<PAGE>
Pursuant to Rule 424(b)(5)
File No. 333-49015
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 4, 1998)
$98,941,000 (APPROXIMATE)
AMERICAN RESIDENTIAL HOME EQUITY LOAN TRUST 1998-1
AMERICAN RESIDENTIAL HOLDINGS, INC.
SELLER
[LOGO] COUNTRYWIDE HOME LOANS, INC. [LOGO]
MASTER SERVICER
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
ASSET-BACKED CERTIFICATES, SERIES 1998-1
DISTRIBUTIONS PAYABLE ON THE 25TH DAY OF EACH MONTH, COMMENCING IN JULY 1998
The Asset-Backed Certificates, Series 1998-1, will consist of the following
six classes: (i) Class A Certificates; (ii) Class M-1 and Class M-2 Certificates
(collectively, the "MEZZANINE CERTIFICATES"); (iii) Class B Certificates
(together with the Mezzanine Certificates, the "SUBORDINATE CERTIFICATES"); (iv)
Class X Certificates; and (v) Class R Certificates (the "RESIDUAL
CERTIFICATES"). Only the Class A Certificates and the Subordinate Certificates
(collectively, the "OFFERED CERTIFICATES") are offered hereby. See "Index of
Defined Terms" on page S-51 of this Prospectus Supplement and on page 99 of the
Prospectus for the location of the definitions of certain capitalized terms.
The Offered Certificates, the Class X Certificates and the Residual
Certificates (collectively or individually, as the context requires, the
"CERTIFICATES") will represent the entire beneficial ownership interest in a
trust fund (the "TRUST FUND") to be created pursuant to a Pooling and Servicing
Agreement, dated as of June 1, 1998, among Bear Stearns Asset Backed Securities,
Inc., as depositor (the "DEPOSITOR"), American Residential Holdings, Inc., as
seller (the "SELLER"), Countrywide Home Loans, Inc., as master servicer (the
"MASTER SERVICER") and Bankers Trust Company of California, N.A., as trustee
(the "TRUSTEE"). The Trust Fund will consist of a pool (the "MORTGAGE POOL") of
conventional, sub-prime mortgage loans (the "MORTGAGE LOANS") secured by first
liens on fully amortizing, one- to four-family residential properties (each, a
"MORTGAGED PROPERTY") and certain other assets described herein. See "The
Mortgage Pool" herein.
(cover continued on next page)
------------------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER "RISK
FACTORS" ON PAGE S-11 HEREIN AND BEGINNING ON PAGE 18 IN
THE ACCOMPANYING PROSPECTUS.
------------------------
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST FUND ONLY AND DO NOT
REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, THE SELLER, THE
MASTER SERVICER, THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES.
NEITHER THE CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY, THE DEPOSITOR, THE SELLER,
THE MASTER SERVICER, THE TRUSTEE OR ANY OF THEIR
RESPECTIVE AFFILIATES.
--------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The Offered Certificates 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 Offered Certificates, before deducting expenses
payable by the Depositor, will be approximately 100% of the aggregate initial
Certificate Principal Balance of the Offered Certificates.
------------------------
The Offered Certificates 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 Offered Certificates will be made in book-entry form only
through the facilities of The Depository Trust Company, CEDEL Bank, societe
anonyme and the Euroclear System on or about June 30, 1998 (the "CLOSING DATE").
The Offered Certificates will be offered in Europe and the United States of
America.
BEAR, STEARNS & CO. INC.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS JUNE 25, 1998
<PAGE>
(continued from cover page)
The Mortgage Pool is subject to optional redemption under the limited
circumstances described herein. Any such optional redemption will result in an
early retirement of the Offered Certificates.
Distributions on the Offered Certificates will be made on the 25th day
of each month or, if such day is not a Business Day, on the first Business Day
thereafter, commencing in July 1998 (each, a "Distribution Date"). Distributions
on the Offered Certificates on each Distribution Date will be applied to the
payment of principal and interest in accordance with the priorities set forth in
this Prospectus Supplement.
For federal income tax purposes, the Trust Fund will comprise multiple
real estate mortgage investment conduits (each, a "REMIC") organized in a tiered
REMIC structure. The Offered Certificates will represent ownership of regular
interests in the Upper Tier REMIC (as defined in the Pooling and Servicing
Agreement).
The Offered Certificates evidence interests in the Trust Fund only and
are payable solely from amounts received with respect thereto. The Master
Servicer's obligations with respect to the Certificates are limited to its
contractual servicing obligations.
There is currently no secondary market for the Offered Certificates.
The Underwriter intends to make a secondary market in the Offered Certificates
but has no obligation to do so. There can be no assurance that a secondary
market for any of the Offered Certificates will develop or, if it does develop,
that it will continue or offer sufficient liquidity of investment.
-------------------
The yield to investors on the Offered Certificates will be sensitive
to, among other things, the rate and timing of principal payments (including
prepayments) of, and losses on, the Mortgage Loans. Because certain of the
Mortgage Loans contain prepayment penalties, the rate of principal payments may
be less than the rate of principal payments for mortgage loans which do not
contain prepayment penalties. The yield to investors on the Offered Certificates
will also be sensitive to the level of the London Interbank offered rate for
one-month United States dollar deposits ("One-Month LIBOR"). In addition, the
yield to investors on the Offered Certificates will be sensitive to the level of
the Mortgage Index and the additional limitations on the Pass-Through Rate for
each Class of the Offered Certificates, as described herein. Although all of the
Mortgage Loans bear interest at adjustable rates ("ARMs"), the interest rates on
all of the ARMs will not adjust for two years following origination. No
representation is made as to the anticipated rate of prepayments on the Mortgage
Loans, the amount and timing of losses thereon, the level of One-Month LIBOR or
the Mortgage Index or the resulting yield to maturity of the Offered
Certificates.
-------------------
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 Offered Certificates. Additional information is contained in
the Prospectus dated June 4, 1998 (the "Prospectus") which accompanies this
Prospectus Supplement and prospective investors are urged to read both this
Prospectus Supplement and the Prospectus in full. Sales of the Offered
Certificates may not be consummated unless the purchaser has received both this
Prospectus Supplement and the Prospectus.
The information set forth herein under "SERVICING OF THE MORTGAGE
LOANS -- The Master Servicer", "--Collection Procedures" and "--Foreclosure and
Delinquency Experience" has been provided by the Master Servicer. No
representation is made by the Depositor, the Seller, the Trustee, the
Underwriter or any of their respective affiliates as to the accuracy or
completeness of the information provided by the Master Servicer.
(ii)
<PAGE>
Until ninety days after the date of this Prospectus Supplement, all
dealers effecting transactions in the Offered Certificates, whether or not
participating in this distribution, may be required to deliver a Prospectus
Supplement and the Prospectus. This is in addition to the obligation of dealers
to deliver a Prospectus Supplement and the Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
(iii)
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
SUMMARY OF TERMS
This Summary of Terms is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement, and, in
the accompanying Prospectus. Certain capitalized terms used in this Summary of
Terms are defined elsewhere in this Prospectus Supplement or in the Prospectus.
See "Index of Defined Terms", on page S-51 of this Prospectus Supplement and on
page 99 of the Prospectus for the location of the definitions of certain
capitalized. terms.
<TABLE>
<S> <C>
Title of Certificates ........................... Asset-Backed Certificates, Series 1998-1 (the "Certificates"), consisting of
the following six classes of certificates: (i) Class A Certificates, (ii)
Class M-1 and Class M-2 Certificates (the "Mezzanine Certificates"), (iii)
Class B Certificates (together with the Mezzanine Certificates, the
"Subordinate Certificates"), (iv) Class X Certificates, and (v) Class R
Certificates (the "Residual Certificates"). Only the Class A and Subordinate
Certificates (the "Offered Certificates") are offered hereby.
The Depositor ................................... Bear Stearns Asset Backed Securities, Inc. See "The Depositor" in the
Prospectus.
The Seller ...................................... American Residential Holdings, Inc., a Delaware corporation (the "Seller").
(An affiliate of American Residential Investment Trust, Inc.)
The Master Servicer ............................. Countrywide Home Loans, Inc. (the "Master Servicer"). See "SERVICING OF
MORTGAGE LOANS--The Master Servicer" herein.
Trustee ......................................... Bankers Trust Company of California, N.A., a national banking association, not
in its individual capacity but solely as trustee on behalf of the
Certificateholders (the "Trustee").
Cut-off Date .................................... June 1, 1998.
Closing Date .................................... On or about June 30, 1998.
Description of Certificates
A. General ................................ The Certificates will be issued pursuant to a Pooling and Servicing Agreement,
dated as of June 1, 1998 (the "Pooling and Servicing Agreement"), among the
Depositor, the Master Servicer, the Seller and the Trustee. The Offered
Certificates, the Class X Certificates and the Residual Certificates will
represent the entire beneficial ownership interest in a trust fund (the "Trust
Fund"), which will consist of a pool (the "Mortgage Pool") of conventional,
sub-prime mortgage loans (the "Mortgage Loans") secured by first liens on
fully amortizing, one- to four- family residential properties (each, a
"Mortgaged Property") and certain other assets described herein. The Mortgage
Loans will be acquired by the Depositor from the Seller which, in turn,
acquired them (through affiliates) from Countrywide Home Loans, Inc. (in such
capacity, the "Loan Seller"). See "THE MORTGAGE POOL" herein.
</TABLE>
S-1
<PAGE>
<TABLE>
<S> <C>
The Original Certificate Principal Balances, the Pass-Through Rates and the
Latest Possible Maturity Dates for the Offered Certificates are expected to be
as follows:
<CAPTION>
Original
Approximate Latest
Certificate Possible
Principal Pass-Through Maturity
Class Balance (1) Rate Date(2)
----- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Class A......... $84,500,000 (3) May 25, 2029
Class M-1....... $ 6,770,000 (3) May 25, 2029
Class M-2....... $ 4,260,000 (3) May 25, 2029
Class B......... $ 3,411,000 (3) May 25, 2029
</TABLE>
<TABLE>
<S> <C>
(1) The Original Certificate Principal Balance of the Offered Certificates
will be subject to a permitted variance of plus or minus 5%.
(2) Calculated in accordance with the assumptions for the determination of the
Latest Possible Maturity Date set forth under "YIELD, PREPAYMENT AND
MATURITY CONSIDERATIONS" in this Prospectus Supplement. It is expected
that the actual last Distribution Date for each Class of Certificates
will occur significantly earlier.
(3) The Pass-Through Rates for the Offered Certificates adjust monthly
as described below.
The Pass-Through Rate per annum for each Class of Offered Certificates will be
equal to the least of (i) the London interbank offered rate for one month
United States dollar deposits ("One-Month LIBOR") (calculated as described
under "DESCRIPTION OF THE CERTIFICATES-Calculation of One-Month LIBOR") plus
the Pass-Through Margin for such Class, (ii) the weighted average of the
maximum lifetime Mortgage Interest Rates on the Mortgage Loans less the
Servicing and Trustee Fees, and (iii) the "Available Funds Cap" for the
Offered Certificates, which is defined as a per annum rate equal to 12 times
the quotient of (x) the total scheduled interest on the Mortgage Loans based
on the Mortgage Interest Rates in effect on the related Due Date less the
Servicing and Trustee Fees for such Due Date divided by (y) the aggregate
Certificate Principal Balance of the Offered Certificates.
The "Pass-Through Margin" for each Class of Offered Certificates is as
follows: for any Distribution Date on or prior to the Optional Termination
Date: Class A, 0.18%; Class M-1, 0.45%; Class M-2, 0.65%; and Class B, 1.45%;
and for any Distribution Date after the Optional Termination Date: Class A,
0.36%; Class M-1, 0.675%; Class M-2, 0.975%; and Class B, 2.175%.
If on any Distribution Date, the Pass-Through Rate for a Class of Offered
Certificates is based upon its Available Funds Cap, the excess of (i) the
amount of interest that such Class would have been entitled to receive on such
Distribution Date had the Pass-Through Rate for that Class not been calculated
based on the Available Funds Cap over (ii) the amount of interest such Class
received on such Distribution Date based on
</TABLE>
S-2
<PAGE>
<TABLE>
<S> <C>
the Available Funds Cap, up to but not exceeding the weighted average of the
maximum lifetime Mortgage Interest Rates on the Mortgage Loans, less the
Servicing and Trustee Fees, together with the unpaid portion of any such
excess from prior Distribution Dates (and interest accrued thereon at the then
applicable Pass-Through Rate, without giving effect to the Available Funds
Cap) is the "Certificate Interest Carryover Amount" for such Class. Any
Certificate Interest Carryover Amount will be paid on future Distribution
Dates from and to the extent of amounts distributed on the Class X
Certificates which are deposited in a reserve fund ("Carryover Reserve Fund"),
as provided in the Pooling and Servicing Agreement. The rating of the Offered
Certificates does not address the likelihood of the payment of any Certificate
Interest Carryover Amount.
