
certain Series of Securities may be concentrated in these regions, and such
concentration may present risk considerations in addition to those generally
present for similar mortgage-backed securities without such concentration.
Book-Entry Registration. If Securities are issued in book-entry form,
such registration may reduce the liquidity of such Securities in the secondary
trading market, since investors may be unwilling to purchase Securities for
which they cannot obtain physical certificates. Since transactions in book-entry
Securities can be effected only through the Depository Trust Company ("DTC"),
participating organizations, Financial Intermediaries and certain banks, the
ability of a Holder to pledge a book-entry Security to persons or entities that
do not participate in the DTC system may be limited due to lack of a physical
certificate representing such Securities. Security Owners will not be recognized
as Holders as such term is used in the related Agreement, and Security Owners
will be permitted to exercise the rights of Holders only indirectly through DTC
and its Participants.
In addition, Holders may experience some delay in their receipt of
distributions of principal of and interest on book-entry Securities, since
distributions are required to be forwarded by the applicable Trustee to DTC and
DTC will then be required to credit such distributions to the accounts of
Depository participants, which thereafter will be required to credit them to the
accounts of Holders either directly or indirectly through Financial
Intermediaries.
Pre-Funding May Adversely Affect Investment. If a Trust Fund includes a
Pre-Funding Account and the Principal Balance of additional Loans delivered to
the Trust Fund during the Pre-Funding Period is less than the original
Pre-Funded Amount, the Holders of the Securities of the related Series will
receive a prepayment of principal as and to the extent described in the related
Prospectus Supplement. Any such principal prepayment may adversely affect the
yield to maturity of the applicable Securities. Since prevailing interest rates
are subject to fluctuation, there can be no assurance that investors will be
able to reinvest such a prepayment at yields equaling or exceeding the yields on
the related Securities. It is possible that the yield on any such reinvestment
will be lower, and may be significantly lower, than the yield on the related
Securities.
The ability of a Trust Fund to invest in subsequent Loans during the
related Pre-Funding Period will be dependant on the ability of the Seller to
originate or acquire Loans that satisfy the requirements for transfer to the
Trust Fund. The ability of the Seller to originate or acquire such Loans will be
affected by a variety of social and economic factors, including the prevailing
level of market interest rates, unemployment levels and consumer perceptions of
general economic conditions.
Although subsequent Loans must satisfy the characteristics described in
the related Prospectus Supplement and generally must be selected on the basis of
the same criteria as those used to select the initial Loans, such Loans may have
been originated more recently than the Loans originally transferred to the Trust
Fund and may be of a lesser credit quality. As a result, the addition of
subsequent Loans may adversely affect the performance of the related Securities.
Bankruptcy Risks. Federal and state statutory provisions, including the
federal bankruptcy laws and state laws affording relief to debtors, may
interfere with or affect the ability of the secured mortgage lender to realize
upon its security. For example, in a proceeding under the federal Bankruptcy
Code, a lender may not foreclose on a mortgaged property without the permission
of the bankruptcy court. The rehabilitation plan proposed by the related debtor
may provide, if the mortgaged property is not the debtor's principal residence
and the court determines that the value of the mortgaged property is less than
the principal balance of the related mortgage loan, for the reduction of the
secured indebtedness to the value of the mortgaged property as of the date of
the commencement of the bankruptcy, rendering the lender a general unsecured
creditor for the difference, and also may reduce the monthly payments due under
such mortgage loan, change the rate of interest and alter the mortgage loan
repayment schedule. The effect of any such proceedings under the federal
Bankruptcy Code, including but not limited to any automatic stay, could result
in delays in receiving payments on the Loans underlying a Series of Securities
and possible reductions in the aggregate amount of such payments.
Consequences of Owning Original Issue Discount Securities. Debt
Securities that are Compound Interest Securities will be, and certain of the
Debt Securities may be, issued with original issue discount for federal income
tax purposes. A Holder of Debt Securities issued with original issue discount
will be required to include original issue discount in ordinary gross income for
federal income tax purposes as it accrues, in advance of receipt of the cash
attributable to such income. Accrued but unpaid interest on the Debt Securities
that are Compound Interest Securities generally will be treated as having
original issue discount for this purpose. See "Certain Federal Income Tax
Considerations--Interest and Acquisition Discount" herein.
REMIC-Related Risks. Holders of Residual Interest Securities will be
required to report on their federal income tax returns as ordinary income their
pro rata share of the taxable income of the REMIC, regardless of the amount or
timing of their receipt of cash payments, as described in "Certain Federal
Income Tax Considerations." Accordingly, under certain circumstances, Holders of
Securities that constitute Residual Interest Securities may have taxable income
and tax liabilities arising from such investment during a taxable year in excess
of the cash received during such period. Individual Holders of Residual Interest
Securities may be limited in their ability to deduct servicing fees and other
expenses of the REMIC. In addition, Residual Interest Securities are subject to
certain restrictions on transfer. Because of the special tax treatment of
Residual Interest Securities, the taxable income arising in a given year on a
Residual Security will not be equal to the taxable income associated with
investment in a corporate bond or stripped instrument having similar cash flow
characteristics and pre-tax yield. Therefore, the after-tax yield on the
Residual Interest Security may be significantly less than that of a corporate
bond or stripped instrument having similar cash flow characteristics.
Additionally, prospective purchasers of a REMIC Residual Interest Security
should be aware that the IRS recently finalized regulations that provide that a
REMIC Residual Interest Security acquired after January 3, 1995 cannot be
marked-to-market. Prospective purchasers of a REMIC Residual Interest Security
should consult their tax advisors regarding the possible application of such
regulations. See "Certain Federal Income Tax Considerations--Taxation of Holders
of Residual Interest Securities--Mark to Market Rules."
Unsecured Home Improvement and Other Loans. The Trust Fund for any
Series may include Home Improvement Contracts that are not secured by an
interest in real estate or otherwise. The Trust Fund for any Series may also
include home equity contracts that were originated with Loan-to-Value Ratios or
Combined Loan-to-Value Ratios in excess of the value of the related Mortgaged
Property pledged as security therefor. Under such circumstances, the Trust Fund
for the related Series could be treated as a general unsecured creditor as to
any unsecured portion of any such Loan. In the event of a default under a Loan
that is unsecured in whole or in part, the related Trust Fund will have recourse
only against the borrower's assets generally for the unsecured portion of the
Loan, along with all other general unsecured creditors of the borrower. In a
bankruptcy or insolvency proceeding relating to a borrower on any such Loan, the
unsecured obligations of the borrower with respect to such Loan may be
discharged, even though the value of the borrower's assets made available to the
related Trust Fund as a general unsecured creditor is insufficient to pay
amounts due and owning under the related Loan.
Risk of Losses Associated with Adjustable Rate Loans. Adjustable rate
Loans may be underwritten on the basis of an assessment that Mortgagors will
have the ability to make payments in higher amounts after relatively short
periods of time. In some instances, Mortgagors' income may not be sufficient to
enable them to continue to make their loan payments as such payments increase
and thus the likelihood of default will increase.
Potential Liability For Environmental Conditions. Real property pledged
as security to a lender may be subject to certain environmental risks. Federal,
state and local laws and regulations impose a wide range of requirements on
activities that may affect the environment, health and safety. In certain
circumstances, these laws and regulations impose obligations on owners or
operators of residential properties such as those subject to the Loans. The
failure to comply with such laws and regulations may result in fines and
penalties.
In particular, under various federal, state and local laws and
regulations, an owner or operator of real estate may be liable for the costs of
addressing hazardous substances on, in or beneath such property and related
costs. Such liability could exceed the value of the property and the aggregate
assets of the owner or operator. In addition, persons who transport or dispose
of hazardous substances, or arrange for the transportation, disposal or
treatment of hazardous substances, at off-site locations may also be held liable
if there are releases or threatened releases of hazardous substances at such
off-site locations.
In addition, under the laws of some states and under the Federal
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
contamination of property may give rise to a lien on the property to assure the
payment of the costs of clean-up. In several states, such a lien has priority
over the lien of an existing mortgage against such property.
Under the laws of some states, and under CERCLA and the Federal Solid
Waste Disposal Act, there is a possibility that a lender may be held liable as
an "owner" or "operator" for costs of addressing releases or threatened releases
of hazardous substances at a property, or releases of petroleum from an
underground storage tank, under certain circumstances. See "Certain Legal
Aspects of the Loans--Environmental Risks."
Consumer Protection Laws May Affect Loans. Applicable state laws
generally regulate interest rates and other charges and require certain
disclosures. In addition, other state laws, public policy and general principles
of equity relating to the protection of consumers, unfair and deceptive
practices and debt collection practices may apply to the origination, servicing
and collection of the Loans. Depending on the provisions of the applicable law
and the specific facts and circumstances involved, violations of these laws,
policies and principles may limit the ability of the Servicer to collect all or
part of the principal of or interest on the Loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the owner of
the Loan to damages and administrative enforcement.
The Loans are also subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding the
terms of the Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color, sex,
religion, marital status, national origin, receipt of public assistance or the
exercise of any right under the Consumer Credit Protection Act, in the extension
of credit;
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience; and
(iv) for loans that were originated or closed after November 7, 1989,
the Home Equity Loan Consumer Protection Act of 1988, which requires additional
application disclosures, limits changes that may be made to the loan documents
without the borrower's consent and restricts a lender's ability to declare a
default or to suspend or reduce a borrower's credit limit to certain enumerated
events.
The Riegle Act. Certain mortgage loans are subject to the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "Riegle Act"),
which incorporates the Home Ownership and Equity Protection Act of 1994. These
provisions impose additional disclosure and other requirements on creditors with
respect to non-purchase money mortgage loans with high interest rates or high
up-front fees and charges. The provisions of the Riegle Act apply on a mandatory
basis to all mortgage loans originated on or after October 1, 1995. These
provisions can impose specified statutory liabilities upon creditors who fail to
comply with their provisions and may affect the enforceability of the related
loans. In addition, any assignee of the creditor would generally be subject to
all claims and defenses that the consumer could assert against the creditor,
including, without limitation, the right to rescind the mortgage loan.
The Home Improvement Contracts are also subject to the Preservation of
Consumers' Claims and Defenses regulations of the Federal Trade Commission and
other similar federal and state statutes and regulations (collectively, the
"Holder in Due Course Rules"), which protect the homeowner from defective
craftsmanship or incomplete work by a contractor. These laws permit the obligor
to withhold payment if the work does not meet the quality and durability
standards agreed to by the homeowner and the contractor. The Holder in Due
Course Rules have the effect of subjecting any assignee of the seller in a
consumer credit transaction to all claims and defenses the obligor in the credit
sale transaction could assert against the seller of the goods.
Violations of certain provisions of these federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Loans and in addition, could subject the Trust Fund to damages and
administrative enforcement. See "Certain Legal Aspects of the Loans."
Contracts Will Not Be Stamped. In order to give notice of the right,
title and interest of Holders to the Home Improvement Contracts, the Depositor
will cause a UCC-1 financing statement to be executed by the Depositor or the
Seller identifying the applicable Trustee as the secured party and identifying
all Home Improvement Contracts as collateral. Unless otherwise specified in the
related Prospectus Supplement, the Home Improvement Contracts will not be
stamped or otherwise marked to reflect their assignment to the Trust Fund.
Therefore, if, through negligence, fraud or otherwise, a subsequent purchaser
were able to take physical possession of the Home Improvement Contracts without
notice of such assignment, the interest of Holders in the Home Improvement
Contracts could be defeated. See "Certain Legal Aspects of the Loans--The Home
Improvement Contracts."
Ratings Are Not Recommendations. It will be a condition to the issuance
of a Series of Securities that they be rated in one of the four highest rating
categories by the Rating Agencies identified in the related Prospectus
Supplement. Any such rating would be based on, among other things, the adequacy
of the value of the Primary Assets and any Enhancement with respect to such
Series. Such rating should not be deemed a recommendation to purchase, hold or
sell Securities, inasmuch as it does not address market price or suitability for
a particular investor. There is also no assurance that any such rating will
remain in effect for any given period of time or may not be lowered or withdrawn
entirely by the Rating Agencies if in their judgment circumstances in the future
so warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Primary Assets, such rating might also be lowered
or withdrawn, among other reasons, because of an adverse change in the financial
or other condition of an Enhancer or a change in the rating of such Enhancer's
long term debt.
DESCRIPTION OF THE SECURITIES
GENERAL
Each Series of Notes will be issued pursuant to an indenture (each, an
"Indenture") between the related Trust Fund and the entity named in the related
Prospectus Supplement as Indenture Trustee with respect to such Series. A form
of Indenture has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part. The Certificates will also be issued in Series
pursuant to separate agreements (each, a "Pooling and Servicing Agreement" or a
"Trust Agreement") among the Depositor, the Servicer, if the Series relates to
Loans, and the Trustee. A form of Pooling and Servicing Agreement has been filed
as an exhibit to the Registration Statement of which this Prospectus forms a
part. A Series may consist of both Notes and Certificates.
The Seller may agree to reimburse the Depositor for certain fees and
expenses of the Depositor incurred in connection with the offering of the
Securities.
The following summaries describe certain provisions in the Agreements
common to each Series of Securities. The summaries do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, the
provisions of the Agreements and the Prospectus Supplement relating to each
Series of Securities. Where particular provisions or terms used in the
Agreements are referred to, the actual provisions (including definitions of
terms) are incorporated herein by reference as part of such summaries.
Each Series of Securities will consist of one or more Classes of
Securities, one or more of which may be Compound Interest Securities, Variable
Interest Securities, PAC Securities, Zero Coupon Securities, Principal Only
Securities, Interest Only Securities or Participating Securities. A Series may
also include one or more Classes of Subordinated Securities. The Securities of
each Series will be issued only in fully registered form, without coupons, in
the authorized denominations for each Class specified in the related Prospectus
Supplement. Upon satisfaction of the conditions, if any, applicable to a Class
of a Series, as described in the related Prospectus Supplement, the transfer of
the Securities may be registered and the Securities may be exchanged at the
office of the applicable Trustee specified in the Prospectus Supplement without
the payment of any service charge other than any tax or governmental charge
payable in connection with such registration of transfer or exchange. If
specified in the related Prospectus Supplement, one or more Classes of a Series
may be available in book-entry form only.
Unless otherwise provided in the related Prospectus Supplement,
payments of principal of and interest on a Series of Securities will be made on
the Distribution Dates specified in the Prospectus Supplement relating to such
Series by check mailed to Holders of such Series, registered as such at the
close of business on the record date specified in the related Prospectus
Supplement applicable to such Distribution Dates at their addresses appearing on
the security register, except that (a) payments may be made by wire transfer (at
the expense of the Holder requesting payment by wire transfer) in certain
circumstances described in the related Prospectus Supplement and (b) final
payments of principal in retirement of each Security will be made only upon
presentation and surrender of such Security at the office of the applicable
Trustee specified in the Prospectus Supplement. Notice of the final payment on a
Security will be mailed to the Holder of such Security before the Distribution
Date on which the final principal payment on any Security is expected to be made
to the Holder of such Security.
Payments of principal of and interest on the Securities will be made by
the applicable Trustee, or a paying agent on behalf of such Trustee, as
specified in the related Prospectus Supplement. Unless otherwise provided in the
related Prospectus Supplement, all payments with respect to the Primary Assets
for a Series, together with reinvestment income thereon, amounts withdrawn from
any Reserve Fund, and amounts available pursuant to any other Enhancement will
be deposited directly into the Collection Account. If provided in the related
Prospectus Supplement, such deposits may be net of certain amounts payable to
the related Servicer and any other person specified in such Prospectus
Supplement. Such amounts thereafter will be deposited into the Distribution
Account(s) and will be available to make payments on the Securities of such
Series on the next Distribution Date. See "The Trust Funds--Collection and
Distribution Accounts."
VALUATION OF THE PRIMARY ASSETS
If specified in the related Prospectus Supplement for a Series of
Notes, each Primary Asset included in the related Trust Fund for a Series will
be assigned an initial "Asset Value." Unless otherwise specified in the related
Prospectus Supplement, at any time the Asset Value of the Primary Assets will be
equal to the product of the Asset Value Percentage as set forth in the Indenture
and the lesser of (a) the stream of remaining regularly scheduled payments on
the Primary Assets, net, unless otherwise provided in the related Prospectus
Supplement, of certain amounts payable as expenses, together with income earned
on each such scheduled payment received through the day preceding the next
Distribution Date at the Assumed Reinvestment Rate, if any, discounted to
present value at the highest interest rate on the Notes of such Series over
periods equal to the interval between payments on the Notes, and (b) the
then-outstanding Principal Balance of the Primary Assets. Unless otherwise
specified in the related Prospectus Supplement, the initial Asset Value of the
Primary Assets will be at least equal to the principal amount of the Notes of
the related Series at the date of issuance thereof.
The "Assumed Reinvestment Rate," if any, for a Series will be the
highest rate permitted by the Rating Agencies or a rate insured by means of a
surety bond, guaranteed investment contract, Deposit Agreement or other
arrangement satisfactory to the Rating Agencies. If the Assumed Reinvestment
Rate is so insured, the related Prospectus Supplement will set forth the terms
of such arrangement.
PAYMENTS OF INTEREST
The Securities of each Class by their terms entitled to receive
interest will bear interest (calculated, unless otherwise specified in the
related Prospectus Supplement, on the basis of a 360-day year of twelve 30-day
months) from the date and at the per annum rate specified, or calculated in the
method described, in the related Prospectus Supplement. Interest on such
Securities of a Series will be payable on the Distribution Date specified in the
related Prospectus Supplement. The rate of interest on Securities of a Series
may be variable or may change with changes in the annual percentage rates of the
Loans or Underlying Loans relating to the Private Securities, as applicable,
included in the related Trust Fund and/or as prepayments occur with respect to
such Loans or Underlying Loans, as applicable. Principal Only Securities may not
be entitled to receive any interest distributions or may be entitled to receive
only nominal interest distributions. Any interest on Zero Coupon Securities that
is not paid on the related Distribution Date will accrue and be added to the
principal thereof on such Distribution Date.
Interest payable on the Securities on a Distribution Date will include
all interest accrued during the period specified in the related Prospectus
Supplement. In the event interest accrues during the calendar month preceding a
Distribution Date, the effective yield to Holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the Securities were to
accrue through the day immediately preceding such Distribution Date.
PAYMENTS OF PRINCIPAL
On each Distribution Date for a Series, principal payments will be made
to the Holders of the Securities of such Series on which principal is then
payable, to the extent set forth in the related Prospectus Supplement. Such
payments will be made in an aggregate amount determined as specified in the
related Prospectus Supplement and will be allocated among the respective Classes
of a Series in the manner, at the times and in the priority (which may, in
certain cases, include allocation by random lot) set forth in the related
Prospectus Supplement.
FINAL SCHEDULED DISTRIBUTION DATE
The Final Scheduled Distribution Date with respect to each Class of a
Series of Notes is the date no later than which the principal thereof will be
fully paid and with respect to each Class of a Series of Certificates will be
the date on which the entire aggregate principal balance of such Class is
expected to be reduced to zero, in each case calculated on the basis of the
assumptions applicable to such Series described in the related Prospectus
Supplement. The Final Scheduled Distribution Date for each Class of a Series
will be specified in the related Prospectus Supplement. Since payments on the
Primary Assets will be used to make distributions in reduction of the
outstanding principal amount of the Securities, it is likely that the actual
final Distribution Date of any such Class will occur earlier, and may occur
substantially earlier, than its Final Scheduled Distribution Date. Furthermore,
with respect to a Series of Certificates, unless otherwise specified in the
related Prospectus Supplement, as a result of delinquencies, defaults and
liquidations of the Primary Assets in the Trust Fund, the actual final
Distribution Date of any Certificate may occur later than its Final Scheduled
Distribution Date. No assurance can be given as to the actual prepayment
experience with respect to a Series. See "Weighted Average Life of the
Securities" below.
SPECIAL REDEMPTION
If so specified in the Prospectus Supplement relating to a Series of
Securities having other than monthly Distribution Dates, one or more Classes of
Securities of such Series may be subject to special redemption, in whole or in
part, on the day specified in the related Prospectus Supplement (the "Special
Redemption Date") if, as a consequence of prepayments on the Loans or Underlying
Loans, as applicable, relating to such Securities, or low yields then available
for reinvestment, the entity specified in the related Prospectus Supplement
determines, based on assumptions specified in the applicable Agreement, that the
amount available for the payment of interest that will have accrued on such
Securities (the "Available Interest Amount") through the designated interest
accrual date specified in the related Prospectus Supplement is less than the
amount of interest that will have accrued on such Securities to such date. In
such event and as further described in the related Prospectus Supplement, the
applicable Trustee will redeem a principal amount of outstanding Securities of
such Series as will cause the Available Interest Amount to equal the amount of
interest that will have accrued through such designated interest accrual date
for such Series of Securities outstanding immediately after such redemption.