B. Form of Certificates .................... The Offered Certificates will initially be issued in book-entry form. Persons
acquiring beneficial ownership interests in the Offered Certificates
("Certificate Owners") may elect to hold their Offered Certificate interests
through The Depository Trust Company ("DTC"), in the United States, or Cedel
Bank, societe anonyme ("CEDEL") or the Euroclear System ("Euroclear"), in
Europe. Transfers within DTC, CEDEL or Euroclear, as the case may be, will be
in accordance with the usual rules and operating procedures of the relevant
system. So long as the Offered Certificates are Book-Entry Certificates (as
defined herein), such Certificates will be evidenced by one or more
Certificates registered in the name of Cede & Co. ("Cede"), as the nominee of
DTC or one of the relevant depositaries (collectively, the "European
Depositaries"). Cross-market transfers between persons holding directly or
indirectly through DTC, on the one hand, and counterparties holding directly
or indirectly through CEDEL or Euroclear, on the other, will be effected in
DTC through Citibank N.A. ("Citibank") or The Chase Manhattan Bank ("Chase"),
the relevant depositaries of CEDEL or Euroclear, respectively, and each a
participating member of DTC. The interests of the Offered Certificateholders
will be represented by book entries on the records of DTC and participating
members thereof. No Certificate Owner will be entitled to receive a definitive
certificate representing such person's interest, except in the event that
Definitive Certificates (as defined herein) are issued under the limited
circumstances described under "DESCRIPTION OF THE CERTIFICATES--Book-Entry
Certificates" herein. All references in this Prospectus Supplement to the
Offered Certificates reflect the rights of Certificate Owners only as such
rights may be exercised through DTC and its participating organizations for so
long as the Offered Certificates are held by DTC. See "RISK
FACTORS-Consequences of Owning Book-Entry Certificates," "DESCRIPTION OF THE
CERTIFICATES--Book-Entry Certificates" herein and "Annex I" hereto.
</TABLE>
S-3
<PAGE>
<TABLE>
<S> <C>
C. Distributions ........................... Distributions on the Offered Certificates will be made on the 25th day of each
month or, if such day is not a Business Day, on the first Business Day
thereafter, commencing in July 1998 (each, a "Distribution Date").
Distributions on each Distribution Date will be made to Certificateholders of
record as of the close of business on the Business Day immediately preceding
such Distribution Date (each, a "Record Date"), except that the final
distribution on any Offered Certificate will be made only upon presentation
and surrender of such Offered Certificate at the office or agency of the
Trustee in New York, New York. Distributions on the Offered Certificates on
each Distribution Date will be applied to the payment of principal and
interest on such Certificates in accordance with the priorities described
herein. The rights of the holders of the Class B Certificates to receive
distributions with respect to the Mortgage Loans are subordinate to the rights
of the holders of the Mezzanine Certificates, which in turn are subordinate to
the rights of the holders of the Class A Certificates, in each case to the
extent described herein. The rights of the holders of the Class X Certificates
and the Residual Certificates to receive distributions with respect to the
Mortgage Loans are subordinate to the rights of the Offered
Certificateholders, to the extent described herein.
1. Interest................................. On each Distribution Date, the interest distributable with respect to the
Offered Certificates is the interest which has accrued thereon at the related
Pass-Through Rate from and including the preceding Distribution Date (or from
the Closing Date, in the case of the first Distribution Date) to and including
the day prior to the current Distribution Date. The period referred to in the
preceding sentence relating to the accrual of interest is the "Accrual Period"
for each Class of Offered Certificates. All calculations of interest on the
Offered Certificates will be made on the basis of a 360-day year and the
actual number of days elapsed in the applicable Accrual Period.
2. Principal................................ On each Distribution Date, monthly distributions that reduce the Certificate
Principal Balances of the Offered Certificates: (i) will generally reflect
collections of principal in respect of the Mortgage Loans; and (ii) until
certain overcollateralization levels have been reached, will include excess
interest collected on the Mortgage Loans. Distributions of principal to each
Class of Offered Certificates will not exceed the respective original
Certificate Principal Balances thereof. See "DESCRIPTION OF THE
CERTIFICATES--Distributions" and "--Overcollateralization Provisions" herein.
Credit Enhancement .............................. The Credit Enhancement provided for the benefit of the holders of the Offered
Certificates consists of (x) with respect to the Class A Certificates and, to
a limited extent, the Mezzanine Certificates, the provisions with respect to
preferential distributions of principal and interest described herein and (y)
the application of excess interest on the Mortgage Loans under the
overcollateralization mechanics discussed herein.
</TABLE>
S-4
<PAGE>
<TABLE>
<S> <C>
Senior and Subordinated Distributions: On each Distribution Date,
distributions with respect to principal of and interest on the Certificates
will be made: first, to the Class A Certificates; second, to the Class M-1
Certificates; third, to the Class M-2 Certificates; fourth, to the Class B
Certificates; and fifth to the Class X Certificates, the Residual Certificates
and, to the extent provided in the Pooling and Servicing Agreement, to the
Master Servicer as an Extra Master Servicing Fee.
Initially, principal will be distributed exclusively to the Class A
Certificates until the Stepdown Date (as defined herein). On or after the
Stepdown Date, so long as a Trigger Event is not in effect, principal will be
distributed first with respect to the Class A Certificates generally until the
excess of the aggregate Stated Principal Balance of the Mortgage Loans over
the Certificate Principal Balance of the Class A Certificates is equal to
66.41% of the aggregate Stated Principal Balance of the Mortgage Loans as of
the preceding Due Date; thereafter, principal not required to be distributed
with respect to the Class A Certificates will be distributed to the Class M-1
Certificates generally until the excess of the aggregate Stated Principal
Balance of the Mortgage Loans over the sum of the Certificate Principal
Balances of the Class A and Class M-1 Certificates is equal to 80.09% of the
aggregate Stated Principal Balance of the Mortgage Loans as of the preceding
Due Date; thereafter, principal not required to be distributed with respect to
the Class A and Class M-1 Certificates will be distributed to the Class M-2
Certificates generally until the excess of the aggregate Stated Principal
Balance of the Mortgage Loans over the sum of the Certificate Principal
Balances of the Class A, Class M-1 and Class M-2 Certificates is equal to
88.71% of the aggregate Stated Principal Balance of the Mortgage Loans as of
the preceding Due Date; thereafter principal not required to be distributed
with respect to Class A, Class M-1 and Class M-2 Certificates will be
distributed to the Class B Certificates of generally until the excess of the
aggregate Stated Principal Balance of the Mortgage Loans over the sum of the
Certificate Principal Balances of the Class A, Class M-1, Class M-2 and Class
B Certificates is equal to 95.60% of the aggregate Stated Principal Balance of
the Mortgage Loans as of the preceding Due Date; thereafter principal not
required to be distributed to the Offered Certificates will be distributed to
the Class X Certificates, the Residual Certificates and, to the extent
provided in the Pooling and Servicing Agreement, to the Master Servicer as an
Extra Master Servicing Fee.
See "DESCRIPTION OF THE CERTIFICATES-Distributions-Distributions of Principal"
herein.
Overcollateralization. The cashflow provisions are expected to result
initially in an increased rate of amortization of the Class A Certificates
relative to the amortization of the Mortgage Loans through the application of
excess interest received on the Mortgage Loan to the payment of the principal
of Class A Certificates ("overcollateralization") until a
</TABLE>
S-5
<PAGE>
<TABLE>
<S> <C>
required level of overcollateralization is achieved (the "Specified
Overcollateralization Amount"). As a result, the aggregate Stated Principal
Balance of the Mortgage Loans is expected, from time to time, to exceed the
aggregate Certificate Principal Balance of the Offered Certificates. Once the
Specified Overcollateralization Amount is reached, and subject to the
provisions described in the next paragraph, the increased rate of amortization
of the Class A Certificates will cease, unless necessary to maintain the
required level of overcollateralization. The Pooling and Servicing Agreement
provides that, subject to certain floors, caps and triggers, the Specified
Overcollateralization Amount may increase or decrease over time as described
herein. An increase would result in a temporary period of faster amortization
of the Class A Certificates to increase the actual level of
overcollateralization to its required level; a decrease would result in a
temporary period of slower amortization to reduce the actual level of
overcollateralization to its required level.
See "DESCRIPTION OF THE CERTIFICATES--Overcollateralization Provisions" herein.
Realized Losses. If on any Distribution Date the aggregate Certificate
Principal Balance of the Offered Certificates exceeds the aggregate Stated
Principal Balance of the Mortgage Loans, the Certificate Principal Balances of
the Subordinate Certificates will be reduced, in reverse order of seniority
(first Class B, second Class M-2 and third Class M-1), by the amount of the
excess; any such excess is referred to as an "Applied Realized Loss Amount."
Thereafter, such Subordinate Certificates are only entitled to distributions
of interest and principal with respect to their Certificate Principal Balances
as so reduced, and the amount of any Applied Realized Loss Amount will be
payable to the applicable Class or Classes of Subordinate Certificates only to
the extent of future excess cash flow as described herein. See "DESCRIPTION OF
THE CERTIFICATES-Overcollateralization Provisions" herein.
The Mortgage Loans............................... Each of the mortgage loans (the "Mortgage Loans") is secured by a first lien
on a one to four-family residential property (a "Mortgaged Property"). The
statistical information presented in this Prospectus Supplement is based on
the number and the principal balances of the Mortgage Loans as of June 1, 1998
(the "Cut-off Date"). The aggregate principal balance of the Mortgage Pool as
of the Cut-off Date is $98,942,226.82 (the "Cut-off Date Pool Principal
Balance"). Some amortization of the Mortgage Loans may occur between the
Cut-off Date and the Closing Date. Further, certain Mortgage Loans may prepay
in full or may be determined not to meet the eligibility requirements for the
final pool and as a result may not be included in the final pool. As a result
of the foregoing, the statistical distribution of the characteristics in the
final Mortgage Pool as of the Cut-off Date will vary from the statistical
distribution of such characteristics in the Mortgage Pool as presented in this
</TABLE>
S-6
<PAGE>
<TABLE>
<S> <C>
Prospectus Supplement, although such variance will not be material.
The following summarizes the characteristics of the Mortgage Pool as of the
Cut-off Date:
</TABLE>
<TABLE>
<S> <C> <C>
Aggregate Principal Balance............... $98,942,226.82
Average Principal Balance................. $105,369.78
Range of Principal Balances............... $13,592.77 - $630,697.72
Mortgage Interest Rates...................
Current Weighted Average Mortgage Rate.. 9.32%
Range of Current Mortgage Rates......... 6.75% - 14.125%
Weighted Average Maximum Lifetime
Mortgage Rate......................... 16.27%
Range of Maximum Lifetime Mortgage 13.75% - 21.125%
Rates...................................
Weighted Average Lifetime Minimum
Mortgage Rate......................... 9.32%
Range of Minimum Lifetime Mortgage 6.75% - 14.125%
Rates...................................
Weighted Average Loan-to-Value Ratio....... 75.37%
Weighted Average Scheduled Remaining
Term...................................... 358 months
Range of Scheduled Remaining Terms........ 353-359 months
Mortgaged Premises........................
Single-family detached dwelling......... 79.22%
2-4 Family dwellings.................... 4.16%
Planned unit developments............... 12.88%
Condominiums............................ 3.08%
Manufactured Housing.................... 0.67%
First Liens............................... 100%
</TABLE>
<TABLE>
<S> <C>
All the Mortgage Loans are expected to be subject to periodic interest rate
adjustment caps, lifetime interest rate ceilings and lifetime interest rate
floors. As described herein under "THE MORTGAGE POOL--General," the Mortgage
Rate for substantially all of the Mortgage Loans will generally be subject to
adjustment semi-annually to equal the sum, rounded to the nearest 0.125%, of
the Mortgage Index and the Gross Margin for such Mortgage Loan, subject to the
effects of any applicable Periodic Rate Cap, Maximum Mortgage Rate and Minimum
Mortgage Rate.
Approximately 100% of the Mortgage Loans are 2/28 Mortgage Loans (as defined
herein).
The Mortgage Index applicable to any semi-annual Adjustment Date for
substantially all of the Mortgage Loans will be the average of the London
interbank offered rates for six-month U.S. dollar deposits in the London
market, as set forth in The Wall Street Journal, or, if the Mortgage Index
ceases to be published in The Wall Street Journal or becomes unavailable for
any reason, then the Mortgage Index shall be a new index selected by the
Master Servicer on behalf of the Trustee, as holder of the related Mortgage
Note, based on comparable information, in each case as most recently announced
as of a date 45 days prior to such Adjustment Date. The Mortgage Index value
published on June 26, 1998 was 5.75000%. See "The Mortgage Pool" in this
Prospectus Supplement.
Servicing........................................ Under the terms of the Pooling and Servicing Agreement, the Master Servicer
will be responsible for the servicing of the Mortgage Loans and will receive
from interest collected on the Mortgage Loans a monthly servicing fee on each
Mortgage
</TABLE>
S-7
<PAGE>
<TABLE>
<S> <C>
Loan equal to the Stated Principal Balance thereof multiplied by one-twelfth
of the Servicing Fee Rate (such product, the "Servicing Fee"). See "SERVICING
OF THE MORTGAGE LOANS-Servicing Compensation and Payment of Expenses" herein.
The Master Servicer is obligated to make cash advances ("Advances") with
respect to delinquent payments of principal of and interest on any Mortgage
Loan to the extent described herein. The Trustee will be obligated to make any
such Advance if the Master Servicer fails in its obligation to do so (which
failure by the Master Servicer will be an Event of Default), to the extent
provided in the Pooling and Servicing Agreement. See "SERVICING OF THE
MORTGAGE LOANS--Advances" herein.
Optional Termination............................. On any Distribution Date on which the Stated Principal Balance of the Mortgage
Loans is less than or equal to 10% of the Cut-off Date Pool Principal Balance
(an "Optional Termination Date"), the Seller will have the option (but not the
obligation) to purchase, in whole, the remaining Mortgage Loans and the REO
Property (as defined herein), and thereby effect the early retirement of all
Certificates. See "DESCRIPTION OF THE CERTIFICATES--Optional Termination"
herein.
Federal Income Tax Consequences.................. An election of REMIC status for federal income tax purposes will be made with
respect to each REMIC described in the Pooling and Servicing Agreement. The
Offered Certificates and the Class X Certificates will represent beneficial
ownership of REMIC regular interests in the Upper Tier REMIC (as defined in
the Pooling and Servicing Agreement). See "FEDERAL INCOME TAX CONSEQUENCES"
herein. The Residual Certificates will represent the beneficial ownership of
the sole class of "residual interest" in each REMIC. Certain Classes of
Offered Certificates may be issued with original issue discount ("OID") for
federal income tax purposes. See "FEDERAL INCOME TAX CONSEQUENCES" herein and
"CERTAIN FEDERAL INCOME TAX CONSIDERATIONS"in the Prospectus.
The Offered Certificates will also represent the beneficial interest in the
right to receive payments from the Carryover Reserve Fund pursuant to an
Interest Rate Cap Agreement (as defined herein). The Carryover Reserve Fund
will be treated as an "outside reserve fund" for purposes of the Code.
Beneficial owners of the Offered Certificates will be treated for federal
income tax purposes as having purchased an undivided beneficial interest in
regular interests in the Upper Tier REMIC and as having acquired rights under
the Interest Rate Cap Agreement, both to the extent of the owner's
proportionate interest in the Offered Certificates. An Offered
Certificateholder generally will recognize ordinary income equal to such
Certificateholder's proportionate share of interest and original issue
discount, if any, accrued on the Offered Certificates and will take into
account a proportionate share of any payments received under the Interest Rate
Cap Agreement. An Offered Certificateholder's income derived
</TABLE>
S-8
<PAGE>
<TABLE>
<S> <C>
from payments received under the Interest Rate Cap Agreement generally must be
accounted for under the notional principal contract regulations. See "FEDERAL
INCOME TAX CONSEQUENCES--The Carryover Reserve Fund" herein.
ERISA Considerations............................. The acquisition of a Class A Certificate by an employee benefit plan subject
to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
or a plan or arrangement subject to Section 4975 of the Code (each of the
foregoing, a "Plan") could, in some instances, result in a "prohibited
transaction" or other violation of the fiduciary responsibility provisions of
ERISA and Code Section 4975. However, certain exemptions from the prohibited
transaction rules of ERISA could be applicable to the acquisition of Class A
Certificates. Subject to the considerations and conditions described under
"ERISA CONSIDERATIONS" herein, it is expected that the Class A Certificates
may be purchased by a Plan. Any Plan fiduciary considering whether to purchase
any of the Class A Certificates on behalf of a Plan should consult with its
counsel regarding the applicability of the provisions of ERISA and the Code.
The Subordinate Certificates may not be purchased by Plans except as provided
herein. See "ERISA CONSIDERATIONS" herein and in the Prospectus.
Legal Investment................................. The Class A Certificates and the Class M-1 Certificates will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") so long as they are rated in one of the two
highest rating categories by at least one nationally recognized statistical
rating organization and, as such, are legal investments for certain entities
to the extent provided for in SMMEA. The Class M-2 Certificates and the Class
B Certificates will not constitute mortgage-related securities for purposes of
SMMEA.
Institutions whose investment activities are subject to review by federal or
state regulatory authorities should consult with their counsel or the
applicable authorities to determine whether an investment in the Offered
Certificates complies with applicable guidelines, policy statements or
restrictions. See "LEGAL INVESTMENT" in the Prospectus.
Ratings.......................................... It is a condition of the issuance of the Offered Certificates that each Class
of Offered Certificates be assigned the ratings designated below by Standard &
Poor's Rating Services, a division of the McGraw-Hill Companies, Inc. ("S&P)
and Fitch IBCA, Inc. ("Fitch," and together with S&P, the "Rating Agencies").
<CAPTION>
S&P
Class Rating Fitch Rating
----- ------ ------------
<S> <C> <C> <C>
A AAA AAA
M-1 AA AA
M-2 A A
B BBB BBB
</TABLE>
S-9
<PAGE>
<TABLE>
<S> <C>
The security ratings of the Offered Certificates should be evaluated
independently from similar ratings on other types of securities. A security
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the Rating Agencies. The
ratings assigned to the Offered Certificates do not address the likelihood of
the payment of any Certificate Interest Carryover Amount. The Depositor has
not requested a rating of the Offered Certificates by any rating agency other
than the Rating Agencies; there can be no assurance, however, as to whether
any other rating agency will rate any Class of the Offered Certificates or, if
it does, what rating would be assigned by such other rating agency. The rating
assigned by such other rating agency to any Class of the Offered Certificates
could be lower than the respective ratings assigned by the Rating Agencies.
See "RATINGS" herein.
</TABLE>
S-10
<PAGE>
RISK FACTORS
Investors should consider the following risks in connection with the
purchase of the Offered Certificates.
Consequences of Owning Book-Entry Certificates. Issuance of the Offered
Certificates in book-entry form may reduce the liquidity of the Offered
Certificates in the secondary trading market since investors may be unwilling to
purchase Offered Certificates for which they cannot obtain physical
certificates. See "DESCRIPTION OF THE CERTIFICATES--Book-Entry Certificates"
herein and "RISK FACTORS--Book-Entry Registration" in the Prospectus.
Since transactions in the Offered Certificates can be effected only
through DTC, CEDEL, Euroclear, participating organizations, indirect
participants and certain banks, the ability of a Certificate Owner to pledge an
Offered Certificate to persons or entities that do not participate in the DTC,
CEDEL or Euroclear system may be limited due to lack of a physical certificate
representing the Offered Certificates. See "DESCRIPTION OF THE
CERTIFICATES--Book-Entry Certificates" herein and "RISK FACTORS--Book-Entry
Registration" in the Prospectus.
Certificate Owners may experience some delay in their receipt of
distributions of interest and principal on the Offered Certificates since such
distributions will be forwarded by the Trustee to DTC and DTC will credit such
distributions to the accounts of its Participants (as defined herein) which will
thereafter credit them to the accounts of Certificate Owners either directly or
indirectly through indirect participants. Certificate Owners will not be
recognized as Certificateholders of the Offered Certificates as such term is
used in the Pooling and Servicing Agreement, and Certificate Owners will be
permitted to exercise the rights of Offered Certificateholders only indirectly
through DTC and its Participants. See "DESCRIPTION OF THE CERTIFICATES--
Book-Entry Certificates" herein and "RISK FACTORS--Book-Entry Registration"
in the Prospectus.
Cash Flow Considerations and Risks. Even assuming that the Mortgaged
Properties provide adequate security for the Mortgage Loans, substantial delays
could be encountered in connection with the liquidation of Mortgage Loans that
are delinquent and resulting shortfalls in distributions to the
Certificateholders could occur. Further, liquidation expenses (such as legal
fees, real estate taxes, and maintenance and preservation expenses) will reduce
the security for such Mortgage Loans and thereby reduce the proceeds payable to
the Certificateholders. In the event any of the Mortgaged Properties fail to
provide adequate security for the related Mortgage Loans, the Offered
Certificates (particularly the most subordinate Classes) could experience a
loss.
Subordination--Limited Protection Awarded to Offered Certificates. The
rights of the Class M-1 Certificates to receive distributions with respect to
the Mortgage Loans will be subordinate to the rights of the Class A Certificates
to receive such distributions; the rights of the Class M-2 Certificates to
receive distributions with respect to the Mortgage Loans will be subordinate to
the rights of the Class A and the Class M-1 Certificates to receive such
distributions; and the rights of the Class B Certificates to receive
distributions with respect to the Mortgage Loans will be subordinate to the
rights of the Class A, Class M-1 and Class M-2 Certificates to receive such
distributions. The Class X Certificates and the Residual Certificates are
subordinated to all Classes of the Offered Certificates. The subordination of
the Subordinate Certificates relative to the Class A Certificates (and of the
more lower-ranking Classes of Subordinate Certificates to the higher-ranking
Classes) is intended to enhance the likelihood of regular receipt by each holder
of a Certificate of relatively higher payment priority of the full amount of the
monthly distributions allocable to them, and to afford protection against
losses.
Subordination--Allocation of Losses to Subordinate Certificates. If
Realized Losses are incurred with respect to the Mortgage Loans to the extent
that the aggregate Certificate Principal Balance of the Offered Certificates
exceeds the aggregate Stated Principal Balance of the Mortgage Loans, the
Certificate Principal Balances of the Subordinate Certificates will be reduced
in reverse order of seniority (first Class B, second Class M-2 and third Class
M-1) by the amount of the excess. Consequently, the yields to maturity on the
Mezzanine Certificates and Class B Certificates will be sensitive, in varying
degrees, to defaults on the Mortgage Loans (and the timing thereof). Investors
should fully consider the risks associated with an investment in the Mezzanine
Certificates or Class B Certificates, including the possibility that such
investors may not fully recover their initial investment as a result of Realized
Losses.
S-11
<PAGE>
Overcollateralization Provisions. The operation of the
overcollateralization provisions of the Pooling and Servicing Agreement will
affect the weighted average life of the Certificates and consequently the yield
to maturity of the Offered Certificates. Unless and until the required amount of
overcollateralization is reached, Excess Cashflow (as defined herein) will be
applied as distributions of principal of the Class or Classes of Certificates
then entitled to distributions of principal, thereby reducing the weighted
average lives thereof. The actual required amount of overcollateralization may
change from Distribution Date to Distribution Date pursuant to the terms set
forth in the Pooling and Servicing Agreement, producing uneven distributions of
accelerated payments in respect of principal. There can be no assurance as to
when or whether the required amount of overcollateralization will be reached.
Excess Cashflow generally is a function of the excess of interest
collected or advanced on the Mortgage Loans over the amount of interest payable
on the Certificates and certain Trust Fund expenses. Mortgage Loans with higher
Net Mortgage Rates will contribute more interest to the Excess Cashflow.
Mortgage Loans with higher Net Mortgage Rates may prepay faster than Mortgage
Loans with relatively lower Net Mortgage Rates in response to a given change in
market interest rates. Any such disproportionate prepayments of Mortgage Loans
with higher Net Mortgage Rates may adversely affect the amount of Excess
Cashflow.
As a result of the interaction of the foregoing factors, the effect
of the overcollateralization provisions on the weighted average life of a
Class of Offered Certificates may vary significantly over time. See "YIELD,
PREPAYMENT AND MATURITY CONSIDERATIONS" herein.
Prepayment Considerations and Risks. The prepayment experience of the
Mortgage Loans may be affected by a wide variety of factors, including general
economic conditions, interest rates, the availability of alternative financing
and homeowner mobility. In addition, substantially all of the Mortgage Loans
contain due-on-sale provisions and the Master Servicer intends to enforce such
provisions unless (i) such enforcement is not permitted by applicable law or
(ii) the Master Servicer, in a manner consistent with reasonable commercial
practice, permits the purchaser of the related Mortgaged Property to assume the
Mortgage Loan. To the extent permitted by applicable law, such assumption will
not release the original borrower from its obligation under any such Mortgage
Loan. See "YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS" herein and "CERTAIN
LEGAL ASPECTS OF THE LOANS-Due-on-Sale Clauses in Mortgage Loans" in the
Prospectus for a description of certain provisions of the Mortgage Loans that
may affect the prepayment experience thereof. The yield to maturity and weighted
average life of the Offered Certificates will be affected primarily by the rate
and timing of principal payments (including prepayments) of, and losses on, the
Mortgage Loans.
The yield to investors on the Offered Certificates will also be
sensitive to the level of One-Month LIBOR, the level of the Mortgage Index and
the additional limitations on the Pass-Through Rate as described herein.
Although all of the Mortgage Loans bear interest at adjustable rates ("ARMs"),
the interest rates on all of the ARMs will not adjust for two years following
origination. In addition, the yield to maturity of the Offered Certificates
purchased at a discount or premium will be more sensitive to the rate and timing
of payments thereon. Certificateholders should consider, in the case of the
Offered Certificates purchased at a discount, the risk that a lower than
anticipated rate of principal payments could result in an actual yield that is
lower than the anticipated yield and, in the case of the Offered Certificates
purchased at a premium, the risk that a faster than anticipated rate of
principal payments could result in an actual yield that is lower than the
anticipated yield. Because certain of the Mortgage Loans contain prepayment
penalties, the rate of principal payments may be less than the rate of principal
payments for mortgage loans which do not contain prepayment penalties. No
representation is made as to the anticipated rate of prepayments on the Mortgage
Loans, the amount and timing of losses thereon, the level of One-Month LIBOR or
the Mortgage Index or the resulting yield to maturity of any Offered
Certificates. Any reinvestment risks resulting from a faster or slower incidence
of payments on the Mortgage Loans will be borne entirely by the Offered
Certificateholders as described herein. See "YIELD, PREPAYMENT AND MATURITY
CONSIDERATIONS" herein.
Certificate Ratings. The ratings of each Class of the Offered
Certificates will depend primarily on an assessment by the Rating Agencies of
the Mortgage Loans as well as the structure of the transaction. The ratings by
the Rating Agencies of any Class of Offered Certificates is not a recommendation
to purchase, hold or sell any Offered Certificates, inasmuch as such ratings do
not comment as to the market price or suitability for a particular investor.