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION
The Depositor or the Servicer may, at its option, redeem, in whole or
in part, one or more Classes of Notes or purchase one or more Classes of
Certificates of any Series, on any Distribution Date under the circumstances, if
any, specified in the Prospectus Supplement relating to such Series.
Alternatively, if so specified in the related Prospectus Supplement for a Series
of Certificates, the Depositor, the Servicer, or another entity designated in
the related Prospectus Supplement may, at its option, cause an early termination
of a Trust Fund by repurchasing all of the Primary Assets from such Trust Fund
on or after a date specified in the related Prospectus Supplement, or on or
after such time as the aggregate outstanding principal amount of the
Certificates or Primary Assets, as specified in the related Prospectus
Supplement, is equal to or less than the amount or percentage specified in the
related Prospectus Supplement. Notice of such redemption, purchase or
termination must be given by the Depositor or the Trustee prior to the related
date. The redemption, purchase or repurchase price will be set forth in the
related Prospectus Supplement. If specified in the related Prospectus
Supplement, in the event that a REMIC election has been made, the Trustee shall
receive a satisfactory opinion of counsel that the optional redemption, purchase
or termination will be conducted so as to constitute a "qualified liquidation"
under Section 860F of the Code.
In addition, the Prospectus Supplement may provide other circumstances
under which Holders of Securities of a Series could be fully paid significantly
earlier than would otherwise be the case if payments or distributions were
solely based on the activity of the related Primary Assets.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
Weighted average life refers to the average amount of time that will
elapse from the date of issue of a security until each dollar of principal of
such security will be repaid to the investor. Unless otherwise specified in the
related Prospectus Supplement, the weighted average life of the Securities of a
Class will be influenced by the rate at which the amount financed under the
Loans or Underlying Loans relating to the Private Securities, as applicable,
included in the Trust Fund for a Series is paid, which may be in the form of
scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to
a prepayment standard or model. The Prospectus Supplement for a Series of
Securities will describe the prepayment standard or model, if any, used and may
contain tables setting forth the projected weighted average life of each Class
of Securities of such Series and the percentage of the original principal amount
of each Class of Securities of such Series that would be outstanding on
specified Distribution Dates for such Series based on the assumptions stated in
such Prospectus Supplement, including assumptions that prepayments on the Loans
or Underlying Loans relating to the Private Securities, as applicable, included
in the related Trust Fund are made at rates corresponding to various percentages
of the prepayment standard or model specified in such Prospectus Supplement.
There is, however, no assurance that prepayment of the Loans or
Underlying Loans relating to the Private Securities, as applicable, included in
the related Trust Fund will conform to any level of any prepayment standard or
model specified in the related Prospectus Supplement. The rate of principal
prepayments on pools of loans may be influenced by a variety of factors,
including job related factors such as transfers, layoffs or promotions and
personal factors such as divorce, disability or prolonged illness. Economic
conditions, either generally or within a particular geographic area or industry,
also may affect the rate of principal prepayments. Demographic and social
factors may influence the rate of principal prepayments in that some borrowers
have greater financial flexibility to move or refinance than do other borrowers.
The deductibility of mortgage interest payments, servicing decisions and other
factors also affect the rate of principal prepayments. As a result, there can be
no assurance as to the rate or timing of principal prepayments of the Loans or
Underlying Loans either from time to time or over the lives of such Loans or
Underlying Loans.
The rate of prepayments of conventional housing loans and other
receivables has fluctuated significantly in recent years. In general, however,
if prevailing interest rates fall significantly below the interest rates on the
Loans or Underlying Loans relating to the Private Securities, as applicable, for
a Series, such loans are likely to prepay at rates higher than if prevailing
interest rates remain at or above the interest rates borne by such loans. In
this regard, it should be noted that the Loans or Underlying Loans, as
applicable, for a Series may have different interest rates. In addition, the
weighted average life of the Securities may be affected by the varying
maturities of the Loans or Underlying Loans relating to the Private Securities,
as applicable. If any Loans or Underlying Loans relating to the Private
Securities, as applicable, for a Series have actual terms-to-stated maturity of
less than those assumed in calculating the Final Scheduled Distribution Date of
the related Securities, one or more Classes of the Series may be fully paid
prior to their respective Final Scheduled Distribution Date, even in the absence
of prepayments and a reinvestment return higher than the Assumed Reinvestment
Rate.
THE TRUST FUNDS
GENERAL
The Notes of each Series will be secured by the pledge of the assets of
the related Trust Fund, and the Certificates of each Series will represent
interests in the assets of the related Trust Fund. The Trust Fund of each Series
will include assets purchased from the Seller composed of (i) the Primary
Assets, (ii) amounts available from the reinvestment of payments on such Primary
Assets at the Assumed Reinvestment Rate, if any, specified in the related
Prospectus Supplement, (iii) any Enhancement, (iv) any Property that secured a
Loan but which is acquired by foreclosure or deed in lieu of foreclosure or
repossession and (v) the amount, if any, initially deposited into the Collection
Account or Distribution Account(s) for a Series as specified in the related
Prospectus Supplement.
The Securities will be non-recourse obligations of the related Trust
Fund. The assets of the Trust Fund specified in the related Prospectus
Supplement for a Series of Securities, unless otherwise specified in the related
Prospectus Supplement, will serve as collateral only for that Series of
Securities. Holders of a Series of Notes may only proceed against such
collateral securing such Series of Notes in the case of a default with respect
to such Series of Notes and may not proceed against any assets of the Depositor
or the related Trust Fund not pledged to secure such Notes.
The Primary Assets for a Series will be sold by the Seller to the
Depositor or purchased by the Depositor in the open market or in privately
negotiated transactions, which may include transactions with affiliates and will
be transferred by the Depositor to the Trust Fund. Loans relating to a Series
will be serviced by the Servicer, which may be the Seller, specified in the
related Prospectus Supplement, pursuant to a Pooling and Servicing Agreement,
with respect to a Series of Certificates or a servicing agreement (each, a
"Servicing Agreement") between the Trust Fund and Servicer, with respect to a
Series of Notes.
If so specified in the related Prospectus Supplement, a Trust Fund
relating to a Series of Securities may be a business trust formed under the laws
of the state specified in the related Prospectus Supplement pursuant to a trust
agreement (each, a "Trust Agreement") between the Depositor and the Trustee of
such Trust Fund specified in the related Prospectus Supplement.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or liabilities.
No Trust Fund is expected to engage in any activities other than acquiring,
managing and holding the related Primary Assets and other assets contemplated
herein and in the related Prospectus Supplement and the proceeds thereof,
issuing Securities and making payments and distributions thereon and certain
related activities. No Trust Fund is expected to have any source of capital
other than its assets and any related Enhancement.
Primary Assets included in the Trust Fund for a Series may consist of
any combination of Loans and Private Securities, to the extent and as specified
in the related Prospectus Supplement.
THE LOANS
Mortgage Loans. The Primary Assets for a Series may consist, in whole
or in part, of closed-end home equity loans (the "Closed-End Loans") and/or
revolving home equity loans or certain balances therein (the "Revolving Credit
Line Loans" and, together with the Closed-End Loans, the "Mortgage Loans")
secured by mortgages primarily on Single Family Properties that may be
subordinated to other mortgages on the same Mortgaged Property. The Mortgage
Loans may have fixed interest rates or adjustable interest rates and may provide
for other payment characteristics as described below and in the related
Prospectus Supplement.
The full principal amount of a Closed-End Loan is advanced at
origination of the loan and generally is repayable in equal (or substantially
equal) installments of an amount sufficient to fully amortize such loan at its
stated maturity. Unless otherwise described in the related Prospectus
Supplement, the original terms to stated maturity of Closed-End Loans will not
exceed 360 months. Principal amounts on a Revolving Credit Line Loan may be
drawn down (up to a maximum amount as set forth in the related Prospectus
Supplement) or repaid under each Revolving Credit Line Loan from time to time,
but may be subject to a minimum periodic payment. Except to the extent provided
in the related Prospectus Supplement, the Trust Fund will not include any
amounts borrowed under a Revolving Credit Line Loan after the Cut-off Date. As
more fully described in the related Prospectus Supplement, interest on each
Revolving Credit Line Loan, excluding introductory rates offered from time to
time during promotional periods, is computed and payable monthly on the average
daily Principal Balance of such Loan. Under certain circumstances, under either
a Revolving Credit Line Loan or a Closed-End Loan, a borrower may choose an
interest only payment option and is obligated to pay only the amount of interest
that accrues on the loan during the billing cycle. An interest only payment
option may be available for a specified period before the borrower must begin
paying at least the minimum monthly payment of a specified percentage of the
average outstanding balance of the loan.
The rate of prepayment on the Mortgage Loans cannot be predicted. Home
equity loans have been originated in significant volume only during the past few
years and the Depositor is not aware of any publicly available studies or
statistics on the rate of prepayment of such loans. Generally, home equity loans
are not viewed by borrowers as permanent financing. Accordingly, the Mortgage
Loans may experience a higher rate of prepayment than traditional first mortgage
loans. On the other hand, because home equity loans such as the Revolving Credit
Line Loans generally are not fully amortizing, the absence of voluntary borrower
prepayments could cause rates of principal payments lower than, or similar to,
those of traditional fully-amortizing first mortgages. The prepayment experience
of the related Trust Fund may be affected by a wide variety of factors,
including general economic conditions, prevailing interest rate levels, the
availability of alternative financing and homeowner mobility and the frequency
and amount of any future draws on any Revolving Credit Line Loans. Other factors
that might be expected to affect the prepayment rate of a pool of home equity
mortgage loans or home improvement contracts include the amounts of, and
interest rates on, the underlying first mortgage loans, and the use of first
mortgage loans as long-term financing for home purchase and subordinate mortgage
loans as shorter-term financing for a variety of purposes, including home
improvement, education expenses and purchases of consumer durables such as
automobiles. Accordingly, the Mortgage Loans may experience a higher rate of
prepayment than traditional fixed-rate mortgage loans. In addition, any future
limitations on the right of borrowers to deduct interest payments on home equity
loans for federal income tax purposes may further increase the rate of
prepayments of the Loans. Moreover, the enforcement of a "due-on-sale" provision
(as described below) will have the same effect as a prepayment of the related
Loan. See "Certain Legal Aspects of the Loans--Due-on-Sale Clauses in Mortgage
Loans."
Collections on Revolving Credit Line Loans may vary because, among
other things, borrowers may (i) make payments during any month as low as the
minimum monthly payment for such month or, during the interest-only period for
certain Revolving Credit Line Loans and, in more limited circumstances,
Closed-End Loans with respect to which an interest-only payment option has been
selected, the interest and the fees and charges for such month or (ii) make
payments as high as the entire Principal Balance plus accrued interest and the
fees and charges thereon. It is possible that borrowers may fail to make the
required periodic payments. In addition, collections on the Mortgage Loans may
vary due to seasonal purchasing and the payment habits of borrowers.
The Mortgaged Properties will include Single Family Property (i.e.,
one- to four-family residential housing, including Condominium Units and
Cooperative Dwellings) and mixed-use property. Mixed-use properties will consist
of structures of no more than three stories that include one- to
four-residential dwelling units and space used for retail, professional or other
commercial uses. Such uses, which will not involve more than 50% of the space in
the structure, may include doctor, dentist or law offices, real estate agencies,
boutiques, newsstands, convenience stores or other similar types of uses
intended to cater to individual customers as specified in the related Prospectus
Supplement. The properties may be located in suburban or metropolitan districts.
Any such non-residential use will be in compliance with local zoning laws and
regulations. The Mortgaged Properties may consist of detached individual
dwellings, individual condominiums, townhouses, duplexes, row houses, individual
units in planned unit developments and other attached dwelling units. Each
Single Family Property will be located on land owned in fee simple by the
borrower or on land leased by the borrower for a term at least ten years (unless
otherwise provided in the related Prospectus Supplement) greater than the term
of the related Loan. Attached dwellings may include owner-occupied structures
where each borrower owns the land upon which the unit is built, with the
remaining adjacent land owned in common or dwelling units subject to a
proprietary lease or occupancy agreement in a cooperatively owned apartment
building.
Unless otherwise specified in the related Prospectus Supplement,
Mortgages on Cooperative Dwellings consist of a lien on the shares issued by
such Cooperative Dwelling and the proprietary lease or occupancy agreement
relating to such Cooperative Dwelling.
The aggregate Principal Balance of Loans secured by Properties that are
owner-occupied will be disclosed in the related Prospectus Supplement. Unless
otherwise specified in the Prospectus Supplement, the sole basis for a
representation that a given percentage of the Loans are secured by Single Family
Property that is owner-occupied will be either (i) the making of a
representation by the Mortgagor at origination of the Mortgage Loan either that
the underlying Mortgaged Property will be used by the Mortgagor for a period of
at least six months every year or that the Mortgagor intends to use the
Mortgaged Property as a primary residence, or (ii) a finding that the address of
the underlying Mortgaged Property is the Mortgagor's mailing address as
reflected in the Servicer's records. To the extent specified in the related
Prospectus Supplement, the Mortgaged Properties may include non-owner occupied
investment properties and vacation and second homes.
Unless otherwise specified in the related Prospectus Supplement, the
initial Combined Loan-to-Value Ratio of a Loan is computed in the manner
described in the related Prospectus Supplement, taking into account the amounts
of any related senior mortgage loans.
Home Improvement Contracts. The Primary Assets for a Series may
consist, in whole or in part, of home improvement installment sales contracts
and installment loan agreements (the "Home Improvement Contracts") originated by
a home improvement contractor in the ordinary course of business. As specified
in the related Prospectus Supplement, the Home Improvement Contracts will either
be unsecured or secured by the Mortgages primarily on Single Family Properties,
which are generally subordinated to other mortgages on the same Mortgaged
Property or by purchase money security interests in the Home Improvements
financed thereby. Unless otherwise specified in the applicable Prospectus
Supplement, the Home Improvement Contracts will be fully amortizing and may have
fixed interest rates or adjustable interest rates and may provide for other
payment characteristics as described below and in the related Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
home improvements (the "Home Improvements") securing the Home Improvement
Contracts include, but are not limited to, replacement windows, house siding,
new roofs, swimming pools, satellite dishes, kitchen and bathroom remodeling
goods and solar heating panels. The initial Loan-to-Value Ratio of a Home
Improvement Contract will be computed in the manner described in the related
Prospectus Supplement.
Additional Information. The selection criteria that will apply with
respect to the Loans, including, but not limited to, the Combined Loan-to-Value
Ratios or Loan-to-Value Ratios, as applicable, original terms to maturity and
delinquency information, will be specified in the related Prospectus Supplement.
The Loans for a Series may include Loans that do not amortize their
entire Principal Balance by their stated maturity in accordance with their terms
and require a balloon payment of the remaining Principal Balance at maturity, as
specified in the related Prospectus Supplement. As further described in the
related Prospectus Supplement, the Loans for a Series may include Loans that do
not have a specified stated maturity.
The Loans will be conventional contracts or contracts insured by the
Federal Housing Administration (the "FHA") or partially guaranteed by the
Veterans Administration (the "VA"). Loans designated in the related Prospectus
Supplement as insured by the FHA will be insured by the FHA as authorized under
the United States Housing Act of 1937, as amended. Such Loans will be insured
under various FHA programs. These programs generally limit the principal amount
and interest rates of the mortgage loans insured. Loans insured by the FHA
generally require a minimum down payment of approximately 5% of the original
principal amount of the loan. No FHA-insured Loans relating to a Series may have
an interest rate or original principal amount exceeding the applicable FHA
limits at the time or origination of such loan.
The insurance premiums for Loans insured by the FHA are collected by
lenders approved by the Department of Housing and Urban Development ("HUD") and
are paid to the FHA. The regulations governing FHA single-family mortgage
insurance programs provide that insurance benefits are payable either upon
foreclosure (or other acquisition of possession) and conveyance of the mortgaged
premises to HUD or upon assignment of the defaulted Loan to HUD. With respect to
a defaulted FHA-insured Loan, the Servicer is limited in its ability to initiate
foreclosure proceedings. When it is determined, either by the Servicer or HUD,
that default was caused by circumstances beyond the mortgagor's control, the
Servicer is expected to make an effort to avoid foreclosure by entering, if
feasible, into one of a number of available forms of forbearance plans with the
mortgagor. Such plans may involve the reduction or suspension of regular
mortgage payments for a specified period, with such payments to be made upon or
before the maturity date of the mortgage, or the recasting of payments due under
the mortgage up to or beyond the maturity date. In addition, when a default
caused by such circumstances is accompanied by certain other criteria, HUD may
provide relief by making payments to the Servicer in partial or full
satisfaction of amounts due under the Loan (which payments are to be repaid by
the mortgagor to HUD) or by accepting assignment of the loan from the Servicer.
With certain exceptions, at least three full monthly installments must be due
and unpaid under the Loan and HUD must have rejected any request for relief from
the mortgagor before the Servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Currently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The Servicer of each FHA-insured Loan will be obligated
to purchase any such debenture issued in satisfaction of such Loan upon default
for an amount equal to the principal amount of any such debenture.
The amount of insurance benefits generally paid by the FHA is equal to
the entire unpaid principal amount of the defaulted Loan adjusted to reimburse
the Servicer for certain costs and expenses and to deduct certain amounts
received or retained by the Servicer after default. When entitlement to
insurance benefits results from foreclosure (or other acquisition of possession)
and conveyance to HUD, the Servicer is compensated for no more than two-thirds
of its foreclosure costs, and is compensated for interest accrued and unpaid
prior to such date but in general only to the extent it was allowed pursuant to
a forbearance plan approved by HUD. When entitlement to insurance benefits
results from assignment of the Loan to HUD, the insurance payment includes full
compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA-insured Loan, bears
interest from a date 30 days after the mortgagor's first uncorrected failure to
perform any obligation to make any payment due under the Loan and, upon
assignment, from the date of assignment to the date of payment of the claim, in
each case at the same interest rate as the applicable HUD debenture interest
rate as described above.
Loans designated in the related Prospectus Supplement as guaranteed by
the VA will be partially guaranteed by the VA under the Serviceman's
Readjustment Act of 1944, as amended (the "VA Guaranty"). The Serviceman's
Readjustment Act of 1944, as amended, permits a veteran (or in certain
instances, the spouse of a veteran) to obtain a mortgage loan guaranty by the VA
covering mortgage financing of the purchase of a one- to four-family dwelling
unit at interest rates permitted by the VA. The program has no mortgage loan
limits, requires no down payment from the purchaser and permits the guarantee of
mortgage loans of up to 30 years' duration.
The maximum guaranty that may be issued by the VA under a VA guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 1803(a), as amended. The
liability on the guaranty is reduced or increased pro rata with any reduction or
increase in the amount of indebtedness, but in no event will the amount payable
on the guaranty exceed the amount of the original guaranty. The VA may, at its
option and without regard to the guaranty, make full payment to a mortgage
holder of unsatisfied indebtedness on a mortgage upon its assignment to the VA.
With respect to a defaulted VA guaranteed Loan, the Servicer is, absent
exceptional circumstances, authorized to announce its intention to foreclose
only when the default has continued for three months. Generally, a claim for the
guaranty is submitted after liquidation of the Mortgaged Property.
The amount payable under the guaranty will be the percentage of the
VA-insured Loan originally guaranteed applied to indebtedness outstanding as of
the applicable date of computation specified in the VA regulations. Payments
under the guaranty will be equal to the unpaid principal amount of the loan,
interest accrued on the unpaid balance of the loan to the appropriate date of
computation and limited expenses of the mortgagee, but in each case only to the
extent that such amounts have not been recovered through liquidation of the
Mortgaged Property. The amount payable under the guaranty may in no event exceed
the amount of the original guaranty.