There is no assurance that the ratings will remain in place for any given period
of time or that the ratings
S-12
<PAGE>
will not be lowered or withdrawn by the Rating Agencies. In general, the ratings
address credit risk and do not address the likelihood of prepayments. The
ratings of each Class of the Offered Certificates do not address the possibility
of the imposition of United States withholding tax with respect to non-U.S.
persons.
Bankruptcy and Insolvency Risks. The sale of the Mortgage Loans from
the Seller to the Depositor will be treated as a sale of the Mortgage Loans.
However, in the event of an insolvency of the Seller, the trustee in bankruptcy
of the Seller may attempt to recharacterize the sale of the Mortgage Loans as a
borrowing by the Seller, secured by a pledge of the applicable Mortgage Loans.
If the trustee in bankruptcy decided to challenge such transfer, delays in
payments of the Offered Certificates and reductions in the amounts thereof could
occur. The Depositor will warrant in the Pooling and Servicing Agreement that
the transfer of the Mortgage Loans by it to the Trust Fund is either a valid
transfer and assignment of such Mortgage Loans to the Trust Fund or the grant to
the Trust Fund of a security interest in such Mortgage Loans.
In the event of a bankruptcy or insolvency of the Master Servicer, the
bankruptcy trustee or receiver may have the power to prevent the Trustee or the
Class A Certificateholders from appointing a successor Master Servicer.
Geographic Concentration. As of the Cut-off Date approximately 25.37%
of the Cut-off Date Principal Balance of the Mortgage Loans were secured by
Mortgaged Properties located in the State of California. An overall decline in
the California residential real estate market could adversely affect the values
of the Mortgaged Properties securing such Mortgage Loans such that the Principal
Balances of the related Mortgage Loans could equal or exceed the value of such
Mortgaged Properties. As the residential real estate market is influenced by
many factors, including the general condition of the economy and interest rates,
no assurances may be given that the California residential real estate market
will not weaken. If the California residential real estate market should
experience an overall decline in property values after the dates of origination
of such Mortgage Loans, the rates of losses on such Mortgage Loans would be
expected to increase, and could increase substantially.
Delinquent Mortgage Loans. The Trust Fund may include Mortgage Loans
which are 59 or fewer days delinquent as of the Cut-off Date. It is expected
that none of the Mortgage Loans will be between 30 days and 59 days delinquent.
As of the Cut-off Date, none of the Mortgage Loans were more than 30 days
delinquent. None of the Mortgage Loans were contractually delinquent for more
than 59 days as of the Cut-off Date.
For a discussion of additional risks pertaining to the Offered
Certificates, see "RISK FACTORS" in the Prospectus.
S-13
<PAGE>
THE MORTGAGE POOL
General
Set forth below is certain statistical information with respect to the
Mortgage Pool expected to be included in the Trust Fund as of the Closing Date.
All such information is approximate and is given as of the Cut-off Date. Prior
to the Closing Date, Mortgage Loans may be removed and other Mortgage Loans may
be substituted therefor. In addition, as described below, the Mortgage Loans may
be prepaid at any time. As a result, certain characteristics of the Mortgage
Loans in the Trust Fund on the Closing Date may vary from the characteristics
set forth below as of the Cut-off Date.
All of the Mortgage Loans will provide for the amortization of the
amount financed over a series of monthly payments and will provide for payments
due as of the first day of each month. The Mortgage Loans to be included in the
Trust Fund were originated or purchased by Countrywide Home Loans, Inc. (the
"Loan Seller") and were originated substantially in accordance with the Loan
Seller's underwriting criteria for sub-prime ("B&C") quality mortgage loans
described herein under "--Underwriting Standards--B&C Quality Mortgage Loans."
Sub-prime mortgage loans are generally mortgage loans made to borrowers with
prior credit difficulties.
Scheduled monthly payments made by the Mortgagors on the Mortgage Loans
("Scheduled Payments") either earlier or later than the scheduled due dates
thereof will not affect the amortization schedule or the relative application of
such payments to principal and interest. All of the Mortgage Notes will provide
for a fifteen (15) day grace period for monthly payments. Any Mortgage Loan may
be prepaid in full or in part at any time; however, approximately 77.70% of the
Cut-off Date Principal Balance of the Mortgage Loans provide for the payment by
the borrower of a prepayment charge in limited circumstances on full prepayments
typically made within five years from the date of execution of the related
Mortgage Note. In general, the related Mortgage Note will provide that a
prepayment charge will apply if, during the first five years from the date of
origination of such Mortgage Loan, the borrower prepays such Mortgage Loan in
full. The amount of the prepayment charge will generally be equal to six months'
advance interest calculated on the basis of the rate in effect at the time of
such prepayment on the amount prepaid in excess of 20% of the original principal
balance of such Mortgage Loan.
Substantially all of the Mortgage Loans will have a Mortgage Rate which
is subject to semi-annual adjustment on the first day of the months specified in
the related Mortgage Note (each such date, an "Adjustment Date") to equal the
sum, rounded to the nearest 0.125%, of (i) the average of the London interbank
offered rates for six-month U.S. dollar deposits in the London market, as set
forth in The Wall Street Journal, or, if such rate ceases to be published in The
Wall Street Journal or becomes unavailable for any reason, then based upon a new
index selected by the Master Servicer on behalf of the Trustee, as holder of the
related Mortgage Note, based on comparable information, in each case as most
recently announced as of a date 45 days prior to such Adjustment Date (the
"Mortgage Index"), and (ii) a fixed percentage amount specified in the related
Mortgage Note (the "Gross Margin"); provided, however, that the Mortgage Rate
will not increase or decrease by more than 1.50% on any Adjustment Date (the
"Periodic Rate Cap"). Substantially all of the Mortgage Loans as of the Cut-off
Date were originated with Mortgage Rates less than the sum of the then
applicable Mortgage Index and the related Gross Margin. Substantially all of the
Mortgage Loans as of the Cut-off Date have fixed Mortgage Rates for
approximately 24 months (the "2/28 Mortgage Loans") after origination thereof
before becoming subject to the semi-annual adjustment described in the preceding
sentences. Substantially all of the Mortgage Loans as of the Cut-off Date will
provide that over the life of each such Mortgage Loan the Mortgage Rate will in
no event be more than the initial Mortgage Rate plus 10.25% (the "Maximum
Mortgage Rate"). Substantially all of the Mortgage Loans as of the Cut-off Date
provide that in no event will the Mortgage Rate for each such Mortgage Loan be
less than the initial Mortgage Rate (such rate, the "Minimum Mortgage Rate").
Effective with the first payment due on an Mortgage Loan after each related
Adjustment Date, the monthly payment will be adjusted to an amount which will
fully amortize the outstanding principal balance of the Mortgage Loan over its
remaining term.
The Cut-off Date Pool Principal Balance is $98,942,226.82, which is
equal to the aggregate Stated Principal Balance of the Mortgage Loans in the
Mortgage Pool as of the Cut-off Date. As of the Cut-off Date, none of the
Mortgage Loans were more than 30 days delinquent. None of the Mortgage Loans
were contractually delinquent for more than 59 days as of the Cut-off Date.
S-14
<PAGE>
The average Cut-off Date Principal Balance of the Mortgage Loans was
approximately $105,369.78, the minimum Cut-off Date Principal Balance was
$13,592.77, the maximum Cut-off Date Principal Balance was $630,697.72. The
minimum current Mortgage Rate and the maximum current Mortgage Rate as of the
Cut-off Date were approximately 6.75% and 14.125% per annum, respectively, and
the weighted average Mortgage Rate was approximately 9.32% per annum. The
remaining term to scheduled maturity for the Mortgage Loans ranged from 353 to
359 months and the weighted average remaining term to scheduled maturity was
approximately 358 months. As of the Cut-off Date, approximately 79.22% of the
Mortgage Loans were secured by Mortgaged Properties which are single-family
detached residences and 93.14% were owner-occupied. As of the Cut-off Date,
approximately 25.37% and 6.31% of the Mortgage Loans by Cut-off Date Principal
Balance are secured by Mortgaged Properties located in California and Michigan,
respectively.
The "Loan-to-Value Ratio" of a Mortgage Loan is equal to (i) the
principal balance of such Mortgage Loan at the date of origination, divided by
(ii) the Collateral Value of the related Mortgaged Property. The "Combined
Loan-to-Value Ratio" of a Mortgage Loan at any given time is the ratio,
expressed as a percentage, of (i) the sum of (a) the original principal balance
of the Mortgage Loan and (b) the outstanding principal balance at the date of
origination of the Mortgage Loan of any senior mortgage loan(s) or, in the case
of any open-ended senior mortgage loan, the maximum available line of credit
with respect to such mortgage loan, regardless of any lesser amount actually
outstanding at the date of origination of the Mortgage Loan, to (ii) the
Collateral Value of the related Mortgaged Property. The "Collateral Value" of a
Mortgaged Property is the lesser of (x) the appraised value based on an
appraisal made for the Loan Seller by an independent fee appraiser at the time
of the origination of the related Mortgage Loan, and (y) the sales price of such
Mortgaged Property at such time of origination. With respect to a Mortgage Loan
the proceeds of which were used to refinance an existing mortgage loan, the
Collateral Value is the appraised value of the Mortgaged Property based upon the
appraisal obtained at the time of refinancing. No assurance can be given that
the values of the Mortgaged Properties have remained or will remain at their
levels as of the dates of origination of the related Mortgage Loans. As of the
Cut-off Date, the weighted average Loan-to-Value Ratio for the Mortgage Loans
was 75.37%.
Mortgage Loans
The following tables describe the Mortgage Pool and the related
Mortgaged Properties as of the close of business on the Cut-off Date. The sum of
the columns below may not equal the total indicated due to rounding.
S-15
<PAGE>
<TABLE>
<CAPTION>
Current Mortgage Rates(1) Maximum Rates(1)
- -------------------------------------------------------------- ----------------------------------------------------------
Aggregate Aggregate
Number of Principal Percent Number of Principal Percent
Range of Current Mortgage Balance of Range of Mortgage Balance of
Mortgage Rates (%) Loans Outstanding Pool Maximum Rates (%) Loans Outstanding Pool
- ------------------------- ----------- -------------- --------- --------------------- ----------- --------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
6.001% - 7.000% 3 $ 372,193.73 0.38% 13.001% - 14.000% 4 $ 557,098.84 0.56%
7.001% - 8.000% 72 8,770,365.48 8.86 14.001% - 15.000% 86 10,659,902.34 10.77
8.001% - 9.000% 289 37,544,715.72 37.95 15.001% - 16.000% 284 36,967,068.93 37.36
9.001% - 10.000% 312 32,044,679.01 32.39 16.001% - 17.000% 306 30,966,889.67 31.30
10.001% - 11.000% 170 14,638,947.47 14.80 17.001% - 18.000% 171 14,561,979.87 14.72
11.001% - 12.000% 60 3,806,707.64 3.85 18.001% - 19.000% 55 3,464,669.40 3.50
12.001% - 13.000% 29 1,550,409.07 1.57 19.001% - 20.000% 29 1,550,409.07 1.57
13.001% - 14.000% 3 142,221.44 0.14 20.001% - 21.000% 3 142,221.44 0.14
14.001% - 15.000% 1 71,987.26 0.07 21.001% - 22.000% 1 71,987.26 0.07
---- --------------- ------ ---- ---------------- ------
Total.......... 939 $98,942,226.82 100.00% Total......... 939 $ 98,942,226.82 100.00%
==== =============== ====== ==== ================ ======
</TABLE>
<TABLE>
- ------------ ------------
<S> <C> <C> <C>
(1) As of the Cut-off Date, the weighted average Mortgage (1) As of the Cut-off Date, the weighted average maximum
Rate of the Mortgage Loans was approximately 9.32% per rate of the Mortgage Loans was approximately 16.27%
annum. per annum
</TABLE>
<TABLE>
<CAPTION>
Current Mortgage Loan
Gross Margins(1) Principal Balances(1)
- --------------------------------------------------------------- ----------------------------------------------------------
Range of
Aggregate Current Mortgage Aggregate
Number of Principal Percent Loan Number of Principal Percent
Range of Gross Margins Mortgage Balance of Principal Balances Mortgage Balance of
(%) Loans Outstanding Pool ($) Loans Outstanding Pool
- ------------------------ ------------ --------------- --------- ---------------------- --------- --------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
0.00% - 5.00% 22 $ 1,744,201.34 1.76% $ 0.00 - 25,000.00 20 $ 409,674.39 0.41%
5.00% - 6.00% 431 45,652,427.26 46.14 25,00.01 - 50,000.00 161 6,356,111.04 6.42
6.00% - 7.00% 387 43,669,607.15 44.14 50,00.01 - 75,000.00 231 14,287,190.41 14.44
7.00% - 8.00% 90 7,022,397.29 7.10 75,00.01 - 100,000.00 173 15,119,815.45 15.28
8.00% - 9.00% 7 524,748.63 0.53 100,00.01 - 125,000.00 104 11,707,269.47 11.83
9.00% - 10.00% 1 104,000.00 0.11 125,00.01 - 150,000.00 63 8,540,655.01 8.63
10.00% - 11.00% 1 224,845.15 0.23 150,00.01 - 175,000.00 44 7,078,942.01 7.15
----- --------------- -----
Total........... 939 $98,942,226.82 100.00% 175,00.01 - 200,000.00 52 9,791,311.18 9.90
===== =============== ======
200,00.01 - 250,000.00 47 10,408,747.74 10.52
- ---------------
(1) As of the Cut-off Date, the weighted average Gross 250,00.01 - 300,000.00 18 4,871,004.62 4.92
Margin of the Mortgage Loans was approximately 6.21%.
300,00.01 - 350,000.00 12 3,933,688.16 3.98
350,00.01 - 400,000.00 5 1,908,181.17 1.93
400,00.01 - 450,000.00 1 438,148.26 0.44
450,00.01 - 500,000.00 5 2,416,710.15 2.44
500,00.01 - 550,000.00 2 1,044,080.04 1.06
600,00.01 - 650,000.00 1 630,697.72 0.64
------ ---------------- ------
Total......... 939 $ 98,942,226.82 100.00%
------ --------------- ------
</TABLE>
<TABLE>
<S> <C>
------------
(1) As of the Cut-off Date, the average current Mortgage Loan
principal balance was approximately $105,369.78.
</TABLE>
S-16
<PAGE>
<TABLE>
<CAPTION>
Minimum Rates (1) State Distribution of Mortgaged Properties
- ------------------------------------------------------------ ---------------------------------------------------------
Aggregate Aggregate
Number of Principal Percent Number of Principal Percent
Range of Minimum Mortgage Balance of Mortgaged Balance of
Rates (%) Loans Outstanding Pool State Loans Outstanding Pool
- ------------------- ------------ ---------------- ---------- -------------------- ---------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
6.001% - 7.000% 3 $ 372,193.73 0.38% Alaska 1 $ 81,371.76 0.08%
7.001% - 8.000% 72 8,770,365.48 8.86 Arizona 29 3,667,169.65 3.71
8.001% - 9.000% 289 37,544,715.72 37.95 California 134 25,101,183.02 25.37
9.001% - 10.000% 312 32,044,679.01 32.39 Colorado 33 3,635,580.58 3.67
10.001% - 11.000% 170 14,638,947.47 14.80 Connecticut 8 1,490,101.39 1.51
11.001% - 12.000% 60 3,806,707.64 3.85 District of Columbia 2 206,522.11 0.21
12.001% - 13.000% 29 1,550,409.07 1.57 Florida 51 4,807,610.32 4.86
13.001% - 14.000% 3 142,221.44 0.14 Georgia 12 869,460.53 0.88
14.001% - 15.000% 1 71,987.26 0.07 Hawaii 4 847,928.50 0.86
---- ---------------- ------ Idaho 35 2,986,921.71 3.02
Illinois 17 1,511,942.05 1.53
Total........ 939 $ 98,942,226.82 100.00% Indiana 29 2,114,302.63 2.14
==== ================ ====== Iowa 8 402,421.98 0.41
- --------------- Kansas 5 404,486.90 0.41
(1) As of the Cut-off Date, the weighted average Minimum Kentucky 11 702,264.73 0.71
Rate of the Mortgage Loans was approximately 9.32%. Louisiana 38 3,590,886.82 3.63
Maryland 2 86,847.44 0.09
Massachusetts 6 627,469.99 0.63
Michigan 72 6,241,470.47 6.31
Loan-to-Value Ratio(1) Minnesota 12 1,130,978.99 1.14
- ------------------------------------------------------------ Mississippi 8 607,794.77 0.61
Aggregate Missouri 46 3,071,580.36 3.10
Number of Principal Percent Montana 11 1,232,560.51 1.25
Range of Mortgage Balance of Nebraska 2 339,397.16 0.34
Loan-to-Value Nevada 10 1,583,060.88 1.60
Ratios (%) Loans Outstanding Pool New Hampshire 2 176,224.38 0.18
- --------------------- ------------ --------------- ------- New Jersey 2 266,223.88 0.27
New Mexico 17 1,784,004.28 1.80
10.01% - 15.00% 2 $ 51,952.05 0.05% New York 4 614,268.24 0.62
15.01% - 20.00% 1 21,480.40 0.02 North Carolina 39 3,181,772.59 3.22
20.01% - 25.00% 1 30,000.00 0.03 Ohio 51 3,633,425.62 3.67
25.01% - 30.00% 1 50,000.00 0.05 Oklahoma 12 690,602.67 0.70
30.01% - 35.00% 6 311,155.22 0.31 Oregon 17 2,079,716.13 2.10
35.01% - 40.00% 7 384,831.53 0.39 Pennsylvania 32 1,827,200.84 1.85
40.01% - 45.00% 4 235,839.80 0.24 Rhode Island 1 91,945.68 0.09
45.01% - 50.00% 13 1,252,691.18 1.27 South Carolina 3 198,735.12 0.20
50.01% - 55.00% 22 1,773,845.60 1.79 Tennessee 17 1,511,669.09 1.53
55.01% - 60.00% 41 3,415,903.79 3.45 Texas 34 3,581,864.85 3.62
60.01% - 65.00% 72 6,089,305.33 6.15 Utah 42 4,618,662.29 4.67
65.01% - 70.00% 129 12,123,255.02 12.25 Virginia 3 178,586.16 0.18
70.01% - 75.00% 167 17,569,133.97 17.76 Washington 33 3,999,667.10 4.04
75.01% - 80.00% 311 36,654,822.60 37.05 Wisconsin 44 3,166,342.65 3.20
80.01% - 85.00% 130 15,016,307.49 15.18 ---- --------------- ------
85.01% - 90.00% 32 3,961,702.84 4.00
----- -------------- ------ Total....... 939 $98,942,226.82 100.00%
==== =============== ======
Total.......... 939 $98,942,226.82 100.00%
===== ============== ======
</TABLE>
(1) As of the Cut-off Date, the weighted average
Loan-to-Value of the Mortgage Loans was approximately 75.37%.
<TABLE>
<CAPTION>
Next Adjustment Date-2/28 Period
-------------------------------------------------------
Aggregate
Next Number of Principal Percent
Adjustment Mortgage Balance of
Date Loans Outstanding Pool
--------------- ---------- ---------------- ------------
<S> <C> <C> <C>
November, 1999 3 $ 174,743.31 0.18%
December, 1999 1 323,857.41 0.33
January, 2000 1 38,389.96 0.04
February, 2000 24 3,160,307.09 3.19
March, 2000 110 11,255,318.15 11.38
April, 2000 659 69,341,444.93 70.08
May, 2000 141 14,648,165.97 14.80
--- -------------- ------
Total.... 939 $98,942,226.82 100.00%
=== ============== ======
</TABLE>
S-17
<PAGE>
<TABLE>
<CAPTION>
Product Type Remaining Months to Stated Maturity(1)
- ------------------------------------------------------------- ---------------------------------------------------------
Aggregate
Number of Aggregate Percent Number of Principal Percent
Mortgage Principal of Mortgaged Balance of
Product Type Loans Balance Pool Remaining Terms Loans Outstanding Pool
- --------------------- ------------ --------------- ---------- ------------------ ------------ -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
"2/28" 6 month LIBOR 939 $98,942,226.82 100.00% 301 to 360 months 939 $98,942,226.82 100.00%
--- ------------- ------ --- -------------- ------
Total........ 939 $98,942,226.82 100.00% Total........ 939 $98,942,226.82 100.00%
=== ============= ====== === ============== ======
</TABLE>
--------------
<TABLE>
<S> <C>
(1) As of the Cut-off Date, the weighted average remaining
months to scheduled maturity was approximately
358 months.
</TABLE>
<TABLE>
<CAPTION>
Type of Mortgaged Properties Loan Purpose
- ------------------------------------------------------------- ---------------------------------------------------------
Aggregate Aggregate
Number of Principal Percent Number of Loan Percentage
Property Mortgage Balance of Loan Mortgage Balance of
Type Loans Outstanding Pool Purpose Loans Outstanding Pool
- --------------------- ------------ --------------- ---------- ------------------ ----------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Single Family 773 $78,378,395.83 79.22% Refinance/Consolidation 473 $49,660,588.54 50.19%
Detached
Planned Unit 79 12,743,599.38 12.88 Purchase 315 32,156,436.36 32.50
Development
Two-to-Four Family 42 4,111,998.61 4.16 Refinance 150 16,865,404.41 17.05
Residence
Condominium 33 3,045,970.20 3.08 Construction 1 259,797.51 0.26
Manufactured Housing 12 662,262.80 0.67 --- -------------- ------
--- --------------- ------
Total........ 939 $98,942,226.82 100.00%
=== ============== ======
Total........ 939 $98,942,226.82 100.00%
=== =============== ======
</TABLE>
<TABLE>
<CAPTION>
Occupancy Types(1) Loan Credit Rating
- ------------------------------------------------------------- ---------------------------------------------------------
Aggregate Aggregate
Number of Principal Percent Number of Principal Percent
Mortgage Balance of Loan Mortgage Balance of
Occupancy Type Loans Outstanding Pool Credit Rating Loans Outstanding Pool
- --------------------- ------------ --------------- ---------- ------------------ ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Owner Occupied 850 $92,153,090.82 93.14% A+ 378 $45,081,083.31 45.56%
Investor Owned 82 5,861,430.92 5.92 A- 218 24,103,137.20 24.36
Second Home 7 927,705.08 0.94 B 172 17,686,688.33 17.88
---- -------------- ------ C 98 7,377,421.35 7.46
C- 56 3,515,541.12 3.55
D 17 1,178,355.51 1.19
Total........ 939 $98,942,226.82 100.00% --- -------------- ------
==== =============== ======
Total........ 939 $98,942,226.82 100.00%
=== ============== ======
</TABLE>
- -----------
(1) Based upon representation of the related mortgagors at the time of
origination.
<TABLE>
<CAPTION>
Loan Documentation
------------------------------------------------------------
Aggregate
Number of Principal Percent
Loan Mortgage Balance of
Documentation Loans Outstanding Pool
------------------ ----------- -------------- ----------
<S> <C> <C> <C>
Full/Alternative 676 $69,189,495.59 69.93%
Limited Documentation 244 27,208,599.44 27.50
No Ratio 19 2,544,131.79 2.57
---- ------------- ------
Total........ 939 $98,942,226.82 100.00%
=== ============== ======
</TABLE>
S-18
<PAGE>
Assignment of the Mortgage Loans
Pursuant to the Pooling and Servicing Agreement, the Depositor on the
Closing Date will sell, transfer, assign, set over and otherwise convey without
recourse to the Trustee in trust for the benefit of the Certificateholders all
right, title and interest of the Depositor in and to each Mortgage Loan and all
right, title and interest in and to all other assets included in the Trust Fund,
including all principal and interest received on or with respect to the Mortgage
Loans on and after the Cut-off Date, exclusive of principal due prior to the
Cut-off Date and interest accruing prior to June 1, 1998.
In connection with such transfer and assignment, the Depositor will
deliver the following documents on or before the Closing Date (collectively
constituting the "Trustee's Mortgage File") with respect to each Mortgage Loan:
(i) the original Mortgage Note, endorsed without recourse in
the following form: "Pay to the order of _____ without recourse," with
all intervening endorsements that show a complete chain of endorsement
from the originator to the Depositor;
(ii) the original recorded Mortgage;
(iii) a duly executed assignment of the Mortgage to "Bankers
Trust Company of California, N.A., a national banking association, as
trustee under the Pooling and Servicing Agreement dated as of June 1,
1998, Bear Stearns Asset Backed Securities, Inc., Asset-Backed
Certificates, Series 1998-1, without recourse"; in recordable form, as
described in the Pooling and Servicing Agreement;
(iv) the original recorded assignment or assignments of the
Mortgage together with all interim recorded assignments of such
Mortgage;
(v) the original or copies of each assumption, modification,
written assurance or substitution agreement, if any; and
(vi) the original or duplicate original lender's title policy
and all riders thereto or, in the event such original title policy has
not been received from the insurer, such original or duplicate original
lender's title policy and all riders thereto shall be delivered within
one year of the Closing Date.
Assignments of the Mortgage Loans to the Trustee (or its nominee) will
be recorded in the appropriate public office for real property records, except
in states (such as California) as to which an opinion of counsel is delivered to
the effect that such recording is not required to protect the Trustee's
interests in the Mortgage Loan against the claim of any subsequent transferee or
any successor to or creditor of the Depositor or the Seller. As to any Mortgage
Loan, the recording requirement exception described in the preceding sentence is
applicable only so long as the related Mortgage File is maintained in the
possession of the Trustee in one of the states to which such exception applies.
In the event any such assignment is delivered to the Trustee in blank and the
related Mortgage File is released by the Trustee pursuant to applicable
provisions of the Pooling and Servicing Agreement, the Trustee shall complete
such assignment as provided in subparagraph (iii) above prior to any such
release. In the event such recording is required to protect the interest of the
Trustee in the Mortgage Loans, the Seller is required to cause each previously
unrecorded assignment to be submitted for recording.