The related Prospectus Supplement for each Series will provide
information with respect to the Loans that are Primary Assets as of the Cut-off
Date, including, among other things, and to the extent relevant: (a) the
aggregate unpaid Principal Balance of the Loans; (b) the range and weighted
average Loan Rate on the Loans, and, in the case of adjustable rate Loans, the
range and weighted average of the current Loan Rates and the Lifetime Rate Caps,
if any; (c) the range and average Principal Balance of the Loans; (d) the
weighted average original and remaining term-to-stated maturity of the Loans and
the range of original and remaining terms-to-stated maturity, if applicable; (e)
the range and weighted average of Combined Loan-to-Value Ratios or Loan-to-Value
Ratios for the Loans, as applicable; (f) the percentage (by Principal Balance as
of the Cut-off Date) of Loans that accrue interest at adjustable or fixed
interest rates; (g) any special hazard Insurance Policy or bankruptcy bond or
other enhancement relating to the Loans; (h) the percentage (by Principal
Balance as of the Cut-off Date) of Loans that are secured by Mortgaged
Properties or Home Improvements or that are unsecured; (i) the geographic
distribution of any Mortgaged Properties securing the Loans; (j) the percentage
of Loans (by Principal Balance as of the Cut-off Date) that are secured by
Single Family Properties, shares relating to Cooperative Dwellings, Condominium
Units, investment property and vacation or second homes; (k) the lien priority
of the Loans; (l) the delinquency status and year of origination of the Loans;
(m) whether such Loans are Closed-End Loans and/or Revolving Credit Line Loans;
and (n) in the case of Revolving Credit Line Loans, the general payments and
credit line terms of such Loans and other pertinent features thereof. The
related Prospectus Supplement will also specify any other limitations on the
types or characteristics of Loans for a Series.
If information of the nature described above respecting the Loans is
not known to the Depositor at the time the Securities are initially offered,
approximate or more general information of the nature described above will be
provided in the Prospectus Supplement and additional information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related Series and to be filed with the Commission within 15
days after the initial issuance of such Securities.
PRIVATE SECURITIES
General. Primary Assets for a Series may consist, in whole or in part,
of Private Securities that include pass-through certificates representing
beneficial interests in loans of the type that would otherwise be eligible to be
Loans (the "Underlying Loans") or (b) collateralized obligations secured by
Underlying Loans. Such pass-through certificates or collateralized obligations
will have previously been (a) offered and distributed to the public pursuant to
an effective registration statement or (b) purchased in a transaction not
involving any public offering from a person who is not an affiliate of the
issuer of such securities at the time of sale (nor an affiliate thereof at any
time during the three preceding months); provided a period of three years
elapsed since the later of the date the securities were acquired from the issuer
or an affiliate thereof. Although individual Underlying Loans may be insured or
guaranteed by the United States or an agency or instrumentality thereof, they
need not be, and Private Securities themselves will not be so insured or
guaranteed.
Private Securities will have been issued pursuant to a pooling and
servicing agreement, a trust agreement or similar agreement (a "PS Agreement").
The seller/servicer of the Underlying Loans will have entered into the PS
Agreement with the trustee under such PS Agreement (the "PS Trustee"). The PS
Trustee or its agent, or a custodian, will possess the Underlying Loans.
Underlying Loans will be serviced by a servicer (the "PS Servicer") directly or
by one or more sub-servicers who may be subject to the supervision of the PS
Servicer.
The sponsor of the Private Securities (the "PS Sponsor") will be a
financial institution or other entity engaged generally in the business of
lending; a public agency or instrumentality of a state, local or federal
government; or a limited purpose corporation organized for the purpose of, among
other things, establishing trusts and acquiring and selling loans to such
trusts, and selling beneficial interests in such trusts. If so specified in the
Prospectus Supplement, the PS Sponsor may be an affiliate of the Depositor. The
obligations of the PS Sponsor will generally be limited to certain
representations and warranties with respect to the assets conveyed by it to the
related trust. Unless otherwise specified in the related Prospectus Supplement,
the PS Sponsor will not have guaranteed any of the assets conveyed to the
related trust or any of the Private Securities issued under the PS Agreement.
Additionally, although the Underlying Loans may be guaranteed by an agency or
instrumentality of the United States, the Private Securities themselves will not
be so guaranteed.
Distributions of principal and interest will be made on the Private
Securities on the dates specified in the related Prospectus Supplement. The
Private Securities may be entitled to receive nominal or no principal
distributions or nominal or no interest distributions. Principal and interest
distributions will be made on the Private Securities by the PS Trustee or the PS
Servicer. The PS Sponsor or the PS Servicer may have the right to repurchase the
Underlying Loans after a certain date or under other circumstances specified in
the related Prospectus Supplement.
The Underlying Loans may be fixed rate, level payment, fully amortizing
loans or adjustable rate loans or loans having balloon or other irregular
payment features. Such Underlying Loans will be secured by mortgages on
Mortgaged Properties.
Credit Support Relating to Private Securities. Credit support in the
form of Reserve Funds, subordination of other private securities issued under
the PS Agreement, guarantees, cash collateral accounts, Security Policies or
other types of credit support may be provided with respect to the Underlying
Loans or with respect to the Private Securities themselves. The type,
characteristics and amount of credit support will be a function of certain
characteristics of the Underlying Loans and other factors and will have been
established for the Private Securities on the basis of requirements of the
nationally recognized statistical rating organization that rated the Private
Securities.
Additional Information. The Prospectus Supplement for a Series for
which the Primary Assets include Private Securities will specify (such
disclosure may be on an approximate basis and will be as of the date specified
in the related Prospectus Supplement), to the extent relevant and to the extent
such information is reasonably available to the Depositor and the Depositor
reasonably believes such information to be reliable: (i) the aggregate
approximate principal amount and type of the Private Securities to be included
in the Trust Fund for such Series; (ii) certain characteristics of the
Underlying Loans, including (a) the payment features of such Underlying Loans
(i.e., whether they are Closed-End Loans and/or Revolving Credit Line Loans,
whether they are fixed rate or adjustable rate and whether they provide for
fixed level payments or other payment features), (b) the approximate aggregate
Principal Balance, if known, of such Underlying Loans insured or guaranteed by a
governmental entity, (c) the servicing fee or range of servicing fees with
respect to the Underlying Loans, (d) the minimum and maximum stated maturities
of such Underlying Loans at origination, (e) the lien priority of such
Underlying Loans and (f) the delinquency status and year of origination of such
Underlying Loans; (iii) the maximum original term-to-stated maturity of the
Private Securities; (iv) the weighted average term-to-stated maturity of the
Private Securities; (v) the pass-through or certificate rate or ranges thereof
for the Private Securities; (vi) the PS Sponsor, the PS Servicer (if other than
the PS Sponsor) and the PS Trustee for such Private Securities; (vii) certain
characteristics of credit support if any, such as Reserve Funds, Security
Policies or guarantees relating to such Loans underlying the Private Securities
or to such Private Securities themselves; (viii) the terms on which Underlying
Loans may, or are required to, be purchased prior to their stated maturity or
the stated maturity of the Private Securities; and (ix) the terms on which
Underlying Loans may be substituted for those originally underlying the Private
Securities.
If information of the nature described above representing the Private
Securities is not known to the Depositor at the time the Securities are
initially offered, approximate or more general information of the nature
described above will be provided in the Prospectus Supplement and the additional
information, if available, will be set forth in a Current Report on Form 8-K to
be available to investors on the date of issuance of the related Series and to
be filed with the Commission within 15 days of the initial issuance of such
Securities.
COLLECTION AND DISTRIBUTION ACCOUNTS
A separate Collection Account will be established by the Trustee or the
Servicer, in the name of the Trustee, for each Series of Securities for receipt
of the amount of cash, if any, specified in the related Prospectus Supplement to
be initially deposited therein by the Depositor, all amounts received on or with
respect to the Primary Assets and, unless otherwise specified in the related
Prospectus Supplement, income earned thereon. Certain amounts on deposit in such
Collection Account and certain amounts available pursuant to any Enhancement, as
provided in the related Prospectus Supplement, will be deposited into the
applicable Distribution Account, which will also be established by the
applicable Trustee for each such Series of Securities, for distribution to the
related Holders. Unless otherwise specified in the related Prospectus
Supplement, the applicable Trustee will invest the funds in the Collection
Account and the Distribution Account(s) in Eligible Investments maturing, with
certain exceptions, not later, in the case of funds in the Collection Account,
than the day preceding the date such funds are due to be deposited into the
Distribution Account(s) or otherwise distributed and, in the case of funds in
the Distribution Account(s), than the day preceding the next Distribution Date
for the related Series of Securities. Eligible Investments include, among other
investments, obligations of the United States and certain agencies thereof,
federal funds, certificates of deposit, commercial paper, demand and time
deposits and banker's acceptances, certain repurchase agreements of United
States government securities and certain guaranteed investment contracts, in
each case acceptable to the Rating Agencies.
Notwithstanding any of the foregoing, amounts may be deposited and
withdrawn pursuant to any Deposit Agreement or Minimum Principal Payment
Agreement as specified in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, a Trust Fund will
include one or more segregated trust accounts (each, a "Pre-Funding Account")
established and maintained with the Trustee for the related Series. If so
specified, on the Closing Date for such Series, a portion of the proceeds of the
sale of the Securities of such Series (such amount, the "Pre-Funded Amount")
will be deposited into the Pre-Funding Account and may be used to purchase
additional Primary Assets during the period of time specified in the related
Prospectus Supplement (the "Pre-Funding Period"). In no case will the Pre-Funded
Amount exceed 50% of the aggregate principal amount of the related Securities,
and in no case will the Pre-Funding Period exceed one year. The Primary Assets
to be so purchased generally will be selected on the basis of the same criteria
as those used to select the initial Primary Assets, and the same representations
and warranties will be made with respect thereto. If any Pre-Funded Amount
remains on deposit in the Pre-Funding Account at the end of the Pre-Funding
Period, such amount will be applied in the manner specified in the related
Prospectus Supplement to prepay the Notes and/or the Certificates of the
applicable Series.
If a Pre-Funding Account is established, one or more segregated trust
accounts (each, a "Capitalized Interest Account") may be established and
maintained with the Trustee for the related Series. On the Closing Date for such
Series, a portion of the proceeds of the sale of the Securities of such Series
will be deposited into the Capitalized Interest Account and used to fund the
excess, if any, of the sum of (i) the amount of interest accrued on the
Securities of such Series and (ii) if specified in the related Prospectus
Supplement, certain fees or expenses during the Pre-Funding Period, over the
amount of interest available therefor from the Primary Assets in the Trust Fund.
Any amounts on deposit in the Capitalized Interest Account at the end of the
Pre-Funding Period that are not necessary for such purposes will be distributed
to the person specified in the related Prospectus Supplement.
ENHANCEMENT
If stated in the Prospectus Supplement relating to a Series of
Securities, simultaneously with the Depositor's assignment of the Primary Assets
to the Trustee, the Depositor will obtain a Security Policy, issue Subordinated
Securities or obtain any other form of enhancement or combination thereof
(collectively, "Enhancement") in favor of the Trustee on behalf of the Holders
of the related Series or designated Classes of such Series from an institution
or by other means acceptable to the Rating Agencies. The Enhancement will
support the payment of principal of and interest on the Securities, and may be
applied for certain other purposes to the extent and under the conditions set
forth in such Prospectus Supplement. Enhancement for a Series may include one or
more of the following forms, or such other form as may be specified in the
related Prospectus Supplement. If so specified in the related Prospectus
Supplement, any of such Enhancement may be structured so as to protect against
losses relating to more than one Trust Fund, in the manner described therein.
SUBORDINATED SECURITIES
If specified in the related Prospectus Supplement, Enhancement for a
Series may consist of one or more Classes of Subordinated Securities. The rights
of the related Subordinated Securityholders to receive distributions on any
Distribution Date will be subordinate in right and priority to the rights of
Holders of Senior Securities of the Series, but only to the extent described in
the related Prospectus Supplement.
INSURANCE
If stated in the related Prospectus Supplement, Enhancement for a
Series may consist of special hazard Insurance Policies, bankruptcy bonds and
other types of insurance relating to the Primary Assets, as described below and
in the related Prospectus Supplement.
Pool Insurance Policy. If so specified in the Prospectus Supplement
relating to a Series of Securities, the Depositor will obtain a pool insurance
policy (the "Pool Insurance Policy") for the Loans in the related Trust Fund.
The Pool Insurance Policy will cover any loss (subject to the limitations
described in a related Prospectus Supplement) by reason of default. but will not
cover the portion of the Principal Balance of any Loan that is required to be
covered by any primary mortgage Insurance Policy. The amount and terms of any
such coverage will be set forth in the related Prospectus Supplement.
Special Hazard Insurance Policy. Although the terms of such policies
vary to some degree, a special hazard Insurance Policy typically provides that,
where there has been damage to Property securing a defaulted or foreclosed Loan
(title to which has been acquired by the insured) and to the extent such damage
is not covered by the standard hazard Insurance Policy or any flood Insurance
Policy, if applicable, required to be maintained with respect to such Property,
or in connection with partial loss resulting from the application of the
coinsurance clause in a standard hazard Insurance Policy, the special hazard
insurer will pay the lesser of (i) the cost of repair or replacement of such
Property or (ii) upon transfer of such Property to the special hazard insurer,
the unpaid Principal Balance of such Loan at the time of acquisition of such
Property by foreclosure or deed in lieu of foreclosure, plus accrued interest to
the date of claim settlement and certain expenses incurred by the Servicer with
respect to such Property. If the unpaid Principal Balance plus accrued interest
and certain expenses is paid by the special hazard insurer, the amount of
further coverage under the special hazard Insurance Policy will be reduced by
such amount less any net proceeds from the sale of such Property. Any amount
paid as the cost of repair of such Property will reduce coverage by such amount.
Special hazard Insurance Policies typically do not cover losses occasioned by
war, civil insurrection, certain governmental actions, errors in design, faulty
workmanship or materials (except under certain circumstances), nuclear reaction,
flood (if the mortgaged property is in a federally designated flood area),
chemical contamination and certain other risks.
Restoration of the Property with the proceeds described under (i) above
is expected to satisfy the condition under any Pool Insurance Policy that such
Property be restored before a claim under such Pool Insurance Policy may be
validly presented with respect to the defaulted Loan secured by such Property.
The payment described under (ii) above will render unnecessary presentation of a
claim in respect of such Loan under any Pool Insurance Policy. Therefore, so
long as such Pool Insurance Policy remains in effect, the payment by the special
hazard insurer of the cost of repair or of the unpaid Principal Balance of the
related Loan plus accrued interest and certain expenses will not affect the
total amount in respect of insurance proceeds paid to Holders of the Securities,
but will affect the relative amounts of coverage remaining under the special
hazard Insurance Policy and Pool Insurance Policy.
Bankruptcy Bond. In the event of a bankruptcy of a borrower, the
bankruptcy court may establish the value of the Property securing the related
Loan at an amount less than the then-outstanding Principal Balance of such Loan.
The amount of the secured debt could be reduced to such value, and the holder of
such Loan thus would become an unsecured creditor to the extent the Principal
Balance of such Loan exceeds the value so assigned to the Property by the
bankruptcy court. In addition, certain other modifications of the terms of a
Loan can result from a bankruptcy proceeding. See "Certain Legal Aspects of the
Loans." If so provided in the related Prospectus Supplement, the Depositor or
other entity specified in the related Prospectus Supplement will obtain a
bankruptcy bond or similar insurance contract (the "bankruptcy bond") covering
losses resulting from proceedings with respect to borrowers under the Bankruptcy
Code. The bankruptcy bond will cover certain losses resulting from a reduction
by a bankruptcy court of scheduled payments of principal of and interest on a
Loan or a reduction by such court of the principal amount of a Loan and will
cover certain unpaid interest on the amount of such a principal reduction from
the date of the filing of a bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount
specified in the related Prospectus Supplement for all Loans in the Trust Fund
for such Series. Such amount will be reduced by payments made under such
bankruptcy bond in respect of such Loans, unless otherwise specified in the
related Prospectus Supplement, and will not be restored.
RESERVE FUNDS
If so specified in the Prospectus Supplement relating to a Series of
Securities, the Depositor will deposit into one or more funds to be established
with the applicable Trustee as part of the Trust Fund for such Series or for the
benefit of any Enhancer with respect to such Series (each, a "Reserve Fund")
cash, a letter or letters of credit, cash collateral accounts, Eligible
Investments, or other instruments meeting the criteria of the Rating Agencies
rating any Series of the Securities in the amount specified in such Prospectus
Supplement. In the alternative or in addition to such deposit, a Reserve Fund
for a Series may be funded over time through application of all or a portion of
the excess cash flow from the Primary Assets for such Series, to the extent
described in the related Prospectus Supplement. If applicable, the initial
amount of the Reserve Fund and the Reserve Fund maintenance requirements for a
Series of Securities will be described in the related Prospectus Supplement.
Amounts withdrawn from any Reserve Fund will be applied by the
applicable Trustee to make payments on the Securities of a Series, to pay
expenses, to reimburse any Enhancer or for any other purpose, in the manner and
to the extent specified in the related Prospectus Supplement.
Amounts deposited into a Reserve Fund will be invested by the
applicable Trustee in Eligible Investments maturing no later than the day
specified in the related Prospectus Supplement.
MINIMUM PRINCIPAL PAYMENT AGREEMENT
If stated in the Prospectus Supplement relating to a Series of
Securities, the Depositor will enter into a Minimum Principal Payment Agreement
with an entity meeting the criteria of the Rating Agencies pursuant to which
such entity will provide certain payments on the Securities of such Series in
the event that aggregate scheduled principal payments and/or prepayments on the
Primary Assets for such Series are not sufficient to make certain payments on
the Securities of such Series, as provided in the Prospectus Supplement.
DEPOSIT AGREEMENT
If specified in a Prospectus Supplement, the Depositor and the
applicable Trustee for such Series of Securities will enter into a Deposit
Agreement with the entity specified in such Prospectus Supplement on or before
the sale of such Series of Securities. The purpose of a Deposit Agreement would
be to accumulate available cash for investment so that such cash, together with
income thereon, can be applied to future distributions on one or more Classes of
Securities. The Prospectus Supplement for a Series of Securities pursuant to
which a Deposit Agreement is used will contain a description of the terms of
such Deposit Agreement.
SERVICING OF LOANS
GENERAL
Customary servicing functions with respect to Loans comprising the
Primary Assets in the Trust Fund will be provided by the Servicer directly
pursuant to the related Servicing Agreement or Pooling and Servicing Agreement,
as the case may be, with respect to a Series of Securities.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The Servicer will make reasonable efforts to collect all payments
required to be made under the Loans and will, consistent with the terms of the
related Agreement for a Series and any applicable Enhancement, follow such
collection procedures as it follows with respect to comparable loans held in its
own portfolio. Consistent with the above, the Servicer may, in its discretion,
(i) waive any assumption fee, late payment charge, or other charge in connection
with a Loan and (ii) to the extent provided in the related Agreement, arrange
with an obligor a schedule for the liquidation of delinquencies by extending the
Due Dates for Scheduled Payments on such Loan.
If specified in the related Prospectus Supplement, the Servicer, to the
extent permitted by law, will establish and maintain escrow or impound accounts
(each, an "Escrow Account") with respect to Loans in which payments by obligors
to pay taxes, assessments, mortgage and hazard Insurance Policy premiums, and
other comparable items will be deposited. Loans may not require such payments
under the loan related documents, in which case the Servicer would not be
required to establish any Escrow Account with respect to such Loans. Withdrawals
from the Escrow Accounts are to be made to effect timely payment of taxes,
assessments and mortgage and hazard insurance, to refund to obligors amounts
determined to be overages, to pay interest to obligors on balances in the Escrow
Account to the extent required by law, to repair or otherwise protect the
property securing the related Loan and to clear and terminate such Escrow
Account. The Servicer will be responsible for the administration of the Escrow
Accounts and generally will make advances to such accounts when a deficiency
exists therein.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT
Unless otherwise specified in the related Prospectus Supplement, the
Trustee or the Servicer will establish a separate account (the "Collection
Account") in the name of the Trustee. Unless otherwise indicated in the related
Prospectus Supplement, the Collection Account will be an account maintained (i)
at a depository institution, the long-term unsecured debt obligations of which
at the time of any deposit therein are rated by each Rating Agency rating the
Securities of such Series at levels satisfactory to each Rating Agency or (ii)
in an account or accounts the deposits in which are insured to the maximum
extent available by the Federal Deposit Insurance Corporation or that are
secured in a manner meeting requirements established by each Rating Agency.