The Trustee will review the Mortgage Loan documents delivered to it and
will hold such documents in trust for the benefit of the holders of the
Certificates. After the Closing Date, if any document is found to be missing or
defective in any material respect, the Trustee is required to notify the Seller
in writing. If the Seller cannot or does not cure such omission or defect within
90 days of its receipt of notice from the Trustee, the Seller is required to
repurchase the related Mortgage Loan from the Trust Fund at a price (the
"Purchase Price") equal to 100% of the Stated Principal Balance thereof plus
accrued and unpaid interest thereon, at a rate equal to the difference between
(x) the Mortgage Rate and (y) the sum of the Servicing Fee Rate and the Trustee
Fee Rate (the "Net Mortgage Rate") to the first day of the month in which the
Purchase Price is to be distributed to holders of the Certificates. Rather than
repurchase the Mortgage Loan as provided above, the Seller may remove such
Mortgage Loan (a "Deleted Mortgage Loan") from the Trust Fund and substitute in
its place another Mortgage Loan of like kind (a
S-19
<PAGE>
"Replacement Mortgage Loan"); however, such substitution is only permitted
within two years after the Closing Date, and may not be made unless an opinion
of counsel is provided to the effect that such substitution would not disqualify
either REMIC or result in a prohibited transaction tax under the Code. Any
Replacement Mortgage Loan generally will, on the date of substitution, among
other characteristics set forth in the Pooling and Servicing Agreement, (i) have
a Stated Principal Balance, after deduction of the principal portion of the
scheduled payment due in the month of substitution, not in excess of, and not
less than 90% of, the Stated Principal Balance of the Deleted Mortgage Loan (the
amount of any shortfall to be deposited by the Seller in the Certificate Account
not later than the succeeding Determination Date and held for distribution to
the holders of the Certificates on the related Distribution Date), (ii) have a
Maximum Mortgage Rate not more than 1% per annum higher or lower than the
Maximum Mortgage Rate of the Deleted Mortgage Loan, (iii) have a Minimum
Mortgage Rate not more than 1% per annum higher or lower than the Minimum
Mortgage Rate of the Deleted Mortgage Loan, (iv) have the same Mortgage Index
and Periodic Rate Cap as the Deleted Mortgage Loan and a Gross Margin not more
than 1% per annum higher or lower than that of the Deleted Mortgage Loan, (v)
have the same or higher credit quality characteristics than that of the Deleted
Mortgage Loan, (vi) be accruing interest at a rate not more than 1% per annum
higher or lower than that of the Deleted Mortgage Loan, (vii) have a Combined
Loan-to-Value Ratio or Loan-to-Value Ratio, as applicable, no higher than that
of the Deleted Mortgage Loan, (viii) have a remaining term to maturity not
greater than (and not more than one year less than) that of the Deleted Mortgage
Loan, (ix) not permit conversion of the Mortgage Rate from a fixed rate to a
variable rate or vice versa, (x) provide for a prepayment charge on terms
substantially similar to those of the prepayment charge, if any, of the Deleted
Mortgage Loan, (xi) constitute the same occupancy type as the Deleted Mortgage
Loan, and (xii) comply with all of the representations and warranties set forth
in the Pooling and Servicing Agreement as of the date of substitution. This
cure, repurchase or substitution obligation constitutes the sole remedy
available to the Certificateholders, the Trustee or the Depositor for omission
of, or a material defect in, a Mortgage Loan document.
Underwriting Standards
B&C Quality Mortgage Loans. The following is a description of the
underwriting procedures customarily employed by the Loan Seller with respect to
B&C quality mortgage loans. The Loan Seller produces its B&C quality mortgage
loans through its Consumer Markets, Full Spectrum Lending, Correspondent Lending
and Wholesale Lending Divisions. Prior to the funding of any B&C quality
mortgage loan, the Loan Seller underwrites the related mortgage loan in
accordance with the underwriting standards established by the Loan Seller. In
general, the mortgage loans are underwritten centrally by a specialized group of
underwriters who are familiar with the unique characteristics of B&C quality
mortgage loans. In general, the Loan Seller does not purchase any B&C quality
mortgage loan that it has not itself underwritten.
The Loan Seller's underwriting standards are primarily intended to
evaluate the value and adequacy of the mortgaged property as collateral for the
proposed mortgage loan but also take into consideration the borrower's credit
standing and repayment ability On a case by case basis, the Loan Seller may
determine that, based upon compensating factors, a prospective borrower not
strictly qualifying under the underwriting risk category guidelines described
below warrants an underwriting exception. Compensating factors may include low
loan-to-value ratio, low debt-to-income ratio, stable employment and time in the
same residence. It is expected that a significant number of the Mortgage Loans
underwritten in accordance with the Loan Seller's B&C quality mortgage loan
underwriting guidelines, will have been originated based on such underwriting
exceptions.
Each prospective borrower completes an application which includes
information with respect to the applicant's assets, liabilities, income, credit
history and employment history, as well as certain other personal information.
If the loan-to-value ratio is greater than 70%, the Loan Seller generally
verifies the source of funds for the down-payment; the Loan Seller does not
verify the source of such funds if the loan-to-value ratio is 70% or less. The
Loan Seller requires an independent credit bureau report on the credit history
of each applicant in order to evaluate the applicant's ability to repay. The
report typically contains information relating to such matters as credit history
with local and national merchants and lenders, installment debt payments and any
record of defaults, bankruptcy, repossession, suits or judgments.
After obtaining all applicable employment, credit and property
information, the Loan Seller uses a debt-to-income ratio to assist in
determining whether the prospective borrower has sufficient monthly income
available to support the payments of principal and interest on the mortgage loan
in addition to other monthly credit obligations.
S-20
<PAGE>
The "debt-to-income ratio" is the ratio of the borrower's total monthly credit
obligations to the borrower's gross monthly income. The maximum monthly
debt-to-income ratio varies depending upon a borrower's credit grade and
documentation level (as described below) but does not generally exceed 55%.
Variations in the monthly debt-to-income ratios limit are permitted based on
compensating factors.
The Loan Seller's underwriting standards are applied in accordance with
applicable federal and state laws and regulations and require an independent
appraisal of the mortgaged property which conforms to Federal Home Loan Mortgage
Corporation ("FHLMC") and Federal National Mortgage Corporation ("FNMA")
standards. Each appraisal includes a market data analysis based on recent sales
of comparable homes in the area and, where deemed appropriate, replacement cost
analysis based on the current cost of constructing a similar home and generally
is required to have been made not earlier than 180 days prior to the date of
origination of the mortgage loan. Every independent appraisal is reviewed by a
Loan Seller representative before the loan is funded, and an additional drive-by
appraisal is generally performed in connection with loan amounts over $350,000
with 80% or higher loan-to-value ratios. A drive-by appraisal is an exterior
examination of the premises by the appraiser to determine that the property is
in good condition. In most cases, properties that are not in good condition
(including properties requiring major deferred maintenance) are not acceptable
as collateral for a B&C loan. The maximum loan amount varies depending upon a
borrower's credit grade and documentation level but does not generally exceed
$500,000. Variations in maximum loan amount limits are permitted based on
compensating factors.
The Loan Seller's underwriting standards permit first mortgage loans
with loan-to-value ratios at origination of up to 90% and second mortgage loans
with combined loan-to-value ratios at origination of up to 85% depending on the
program, type and use of the property, documentation level, creditworthiness of
the borrower and debt to income ratio.
The Loan Seller requires title insurance on all B&C quality mortgage
loans. The Loan Seller also requires that fire and extended coverage casualty
insurance be maintained on the mortgaged property in an amount at least equal to
the principal balance or the replacement cost of the mortgaged property,
whichever is less.
The Loan Seller's B&C mortgage loan underwriting standards are less
stringent than the standards generally acceptable to FNMA and FHLMC with regard
to the borrower's credit standing and repayment ability because the standards
focus more on the value of the mortgaged property. Borrowers who qualify
generally have payment histories and debt-to-income ratios which would not
satisfy FNMA and FHLMC underwriting guidelines and may have a record of major
derogatory credit items such as outstanding judgments or prior bankruptcies. The
Loan Seller's B&C mortgage loan underwriting guidelines establish the maximum
permitted loan-to-value ratio for each loan type based upon these and other risk
factors with more risk factors resulting in lower loan-to-value ratios.
The Loan Seller underwrites or originates B&C quality mortgage loans
pursuant to alternative sets of underwriting criteria under its Full
Documentation Loan Program (the "Full Doc Program"), Simple Documentation Loan
Program (the "Simple Doc Program") and Stated Income Loan Program (the "Stated
Income Program"). Under each of the underwriting programs, The Loan Seller
verifies the loan applicant's sources of income (except under the Stated Income
Program), calculates the amount of income from all sources indicated on the loan
application, reviews the credit history of the applicant, calculates the
debt-to-income ratio to determine the applicant's ability to repay the loan, and
reviews the appraisal of the mortgaged property for compliance with The Loan
Seller's underwriting standards.
The Simple Doc Program is an alternative documentation program whereby
income is verified using methods other than those employed by FNMA and FHLMC.
Under the Simple Doc Program, acceptable documentation of income consists of six
months' bank statements. In the case of self-employed individuals, acceptable
alternative documentation consists of a profit and loss statement supported by a
record of bank statements. Maximum loan-to-value ratios and maximum loan amounts
are generally lower than those permitted under the Full Doc Program.
Under the Stated Income Program, the borrower's employment and income
sources must be stated on the borrower's application. The borrower's income as
stated must be reasonable for the related occupation and such determination as
to reasonableness is subject to the loan underwriter's discretion. However, the
borrower's income as stated on the application is not independently verified.
Maximum loan-to-value ratios are generally lower than those
S-21
<PAGE>
permitted under the Full Doc Program. Except as otherwise stated above, the same
mortgage credit, consumer credit and collateral related underwriting guidelines
apply.
Under the Full Doc, Simple Doc, and Stated Income Programs, various
risk categories are used to grade the likelihood that the mortgagor will satisfy
the repayment conditions of the mortgage loan. These risk categories establish
the maximum permitted loan-to-value ratio, debt-to-income ratio and loan amount,
given the borrower's credit history, the occupancy status of the mortgaged
property and the type of mortgaged property. In general, higher debt-to-income
ratios and more (or more recent) major derogatory credit items such as
outstanding judgments or prior bankruptcies result in a loan being graded in a
higher credit risk category.
SERVICING OF THE MORTGAGE LOANS
General
The Master Servicer will service the Mortgage Loans in accordance with
the terms set forth in the Pooling and Servicing Agreement. The Master Servicer
may perform any of its obligations under the Pooling and Servicing Agreement
through one or more subservicers. Notwithstanding any such subservicing
arrangement, the Master Servicer will remain liable for its servicing duties and
obligations under the Pooling and Servicing Agreement as if the Master Servicer
alone were servicing the Mortgage Loans. As of the Closing Date, the Master
Servicer will service the Mortgage Loans without subservicing arrangements.
The Master Servicer
I The Master Servicer, a New York corporation and a subsidiary of
Countrywide Credit Industries, Inc., will act as the master servicer of the
Mortgage Loans pursuant to the Pooling and Servicing Agreement. The Master
Servicer is engaged primarily in the mortgage banking business, and as such,
originates, purchases, sells and services mortgage loans. The Master Servicer
originates mortgage loans through a retail branch system and through mortgage
loan brokers and correspondents nationwide. The Master Servicer's mortgage loans
are principally first-lien, fixed or Mortgage Loans secured by single-family
residences.
As of December 31, 1997, the Master Servicer provided servicing for
approximately $1.37 billion in B&C quality mortgage loans. As of December 31,
1997, the Master Servicer also provided servicing for prime quality mortgage
loans with an aggregate principal balance of approximately $174.6 billion,
substantially all of which are being serviced for unaffiliated persons.
The principal executive offices of the Master Servicer are located at
4500 Park Granada, Calabasas, California 91302. Its telephone number is (818)
225-3300. The Master Servicer conducts operations from its headquarters in
Calabasas and from offices throughout the nation.
Loan Servicing
The Master Servicer services substantially all of the mortgage loans it
originates or acquires. The Master Servicer has established standard policies
for the servicing and collection of mortgage loans. Servicing includes, but is
not limited to, collecting, aggregating and remitting mortgage loan payments,
accounting for principal and interest, holding escrow (impound) funds for
payment of taxes and insurance, making inspections as required of the mortgaged
properties, preparation of tax related information in connection with the
mortgage loans, supervision of delinquent mortgage loans, loss mitigation
efforts, foreclosure proceedings and, if applicable, the disposition of
mortgaged properties, and generally administering the mortgage loans, for which
it receives servicing fees.
Billing statements with respect to mortgage loans are mailed monthly by
the Master Servicer. The statement details all debits and credits and specifies
the payment due. Notice of changes in the applicable loan rate are provided by
the Master Servicer to the mortgagor with such statements. All payments are due
by the first day of the month.
S-22
<PAGE>
Collection Procedures
B&C Quality Mortgage Loans. When a mortgagor fails to make a payment on
a B&C quality mortgage loan, the Master Servicer attempts to cause the
deficiency to be cured by corresponding with the mortgagor. In most cases,
deficiencies are cured promptly. Pursuant to the Master Servicer's B&C servicing
procedures, the Master Servicer generally mails to the mortgagor a notice of
intent to foreclose after the loan becomes 31 days past due (two payments due
but not received) and, within 30 days thereafter, if the loan remains
delinquent, institutes appropriate legal action to foreclose on the mortgaged
property. Foreclosure proceedings may be terminated if the delinquency is cured.
Mortgage loans to borrowers in bankruptcy proceedings may be restructured in
accordance with law and with a view to maximizing recovery of such loans,
including any deficiencies.