Unless otherwise specified in the related Prospectus Supplement, the
funds held in the Collection Account may be invested in Eligible Investments. If
so specified in the related Prospectus Supplement, the Servicer will be entitled
to receive as additional compensation any interest or other income earned on
funds in the Collection Account.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer, the Depositor, the Trustee or the Seller, as appropriate, will deposit
into the Collection Account for each Series on the Business Day following the
Closing Date, any amounts representing Scheduled Payments due after the related
Cut-off Date but received by the Servicer on or before the Closing Date, and
thereafter, within two business days after the date of receipt thereof, the
following payments and collections received or made by it (other than, unless
otherwise provided in the related Prospectus Supplement, in respect of principal
of and interest on the related Primary Assets due on or before such Cut-off
Date):
(i) All payments in respect of principal, including prepayments, on
such Primary Assets;
(ii) All payments in respect of interest on such Primary Assets after
deducting therefrom, at the discretion of the Servicer but only to the
extent of the amount permitted to be withdrawn or withheld from the
Collection Account in accordance with the related Agreement, the Servicing
Fee in respect of such Primary Assets;
(iii) All amounts received by the Servicer in connection with the
liquidation of Primary Assets or property acquired in respect thereof,
whether through foreclosure sale, repossession or otherwise, including
payments in connection with such Primary Assets received from the obligor,
other than amounts required to be paid or refunded to the obligor pursuant
to the terms of the applicable loan documents or otherwise pursuant to law,
net of related liquidation expenses ("Liquidation Proceeds"), exclusive of,
in the discretion of the Servicer, but only to the extent of the amount
permitted to be withdrawn from the Collection Account in accordance with
the related Agreement, the Servicing Fee, if any, in respect of the related
Primary Asset;
(iv) All proceeds under any title insurance, hazard Insurance Policy or
other Insurance Policy covering any such Primary Asset, other than proceeds
to be applied to the restoration or repair of the related Property or
released to the obligor in accordance with the related Agreement;
(v) All amounts required to be deposited therein from any Reserve Fund
for such Series pursuant to the related Agreement;
(vi) All Advances made by the Servicer required pursuant to the related
Agreement; and
(vii) All repurchase prices of any such Primary Assets repurchased by
the Depositor, the Servicer or the Seller pursuant to the related
Agreement.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer is permitted, from time to time, to make withdrawals from the
Collection Account for each Series for the following purposes:
(i) to reimburse itself for Advances for such Series made by it
pursuant to the related Agreement; provided, that the Servicer's right to
reimburse itself is limited to amounts received on or in respect of
particular Loans (including, for this purpose, Liquidation Proceeds and
Insurance Proceeds) that represent late recoveries of Scheduled Payments
with respect to which any such Advance was made;
(ii) to the extent provided in the related Agreement, to reimburse
itself for any Advances for such Series that the Servicer determines in
good faith it will be unable to recover from amounts representing late
recoveries of Scheduled Payments respecting which such Advance was made or
from Liquidation Proceeds or Insurance Proceeds;
(iii) to reimburse itself from Liquidation Proceeds for liquidation
expenses and for amounts expended by it in good faith in connection with
the restoration of damaged Property and, in the event deposited into the
Collection Account and not previously withheld, and to the extent that
Liquidation Proceeds after such reimbursement exceed the Principal Balance
of the related Loan, together with accrued and unpaid interest thereon to
the Due Date for such Loan next succeeding the date of its receipt of such
Liquidation Proceeds, to pay to itself out of such excess the amount of any
unpaid Servicing Fee and any assumption fees, late payment charges, or
other charges on the related Loan;
(iv) in the event it has elected not to pay itself the Servicing Fee
out of the interest component of any Scheduled Payment, late payment or
other recovery with respect to a particular Loan prior to the deposit of
such Scheduled Payment, late payment or recovery into the Collection
Account, to pay to itself the Servicing Fee, as adjusted pursuant to the
related Agreement, from any such Scheduled Payment, late payment or such
other recovery, to the extent permitted by the related Agreement;
(v) to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it pursuant to the related Agreement;
(vi) to pay to the applicable person with respect to each Primary Asset
or REO Property acquired in respect thereof that has been repurchased or
removed from the Trust Fund by the Depositor, the Servicer or the Seller
pursuant to the related Agreement, all amounts received thereon and not
distributed as of the date on which the related repurchase price was
determined;
(vii) to make payments to the applicable Trustee of such Series for
deposit into the related Distribution Account, if any, or for remittance to
the Holders of such Series in the amounts and in the manner provided for in
the related Agreement; and
(viii) to clear and terminate the Collection Account pursuant to the
related Agreement.
In addition, if the Servicer deposits into the Collection Account for a
Series any amount not required to be deposited therein, it may, at any time,
withdraw such amount from such Collection Account.
ADVANCES AND LIMITATIONS THEREON
The related Prospectus Supplement will describe the circumstances, if
any, under which the Servicer will make Advances with respect to delinquent
payments on Loans. If specified in the related Prospectus Supplement, the
Servicer will be obligated to make Advances, and such obligation may be limited
in amount, or may not be activated until a certain portion of a specified
Reserve Fund is depleted. Advances are intended to provide liquidity and, except
to the extent specified in the related Prospectus Supplement, not to guarantee
or insure against losses. Accordingly, any funds advanced are recoverable by the
Servicer out of amounts received on particular Loans that represent late
recoveries of principal or interest, Insurance Proceeds or Liquidation Proceeds
respecting which any such Advance was made. If an Advance is made and
subsequently determined to be nonrecoverable from late collections, Insurance
Proceeds or Liquidation Proceeds from the related Loan, the Servicer may be
entitled to reimbursement from other funds in the Collection Account or
Distribution Account(s), as the case may be, or from a specified Reserve Fund,
as applicable, to the extent specified in the related Prospectus Supplement.
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
Standard Hazard Insurance; Flood Insurance. Except as otherwise
specified in the related Prospectus Supplement, the Servicer will be required to
maintain or to cause the obligor on each Loan to maintain a standard hazard
Insurance Policy providing coverage of the standard form of fire insurance with
extended coverage for certain other hazards as is customary in the state in
which the related Property is located. The standard hazard Insurance Policies
will provide for coverage at least equal to the applicable state standard form
of fire Insurance Policy with extended coverage for property of the type
securing the related Loans. In general, the standard form of fire and extended
coverage policy will cover physical damage to or destruction of, the related
Property caused by fire, lightning, explosion, smoke, windstorm, hail, riot,
strike and civil commotion, subject to the conditions and exclusions
particularized in each policy. Because the standard hazard Insurance Policies
relating to the Loans will be underwritten by different hazard insurers and will
cover Properties located in various states, such policies will not contain
identical terms and conditions. The basic terms, however, generally will be
determined by state law and generally will be similar. Most such policies
typically will not cover any physical damage resulting from war, revolution,
governmental actions, floods and other water-related causes, earth movement
(including earthquakes, landslides and mudflows), nuclear reaction, wet or dry
rot, vermin, rodents, insects or domestic animals, theft and, in certain cases,
vandalism. The foregoing list is merely indicative of certain kinds of uninsured
risks and is not intended to be all inclusive. Uninsured risks not covered by a
special hazard Insurance Policy or other form of Enhancement will adversely
affect distributions to Holders. When a Property securing a Loan is located in a
flood area identified by HUD pursuant to the Flood Disaster Protection Act of
1973, as amended, the Servicer will be required to cause flood insurance to be
maintained with respect to such Property, to the extent available.
The standard hazard Insurance Policies covering Properties securing
Loans typically will contain a "coinsurance" clause, which in effect will
require the insured at all times to carry hazard insurance of a specified
percentage (generally 80% to 90%) of the full replacement value of the Property,
including any improvements on the Property, in order to recover the full amount
of any partial loss. If the insured's coverage falls below this specified
percentage, such clause will provide that the hazard insurer's liability in the
event of partial loss will not exceed the greater of (i) the actual cash value
(the replacement cost less physical depreciation) of the Property, including the
improvements, if any, damaged or destroyed or (ii) such proportion of the loss,
without deduction for depreciation, as the amount of insurance carried bears to
the specified percentage of the full replacement cost of such Property and
improvements. Since the amount of hazard insurance to be maintained on the
improvements securing the Loans declines as the Principal Balances owing thereon
decrease, and since the value of the Properties will fluctuate over time, the
effect of this requirement in the event of partial loss may be that hazard
Insurance Proceeds will be insufficient to restore fully the damage to the
affected Property.
Unless otherwise specified in the related Prospectus Supplement,
coverage will be in an amount at least equal to the greater of (i) the amount
necessary to avoid the enforcement of any co-insurance clause contained in the
policy or (ii) the outstanding Principal Balance of the related Loan. Unless
otherwise specified in the related Prospectus Supplement, the Servicer will also
maintain on REO Property that secured a defaulted Loan and that has been
acquired upon foreclosure, deed in lieu of foreclosure or repossession, a
standard hazard Insurance Policy in an amount that is at least equal to the
maximum insurable value of such REO Property. No earthquake or other additional
insurance will be required of any obligor or will be maintained on REO Property
acquired in respect of a defaulted Loan, other than pursuant to such applicable
laws and regulations as shall at any time be in force and shall require such
additional insurance.
Any amounts collected by the Servicer under any such Insurance Policies
(other than amounts to be applied to the restoration or repair of the Property,
released to the obligor in accordance with normal servicing procedures or used
to reimburse the Servicer for amounts to which it is entitled to reimbursement)
will be deposited into the Collection Account. In the event that the Servicer
obtains and maintains a blanket policy insuring against hazard losses on all of
the Loans, written by an insurer then acceptable to each Rating Agency that
assigns a rating to such Series, it will conclusively be deemed to have
satisfied its obligations to cause to be maintained a standard hazard Insurance
Policy for each Loan or related REO Property. This blanket policy may contain a
deductible clause, in which case the Servicer will be required, in the event
that there has been a loss that would have been covered by such policy absent
such deductible clause, to deposit into the Collection Account the amount not
otherwise payable under the blanket policy because of the application of such
deductible clause.
REALIZATION UPON DEFAULTED LOANS
The Servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the Properties
securing the related Loans as come into and continue in default and as to which
no satisfactory arrangements can be made for collection of delinquent payments.
In connection with such foreclosure or other conversion, the Servicer will
follow such practices and procedures as it deems necessary or advisable and as
are normal and usual in its servicing activities with respect to comparable
loans serviced by it. However, the Servicer will not be required to expend its
own funds in connection with any foreclosure or towards the restoration of the
Property unless it determines that (i) such restoration or foreclosure will
increase the Liquidation Proceeds in respect of the related Loan available to
the Holders after reimbursement to itself for such expenses and (ii) such
expenses will be recoverable by it either through Liquidation Proceeds or
Insurance Proceeds. Notwithstanding anything to the contrary herein, in the case
of a Trust Fund for which a REMIC election has been made, the Servicer will be
required to liquidate any Property acquired through foreclosure within two years
after the acquisition of the beneficial ownership of such Property. While the
holder of a Property acquired through foreclosure can often maximize its
recovery by providing financing to a new purchaser, the Trust Fund, if
applicable, will have no ability to do so and neither the Servicer nor the
Depositor will be required to do so.
The Servicer may arrange with the obligor on a defaulted Loan a change
in the terms of such Loan (a "Modification") to the extent provided in the
related Prospectus Supplement. Such Modifications may only be entered into if
they meet the underwriting policies and procedures employed by the Servicer in
servicing receivables for its own account and meet the other conditions set
forth in the related Prospectus Supplement.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement for a
Series, when any Property is about to be conveyed by the obligor, the Servicer
will, to the extent it has knowledge of such prospective conveyance and prior to
the time of the consummation of such conveyance, exercise its rights to
accelerate the maturity of the related Loan under the applicable "due-on-sale"
clause, if any, unless it reasonably believes that such clause is not
enforceable under applicable law or if the enforcement of such clause would
result in loss of coverage under any primary mortgage Insurance Policy. In such
event, the Servicer is authorized to accept from or enter into an assumption
agreement with the person to whom such property has been or is about to be
conveyed, pursuant to which such person becomes liable under the Loan and
pursuant to which the original obligor is released from liability and such
person is substituted as the obligor and becomes liable under the Loan. Any fee
collected in connection with an assumption will be retained by the Servicer as
additional servicing compensation. The terms of a Loan may not be changed in
connection with an assumption.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Except as otherwise provided in the related Prospectus Supplement, the
Servicer will be entitled to a periodic fee as servicing compensation (the
"Servicing Fee") in an amount to be determined as specified in the related
Prospectus Supplement. The Servicing Fee may be fixed or variable, as specified
in the related Prospectus Supplement. In addition, unless otherwise specified in
the related Prospectus Supplement, the Servicer will be entitled to servicing
compensation in the form of assumption fees, late payment charges and similar
items, or excess proceeds following disposition of Property in connection with
defaulted Loans.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will pay certain expenses incurred in connection with the servicing of
the Loans, including, without limitation, the payment of the fees and expenses
of each applicable Trustee and independent accountants, payment of Security
Policy and Insurance Policy premiums, if applicable, and the cost of credit
support, if any, and payment of expenses incurred in preparation of reports to
Holders.
When an obligor makes a principal prepayment in full between Due Dates
on the related Loan, the obligor will generally be required to pay interest on
the amount prepaid only to the date of prepayment. If and to the extent provided
in the related Prospectus Supplement, in order that one or more Classes of the
Holders of a Series will not be adversely affected by any resulting shortfall in
interest, the amount of the Servicing Fee may be reduced to the extent necessary
to include in the Servicer's remittance to the applicable Trustee for deposit
into the related Distribution Account an amount equal to one month's interest on
the related Loan (less the Servicing Fee). If the aggregate amount of such
shortfalls in a month exceeds the Servicing Fee for such month, a shortfall to
Holders may occur.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will be entitled to reimbursement for certain expenses incurred by it
in connection with the liquidation of defaulted Loans. The related Holders will
suffer no loss by reason of such expenses to the extent expenses are covered
under related Insurance Policies or from excess Liquidation Proceeds. If claims
are either not made or paid under the applicable Insurance Policies or if
coverage thereunder has been exhausted, the related Holders will suffer a loss
to the extent that Liquidation Proceeds, after reimbursement of the Servicer's
expenses, are less than the Principal Balance of and unpaid interest on the
related Loan that would be distributable to Holders. In addition, the Servicer
will be entitled to reimbursement of expenditures incurred by it in connection
with the restoration of property securing a defaulted Loan, such right of
reimbursement being prior to the rights of the Holders to receive any related
Insurance Proceeds, Liquidation Proceeds or amounts derived from other
Enhancement. The Servicer is generally also entitled to reimbursement from the
Collection Account for Advances.
Unless otherwise specified in the related Prospectus Supplement, the
rights of the Servicer to receive funds from the Collection Account for a
Series, whether as the Servicing Fee or other compensation, or for the
reimbursement of Advances, expenses or otherwise, are not subordinate to the
rights of Holders of such Series.
EVIDENCE AS TO COMPLIANCE
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will provide that each year, a firm of independent
public accountants will furnish a statement to the applicable Trustee to the
effect that such firm has examined certain documents and records relating to the
servicing of the Loans by the Servicer and that, on the basis of such
examination, such firm is of the opinion that the servicing has been conducted
in compliance with such Agreement, except for (i) such exceptions as such firm
believes to be immaterial and (ii) such other exceptions as are set forth in
such statement.
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will also provide for delivery to the applicable
Trustee for such Series of an annual statement signed by an officer of the
Servicer to the effect that the Servicer has fulfilled its obligations under
such Agreement throughout the preceding calendar year.
CERTAIN MATTERS REGARDING THE SERVICER
The Servicer for each Series will be identified in the related
Prospectus Supplement. The Servicer may be an affiliate of the Depositor and may
have other business relationships with the Depositor and its affiliates.
If an Event of Default occurs under either a Servicing Agreement or a
Pooling and Servicing Agreement, the Servicer may be replaced by the Trustee or
a successor Servicer. Unless otherwise specified in the related Prospectus
Supplement, such Events of Default and the rights of a Trustee upon such a
default under the Agreement for the related Series will be substantially similar
to those described under "The Agreements--Events of Default; Rights Upon Events
of Default--Pooling and Servicing Agreement; Servicing Agreement" herein.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer does not have the right to assign its rights and delegate its duties
and obligations under the related Agreement for each Series unless the successor
Servicer accepting such assignment or delegation (i) services similar loans in
the ordinary course of its business, (ii) is reasonably satisfactory to the
Trustee for the related Series, (iii) has a net worth of not less than the
amount specified in the related Prospectus Supplement, (iv) would not cause any
Rating Agency's rating of the Securities for such Series in effect immediately
prior to such assignment, sale or transfer to be qualified, downgraded or
withdrawn as a result of such assignment, sale or transfer and (v) executes and
delivers to the Trustee an agreement, in form and substance reasonably
satisfactory to the Trustee, that contains an assumption by such Servicer of the
due and punctual performance and observance of each covenant and condition to be
performed or observed by the Servicer under the related Agreement from and after
the date of such agreement. No such assignment will become effective until the
Trustee or a successor Servicer has assumed the servicer's obligations and
duties under the related Agreement. To the extent that the Servicer transfers
its obligations to a wholly-owned subsidiary or affiliate, such subsidiary or
affiliate need not satisfy the criteria set forth above; however, in such
instance, the assigning Servicer will remain liable for the servicing
obligations under the related Agreement. Any entity into which the Servicer is
merged or consolidated or any successor corporation resulting from any merger,
conversion or consolidation will succeed to the Servicer's obligations under the
related Agreement; provided, that such successor or surviving entity meets the
requirements for a successor Servicer set forth above.
Except to the extent otherwise provided therein, each Agreement will
provide that neither the Servicer, nor any director, officer, employee or agent
of the Servicer, will be under any liability to the related Trust Fund, the
Depositor or the Holders for any action taken or for failing to take any action
in good faith pursuant to the related Agreement, or for errors in judgment;
provided, however, that neither the Servicer nor any such person will be
protected against any breach of warranty or representations made under such
Agreement or the failure to perform its obligations in compliance with any
standard of care set forth in such Agreement, or liability that would otherwise
be imposed by reason of willful misfeasance, bad faith or negligence in the
performance of their duties or by reason of reckless disregard of their
obligations and duties thereunder. Each Agreement will further provide that the
Servicer and any director, officer, employee or agent of the Servicer is
entitled to indemnification from the related Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the Securities, other than any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
negligence in the performance of duties thereunder or by reason of reckless
disregard of obligations and duties thereunder. In addition, the related
Agreement will provide that the Servicer is not under any obligation to appear
in, prosecute or defend any legal action that is not incidental to its servicing
responsibilities under such Agreement that, in its opinion, may involve it in
any expense or liability. The Servicer may, in its discretion, undertake any
such action that it may deem necessary or desirable with respect to the related
Agreement and the rights and duties of the parties thereto and the interests of
the Holders thereunder. In such event the legal expenses and costs of such
action and any liability resulting therefrom may be expenses, costs, and
liabilities of the Trust Fund and the Servicer may be entitled to be reimbursed
therefor out of the Collection Account.
THE AGREEMENTS
The following summaries describe certain provisions of the Agreements.
The summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Agreements. Where
particular provisions or terms used in the Agreements are referred to, such
provisions or terms are as specified in the related Agreements.
ASSIGNMENT OF PRIMARY ASSETS
General. At the time of issuance of the Securities of a Series, the
Depositor will transfer, convey and assign to the Trust Fund all right, title
and interest of the Depositor in the Primary Assets and other property to be
transferred to the Trust Fund for a Series. Such assignment will include all
principal and interest due on or with respect to the Primary Assets after the
Cut-off Date specified in the related Prospectus Supplement (except for any
Retained Interests). The Trustee will, concurrently with such assignment,
execute and deliver the Securities.
Assignment of Contracts. Unless otherwise specified in the related
Prospectus Supplement, the Depositor will, as to each Loan, deliver or cause to
be delivered to the Trustee, or, as specified in the related Prospectus
Supplement, a custodian on behalf of the Trustee (the "Custodian"), the Mortgage
Note endorsed without recourse to the order of the Trustee or in blank, the
original Mortgage with evidence of recording indicated thereon (except for any
Mortgage not returned from the public recording office, in which case a copy of
such Mortgage will be delivered, together with a certificate that the original
of such Mortgage was delivered to such recording office) and an assignment of
the Mortgage in recordable form. The Trustee, or, if so specified in the related
Prospectus Supplement, the Custodian, will hold such documents in trust for the
benefit of the Holders.
Unless otherwise specified in the related Prospectus Supplement, the
Depositor will as to each Home Improvement Contract deliver or cause to be
delivered to the Trustee (or the Custodian) the original Home Improvement
Contract and copies of documents and instruments related to each Home
Improvement Contract and, other than in the case of unsecured Home Improvement
Contracts, the security interest in the property securing such Home Improvement
Contract. In order to give notice of the right, title and interest of Holders to
the Home Improvement Contracts, the Depositor will cause a UCC-1 financing
statement to be executed by the Depositor or the Seller identifying the Trustee
as the secured party and identifying all Home Improvement Contracts as
collateral. Unless otherwise specified in the related Prospectus Supplement, the
Home Improvement Contracts will not be stamped or otherwise marked to reflect
their assignment to the Trust. Therefore, if, through negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
Home Improvement Contracts without notice of such assignment, the interest of
Holders in the Home Improvement Contracts could be defeated. See "Certain Legal
Aspects of the Loans--The Home Improvement Contracts."