Once foreclosure is initiated by the Master Servicer, a foreclosure
tracking system is used to monitor the progress of the proceedings. The system
includes state specific parameters to monitor whether proceedings are
progressing within the time frame typical for the state in which the mortgaged
property is located. During the foreclosure proceeding, the Master Servicer
determines the amount of the foreclosure bid and whether to liquidate the
mortgage loan.
If foreclosed, the mortgaged property is sold at a public or private
sale and may be purchased by the Master Servicer. After foreclosure, the Master
Servicer may liquidate the mortgaged property and charge-off the loan balance
which was not recovered through liquidation proceeds.
Servicing and charge-off policies and collection practices with respect
to B&C quality mortgage loans may change over time in accordance with, among
other things, the Master Servicer's business judgment, changes in the servicing
portfolio and applicable laws and regulations.
Foreclosure and Delinquency Experience
B&C Quality Mortgage Loans. The following table summarizes the
delinquency experience of the Master Servicer's B&C quality mortgage loans as of
December 31, 1997. A B&C quality mortgage loan is characterized as delinquent if
the borrower has not paid the monthly payment due within one month of the Due
Date. Since the Master Servicer only began servicing B&C quality mortgage loans
in August 1995, the delinquency percentages may be affected by the size and
relative lack of seasoning of the servicing portfolio because many of such loans
were not outstanding long enough to give rise to some or all of the periods of
delinquency indicated in the chart below. Accordingly, the information should
not be considered as a basis for assessing the likelihood, amount, or severity
of delinquency or losses on the applicable Mortgage Loans, and no assurances can
be given that the delinquency experience presented in the table below or that
the foreclosure experience presented in the paragraph below the table will be
indicative of such experience on such Mortgage Loans. The sum of the columns
below may not equal the total indicated due to rounding.
Delinquency Status as of December 31 1997*
<TABLE>
<CAPTION>
Dollars Percent Units Percent
------- ------- ----- -------
<S> <C> <C> <C> <C>
Current................ $1,278,817,109.56 93.31% 13,821 92.94%
30-59 days ............ 48,214,087.76 3.52 577 3.88
60-89 days ............ 13,795,882.50 1.01 140 0.94
90+ days .............. 5,486,263.92 0.40 69 0.46
Foreclosures .......... 12,191,591.67 0.89 130 0.87
Delinquent Bankrupt.... 8,375,386.28 0.61 91 0.61
Current Bankruptcy..... 3,647,005.20 0.27 43 0.29
----------------- ------ ------ ------
Total............... $1,370,527,326.89 100.00% 14,871 100.00%
================= ====== ====== ======
</TABLE>
----------
* Delinquencies are reported on a contractual basis.
Historically, a variety of factors, including the appreciation of real
estate values, have limited the loss and delinquency experience on B&C quality
mortgage loans. There can be no assurance that factors beyond the Master
Servicer's control, such as national or local economic conditions or downturn in
the real estate markets of its lending areas, will not result in increased rates
of delinquencies and foreclosure losses in the future.
S-23
<PAGE>
Servicing Compensation and Payment of Expenses
The Master Servicer will be paid a monthly fee from interest collected
with respect to each Mortgage Loan (as well as from any liquidation proceeds
from a Liquidated Mortgage Loan that are applied to accrued and unpaid interest)
equal to one-twelfth of the Stated Principal Balance thereof multiplied by the
Servicing Fee Rate (such product, the "Servicing Fee"). The "Servicing Fee Rate"
for each Mortgage Loan will equal 0.50% per annum. The amount of the monthly
Servicing Fee is subject to adjustment with respect to prepaid Mortgage Loans,
as described herein under "--Adjustment to Servicing Fee in Connection with
Certain Prepaid Mortgage Loans." The Master Servicer is also entitled to
receive, as additional servicing compensation, amounts in respect of interest
paid on Principal Prepayments (as defined below) received from the 2nd day
through the 15th day of a month ("Prepayment Interest Excess"), all late payment
fees, assumption fees and other similar charges. The Master Servicer is
obligated to pay certain ongoing expenses associated with the Mortgage Loans in
connection with its responsibilities under the Pooling and Servicing Agreement.
In addition to the Servicing Fee, the Trustee will be paid a monthly
fee from interest collected with respect to each Mortgage Loan (as well as from
any liquidation proceeds from a Liquidated Mortgage Loan that are applied to
accrued and unpaid interest) equal to one-twelfth of the Stated Principal
Balance thereof multiplied by the Trustee Fee Rate (such product, the "Trustee
Fee"). The "Trustee Fee Rate" for each Mortgage Loan will equal 0.015% per
annum.
Adjustment to Servicing Fee in Connection with Certain Prepaid Mortgage Loans
When a borrower prepays all or a portion of a Mortgage Loan between
scheduled monthly payment dates ("Due Dates"), the borrower pays interest on the
amount prepaid only to the date of prepayment. Principal Prepayments received
from the 2nd day through the 15th day of a month are included in the related
distribution on the 25th day of the same month, and accordingly no shortfall in
interest otherwise distributable to holders of the Offered Certificates results.
Conversely, Principal Prepayments received from the 16th day of a month to the
first day of the following month are not distributed until the 25th day of such
following month, and accordingly an interest shortfall (a "Prepayment Interest
Shortfall") would result. The period from the 16th day of the month prior to a
Distribution Date (or, in the case of the first Distribution Date, from the
Cut-off Date) to and including the 15th day of the month in which such
Distribution Date occurs is herein referred to as the "Prepayment Period." In
order to mitigate the effect of any such shortfall in interest distributions to
holders of the Offered Certificates on any Distribution Date, one-half of the
amount of the Servicing Fee otherwise payable to the Master Servicer for such
month (the "Compensating Interest") shall, to the extent of such shortfall, be
deposited by the Master Servicer in the Certificate Account for distribution to
holders of the Offered Certificates entitled thereto on such Distribution Date.
However, any such reduction in the Servicing Fee will be made only to the extent
of one-half of the Servicing Fee otherwise payable to the Master Servicer with
respect to Scheduled Payments on Mortgage Loans having the Due Date to which
such Distribution Date relates. Any such deposit by the Master Servicer will be
reflected in the distributions to holders of the Offered Certificates entitled
thereto made on the Distribution Date on which the Principal Prepayment received
would be distributed.
Advances
Subject to the following limitations, on the Business Day prior to each
Distribution Date, the Master Servicer will be required to advance its own
funds, or funds in the Certificate Account that are not required to be
distributed on such Distribution Date, in an amount equal to the aggregate of
payments of principal and interest on the Mortgage Loans (adjusted to the
applicable Net Mortgage Rate) that were due on the related Due Date and
delinquent on the related Determination Date, together with an amount equivalent
to interest (adjusted to the applicable Net Mortgage Rate) deemed due on each
Mortgage Loan as to which the related Mortgaged Property has been acquired by
the Master Servicer through foreclosure or deed-in-lieu of foreclosure in
connection with a defaulted Mortgage Loan ("REO Property"), such latter amount
to be calculated after taking into account any rental income from such Mortgaged
Property (any such advance, an "Advance", and the date of any such Advance, as
described herein, a "Master Servicer Advance Date").
Advances are intended to maintain a regular flow of scheduled interest
and principal payments on the Offered Certificates rather than to guarantee or
insure against losses. The Master Servicer is obligated to make Advances with
respect to delinquent payments of principal of or interest on each Mortgage Loan
(with such
S-24
<PAGE>
payments of interest adjusted to the related Net Mortgage Rate) to the extent
that such Advances are, in its judgment, reasonably recoverable from future
payments and collections or insurance payments or proceeds of liquidation of the
related Mortgage Loan. If the Master Servicer determines on any Determination
Date to make an Advance, such Advance will be included with the distribution to
holders of the Offered Certificates on the related Distribution Date. Any
failure by the Master Servicer to make an Advance as required under the Pooling
and Servicing Agreement will constitute an event of default thereunder, in which
case the Trustee, as successor master servicer, or such other entity as may be
appointed as successor master servicer, will be obligated to make any such
Advance in accordance with the terms of the Pooling and Servicing Agreement.
DESCRIPTION OF THE CERTIFICATES
General
The Offered Certificates will be issued pursuant to a Pooling and
Servicing Agreement, dated as of June 1, 1998 (the "Pooling and Servicing
Agreement"), among the Depositor, the Master Servicer, the Seller and the
Trustee. Set forth below are summaries of the material terms and provisions
pursuant to which the Offered Certificates will be issued. The following
summaries are subject to, and are qualified in their entirety by reference to,
the provisions of the Pooling and Servicing Agreement. When particular
provisions or terms used in the Pooling and Servicing Agreement are referred to,
the actual provisions (including definitions of terms) are incorporated by
reference.
The Bear Stearns Asset Backed Securities, Inc., Asset-Backed
Certificates, Series 1998-1 (the "Certificates") will consist of the following
six Classes of Certificates: Class A Certificates, Class M-1 Certificates, Class
M-2 Certificates (together with the Class M-1 Certificates, the "Mezzanine
Certificates"), Class B Certificates (together with the Mezzanine Certificates,
the "Subordinate Certificates"), Class X Certificates, and Class R Certificates
(the "Residual Certificates"). The Class X Certificates are interest-only
Certificates issued with a notional principal balance as provided in the Pooling
and Servicing Agreement. Only the Class A and the Subordinate Certificates (the
"Offered Certificates") are offered hereby.
The Offered Certificates will be issued in book-entry form as described
below. The Offered Certificates will be issued in minimum dollar denominations
of $25,000 and integral multiples of $1,000 in excess thereof.
Book-Entry Certificates
The Offered Certificates will be book-entry Certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests in
the Offered Certificates ("Certificate Owners") may elect to hold their Offered
Certificates through the Depository Trust Company ("DTC") in the United States,
or CEDEL or Euroclear (in Europe) if they are participants of such systems, or
indirectly through organizations which are participants in such systems. The
Book-Entry Certificates will be issued in one or more certificates which equal
the aggregate principal balance of the Offered Certificates and will initially
be registered in the name of Cede & Co., the nominee of DTC. CEDEL and Euroclear
will hold omnibus positions on behalf of their participants through customers'
securities accounts in CEDEL's and Euroclear's names on the books of their
respective depositaries which in turn will hold such positions in customers'
securities accounts in the depositaries' names on the books of DTC. Citibank
will act as depositary for CEDEL and Chase will act as depositary for Euroclear
(in such capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries"). Investors may hold such beneficial interests in the
Book-Entry Certificates in minimum denominations representing Certificate
Principal Balances of $25,000 and integral multiples of $1,000 in excess
thereof. Except as described below, no person acquiring a Book-Entry Certificate
(each, a "beneficial owner") will be entitled to receive a physical certificate
representing such Offered Certificate (a "Definitive Certificate"). Unless and
until Definitive Certificates are issued, it is anticipated that the only
Certificateholder of the Offered Certificates will be Cede & Co., as nominee of
DTC. Certificate Owners will not be Certificateholders as that term is used in
the Pooling and Servicing Agreement. Certificate Owners are only permitted to
exercise their rights indirectly through the participating organizations that
utilize the services of DTC, including securities brokers and dealers, banks and
trust companies and clearing corporations and certain other organizations
("Participants") and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that
S-25
<PAGE>
maintains the beneficial owner's account for such purpose. In turn, the
Financial Intermediary's ownership of such Book-Entry Certificate will be
recorded on the records of DTC (or of a participating firm that acts as agent
for the Financial Intermediary, whose interest will in turn be recorded on the
records of DTC, if the beneficial owner's Financial Intermediary is not a DTC
participant and on the records of CEDEL or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of, and
interest on, the Offered Certificates from the Trustee through DTC and DTC
participants. While the Offered Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Offered Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Offered Certificates.
Participants and organizations which have indirect access to the DTC system,
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants"), with whom Certificate Owners have accounts
with respect to Offered Certificates are similarly required to make book-entry
transfers and receive and transmit such distributions on behalf of their
respective Certificate Owners. Accordingly, although Certificate Owners will not
possess certificates, the Rules provide a mechanism by which Certificate Owners
will receive distributions and will be able to transfer their interest.
Certificate Owners will not receive or be entitled to receive
certificates representing their respective interests in the Offered
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Certificate Owners who are not
Participants may transfer ownership of Offered Certificates only through
Participants and Indirect Participants by instructing such Participants and
Indirect Participants to transfer Offered Certificates, by book-entry transfer,
through DTC for the account of the purchasers of such Offered Certificates,
which account is maintained with their respective Participants. Under the Rules
and in accordance with DTC's normal procedures, transfers of ownership of
Offered Certificates will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
Participants and Indirect Participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing Certificate
Owners.