With respect to Loans secured by Mortgages, if so specified in the
related Prospectus Supplement, the Depositor will, at the time of issuance of
the Securities, cause assignments to the Trustee of the Mortgages relating to
the Loans for a Series to be recorded in the appropriate public office for real
property records, except in states where, in the opinion of counsel acceptable
to the Trustee, such recording is not required to protect the Trustee's interest
in the related Loans. If specified in the related Prospectus Supplement, the
Depositor will cause such assignments to be so recorded within the time after
issuance of the Securities as is specified in the related Prospectus Supplement,
in which event, the Agreement may, as specified in the related Prospectus
Supplement, require the Depositor to repurchase from the Trustee any Loan the
related Mortgage of which is not recorded within such time, at the price
described below with respect to repurchases by reason of defective
documentation. Unless otherwise provided in the related Prospectus Supplement,
the enforcement of the repurchase obligation would constitute the sole remedy
available to the Holders or the Trustee for the failure of a Mortgage to be
recorded.
Each Loan will be identified in a schedule appearing as an exhibit to
the related Agreement (the "Loan Schedule"). Such Loan Schedule will specify
with respect to each Loan: the original principal amount and unpaid Principal
Balance as of the Cut-off Date; the current Loan Rate; the current Scheduled
Payment of principal and interest; the maturity date, if any, of the related
Mortgage Note; if the Loan is an adjustable rate Loan, the Lifetime Rate Cap, if
any, and the current index.
Assignment of Private Securities. The Depositor will cause Private
Securities to be registered in the name of the PS Trustee (or its nominee or
correspondent). The PS Trustee (or its nominee or correspondent) will have
possession of any certificated Private Securities. Unless otherwise specified in
the related Prospectus Supplement, the PS Trustee will not be in possession of
or be assignee of record of any underlying assets for a Private Security. See
"The Trust Funds--Private Securities" herein. Each Private Security will be
identified in a schedule appearing as an exhibit to the related Agreement (the
"Certificate Schedule"), which will specify the original principal amount,
Principal Balance as of the Cut-off Date, annual pass-through rate or interest
rate and maturity date for each Private Security conveyed to the Trust Fund. In
the Agreement, the Depositor will represent and warrant to the PS Trustee
regarding the Private Securities: (i) that the information contained in the
Certificate Schedule is true and correct in all material respects; (ii) that,
immediately prior to the conveyance of the Private Securities, the Depositor had
good title thereto, and was the sole owner thereof (subject to any Retained
Interest); (iii) that there has been no other sale by it of such Private
Securities; and (iv) that there is no existing lien, charge, security interest
or other encumbrance (other than any Retained Interest) on such Private
Securities.
Repurchase and Substitution of Non-Conforming Primary Assets. Unless
otherwise provided in the related Prospectus Supplement, if any document in the
file relating to the Primary Assets delivered by the Depositor to the Trustee
(or Custodian) is found by the Trustee within 90 days of the execution of the
related Agreement (or promptly after the Trustee's receipt of any document
permitted to be delivered after the Closing Date) to be defective in any
material respect and the Depositor or Seller does not cure such defect within 90
days, or within such other period specified in the related Prospectus
Supplement, the Depositor or Seller will, not later than 90 days or within such
other period specified in the related Prospectus Supplement, after the Trustee's
notice to the Depositor or the Seller, as the case may be, of the defect,
repurchase the related Primary Asset or any property acquired in respect thereof
from the Trustee at a price equal to, unless otherwise specified in the related
Prospectus Supplement, (a) the lesser of (i) the Principal Balance of such
Primary Asset and (ii) the Trust Fund's federal income tax basis in the Primary
Asset and (b) accrued and unpaid interest to the date of the next scheduled
payment on such Primary Asset at the rate set forth in the related Agreement,
provided, however, the purchase price shall not be limited in (i) above to the
Trust Fund's federal income tax basis if the repurchase at a price equal to the
Principal Balance of such Primary Asset will not result in any prohibited
transaction tax under Section 860F(a) of the Code.
If provided in the related Prospectus Supplement, the Depositor or
Seller, as the case may be, may, rather than repurchase the Primary Asset as
described above, remove such Primary Asset from the Trust Fund (the "Deleted
Primary Asset") and substitute in its place one or more other Primary Assets
(each, a "Qualifying Substitute Primary Asset"); provided, however, that (i)
with respect to a Trust Fund for which no REMIC election is made, such
substitution must be effected within 120 days of the date of initial issuance of
the Securities and (ii) with respect to a Trust Fund for which a REMIC election
is made, after a specified time period, the Trustee must have received a
satisfactory opinion of counsel that such substitution will not cause the Trust
Fund to lose its status as a REMIC or otherwise subject the Trust Fund to a
prohibited transaction tax.
Unless otherwise specified in the related Prospectus Supplement, any
Qualifying Substitute Primary Asset will have, on the date of substitution, (i)
a Principal Balance, after deduction of all Scheduled Payments due in the month
of substitution, not in excess of the Principal Balance of the Deleted Primary
Asset (the amount of any shortfall to be deposited to the Collection Account in
the month of substitution for distribution to Holders), (ii) an interest rate
not less than (and not more than 2% greater than) the interest rate of the
Deleted Primary Asset, (iii) a remaining term-to-stated maturity not greater
than (and not more than two years less than) that of the Deleted Primary Asset,
and will comply with all of the representations and warranties set forth in the
applicable Agreement as of the date of substitution.
Unless otherwise provided in the related Prospectus Supplement, the
above-described cure, repurchase or substitution obligations constitute the sole
remedies available to the Holders or the Trustee for a material defect in a
document for a Primary Asset.
The Depositor or another entity will make representations and
warranties with respect to Primary Assets for a Series. If the Depositor or such
entity cannot cure a breach of any such representations and warranties in all
material respects within the time period specified in the related Prospectus
Supplement after notification by the Trustee of such breach, and if such breach
is of a nature that materially and adversely affects the value of such Primary
Asset, the Depositor or such entity will be obligated to repurchase the affected
Primary Asset or, if provided in the related Prospectus Supplement, provide a
Qualifying Substitute Primary Asset therefor, subject to the same conditions and
limitations on purchases and substitutions as described above.
The Depositor's only source of funds to effect any cure, repurchase or
substitution will be through the enforcement of the corresponding obligations,
if any, of the responsible originator or seller of such Primary Assets. See
"Special Considerations--Limited Assets."
No Holder of Securities of a Series, solely by virtue of such Holder's
status as a Holder, will have any right under the applicable Agreement for such
Series to institute any proceeding with respect to such Agreement, unless such
Holder previously has given to the applicable Trustee for such Series written
notice of default and unless the Holders of Securities evidencing not less than
51% of the aggregate voting rights of the Securities for such Series have made
written request upon the applicable Trustee to institute such proceeding in its
own name as Trustee thereunder and have offered to such Trustee reasonable
indemnity, and such Trustee for 60 days has neglected or refused to institute
any such proceeding.
REPORTS TO HOLDERS
The applicable Trustee or other entity specified in the related
Prospectus Supplement will prepare and forward to each Holder on each
Distribution Date, or as soon thereafter as is practicable, a statement setting
forth, to the extent applicable to any Series, among other things:
(i) the amount of principal distributed to Holders of the related
Securities and the outstanding principal balance of such Securities
following such distribution;
(ii) the amount of interest distributed to Holders of the related
Securities and the current interest on such Securities;
(iii) the amount of (a) any overdue accrued interest included in such
distribution, (b) any remaining overdue accrued interest with respect to
such Securities or (c) any current shortfall in amounts to be distributed
as accrued interest to Holders of such Securities;
(iv) the amount of (a) any overdue payments of scheduled principal
included in such distribution, (b) any remaining overdue principal amounts
with respect to such Securities, (c) any current shortfall in receipt of
scheduled principal payments on the related Primary Assets or (d) any
realized losses or Liquidation Proceeds to be allocated as reductions in
the outstanding principal balances of such Securities;
(v) the amount received under any related Enhancement, and the
remaining amount available under such Enhancement;
(vi) the amount of any delinquencies with respect to payments on the
related Primary Assets;
(vii) the book value of any REO Property acquired by the related Trust
Fund; and
(viii) such other information as specified in the related Agreement.
In addition, within a reasonable period of time after the end of each
calendar year, the applicable Trustee, unless otherwise specified in the related
Prospectus Supplement, will furnish to each Holder of record at any time during
such calendar year (a) the aggregate of amounts reported pursuant to (i), (ii)
and (iv)(d) above for such calendar year and (b) such information specified in
the related Agreement to enable Holders to prepare their tax returns including,
without limitation, the amount of original issue discount accrued on the
Securities, if applicable. Information in the Distribution Date and annual
statements provided to the Holders will not have been examined and reported upon
by an independent public accountant. However, the Servicer will provide to each
applicable Trustee a report by independent public accountants with respect to
the Servicer's servicing of the Loans. See "Servicing of Loans--Evidence as to
Compliance" herein.
If so specified in the Prospectus Supplement for a Series of
Securities, such Series or one or more Classes of such Series will be issued in
book-entry form. In such event, owners of beneficial interests in such
Securities will not be considered Holders and will not receive such reports
directly from the applicable Trustee. The applicable Trustee will forward such
reports only to the entity or its nominee that is the registered holder of the
global certificate that evidences such book-entry securities. Beneficial owners
will receive such reports from the participants and indirect participants of the
applicable book-entry system in accordance with the policies and procedures of
such entities.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Servicing Agreement. Unless otherwise
specified in the related Prospectus Supplement, Events of Default under the
Pooling and Servicing Agreement for each Series of Certificates relating to
Loans include (i) any failure by the Servicer to deposit amounts in the
Collection Account and Distribution Account(s) to enable the applicable Trustee
to distribute to Holders of such Series any required payment, which failure
continues unremedied for the number of days specified in the related Prospectus
Supplement after the giving of written notice of such failure to the Servicer by
the applicable Trustee for such Series, or to the Servicer and such Trustee by
the Holders of such Series evidencing not less than 25% of the aggregate voting
rights of the Securities for such Series, (ii) any failure by the Servicer duly
to observe or perform in any material respect any other of its covenants or
agreements in the applicable Agreement that continues unremedied for the number
of days specified in the related Prospectus Supplement after the giving of
written notice of such failure to the Servicer by the applicable Trustee, or to
the Servicer and such Trustee by the Holders of such Series evidencing not less
than 25% of the aggregate voting rights of the Securities for such Series, and
(iii) certain events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings and certain actions by the Servicer
indicating its insolvency, reorganization or inability to pay its obligations.
So long as an Event of Default remains unremedied under the applicable
Agreement for a Series of Securities relating to the servicing of Loans, unless
otherwise specified in the related Prospectus Supplement, the Trustee for such
Series or Holders of Securities of such Series evidencing not less than 51% of
the aggregate voting rights of the Securities for such Series may terminate all
of the rights and obligations of the Servicer as servicer under the applicable
Agreement (other than its right to recovery of other expenses and amounts
advanced pursuant to the terms of such Agreement, which rights the Servicer will
retain under all circumstances), whereupon the Trustee will succeed to all the
responsibilities, duties and liabilities of the Servicer under such Agreement
and will be entitled to reasonable servicing compensation not to exceed the
applicable servicing fee, together with other servicing compensation in the form
of assumption fees, late payment charges or otherwise as provided in such
Agreement.
In the event that the Trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a finance
institution, bank or loan servicing institution with a net worth specified in
the related Prospectus Supplement to act as successor Servicer under the
provisions of the applicable Agreement. The successor Servicer would be entitled
to reasonable servicing compensation in an amount not to exceed the Servicing
Fee as set forth in the related Prospectus Supplement, together with other
servicing compensation in the form of assumption fees, late payment charges or
otherwise, as provided in such Agreement.
During the continuance of any Event of Default of a Servicer under an
Agreement for a Series of Securities, the applicable Trustee for such Series
will have the right to take action to enforce its rights and remedies and to
protect and enforce the rights and remedies of the Holders of such Series, and,
unless otherwise specified in the related Prospectus Supplement, Holders of
Securities evidencing not less than 51% of the aggregate voting rights of the
Securities for such Series may direct the time, method and place of conducting
any proceeding for any remedy available to the applicable Trustee or exercising
any trust or power conferred upon such Trustee. However, the applicable Trustee
will not be under any obligation to pursue any such remedy or to exercise any of
such trusts or powers unless such Holders have offered such Trustee reasonable
security or indemnity against the cost, expenses and liabilities that may be
incurred by such Trustee therein or thereby. The applicable Trustee may decline
to follow any such direction if such Trustee determines that the action or
proceeding so directed may not lawfully be taken or would involve it in personal
liability or be unjustly prejudicial to the non-assenting Holders.
Indenture. Unless otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for thirty (30) days or more in the payment of any
principal of or interest on any Note of such Series; (ii) failure to perform any
other covenant of the Depositor or the Trust Fund in the Indenture that
continues for a period of sixty (60) days after notice thereof is given in
accordance with the procedures described in the related Prospectus Supplement;
(iii) any representation or warranty made by the Depositor or the Trust Fund in
the Indenture or in any certificate or other writing delivered pursuant thereto
or in connection therewith with respect to or affecting such Series having been
incorrect in a material respect as of the time made, and such breach is not
cured within sixty (60) days after notice thereof is given in accordance with
the procedures described in the related Prospectus Supplement; (iv) certain
events of bankruptcy, insolvency, receivership or liquidation of the Depositor
or the Trust Fund; or (v) any other Event of Default provided with respect to
Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the
time outstanding occurs and is continuing, either the Indenture Trustee or the
Holders of a majority of the then-aggregate outstanding amount of the Notes of
such Series may declare the principal amount (or, if the Notes of that Series
are Zero Coupon Securities, such portion of the principal amount as may be
specified in the terms of that Series, as provided in the related Prospectus
Supplement) of all the Notes of such Series to be due and payable immediately.
Such declaration may, under certain circumstances, be rescinded and annulled by
the Holders of a majority in aggregate outstanding amount of the Notes of such
Series.
If, following an Event of Default with respect to any Series of Notes,
the Notes of such Series have been declared to be due and payable, the Indenture
Trustee may, in its discretion, notwithstanding such acceleration, elect to
maintain possession of the collateral securing the Notes of such Series and to
continue to apply distributions on such collateral as if there had been no
declaration of acceleration if such collateral continues to provide sufficient
funds for the payment of principal of and interest on the Notes of such Series
as they would have become due if there had not been such a declaration. In
addition, the Indenture Trustee may not sell or otherwise liquidate the
collateral securing the Notes of a Series following an Event of Default other
than a default in the payment of any principal of or interest on any Note of
such Series for thirty (30) days or more, unless (a) the Holders of 100% of the
then-aggregate outstanding amount of the Notes of such Series consent to such
sale, (b) the proceeds of such sale or liquidation are sufficient to pay in full
the principal of and accrued interest due and unpaid on the outstanding Notes of
such Series at the date of such sale or (c) the Indenture Trustee determines
that such collateral would not be sufficient on an ongoing basis to make all
payments on such Notes as such payments would have become due if such Notes had
not been declared due and payable, and the Indenture Trustee obtains the consent
of the Holders of 66-2/3% of the then-aggregate outstanding amount of the
Notes of such Series.
In the event that the Indenture Trustee liquidates the collateral in
connection with an Event of Default involving a default for thirty (30) days or
more in the payment of principal of or interest on the Notes of a Series, the
Indenture provides that the Indenture Trustee will have a prior lien on the
proceeds of any such liquidation for unpaid fees and expenses. As a result, upon
the occurrence of such an Event of Default, the amount available for
distribution to the Noteholders may be less than would otherwise be the case.
However, the Indenture Trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the Indenture for the benefit of the Noteholders
after the occurrence of such an Event of Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a Series is declared due and payable, as
described above, the Holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount that is unamortized.
Subject to the provisions of the Indenture relating to the duties of
the Indenture Trustee, in case an Event of Default shall occur and be continuing
with respect to a Series of Notes, the Indenture Trustee will be under no
obligation to exercise any of the rights or powers under the Indenture at the
request or direction of any of the Holders of Notes of such Series, unless such
Holders offered to the Indenture Trustee security or indemnity satisfactory to
it against the costs, expenses and liabilities that might be incurred by it in
complying with such request or direction. Subject to such provisions for
indemnification and certain limitations contained in the Indenture, the Holders
of a majority of the then-aggregate outstanding amount of the Notes of such
Series shall have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Indenture Trustee or exercising
any trust or power conferred on the Indenture Trustee with respect to the Notes
of such Series, and the Holders of a majority of the then-aggregate outstanding
amount of the Notes of such Series may, in certain cases, waive any default with
respect thereto, except a default in the payment of principal or interest or a
default in respect of a covenant or provision of the Indenture that cannot be
modified without the waiver or consent of all the Holders of the outstanding
Notes of such Series affected thereby.
THE TRUSTEES
The identity of the commercial bank, savings and loan association or
trust company named as the Trustee or Indenture Trustee, as the case may be, for
each Series of Securities will be set forth in the related Prospectus
Supplement. Entities serving as Trustee may have normal banking relationships
with the Depositor or the Servicer. In addition, for the purpose of meeting the
legal requirements of certain local jurisdictions, each Trustee will have the
power to appoint co-trustees or separate trustees. In the event of such
appointment, all rights, powers, duties and obligations conferred or imposed
upon the applicable Trustee by the Agreement relating to such Series will be
conferred or imposed upon such Trustee and each such separate trustee or
co-trustee jointly, or, in any jurisdiction in which such Trustee shall be
incompetent or unqualified to perform certain acts, singly upon such separate
trustee or co-trustee who will exercise and perform such rights, powers, duties
and obligations solely at the direction of the applicable Trustee. The
applicable Trustee may also appoint agents to perform any of the
responsibilities of such Trustee, which agents will have any or all of the
rights, powers, duties and obligations of such Trustee conferred on them by such
appointment; provided, that the applicable Trustee will continue to be
responsible for its duties and obligations under the Agreement.
DUTIES OF TRUSTEES
No Trustee will make any representations as to the validity or
sufficiency of the related Agreement, the Securities or of any Primary Asset or
related documents. If no Event of Default (as defined in the related Agreement)
has occurred, the applicable Trustee will be required to perform only those
duties specifically required of it under such Agreement. Upon receipt of the
various certificates, statements, reports or other instruments required to be
furnished to it, the applicable Trustee will be required to examine them to
determine whether they are in the form required by the related Agreement.
However, such Trustee will not be responsible for the accuracy or content of any
such documents furnished to it by the Holders or the Servicer under the related
Agreement.
Each Trustee may be held liable for its own negligent action or failure
to act, or for its own misconduct; provided, however, that no Trustee will be
personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the related
Holders in an Event of Default. No Trustee will be required to expend or risk
its own funds or otherwise incur any financial liability in the performance of
any of its duties under the related Agreement, or in the exercise of any of its
rights or powers, if it has reasonable grounds for believing that repayment of
such funds or adequate indemnity against such risk or liability is not
reasonably assured to it.
RESIGNATION OF TRUSTEES
Each Trustee may, upon written notice to the Depositor, resign at any
time, in which event the Depositor will be obligated to use its best efforts to
appoint a successor Trustee. If no successor Trustee has been appointed and has
accepted such appointment within 30 days after the giving of such notice of
resignation, the resigning Trustee may petition any court of competent
jurisdiction for appointment of a successor Trustee. Each Trustee may also be
removed at any time (i) if such Trustee ceases to be eligible to continue as
such under the related Agreement, (ii) if such Trustee becomes insolvent or
(iii) by the Holders of Securities evidencing over 50% of the aggregate voting
rights of the Securities in the Trust Fund upon written notice to the applicable
Trustee and to the Depositor. Any resignation or removal of a Trustee and
appointment of a successor Trustee will not become effective until acceptance of
the appointment by the successor Trustee.
AMENDMENT OF AGREEMENT
Unless otherwise specified in the Prospectus Supplement, the Agreement
for each Series of Securities may be amended by the Depositor, the Servicer
(with respect to a Series relating to Loans), and the applicable Trustee with
respect to such Series, without notice to or consent of the Holders (i) to cure
any ambiguity, (ii) to correct any defective provisions or to correct or
supplement any provision therein, (iii) to add to the duties of the Depositor,
the applicable Trustee or the Servicer, (iv) to add any other provisions with
respect to matters or questions arising under such Agreement or related
Enhancement, (v) to add or amend any provisions of such Agreement as required by
a Rating Agency in order to maintain or improve the rating of the Securities (it
being understood that none of the Depositor, the Seller, the Servicer or any
Trustee is obligated to maintain or improve such rating), or (vi) to comply with
any requirements imposed by the Code; provided, that any such amendment except
pursuant to clause (vi) above will not adversely affect in any material respect
the interests of any Holders of such Series, as evidenced by an opinion of
counsel delivered to the applicable Trustee. Any such amendment except pursuant
to clause (vi) above shall be deemed not to adversely affect in any material
respect the interests of any Holder if the applicable Trustee receives written
confirmation from each Rating Agency rating such Securities that such amendment
will not cause such Rating Agency to reduce the then-current rating thereof.
Unless otherwise specified in the Prospectus Supplement, each Agreement for each
Series may also be amended by the applicable Trustee, the Servicer, if
applicable, and the Depositor with respect to such Series with the consent of
the Holders possessing not less than 66-2/3% of the aggregate outstanding
principal amount of the Securities of such Series or, if only certain Classes of
such Series are affected by such amendment, 66-2/3% of the aggregate outstanding
principal amount of the Securities of each Class of such Series affected
thereby, for the purpose of adding any provisions to or changing in any manner
or eliminating any of the provisions of such Agreement or modifying in any
manner the rights of Holders of such Series; provided, however, that no such
amendment may (a) reduce the amount or delay the timing of payments on any
Security without the consent of the Holder of such Security; or (b) reduce the
aforesaid percentage of the aggregate outstanding principal amount of Securities
of each Class, the Holders of which are required to consent to any such
amendment, without the consent of the Holders of 100% of the aggregate
outstanding principal amount of each Class of Securities affected thereby.
VOTING RIGHTS
The related Prospectus Supplement will set forth the method of
determining allocation of voting rights with respect to a Series.
LIST OF HOLDERS
Upon written request of three or more Holders of record of a Series for
purposes of communicating with other Holders with respect to their rights under
the Agreement, which request is accompanied by a copy of the communication such
Holders propose to transmit, the applicable Trustee will afford such Holders
access during business hours to the most recent list of Holders of that Series
held by such Trustee.
No Agreement will provide for the holding of any annual or other
meeting of Holders.
BOOK-ENTRY SECURITIES
If specified in the Prospectus Supplement for a Series of Securities,
such Series or one or more Classes of such Series may be issued in book-entry
form. In such event, beneficial owners of such Securities will not be considered
"Holders" under the Agreements and may exercise the rights of Holders only
indirectly through the participants in the applicable book-entry system.
REMIC ADMINISTRATOR
For any Series with respect to which a REMIC election is made,
preparation of certain reports and certain other administrative duties with
respect to the Trust Fund may be performed by a REMIC administrator, who may be
an affiliate of the Depositor.
TERMINATION
Pooling and Servicing Agreement; Trust Agreement. The obligations
created by the Pooling and Servicing Agreement or Trust Agreement for a Series
will terminate upon the distribution to Holders of all amounts distributable to
them pursuant to such Agreement under the circumstances described in the related
Prospectus Supplement. See "Description of the Securities--Optional Redemption,
Purchase or Termination" herein.
Indenture. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Indenture Trustee for cancellation of all
the Notes of such Series or, with certain limitations, upon deposit with the
Indenture Trustee of funds sufficient for the payment in full of all of the
Notes of such Series.
In addition to such discharge with certain limitations, the Indenture
will provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Indenture Trustee, in trust, of money and/or direct obligations
of or obligations guaranteed by the United States of America that, through the
payment of interest and principal in respect thereof in accordance with their
terms, will provide money in an amount sufficient to pay the principal of and
each installment of interest on the Notes of such Series on the Final Scheduled
Distribution Date for such Notes and any installment of interest on such Notes
in accordance with the terms of the Indenture and the Notes of such Series. In
the event of any such defeasance and discharge of Notes of such Series, Holders
of Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal of and interest on, if any, their Notes
until maturity.
CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans, home improvement installment sales contracts and home
improvement installment loan agreements that are general in nature. Because
certain of such legal aspects are governed by applicable state law (which laws
may differ substantially), the summaries do not purport to be complete nor
reflect the laws of any particular state, nor encompass the laws of all states
in which the properties securing the Loans are situated.
MORTGAGES
The Loans for a Series will, and certain Home Improvement Contracts for
a Series may, be secured by either mortgages or deeds of trust or deeds to
secure debt (such Mortgage Loans and Home Improvement Contracts are hereinafter
referred to in this section as "mortgage loans"), depending upon the prevailing
practice in the state in which the property subject to a mortgage loan is
located. The filing of a mortgage, deed of trust or deed to secure debt creates
a lien or title interest upon the real property covered by such instrument and
represents the security for the repayment of an obligation that is customarily
evidenced by a promissory note. It is not prior to the lien for real estate
taxes and assessments or other charges imposed under governmental police powers
and may also be subject to other liens pursuant to the laws of the jurisdiction
in which the Mortgaged Property is located. Priority with respect to such
instruments depends on their terms, the knowledge of the parties to the mortgage
and generally on the order of recording with the applicable state, county or
municipal office. There are two parties to a mortgage, the mortgagor, who is the
borrower/property owner or the land trustee (as described below), and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the borrower/property owner is the
beneficiary; at origination of a mortgage loan, the borrower executes a separate
undertaking to make payments on the mortgage note. A deed of trust transaction
normally has three parties: the trustor, who is the borrower/property owner; the
beneficiary, who is the lender; and the trustee, a third-party grantee. Under a
deed of trust, the trustor grants the property, irrevocably until the debt is
paid, in trust, generally with a power of sale, to the trustee to secure payment
of the obligation. The mortgagee's authority under a mortgage and the trustee's
authority under a deed of trust are governed by the law of the state in which
the real property is located, the express provisions of the mortgage or deed of
trust, and, in some cases, in deed of trust transactions, the directions of the
beneficiary.
FORECLOSURE ON MORTGAGES
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming and expensive. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a receiver
or other officer to conduct the sale of the property. In some states, mortgages
may also be foreclosed by advertisement, pursuant to a power of sale provided in
the mortgage. Foreclosure of a mortgage by advertisement is essentially similar
to foreclosure of a deed of trust by nonjudicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a
nonjudicial trustee's sale under a specific provision in the deed of trust that
authorizes the trustee to sell the property upon any default by the borrower
under the terms of the note or deed of trust. In certain states, such
foreclosure also may be accomplished by judicial action in the manner provided
for foreclosure of mortgages. In some states, the trustee must record a notice
of default and send a copy to the borrower-trustor and to any person who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee in some states must provide notice to any other individual
having an interest in the real property, including any junior lienholders. If
the deed of trust is not reinstated within any applicable cure period, a notice
of sale must be posted in a public place and, in most states, published for a
specified period of time in one or more newspapers. In addition, some state laws
require that a copy of the notice of sale be posted on the property and sent to
all parties having an interest of record in the property. The trustor, borrower,
or any person having a junior encumbrance on the real estate, may, during a
reinstatement period, cure the default by paying the entire amount in arrears
plus the costs and expenses incurred in enforcing the obligation. Generally,
state law controls the amount of foreclosure expenses and costs, including
attorney's fees, which may be recovered by a lender. If the deed of trust is not
reinstated, a notice of sale must be posted in a public place and, in most
states, published for a specified period of time in one or more newspapers. In
addition, some state laws require that a copy of the notice of sale be posted on
the property, recorded and sent to all parties having an interest in the real
property.
An action to foreclose a mortgage is an action to recover the mortgage
debt by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith,
or oppressive or unconscionable conduct such as to warrant a court of equity to
refuse affirmative relief to the mortgagee. Under certain circumstances a court
of equity may relieve the mortgagor from an entirely technical default where
such default was not willful.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, sometimes requiring
up to several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and such sale occurred while the mortgagor was insolvent and
within one year (or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law) of the
filing of bankruptcy. Similarly, a suit against the debtor on the related
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is a
public sale. However, because of the difficulty potential third party purchasers
at the sale have in determining the exact status of title and because the
physical condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for an amount that may be equal to the unpaid
principal amount of the mortgage note secured by the mortgage or deed of trust
plus accrued and unpaid interest and the expenses of foreclosure, in which event
the mortgagor's debt will be extinguished or the lender may purchase for a
lesser amount in order to preserve its right against a borrower to seek a
deficiency judgment in states where such a judgment is available. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burdens of ownership,
including obtaining hazard insurance, paying taxes and making such repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Any loss may be reduced by the
receipt of any mortgage guaranty Insurance Proceeds.
ENVIRONMENTAL RISKS
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and safety.
These include laws and regulations governing air pollutant emissions, hazardous
and toxic substances, impacts to wetlands, leaks from underground storage tanks
and the management, removal and disposal of lead- and asbestos-containing
materials. In certain circumstances, these laws and regulations impose
obligations on the owners or operators of residential properties such as those
subject to the Loans. The failure to comply with such laws and regulations may
result in fines and penalties.
Moreover, under various federal, state and local laws and regulations,
an owner or operator of real estate may be liable for the costs of addressing
hazardous substances on, in or beneath such property and related costs. Such
liability may be imposed without regard to whether the owner or operator knew
of, or was responsible for, the presence of such substances, and could exceed
the value of the property and the aggregate assets of the owner or operator. In
addition, persons who transport or dispose of hazardous substances, or arrange
for the transportation, disposal or treatment of hazardous substances, at
off-site locations may also be held liable if there are releases or threatened
releases of hazardous substances at such off-site locations.
In addition, under the laws of some states and under the Federal
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
contamination of property may give rise to a lien on the property to assure the
payment of the costs of clean-up. In several states, such a lien has priority
over the lien of an existing mortgage against such property. Under CERCLA, such
a lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, there is a possibility
that a lender may be held liable as an "owner or operator" for costs of
addressing releases or threatened releases of hazardous substances at a
property, regardless of whether or not the environmental damage or threat was
caused by a current or prior owner or operator. CERCLA and some state laws
provide an exemption from the definition of "owner or operator" for a secured
creditor who, without "participating in the management" of a facility, holds
indicia of ownership primarily to protect its security interest in the facility.
The Solid Waste Disposal Act (the "SWDA") provides similar protection to secured
creditors in connection with liability for releases of petroleum from certain
underground storage tanks. However, if a lender "participates in the management"
of the facility in question or is found not to have held its interest primarily
to protect a security interest, the lender may forfeit its secured creditor
exemption status.
A regulation promulgated by the U.S. Environmental Protection Agency
(the "EPA") in April 1992 attempted to clarify the activities in which lenders
could engage both prior to and subsequent to foreclosure of a security interest
without forfeiting the secured creditor exemption under CERCLA. The rule was
struck down in 1994 by the United States Court of Appeals for the District of
Columbia Circuit in Kelley ex rel State of Michigan v. Environmental Protection
Agency, 15 F.3d 1100 (D.C Cir. 1994), reh'g denied, 25 F.3d 1088, cert. denied
sub nom. Am. Bankers Ass'n v. Kelley, 115 S.Ct. 900 (1995). Another EPA
regulation promulgated in 1995 clarifies the activities in which lenders may
engage without forfeiting the secured creditor exemption under the underground
storage tank provisions of the SWDA. That regulation has not been struck down.
On September 30, 1996, Congress amended both CERCLA and the SWDA to
provide additional clarification regarding the scope of the lender liability
exemptions under the two statutes. Among other things, the 1996 amendments
specify the circumstances under which a lender will be protected by the CERCLA
and SWDA exemptions, both while the borrower is still in possession of the
secured property and following foreclosure on the secured property.
Generally, the amendments state that a lender who holds indicia of
ownership primarily to protect a security interest in a facility will be
considered to participate in management only if, while the borrower is still in
possession of the facility encumbered by the security interest, the lender (i)
exercises decision-making control over environmental compliance related to the
facility such that the lender has undertaken responsibility for hazardous
substance handling or disposal practices related to the facility or (ii)
exercises control at a level comparable to that of a manager of the facility
such that the lender has assumed or manifested responsibility for (a) overall
management of the facility encompassing daily decision-making with respect to
environmental compliance or (b) overall or substantially all of the operational
functions (as distinguished from financial or administrative functions) of the
facility other than the function of environmental compliance. The amendments
also specify certain activities that are not considered to be "participation in
management," including monitoring or enforcing the terms of the extension of
credit or security interest, inspecting the facility, and requiring a lawful
means of addressing the release or threatened release of a hazardous substance.
The 1996 amendments also specify that a lender who did not participate
in management of a facility prior to foreclosure will not be considered an
"owner or operator," even if the lender forecloses on the facility and after
foreclosure sells or liquidates the facility, maintains business activities,
winds up operations, undertakes an appropriate response action, or takes any
other measure to preserve, protect, or prepare the facility prior to sale or
disposition, if the lender seeks to sell or otherwise divest the facility at the
earliest practicable, commercially reasonable time, on commercially reasonable
terms, taking into account market conditions and legal and regulatory
requirements.
The CERCLA and SWDA lender liability amendments specifically address
the potential liability of lenders who hold mortgages or similar conventional
security interests in real property, such as the Trust Fund does in connection
with the Mortgage Loans and the Home Improvement Contracts.
If a lender is or becomes liable under CERCLA, it may be authorized to
bring a statutory action for contribution against any other "responsible
parties," including a previous owner or operator. However, such persons or
entities may be bankrupt or otherwise judgment proof, and the costs associated
with environmental cleanup and related actions may be substantial. Moreover,
some state laws imposing liability for addressing hazardous substances do not
contain exemptions from liability for lenders. Whether the costs of addressing a
release or threatened release at a property pledged as collateral for one of the
Loans would be imposed on the Trust Fund, and thus occasion a loss to the
Holders, therefore depends on the specific factual and legal circumstances at
issue.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the trustor or mortgagor and foreclosed junior lienors are given
a statutory period in which to redeem the property from the foreclosure sale.
The right of redemption should be distinguished from the equity of redemption,
which is a non-statutory right that must be exercised prior to the foreclosure
sale. In some states, redemption may occur only upon payment of the entire
principal balance of the loan, accrued interest and expenses of foreclosure. In
other states, redemption may be authorized if the former borrower pays only a
portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The exercise
of a right of redemption would defeat the title of any purchaser at a
foreclosure sale, or of any purchaser from the lender subsequent to foreclosure
or sale under a deed of trust. Consequently, the practical effect of a right of
redemption is to force the lender to retain the property and pay the expenses of
ownership until the redemption period has run. In some states, there is no right
to redeem property after a trustee's sale under a deed of trust.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGES
The Mortgage Loans comprising or underlying the Primary Assets included
in the Trust Fund for a Series will be secured by Mortgages or deeds of trust,
which may be second or more junior mortgages to other mortgages held by other
lenders or institutional investors. The rights of the Trust Fund (and therefore
the Holders), as mortgagee under a junior mortgage, are subordinate to those of
the mortgagee under the senior mortgage, including the prior rights of the
senior mortgagee to receive hazard insurance and condemnation proceeds and to
cause the property securing the mortgage loan to be sold upon default of the
mortgagor, thereby extinguishing the junior mortgagee's lien unless the junior
mortgagee asserts its subordinate interest in the property in foreclosure
litigation and, possibly, satisfies the defaulted senior mortgage. A junior
mortgagee may satisfy a defaulted senior loan in full and, in some states, may
cure such default and bring the senior loan current, in either event adding the
amounts expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard Insurance Policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under underlying senior mortgages will have the prior right to
collect any Insurance Proceeds payable under a hazard Insurance Policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed
of trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property that appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the mortgagor. All sums so expended by
the mortgagee become part of the indebtedness secured by the mortgage.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions that limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In some states, statutes limit the right of the beneficiary or mortgagee to
obtain a deficiency judgment against the borrower following foreclosure or sale
under a deed of trust. A deficiency judgment is a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower following a foreclosure sale to
the excess of the outstanding debt over the fair market value of the property at
the time of the public sale. The purpose of these statutes is generally to
prevent a beneficiary or a mortgagee from obtaining a large deficiency judgment
against the former borrower as a result of low or no bids at the foreclosure
sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including the federal bankruptcy laws, the
Federal Soldiers' and Sailors' Relief Act and state laws affording relief to
debtors, may interfere with or affect the ability of the secured lender to
realize upon collateral and/or enforce a deficiency judgment. For example, with
respect to federal bankruptcy law, the filing of a petition acts as a stay
against the enforcement of remedies for collection of a debt. Moreover, a court
with federal bankruptcy jurisdiction may permit a debtor through a Chapter 13
Bankruptcy Code rehabilitative plan to cure a monetary default with respect to a
loan on a debtor's residence by paying arrearages within a reasonable time
period and reinstating the original loan payment schedule even though the lender
accelerated the loan and the lender has taken all steps to realize upon his
security (provided no sale of the property has yet occurred) prior to the filing
of the debtor's Chapter 13 petition. Some courts with federal bankruptcy
jurisdiction have approved plans, based on the particular facts of the
reorganization case, that effected the curing of a loan default by permitting
the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan may be modified if the borrower has filed a
petition under Chapter 13. These courts have suggested that such modifications
may include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Federal bankruptcy law and limited case law
indicate that the foregoing modifications could not be applied to the terms of a
loan secured by property that is the principal residence of the debtor. In all
cases, the secured creditor is entitled to the value of its security plus
post-petition interest, attorney's fees and costs to the extent the value of the
security exceeds the debt.
In a Chapter 11 case under the Bankruptcy Code, the lender is precluded
from foreclosing without authorization from the bankruptcy court. The lender's
lien may be transferred to other collateral and/or be limited in amount to the
value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate
due-on-sale clauses through confirmed Chapter 11 plans of reorganization.
The Bankruptcy Code provides priority to certain tax liens over the
lender's security. This may delay or interfere with the enforcement of rights in
respect of a defaulted mortgage loan. In addition, substantive requirements are
imposed upon lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws. The
laws include the federal Truth-in-Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act and related statutes and regulations. These federal laws impose
specific statutory liabilities upon lenders who originate loans and who fail to
comply with the provisions of the law. In some cases, this liability may affect
assignees of the loans.
DUE-ON-SALE CLAUSES IN MORTGAGE LOANS
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases, typically involving
single family residential mortgage transactions, their enforceability has been
limited or denied. In any event, the Garn-St. Germain Depository Institutions
Act of 1982 (the "Garn-St. Germain Act") preempts state constitutional,
statutory and case law that prohibits the enforcement of due-on-sale clauses and
permits lenders to enforce these clauses in accordance with their terms, subject
to certain exceptions. As a result, due-on-sale clauses have become generally
enforceable except in those states whose legislatures exercised their authority
to regulate the enforceability of such clauses with respect to mortgage loans
that were (i) originated or assumed during the "window period" under the
Garn-St. Germain Act, which ended in all cases not later than October 15, 1982,
and (ii) originated by lenders other than national banks, federal savings
institutions and federal credit unions. FHLMC has taken the position in its
published mortgage servicing standards that, out of a total of eleven "window
period states," five states (Arizona, Michigan, Minnesota, New Mexico and Utah)
have enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of window period loans. Also, the Garn-St. Germain Act does
"encourage" lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
In addition, under federal bankruptcy law, due-on-sale clauses may not
be enforceable in bankruptcy proceedings and may, under certain circumstances,
be eliminated in any modified mortgage resulting from such bankruptcy
proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may
contain provisions obligating the borrower to pay a late charge if payments are
not timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations, upon the late charges a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid. Late charges and prepayment fees are typically retained by servicers as
additional servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his defaults
under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon his
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in cases involving the
sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full
or in part without penalty. The regulations of the Office of Thrift Supervision
(the "OTS") prohibit the imposition of a prepayment penalty or equivalent fee
for or in connection with the acceleration of a loan by exercise of a
due-on-sale clause. A mortgagee to whom a prepayment in full has been tendered
may be compelled to give either a release of the mortgage or an instrument
assigning the existing mortgage. The absence of a restraint on prepayment,
particularly with respect to mortgage loans having higher mortgage rates, may
increase the likelihood of refinancing or other early retirements of such
mortgage loans.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. Similar federal
statutes were in effect with respect to mortgage loans made during the first
three months of 1980. The OTS, as successor to the Federal Home Loan Bank Board,
is authorized to issue rules and regulations and to publish interpretations
governing implementation of Title V. Title V authorizes any state to reimpose
interest rate limits by adopting, before April 1, 1983, a state law, or by
certifying that the voters of such state have voted in favor of any provision,
constitutional or otherwise, which expressly rejects an application of the
federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V.
THE HOME IMPROVEMENT CONTRACTS
General
The Home Improvement Contracts, other than those Home Improvement
Contracts that are unsecured or secured by mortgages on real estate (such Home
Improvement Contracts are hereinafter referred to in this section as
"contracts") generally are "chattel paper" or constitute "purchase money
security interests," each as defined in the Uniform Commercial Code in effect in
the applicable jurisdiction (the "UCC"). Pursuant to the UCC, the sale of
chattel paper is treated in a manner similar to perfection of a security
interest in chattel paper. Under the related Agreement, the Depositor will
transfer physical possession of the contracts to the Trustee or a designated
custodian or may retain possession of the contracts as custodian for the
Trustee. In addition, the Depositor will make an appropriate filing of a UCC-1
financing statement in the appropriate states to give notice of the Trustee's
ownership of the contracts. Unless otherwise specified in the related Prospectus
Supplement, the contracts will not be stamped or otherwise marked to reflect
their assignment from the Depositor to the Trustee. Therefore, if through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the contracts without notice of such assignment, the
Trustee's interest in the contracts could be defeated.
Security Interests in Home Improvements
The contracts that are secured by the Home Improvements financed
thereby grant to the originator of such contracts a purchase money security
interest in such Home Improvements to secure all or part of the purchase price
of such Home Improvements and related services. A financing statement generally
is not required to be filed to perfect a purchase money security interest in
consumer goods. Such purchase money security interests are assignable. In
general, a purchase money security interest grants to the holder a security
interest that has priority over a conflicting security interest in the same
collateral and the proceeds of such collateral. However, to the extent that the
collateral subject to a purchase money security interest becomes a fixture, in
order for the related purchase money security interest to take priority over a
conflicting interest in the fixture, the holder's interest in such Home
Improvement must generally be perfected by a timely fixture filing. In general,
under the UCC, a security interest does not exist under the UCC in ordinary
building material incorporated into an improvement on land. Home Improvement
Contracts that finance lumber, bricks, other types of ordinary building material
or other goods that are deemed to lose such characterization, upon incorporation
of such materials into the related property, will not be secured by a purchase
money security interest in the Home Improvement being financed.
Enforcement of Security Interest in Home Improvements
So long as the Home Improvement has not become subject to the real
estate law, a creditor can repossess a Home Improvement securing a contract by
voluntary surrender, by "self-help" repossession that is "peaceful" (i.e.,
without breach of the peace) or, in the absence of voluntary surrender and the
ability to repossess without breach of the peace, by judicial process. The
holder of a contract must give the debtor a number of days' notice, which varies
from 10 to 30 days depending on the state, prior to commencement of any
repossession. The UCC and consumer protection laws in most states place
restrictions on repossession sales, including requiring prior notice to the
debtor and commercial reasonableness in effecting such a sale. The law in most
states also requires that the debtor be given notice of any sale prior to resale
of the unit that the debtor may redeem it at or before such resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgement from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgements, and in many cases
the defaulting borrower would have no assets with which to pay a judgement.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgement.
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade
Commission is intended to defeat the ability of the transferor of a consumer
credit contract that is the seller of goods that gave rise to the transaction
(and certain related lenders and assignees) to transfer such contract free of
notice of claims by the debtor thereunder. The effect of this rule is to subject
the assignee of such a contract to all claims and defenses the debtor could
assert against the seller of goods. Liability under this rule is limited to
amounts paid under a contract; however, the obligor also may be able to assert
the rule to set off remaining amounts due as a defense against a claim brought
by the Trustee against such obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the related
contract.
Applicability of Usury Laws
Title V provides that, subject to the following conditions, state usury
limitations shall not apply to any contract that is secured by a first lien on
certain kinds of consumer goods. The contracts would be covered if they satisfy
certain conditions, among other things, governing the terms of any prepayments,
late charges and deferral fees and requiring a 30-day notice period prior to
instituting any action leading to repossession of the related unit.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision that expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
INSTALLMENT SALES CONTRACTS
The Loans may also consist of installment sales contracts. Under an
installment sales contract (each, an "Installment Sales Contract") the seller
(hereinafter referred to in this section as the "lender") retains legal title to
the property and enters into an agreement with the purchaser (hereinafter
referred to in this section as the "borrower") for the payment of the purchase
price, plus interest, over the term of such contract. Only after full
performance by the borrower of the contract is the lender obligated to convey
title to the property to the purchaser. As with mortgage or deed of trust
financing, during the effective period of the Installment Sales Contract, the
borrower is generally responsible for maintaining the property in good condition
and for paying real estate taxes, assessments and hazard Insurance Policy
premiums associated with the property.
The method of enforcing the rights of the lender under an Installment
Sales Contract varies on a state-by-state basis depending upon the extent to
which state courts are willing, or able pursuant to state statute, to enforce
the contract strictly according to the terms. The terms of Installment Sales
Contracts generally provide that upon a default by the borrower, the borrower
loses his or her right to occupy the property, the entire indebtedness is
accelerated, and the buyer's equitable interest in the property is forfeited.
The lender in such a situation does not have to foreclose in order to obtain
title to the property, although in some cases a quiet title action is in order
if the borrower has filed the Installment Sales Contract in local land records
and an ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
Installment Sales Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Sales Contracts from the harsh consequences of
forfeiture. Under such statutes, a judicial or nonjudicial foreclosure may be
required, the lender may be required to give notice of default and the borrower
may be granted some grace period during which the Installment Sales Contract may
be reinstated upon full payment of the default amount and the borrower may have
a post-foreclosure statutory redemption right. In other states, courts in equity
may permit a borrower with significant investment in the property under an
Installment Sales Contract for the sale of real estate to share in the proceeds
of sale of the property after the indebtedness is repaid or may otherwise refuse
to enforce the forfeiture clause. Nevertheless, generally speaking, the lender's
procedures for obtaining possession and clear title under an Installment Sales
Contract in a given state are simpler and less time-consuming and costly than
are the procedures for foreclosing and obtaining clear title to a property
subject to one or more liens.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of
all branches of the military on active duty, including draftees and reservists
in military service, (i) are entitled to have interest rates reduced and capped
at 6% per annum, on obligations (including Loans) incurred prior to the
commencement of military service for the duration of military service, (ii) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on such obligations entered into prior to
military service for the duration of military service and (iii) may have the
maturity of such obligations incurred prior to military service extended, the
payments lowered and the payment schedule readjusted for a period of time after
the completion of military service. However, the benefits of (i), (ii), or (iii)
above are subject to challenge by creditors and if, in the opinion of the court,
the ability of a person to comply with such obligations is not materially
impaired by military service, the court may apply equitable principles
accordingly. If a borrower's obligation to repay amounts otherwise due on a Loan
included in a Trust Fund for a Series is relieved pursuant to the Soldiers' and
Sailors' Civil Relief Act of 1940, none of the Trust Fund, the Servicer, the
Depositor nor any Trustee will be required to advance such amounts, and any loss
in respect thereof may reduce the amounts available to be paid to the Holders of
the Securities of such Series. Unless otherwise specified in the related
Prospectus Supplement, any shortfalls in interest collections on Loans or
Underlying Loans relating to the Private Securities, as applicable, included in
a Trust Fund for a Series resulting from application of the Soldiers' and
Sailors' Civil Relief Act of 1940 will be allocated to each Class of Securities
of such Series that is entitled to receive interest in respect of such Loans or
Underlying Loans in proportion to the interest that each such Class of
Securities would have otherwise been entitled to receive in respect of such
Loans or Underlying Loans had such interest shortfall not occurred.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware in June 1995,
and is a wholly-owned subsidiary of The Bear Stearns Companies Inc. The
Depositor's principal executive offices are located at 245 Park Avenue, New
York, New York 10167. Its telephone number is (212) 272-4095.
The Depositor will not engage in any activities other than to
authorize, issue, sell, deliver, purchase and invest in (and enter into
agreements in connection with), and/or to engage in the establishment of one or
more trusts, which will issue and sell, bonds, notes, debt or equity securities,
obligations and other securities and instruments ("Depositor Securities")
collateralized or otherwise secured or backed by, or otherwise representing an
interest in, among other things, receivables or pass-through certificates, or
participations or certificates of participation or beneficial ownership in one
or more pools of receivables, and the proceeds of the foregoing, that arise in
connection with loans secured by certain first or junior mortgages on real
estate or manufactured housing and any and all other commercial transactions and
commercial, sovereign, student or consumer loans or indebtedness and, in
connection therewith or otherwise, purchasing, acquiring, owning, holding,
transferring, conveying, servicing, selling, pledging, assigning, financing and
otherwise dealing with such receivables, pass-through certificates, or
participations or certificates of participation or beneficial ownership. Article
Third of the Depositor's Certificate of Incorporation limits the Depositor's
activities to the above activities and certain related activities, such as
credit enhancement with respect to such Depositor Securities, and to any
activities incidental to and necessary or convenient for the accomplishment of
such purposes.
USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds
from the sale of each Series of Securities for one or more of the following
purposes: (i) to purchase the related Primary Assets, (ii) to repay indebtedness
incurred to obtain funds to acquire such Primary Assets, (iii) to establish any
Reserve Funds described in the related Prospectus Supplement and (iv) to pay
costs of structuring and issuing such Securities, including the costs of
obtaining Enhancement, if any. If so specified in the related Prospectus
Supplement, the purchase of the Primary Assets for a Series may be effected by
an exchange of Securities with the Seller of such Primary Assets.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of certain anticipated material federal
income tax consequences of the purchase, ownership, and disposition of the
Securities and is based on the opinion of Brown & Wood LLP, special counsel to
the Depositor (in such capacity, "Tax Counsel"). The summary is based upon the
provisions of the Code, the regulations promulgated thereunder, including, where
applicable, proposed regulations, and the judicial and administrative rulings
and decisions now in effect, all of which are subject to change or possible
differing interpretations. The statutory provisions, regulations, and
interpretations on which this interpretation is based are subject to change, and
such a change could apply retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances. This summary focuses primarily upon investors who will hold
Securities as "capital assets" (generally, property held for investment) within
the meaning of Section 1221 of the Code. Prospective investors may wish to
consult their own tax advisers concerning the federal, state, local and any
other tax consequences as relates specifically to such investors in connection
with the purchase, ownership and disposition of the Securities.
The federal income tax consequences to Holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness; (ii) an
election is made to treat the Trust Fund relating to a particular Series of
Securities as a real estate mortgage investment conduit (a "REMIC") under the
Internal Revenue Code of 1986, as amended (the "Code"); (iii) the Securities
represent an ownership interest in some or all of the assets included in the
Trust Fund for a Series; or (iv) an election is made to treat the Trust Fund
relating to a particular Series of Certificates as a partnership; or (v) an
election is made to treat the Trust Fund relating to a particular Series of
Securities as a Financial Asset Securitization Investment Trust ("FASIT") under
the Code. The Prospectus Supplement for each Series of Securities will specify
how the Securities will be treated for federal income tax purposes and will
discuss whether a REMIC election, if any, will be made with respect to such
Series.
As used herein, the term "U.S. Person" means a citizen or resident of
the United States, a corporation, partnership or other entity created or
organized in or under the laws of the United States 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 certain individual retirement
accounts and annuities, Keogh plans and collective investment funds and separate
accounts in which such plans, accounts or arrangements are invested)
(collectively "Plans") subject to ERISA and on persons who are fiduciaries with
respect to such Plans. Generally, ERISA applies to investments made by Plans.
Among other things, ERISA requires that the assets of Plans be held in trust and
that the trustee, or other duly authorized fiduciary, have exclusive authority
and discretion to manage and control the assets of such Plans. ERISA also
imposes certain duties on persons who are fiduciaries of Plans. Under ERISA, any
person who exercises any authority or control respecting the management or
disposition of the assets of a Plan is considered to be a fiduciary of such Plan
(subject to certain exceptions not here relevant). Certain employee benefit
plans, such as governmental plans (as defined in ERISA Section 3(32)) and, if no
election has been made under Section 410(d) of the Code, church plans (as
defined in ERISA Section 3(33)), are not subject to ERISA requirements.
Accordingly, assets of such plans may be invested in Securities without regard
to the ERISA considerations described above and below, subject to the provisions
of applicable state law. Any such plan that is qualified and exempt from
taxation under Code Sections 401(a) and 501(a), however, is subject to the
prohibited transaction rules set forth in Code Section 503.
In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA and Section 4975 of the Code
prohibit a broad range of transactions involving Plan assets and persons
("Parties in Interest") having certain specified relationships to a Plan and
imposes additional prohibitions where Parties in Interest are fiduciaries with
respect to such Plan. Certain Parties in Interest that participate in a
prohibited transaction may be subject to an excise tax imposed pursuant to
Section 4975 of the Code, or a penalty imposed pursuant to Section 502(i) of
ERISA, unless a statutory, regulatory or administrative exemption is available.
On November 13, 1986, the United States Department of Labor (the "DOL")
issued final regulations (Labor Reg. Section 2510.3-101) concerning the
definition of what constitutes the assets of a Plan (the "Plan Asset
Regulation"). Under this regulation, the underlying assets and properties of
corporations, partnerships and certain other entities in which a Plan acquires
an "equity" interest could be deemed for purposes of ERISA to be assets of the
investing Plan in certain circumstances.
Under the Plan Asset Regulation, the term "equity" interest is defined
as any interest in an entity other than an instrument that is treated as
indebtedness under "applicable local law" and which has no "substantial equity
features." If the Trust Fund issues Notes that are not treated as equity
interests in the Trust Fund for purposes of the Plan Asset Regulation, a Plan's
investment in such Notes would not cause the assets of the Trust to be deemed
Plan assets. However, the Seller, the Servicer, the Special Servicer, the Backup
Servicer, the Indenture Trustee, the Owner Trustee and the Depositor may be the
sponsor of or investment advisor with respect to one or more Plans. Because such
parties may receive certain benefits in connection with the sale of the Notes,
the purchase of Notes using Plan assets over which any such parties (or any
affiliates thereof) has investment authority might be deemed to be a violation
of the prohibited transaction rules of ERISA and the Code for which no exemption
may be available. Accordingly, Notes may not be purchased using the assets of
any Plan if the Seller, the Servicer, the Special Servicer, the Indenture
Trustee, the Owner Trustee, the Depositor or any of their affiliates (a) has
investment or administrative discretion with respect to such Plan assets; (b)
has authority or responsibility to give, or regularly gives, investment advice
with respect to such Plan assets for a fee and pursuant to an agreement of
understanding that such advice (i) will serve as a primary basis for investment
decisions with respect to such Plan assets and (ii) will be based on the
particular investment needs for such Plan; or (c) is an employer maintaining or
contributing to such Plan.
In addition, the Trust Fund, any underwriter, trustee, servicer,
administrator or producer of credit support or their affiliates might be
considered or might become Parties in Interest with respect to a Plan. Also, any
holder of Notes, because of its activities or the activities of its respective
affiliates, may be deemed to be a Party in Interest with respect to certain
Plans, including but not limited to Plans sponsored by such holder. In either
case, the acquisition or holding of Notes by or on behalf of such a Plan could
be considered to give rise to an indirect prohibited transaction within the
meaning of ERISA and the Code, unless it is subject to one or more exemptions
such as: Prohibited Transaction Class Exemption ("PTCE") 84-14, which exempts
certain transactions effected on behalf of a Plan by a "qualified professional
asset manager"; PTCE 90-1, which exempts certain transactions involving
insurance company pooled separate accounts; PTCE 91-38, which exempts certain
transactions involving bank collective investment funds; PTCE 95-60, which
exempts certain transactions involving insurance company general accounts; or
PTCE 96-23, which exempts certain transactions effected on behalf of a Plan by
certain "in-house asset managers." There can be no assurance that any of these
class exemptions will apply with respect to any particular Plan investment in
Notes, or, even if it did apply, that any exemption would apply to all
prohibited transactions that may occur in connection with such an investment.
Each prospective purchaser or transferee of a Note that is a Plan or a person
acting on behalf or investing the assets of a Plan shall be required to
represent (or, with respect to any transfer of a beneficial interest in a Global
Note, shall be deemed to represent) to the Indenture Trustee and the Note
Registrar that the relevant conditions for exemptive relief under at least one
of the foregoing exemptions have been satisfied.
The Plan Asset Regulation provides that, generally, the assets of a
corporation or partnership in which a Plan invests will not be deemed for
purposes of ERISA to be assets of such Plan if the equity interest acquired by
the investing Plan is a publicly-offered security. A publicly-offered security,
as defined in the Plan Asset Regulation, is a security that is widely held,
freely transferable and registered under the Exchange Act.
If no exception under the Plan Asset Regulation applies, then if a Plan
(or a person investing Plan assets, such as an insurance company general
account) acquires an equity interest in the Trust Fund, then the assets of the
Trust Fund would be considered to be assets of the Plan. Because the Loans held
by the Trust Fund may be deemed Plan assets of each Plan that purchases
Securities, an investment in the Securities by a Plan might be a prohibited
transaction under ERISA Sections 406 and 407 and subject to an excise tax under
Code Section 4975 and may cause transactions undertaken in the course of
operating the Trust Fund to constitute prohibited transactions, unless a
statutory or administrative exemption applies.
In Prohibited Transaction Class Exemption 83-1 ("PTCE 83-1"), which
amended Prohibited Transaction Class Exemption 81-7, the DOL exempted from
ERISA's prohibited transaction rules certain transactions relating to the
operation of residential mortgage pool investment trusts and the purchase, sale
and holding of "mortgage pool pass-through certificates" in the initial issuance
of such certificates. PTCE 83-1 permits, subject to certain conditions,
transactions that might otherwise be prohibited between Plans and Parties in
Interest with respect to those Plans related to the origination, maintenance and
termination of mortgage pools consisting of mortgage loans secured by first or
second mortgages or deeds of trust on single-family residential property, and
the acquisition and holding of certain mortgage pool pass-through certificates
representing an interest in such mortgage pools by Plans. If the general
conditions (discussed below) of PTCE 83-1 are satisfied, investments by a Plan
in Securities that represent interests in a Pool consisting of Loans conforming
to these requirements ("Single Family Securities") will be exempt from the
prohibitions of ERISA Sections 406(a) and 407 (relating generally to
transactions with Parties in Interest who are not fiduciaries) if the Plan
purchases the Single Family Securities at no more than fair market value and
will be exempt from the prohibitions of ERISA Sections 406(b)(1) and (2)
(relating generally to transactions with fiduciaries) if, in addition, the
purchase is approved by an independent fiduciary, no sales commission is paid to
the pool sponsor, the Plan does not purchase more than 25% of all Single Family
Securities, and at least 50% of all Single Family Securities are purchased by
persons independent of the pool sponsor or pool trustee. PTCE 83-1 does not
provide an exemption for transactions involving Subordinated Securities.
Accordingly, unless otherwise provided in the related Prospectus Supplement, no
transfer of a Subordinated Security or a Security that is not a Single Family
Security may be made to a Plan.
The discussion in this and the next succeeding paragraph applies only
to Single Family Securities. The Depositor believes that, for purposes of PTCE
83-1, the term "mortgage pass-through certificate" would include: (i) Securities
issued in a Series consisting of only a single Class of Securities; and (ii)
Securities issued in a Series in which there is only one Class of those
particular Trust Securities; provided, that the Securities in the case of clause
(i), or the Securities in the case of clause (ii), evidence the beneficial
ownership of both a specified percentage of future interest payments (greater
than 0%) and a specified percentage (greater than 0%) of future principal
payments on the Loans. It is not clear whether a Class of Securities that
evidences the beneficial ownership in a Trust Fund divided into Loan groups,
beneficial ownership of a specified percentage of interest payments only or
principal payments only, or a notional amount of either principal or interest
payments, or a Class of Securities entitled to receive payments of interest and
principal on the Loans only after payments to other Classes or after the
occurrence of certain specified events would be a "mortgage pass-through
certificate" for purposes of PTCE 83-1.
PTCE 83-1 sets forth three general conditions that must be satisfied
for any transaction to be eligible for exemption: (i) the maintenance of a
system of insurance or other protection for the pooled mortgage loans and
property securing such loans, and for indemnifying Holders against reductions in
pass-through payments due to property damage or defaults in loan payments in an
amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan; (ii) the existence of a pool trustee who
is not an affiliate of the pool sponsor; and (iii) a limitation on the amount of
the payment retained by the pool sponsor, together with other funds inuring to
its benefit, to not more than adequate consideration for selling the mortgage
loans plus reasonable compensation for services provided by the pool sponsor to
the Pool. The Depositor believes that the first general condition referred to
above will be satisfied with respect to the Securities in a Series issued
without a subordination feature, or the unsubordinated Securities only in a
Series issued with a subordination feature; provided, that the subordination and
Reserve Account, subordination by shifting of interests, the pool insurance or
other form of credit enhancement described herein (such subordination, pool
insurance or other form of credit enhancement being the system of insurance or
other protection referred to above) with respect to a Series of Securities is
maintained in an amount not less than the greater of one percent of the
aggregate Principal Balance of the Loans or the Principal Balance of the largest
Loan. See "Description of the Securities" herein. In the absence of a ruling
that the system of insurance or other protection with respect to a Series of
Securities satisfies the first general condition referred to above, there can be
no assurance that these features will be so viewed by the DOL. The Trustee will
not be affiliated with the Depositor.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold Single Family
Securities must make its own determination as to whether the first and third
general conditions, and the specific conditions described briefly in the
preceding paragraph, of PTCE 83-1 have been satisfied, or as to the availability
of any other prohibited transaction exemptions. Each Plan fiduciary should also
determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the Securities is appropriate for the
Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
The DOL issued to Bear, Stearns & Co. Inc., an individual exemption
(Prohibited Transaction Exemption 90-30; Exemption Application No. D-8207, 55
Fed. Reg. 21461 (1990)) (the "Underwriter Exemption"), which applies to certain
sales and servicing of "certificates" that are obligations of a "trust" with
respect to which Bear, Stearns & Co. Inc. is the underwriter, manager or
co-manager of an underwriting syndicate. The Underwriter Exemption provides
relief generally similar to that provided by PTCE 83-1, but is broader in
several respects.
The Underwriter Exemption contains several requirements, some of which
differ from those in PTCE 83-l. The Underwriter Exemption contains an expanded
definition of "certificate," which includes an interest that entitles the Holder
to pass-through payments of principal, interest and/or other payments. The
Underwriter Exemption contains an expanded definition of "trust," which permits
the trust corpus to consist of secured consumer receivables. The definition of
"trust," however, does not include any investment pool unless, inter alia, (i)
the investment pool consists only of assets of the type that have been included
in other investment pools, (ii) certificates evidencing interests in such other
investment pools have been purchased by investors other than Plans for at least
one year prior to the Plan's acquisition of certificates pursuant to the
Underwriter Exemption and (iii) certificates in such other investment pools have
been rated in one of the three highest generic rating categories of the four
credit rating agencies noted below. Generally, the Underwriter Exemption holds
that the acquisition of the certificates by a Plan must be on terms (including
the price for the certificates) that are at least as favorable to the Plan as
they would be in an arm's length transaction with an unrelated party. The
Underwriter Exemption requires that the rights and interests evidenced by the
certificates not be "subordinated" to the rights and interests evidenced by
other certificates of the same trust. The Underwriter Exemption requires that
certificates acquired by a Plan have received a rating at the time of their
acquisition that is in one of the three highest generic rating categories of
Standard & Poor's, a division of The McGraw-Hill Companies, Inc., Moody's
Investors Service, Inc., Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc. The
Underwriter Exemption specifies that the pool trustee must not be an affiliate
of the pool sponsor, nor an affiliate of the Underwriter, the pool servicer, any
obligor with respect to mortgage loans included in the trust constituting more
than five percent of the aggregate unamortized principal balance of the assets
in the trust, or any affiliate of such entities. Finally, the Underwriter
Exemption stipulates that any Plan investing in the certificates must be an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of the
Commission under the Securities Act.
On July 21, 1997, the DOL published in the Federal Register an
amendment to the Underwriter Exemption, which extends exemptive relief to
certain mortgage-backed and asset-backed securities transactions using
pre-funding accounts for trusts issuing pass-through certificates. The amendment
generally allows mortgage loans or other secured receivables (the "Obligations")
supporting payments to certificateholders, and having a value equal to no more
than twenty-five percent (25%) of the total principal amount of the certificates
being offered by the trust, to be transferred to the trust within a 90-day or
three-month period following the closing date (the "Specified Funding Period"),
instead of requiring that all such Obligations be either identified or
transferred on or before the Closing Date. The relief is available when the
following conditions are met:
(1) The ratio of the amount allocated to the pre-funding account to the
total principal amount of the certificates being offered (the "Specified
Funding Limit") must not exceed twenty-five percent (25%).
(2) All Obligations transferred after the Closing Date (the "Additional
Obligations") must meet the same terms and conditions for eligibility as
the original Obligations used to create the trust, which terms and
conditions have been approved by an Exemption Rating Agency.
(3) The transfer of such Additional Obligations to the trust during the
Specified Funding Period must not result in the certificates to be covered
by the Exemption receiving a lower credit rating from an Exemption Rating
Agency upon termination of the Specified Funding Period than the rating
that was obtained at the time of the initial issuance of the certificates
by the trust.
(4) Solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate for all of the Obligations in the trust at
the end of the Specified Funding Period must not be more than 100 basis
points lower than the average interest rate for the Obligations transferred
to the trust on the Closing Date.
(5) In order to insure that the characteristics of the Additional
Obligations are substantially similar to the original Obligations which
were transferred to the Trust Fund:
(i) the characteristics of the Additional Obligations must be
monitored by an insurer or other credit support provider that is
independent of the depositor; or
(ii) an independent accountant retained by the depositor must
provide the depositor with a letter (with copies provided to each
Exemption Rating Agency rating the certificates, the related
underwriter and the related trustee) stating whether or not the
characteristics of the Additional Obligations conform to the
characteristics described in the related prospectus or prospectus
supplement and/or pooling and servicing agreement. In preparing such
letter, the independent accountant must use the same type of procedures
as were applicable to the Obligations transferred to the trust as of
the Closing Date.
(6) The period of pre-funding must end no later than three months or 90
days after the Closing Date or earlier in certain circumstances if the
pre-funding account falls below the minimum level specified in the pooling
and servicing agreement or an Event of Default occurs.
(7) Amounts transferred to any pre-funding account and/or capitalized
interest account used in connection with the pre-funding may be invested
only in certain permitted investments ("Permitted Investments").
(8) The related prospectus or prospectus supplement must describe:
(i) any pre-funding account and/or capitalized interest account
used in connection with a pre-funding account;
(ii) the duration of the period of pre-funding;
(iii) the percentage and/or dollar amount of the Specified
Funding Limit for the trust; and
(iv) that the amounts remaining in the pre-funding account at the
end of the Specified Funding Period will be remitted to
certificateholders as repayments of principal.
(9) The related pooling and servicing agreement must describe the
Permitted Investments for the pre-funding account and/or capitalized
interest account and, if not disclosed in the related prospectus or
prospectus supplement, the terms and conditions for eligibility of
Additional Obligations.
Neither PTCE 83-1 nor the Underwriter Exemption applies to a trust
which contains unsecured obligations.
Any Plan fiduciary that proposes to cause a Plan to purchase Securities
should consult with their counsel concerning the impact of ERISA and the Code,
the applicability of PTCE 83-1 and the Underwriter Exemption, and the potential
consequences in their specific circumstances, prior to making such investment.
Moreover, each Plan fiduciary should determine whether under the general
fiduciary standards of investment procedure and diversification an investment in
the Securities is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
LEGAL MATTERS
The legality of the Securities of each Series, including certain
material federal income tax consequences with respect thereto, will be passed
upon for the Depositor by Brown & Wood LLP, One World Trade Center, New York,
New York 10048.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of
Securities, and no Trust Fund will engage in any business activities or have any
assets or obligations prior to the issuance of the related Series of Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
RATING
It is a condition to the issuance of the Securities of each Series
offered hereby and by the Prospectus Supplement that they shall have been rated
in one of the four highest rating categories by the nationally recognized
statistical rating agency or agencies (each, a "Rating Agency") specified in the
related Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of
the value of the Trust Fund assets and any credit enhancement with respect to
the related Class and will reflect such Rating Agency's assessment solely of the
likelihood that the related Holders will receive payments to which such Holders
are entitled under the related Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments on the related Loans
will be made, the degree to which the rate of such prepayments might differ from
that originally anticipated or the likelihood of early optional termination of
the Series of Securities. Such rating should not be deemed a recommendation to
purchase, hold or sell Securities, inasmuch as it does not address market price
or suitability for a particular investor. Such rating will not address the
possibility that prepayment at higher or lower rates than anticipated by an
investor may cause such investor to experience a lower than anticipated yield or
that an investor purchasing a Security at a significant premium might fail to
recoup its initial investment under certain prepayment scenarios.
There is also no assurance that any such rating will remain in effect
for any given period of time or that it may not be lowered or withdrawn entirely
by the Rating Agencies in the future if in their judgment circumstances so
warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Trust Fund assets or any credit enhancement with
respect to a Series, such rating might also be lowered or withdrawn because of,
among other reasons, an adverse change in the financial or other condition of a
credit enhancement provider or a change in the rating of such credit enhancement
provider's long term debt.
The amount, type and nature of credit enhancement, if any, established
with respect to a Series of Securities will be determined on the basis of
criteria established by each Rating Agency rating Classes of such Series. Such
criteria are sometimes based upon an actuarial analysis of the behavior of
mortgage loans in a larger group. Such analysis is often the basis upon which
each Rating Agency determines the amount of credit enhancement required with
respect to each such Class. There can be no assurance that the historical data
supporting any such actuarial analysis will accurately reflect future experience
nor any assurance that the data derived from a large pool of mortgage loans
accurately predicts the delinquency, foreclosure or loss experience of any
particular pool of Loans. No assurance can be given that values of any
Properties have remained or will remain at their levels on the respective dates
of origination of the related Loans. If the residential real estate markets
should experience an overall decline in property values such that the Principal
Balances of the Loans in a particular Trust Fund and any secondary financing on
the related Properties become equal to or greater than the value of such
Properties, the rates of delinquencies, foreclosures and losses could be higher
than those now generally experienced in the mortgage lending industry. In
additional, adverse economic conditions (which may or may not affect real
property values) may affect the timely payment by mortgagors of scheduled
payments of principal of and interest on the Loans and, accordingly, the rates
of delinquencies, foreclosures and losses with respect to any Trust Fund. To the
extent that such losses are not covered by credit enhancement, such losses will
be borne, at least in part, by the Holders of one or more Classes of the
Securities of the related Series.
LEGAL INVESTMENT
Unless otherwise specified in the related Prospectus Supplement, the
Securities will not constitute "mortgage-related securities" within the meaning
of SMMEA. Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and to
what extent the Securities constitute legal investments for them.
PLAN OF DISTRIBUTION
The Depositor may offer each Series of Securities through Bear, Stearns
& Co. Inc. ("Bear Stearns") or one or more other firms that may be designated at
the time of each offering of such Securities. The participation of Bear Stearns
in any offering will comply with Schedule E to the By-Laws of the National
Association of Securities Dealers, Inc. The Prospectus Supplement relating to
each Series of Securities will set forth the specific terms of the offering of
such Series of Securities and of each Class within such Series, the names of the
underwriters, the purchase price of the Securities, the proceeds to the
Depositor from such sale, any securities exchange on which the Securities may be
listed, and, if applicable, the initial public offering prices, the discounts
and commissions to the underwriters and any discounts and concessions allowed or
reallowed to certain dealers. The place and time of delivery of each Series of
Securities will also be set forth in the Prospectus Supplement relating to such
Series. Bear Stearns is an affiliate of the Depositor.
<PAGE>
GLOSSARY OF TERMS
The following are abbreviated definitions of certain capitalized terms
used in this Prospectus. Unless otherwise provided in a "Supplemental Glossary"
in the Prospectus Supplement for a Series, such definitions shall apply to
capitalized terms used in such Prospectus Supplement. The definitions may vary
from those in the related Agreement for a Series and the related Agreement for a
Series generally provides a more complete definition of certain of the terms.
Reference should be made to the related Agreement for a Series for a more
complete definition of such terms.
"Advance" means cash advanced by the Servicer in respect of delinquent
payments of principal of and interest on a Loan, and for any other purposes
specified in the related Prospectus Supplement.
"Agreement" means, with respect to a Series of Certificates, the
Pooling and Servicing Agreement or Trust Agreement, and, with respect to a
Series of Notes, the Indenture and the Servicing Agreement, as the context
requires.
"Asset Group" means, with respect to the Primary Assets and other
assets comprising the Trust Fund of a Series, a group of such Primary Assets and
other assets having the characteristics described in the related Prospectus
Supplement.
"Bankruptcy Code" means the federal bankruptcy code, 11 United States
Code 101 et seq., and related rules and regulations promulgated thereunder.
"Business Day" means a day that, in the City of New York or in the city
or cities in which the corporate trust office of the applicable Trustee is
located, is neither a legal holiday nor a day on which banking institutions are
authorized or obligated by law, regulations or executive order to be closed.
"Closing Date" means, with respect to a Series, the date specified in
the related Prospectus Supplement as the date on which Securities of such Series
are first issued.
"Combined Loan-to-Value Ratio" means, with respect to a Loan, the ratio
determined as set forth in the related Prospectus Supplement taking into account
the amounts of any related senior mortgage loans on the related Mortgaged
Property.
"Compound Interest Security" means any Security of a Series on which
all or a portion of the interest accrued thereon is added to the principal
balance of such Security on each Distribution Date, through the Accrual
Termination Date, and with respect to which no interest shall be payable until
such Accrual Termination Date, after which interest payments will be made on the
Compound Value thereof.
"Compound Value" means, with respect to a Class of Compound Interest
Securities, the original principal balance of such Class, plus all accrued and
unpaid interest, if any, previously added to the principal balance thereof and
reduced by any payments of principal previously made on such Class of Compound
Interest Securities.
"Condominium" means a form of ownership of real property wherein each
owner is entitled to the exclusive ownership and possession of his or her
individual Condominium Unit and also owns a proportionate undivided interest in
all parts of the Condominium Building (other than the individual Condominium
Units) and all areas or facilities, if any, for the common use of the
Condominium Units.
"Condominium Building" means a multi-unit building or buildings, or a
group of buildings whether or not attached to each other, located on property
subject to Condominium ownership.
"Condominium Unit" means an individual housing unit in a Condominium
Building.
"Cooperative" means a corporation owned by tenant-stockholders who,
through the ownership of stock, shares or membership securities in the
corporation, receives proprietary leases or occupancy agreements that confer
exclusive rights to occupy specific units and that is described in Section 216
of the Code.
"Cooperative Dwelling" means an individual housing unit in a building
owned by a Cooperative.
"Cut-off Date" means the date designated as such in the related
Prospectus Supplement for a Series.
"Deferred Interest" means the excess of the interest accrued on the
Principal Balance of a Loan during a specified period over the amount of
interest required to be paid by an obligor on such Loan on the related Due Date.
"Deposit Agreement" means a guaranteed investment contract or
reinvestment agreement providing for the investment of funds held in a fund or
account, guaranteeing a minimum or a fixed rate of return on the investment of
moneys deposited therein.
"Disqualified Organization" means the United States, any State or
political subdivision thereof, any possession of the United States, any foreign
government, any international organization, or any agency or instrumentality of
any of the foregoing, a rural electric or telephone cooperative described in
section 1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income.
"Distribution Date" means, with respect to a Series or Class of
Securities, each date specified as a distribution date for such Series or Class
in the related Prospectus Supplement.
"Due Date" means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest is due
and payable by the obligor on any Primary Asset pursuant to the terms thereof.
"Eligible Investments" means any one or more of the obligations or
securities described as such in the related Agreement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Event of Default" means an event of default under and as specified in
the related Agreement.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"Final Scheduled Distribution Date" means, with respect to a Class of
Notes of a Series, the date no later than which principal thereof will be fully
paid and with respect to a Class of Certificates of a Series, the date after
which no Certificates of such Class will remain outstanding, in each case based
on the assumptions set forth in the related Prospectus Supplement.
"Holder" means the person or entity in whose name a Security is
registered.
"Insurance Policies" means certain mortgage insurance, hazard insurance
and other insurance policies maintained with respect to the Loans.
"Insurance Proceeds" means amount paid by the insurer under any of the
Insurance Policies covering any Loan or Mortgaged Property.
"Interest Only Securities" means a Class of Securities entitled solely
or primarily to distributions of interest and that is identified as such in the
related Prospectus Supplement.
"Lifetime Rate Cap" means the lifetime limit if any, on the Loan Rate
during the life of each adjustable rate Loan.
"Loan Rate" means, unless otherwise indicated herein or in the
Prospectus Supplement, the interest rate borne by a Loan.
"Loan-to-Value Ratio" means, with respect to a Loan, the ratio
determined as set forth in the related Prospectus Supplement.
"Minimum Principal Payment Agreement" means a minimum principal payment
agreement with an entity meeting the criteria of the Rating Agencies.
"Mortgage" means the mortgage, deed of trust or other similar security
instrument securing a Mortgage Note, as the context may require.
"Mortgage Note" means the note or other evidence of indebtedness of a
Mortgagor under the Loan.
"Mortgaged Property" means the related property subject to a Mortgage.
"Mortgagor" means the obligor on a Mortgage Note.
"1986 Act" means the Tax Reform Act of 1986.
"Notional Amount" means the amount set forth in the related Prospectus
Supplement for a Class of Interest Only Securities.
"PAC" ("Planned Amortization Class Securities") means a Class of
Securities of a Series on which payments of principal are made in accordance
with a schedule specified in the related Prospectus Supplement, based on certain
assumptions stated therein.
"Participating Securities" means Securities entitled to receive
payments of principal and interest and an additional return on investment as
described in the related Prospectus Supplement.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust (including any beneficiary thereof),
unincorporated organization, or government or any agency or political
subdivision thereof.
"Primary Assets" means the Private Securities and/or Loans, as the case
may be, that are included in the Trust Fund for such Series. A Primary Asset
refers to a specific Private Security or Loan, as the case may be.
"Principal Balance" means, with respect to a Primary Asset and as of a
Due Date, the original principal amount of the Primary Asset, plus the amount of
any Deferred Interest added to such principal amount, reduced by all payments,
both scheduled or otherwise, received on such Primary Asset prior to such Due
Date and applied to principal in accordance with the terms of the Primary Asset.
"Principal Only Securities" means a Class of Securities entitled solely
or primarily to distributions of principal and identified as such in the
Prospectus Supplement.
"Private Security" means a participation or pass-through certificate
representing a fractional, undivided interest in Underlying Loans or
collateralized obligations secured by Underlying Loans.
"Property" means either a Home Improvement or a Mortgaged Property
securing a Loan, as the context requires.
"Regular Interest" means a regular interest in a REMIC.
"REMIC Administrator" means the Person, if any, specified in the
related Prospectus Supplement for a Series for which a REMIC election is made,
to serve as administrator of the Series.
"REO Property" means real property that secured a defaulted Loan,
beneficial ownership of which has been acquired upon foreclosure, deed in lieu
of foreclosure, repossession or otherwise.
"Residual Interest" means a residual interest in a REMIC.
"Retained Interest" means, with respect to a Primary Asset, the amount
or percentage specified in the related Prospectus Supplement that is not
included in the Trust Fund for the related Series.
"Scheduled Payments" means the scheduled payments of principal and
interest to be made by the borrower on a Primary Asset.
"Senior Securities" means a Class of Securities as to which the
Holders' rights to receive distributions of principal and interest are senior to
the rights of Subordinated Securityholders, to the extent specified in the
related Prospectus Supplement.
"Series" means a separate series of Securities sold pursuant to this
Prospectus and the related Prospectus Supplement.
"Servicer" means, with respect to a Series relating to Loans, the
Person if any, designated in the related Prospectus Supplement to service Loans
for that Series, or the successors or assigns of such Person.
"Single Family Property" means property securing a Loan consisting of
one- to four-family attached or detached residential housing, including
Cooperative Dwellings.
"Stripped Securities" means Pass-Through Securities representing
interests in Primary Assets with respect to which all or a portion of the
principal payments have been separated from all or a portion of the interest
payments.
"Subordinated Securityholder" means a Holder of a Subordinated
Security.
"Subordinated Securities" means a Class of Securities as to which the
rights of Holders to receive distributions of principal, interest or both is
subordinated to the rights of Holders of Senior Securities, and may be allocated
losses and shortfalls prior to the allocation thereof to other Classes of
Securities, to the extent and under the circumstances specified in the related
Prospectus Supplement.
"Trustee" means the trustee under the applicable Agreement, and its
successors.
"Trust Fund" means, with respect to any Series of Securities, the trust
holding all money, instruments, securities and other property, including all
proceeds thereof, held, with respect to a Series of Certificates, for the
benefit of the Holders by the Trustee under the Pooling and Servicing Agreement
or Trust Agreement or, with respect to a Series of Notes, pledged to the
Indenture Trustee as security for such Notes, including, without limitation, the
Primary Assets (except any Retained Interests), all amounts in the Distribution
Account(s), Collection Account or Reserve Funds, distributions on the Primary
Assets (net of servicing fees), and reinvestment earnings on such net
distributions and any Enhancement and all other property and interest held by or
pledged to the Trustee pursuant to the related Agreement for such Series.
"Variable Interest Security" means a Security on which interest accrues
at a rate that is adjusted, based upon a predetermined index, at fixed periodic
intervals, all as set forth in the related Prospectus Supplement.
"Zero Coupon Security" means a Security entitled to receive payments of
principal only.