Because of time zone differences, credits of securities received in
CEDEL, or Euroclear as a result of a transaction with a Participant will be made
during, subsequent securities settlement processing and dated the business day
following, the DTC settlement date. Such credits or any transactions in such
securities, settled during such processing will be reported to the relevant
Euroclear or CEDEL Participants on such business day. Cash received in CEDEL or
Euroclear, as a result of sales of securities by or through a CEDEL Participant
(as defined below) or Euroclear Participant (as defined below) to a DTC
Participant, will be received with value on the DTC settlement date but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlement in DTC. For information with respect to tax
documentation procedures, relating to the Offered Certificates, see "Federal
Income Tax Consequences--Tax Treatment of Foreign Investors" in the Prospectus
and "Global, Clearance, Settlement and Tax Documentation Procedures--Certain
U.S. Federal Income Tax Documentation Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterpart in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
S-26
<PAGE>
DTC, which is a New York-chartered limited purpose trust company,
performs services for its participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC participant in the Book-Entry
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Certificates will be
subject to the rules, regulations and procedures governing DTC and DTC
participants as in effect from time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, beneficial owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with respect
S-27
<PAGE>
to Offered Certificates held through CEDEL or Euroclear will be credited to the
cash accounts of CEDEL Participants or Euroclear Participants in accordance with
the relevant system's rules and procedures, to the extent received by the
Relevant Depositary. Such distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. See "Federal
Income Tax Consequences--Tax Treatment of Foreign Investors" and "Miscellaneous
Tax Aspects--Backup Withholding" in the Prospectus. Because DTC can only act on
behalf of Financial Intermediaries, the ability of a beneficial owner to pledge
Book-Entry Certificates to persons or entities that do not participate in the
depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such Offered Certificates in the
secondary market since certain potential investors may be unwilling to purchase
Offered Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust Fund provided by the Master
Servicer or the Trustee to Cede, as nominee of DTC, may be made available to
beneficial owners upon request, in accordance with the rules, regulations and
procedures creating and affecting DTC or the Relevant Depositary, and to the
Financial Intermediaries to whose DTC accounts the Book-Entry Certificates of
such beneficial owners are credited.
DTC has advised the Depositor and the Trustee that, unless and until
Definitive Certificates are issued, DTC will take any action permitted to be
taken by the holders of the Book-Entry Certificates under the Pooling and
Servicing Agreement only at the direction of one or more Financial
Intermediaries to whose DTC accounts the Book-Entry Certificates are credited,
to the extent that such actions are taken on behalf of Financial Intermediaries
whose holdings include such Book-Entry Certificates. CEDEL or the Euroclear
Operator, as the case may be, will take any other action permitted to be taken
by a holder of an Offered Certificate under the Pooling and Servicing Agreement
on behalf of a CEDEL Participant or Euroclear Participant only in accordance
with its relevant rules and procedures and subject to the ability of the
Relevant Depositary to effect such actions on its behalf through DTC. DTC may
take actions, at the direction of the related Participants, with respect to some
Offered Certificates which conflict with actions taken with respect to other
Offered Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depositary with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor at its sole
option, elects to terminate a book-entry system through DTC or (c) after the
occurrence of an Event of Default (as defined herein), beneficial owners having
not less than 51% of the Voting Rights (as defined herein) evidenced by the
Offered Certificates advise the Trustee and DTC through the Financial
Intermediaries and the DTC participants in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interests of beneficial owners of such Class.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
holders of the Offered Certificates under the Pooling and Servicing Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Certificates among participants
of DTC, CEDEL and Euroclear, they are under no obligation to perform or continue
to perform such procedures and such procedures may be discontinued at any time.
Deposits to the Certificate Account
The Trustee shall establish and initially maintain an account (the
"Certificate Account") on behalf of the Certificateholders. Within two Business
Days after receipt, the Master Servicer shall remit to the Trustee (or, in the
event the Certificate Account is maintained with another institution pursuant to
the Pooling and Servicing Agreement, to such institution) for deposit into the
Certificate Account the following payments and collections
S-29
<PAGE>
received or made or to be applied by it on or subsequent to the Cut-off Date (to
the extent not applied in computing the Cut-off Date Pool Principal Balance):
(i) all payments on account of principal, including Principal
Prepayments, on the Mortgage Loans;
(ii) all payments on account of interest (other than interest
accruing on the Mortgage Loans prior to June 1, 1998) on the Mortgage
Loans, net of the related Servicing Fee and the Trustee Fee;
(iii) all proceeds of any insurance policies (to the extent
such proceeds are not applied to the restoration of the property or
released to the mortgagor in accordance with the Master Servicer's
normal servicing procedures), other than proceeds that represent
reimbursement of the Master Servicer's costs and expenses incurred in
connection with presenting claims under the related insurance policies
("Insurance Proceeds"), all other net proceeds received in connection
with the partial or complete liquidation of Mortgage Loans (whether
through trustee's sale, foreclosure sale or otherwise) or in connection
with any condemnation or partial release of a Mortgaged Property,
together with the net proceeds received with respect to any Mortgaged
Properties acquired by the Master Servicer by foreclosure or deed in
lieu of foreclosure in connection with defaulted Mortgage Loans (other
than the amount of such net proceeds representing any profit realized
by the Master Servicer in connection with the disposition of any such
properties) (together with Insurance Proceeds, "Liquidation Proceeds");
(iv) all payments made by the Master Servicer in respect of
Prepayment Interest Shortfalls;
(v) any amount required to be deposited by the Seller in
connection with any losses on investment of funds in the Certificate
Account;
(vi) any amounts required to be deposited by the Master
Servicer with respect to any deductible clause in any blanket hazard
insurance policy maintained by the Master Servicer in lieu of requiring
each mortgagor to maintain a primary hazard insurance policy;
(vii) all amounts required to be deposited by the Seller in
connection with shortfalls in the principal amount of Replacement
Mortgage Loans; and
(viii) all Advances.
Withdrawals from the Certificate Account
The Master Servicer (or the Depositor or the Seller, as applicable) may
from time to time direct the Trustee to withdraw funds from the Certificate
Account prior to the close of business on the related Determination Date for the
following purposes:
(i) to pay to the Master Servicer the Servicing Fee to the
extent not previously paid to or withheld by the Master Servicer
(subject to reduction as described above under "Servicing of the
Mortgage Loans Adjustment to Servicing Fee in Connection with Prepaid
Mortgage Loans") and, as additional servicing compensation, assumption
fees, late payment charges and the amount of Prepayment Interest Excess
for the related Prepayment Period;
(ii) to pay to the Trustee the Trustee Fee to the extent not
previously paid to the Trustee;
(iii) to pay to the Seller the net earnings on or investment
income with respect to funds in or credited to the Certificate Account
and any prepayment penalties collected on the Mortgage Loans;
(iv) to reimburse the Master Servicer for Advances, such right
of reimbursement with respect to any Mortgage Loan pursuant to this
clause (iv) being limited to amounts received that represent late
recoveries of payments of principal and/or interest on the related
Mortgage Loan (or Insurance Proceeds or Liquidation Proceeds with
respect thereto) with respect to which such Advance was made;
S-29
<PAGE>
(v) to reimburse the Master Servicer for any Advances
previously made that the Master Servicer has determined to be
nonrecoverable;
(vi) to reimburse the Master Servicer from Insurance Proceeds
for expenses incurred by the Master Servicer and covered by the related
insurance policies;
(vii) to pay the Master Servicer any unpaid Servicing Fees and
to reimburse it for any unreimbursed ordinary and necessary
out-of-pocket costs and expenses incurred by the Master Servicer in the
performance of its master servicing obligations, such right of
reimbursement pursuant to this clause (vii) being limited to amounts
received representing late recoveries of the payments of such costs and
expenses (or Liquidation Proceeds, purchase proceeds or repurchase
proceeds with respect thereto);
(viii) to pay to the Seller, with respect to each Mortgage
Loan or Mortgaged Property acquired in respect thereof that has been
purchased by the Seller from the Trust Fund pursuant to the Pooling and
Servicing Agreement, all amounts received thereon and not taken into
account in determining the related Stated Principal Balance of such
repurchased Mortgage Loan;
(ix) to reimburse the Seller, the Master Servicer or the
Depositor for fees and expenses incurred and reimbursable pursuant to
the Pooling and Servicing Agreement (including in the case of the
Master Servicer, the Extra Master Servicing Fee);
(x) to withdraw any amount deposited in the Certificate
Account and not required to be deposited therein; and
(xi) to clear and terminate the Certificate Account upon
termination of the Pooling and Servicing Agreement.
In addition, not later than 1:00 p.m. Pacific Time on each Master
Servicer Advance Date, the Trustee shall withdraw from the Certificate Account
the amount of Interest Funds and Principal Funds , to the extent on deposit, and
the Trustee shall deposit such amount in the Distribution Account, as described
below.
"Interest Funds" are the sum, without duplication, of (i) all
scheduled interest collected during the related Due Period less the related
Servicing Fee and Trustee Fee, (ii) all Advances relating to interest, (iii) all
Compensating Interest and (iv) Liquidation Proceeds (to the extent such
Liquidation Proceeds relate to interest) less all non-recoverable Advances
relating to interest and certain expenses reimbursed during the related Due
Period.
"Principal Funds" are the sum, without duplication, of (i) the
scheduled principal collected during the related Due Period or advanced on or
before the related Master Servicer Advance Date, (ii) prepayments collected in
the related Prepayment Period, (iii) the Stated Principal Balance of each
Mortgage Loan that was repurchased by the Seller, (iv) the amount, if any, by
which the aggregate unpaid principal balance of any Replacement Mortgage Loans
is less than the aggregate unpaid principal balance of any Deleted Mortgage
Loans delivered by the Seller in connection with a substitution of a Mortgage
Loan and (v) all Liquidation Proceeds collected during the related Due Period
(to the extent such Liquidation Proceeds related to principal) less all
non-recoverable Advances relating to principal reimbursed during the related Due
Period.
A "Due Period" with respect to any Distribution Date is the period
beginning on the second day of the calendar month preceding the calendar month
in which such Distribution Date occurs (or, in the case of the first
Distribution Date, on the Cut-off Date) and ending on the Due Date in the month
in which such Distribution Date occurs.
Deposits to the Distribution Account
The Trustee shall establish and maintain a distribution account (the
"Distribution Account") on behalf of the Certificateholders. The Trustee shall,
promptly upon receipt, deposit in the Distribution Account and retain therein
(i) the aggregate amount withdrawn by it from the Certificate Account; and (ii)
any amount required to be deposited by the Seller in connection with any losses
on investment of funds in the Distribution Account.
S-30
<PAGE>
Withdrawals from the Distribution Account
The Trustee will withdraw funds from the Distribution Account for
distribution to the Certificateholders as described below under
"--Distributions" and may from time to time make withdrawals from the
Distribution Account (i) to pay to the Seller earnings on or investment income
with respect to funds in or credited to the Distribution Account; (ii) to pay to
itself the Trustee Fee to the extent not previously paid to or withheld by the
Trustee; (iii) to withdraw any amount deposited in the Distribution Account and
not required to be deposited therein; and (iv) to clear and terminate the
Distribution Account upon the termination of the Pooling and Servicing
Agreement.
Distributions
General. Distributions on the Certificates will be made by the Trustee
on the 25th day of each month, or if such day is not a Business Day, on the
first Business Day thereafter, commencing in July 1998 (each, a "Distribution
Date"), to the persons in whose names such Certificates are registered at the
close of business on the Business Day immediately preceding the applicable
Distribution Date (the "Record Date").
Distributions on each Distribution Date will be made by check mailed to
the address of the person entitled thereto as it appears on the Certificate
Register or, in the case of any Certificateholder that holds 100% of a Class of
Certificates or who holds a Class of Certificates with an aggregate initial
Certificate Principal Balance of $1,000,000 or more and that has so notified the
Trustee in writing in accordance with the Pooling and Servicing Agreement, by
wire transfer in immediately available funds to the account of such
Certificateholder at a bank or other depository institution having appropriate
wire transfer facilities; provided, however, that the final distribution in
retirement of the Certificates will be made only upon presentation and surrender
of such Certificates at the Corporate Trust Office of the Trustee. On each
Distribution Date, a holder of a Certificate will receive such holder's
Percentage Interest of the amounts required to be distributed with respect to
the applicable Class of Certificates. The "Percentage Interest" evidenced by a
Certificate will equal the percentage derived by dividing the denomination of
such Certificate by the aggregate denominations of all Certificates of the
applicable Class.
Distributions of Interest. On each Distribution Date, the interest
distributable on the Offered Certificates is the interest which has accrued
thereon at the then applicable related Pass-Through Rate from and including the
preceding Distribution Date (or from the Closing Date in the case of the first
Distribution Date) to and including the day prior to the current Distribution
Date. Each period referred to in the preceding sentence relating to the accrual
of interest is the "Accrual Period" for the related Class of Offered
Certificates.
All calculations of interest on the Offered Certificates will be made
on the basis of a 360-day year and the actual number of days elapsed in the
applicable Accrual Period.
On each Distribution Date, the Interest Funds for such Distribution
Date are required to be distributed in the following order of priority, until
such Interest Funds have been fully distributed:
(i) to the Class A Certificates, the Current Interest and any
Interest Shortfall Amount;
(ii) to the Class M-1 Certificates, the Current Interest for
such Class;
(iii) to the Class M-2 Certificates, the Current Interest
for such Class;
(iv) to the Class B Certificates, the Current Interest for
such Class; and
(v) any remainder to be distributed as described below under
"-Overcollateralization Provisions".
"Current Interest", with respect to each Class of the Offered
Certificates and each Distribution Date, is the interest accrued at the
applicable Pass-Through Rate for the applicable Accrual Period on the
Certificate Principal Balance of such Class plus any amount previously
distributed with respect to interest for such Class that is recovered as a
voidable preference by a trustee in bankruptcy.
S-31
<PAGE>
"Interest Shortfall Amount", with respect to each Class of the Offered
Certificates and each Distribution Date, is the sum of (i) the excess of (A)
Current Interest for such Class with respect to prior Distribution Dates
(excluding any Certificate Interest Carryover Amount) over (B) the amount
actually distributed to such Class with respect to interest on such prior
Distribution Dates and (ii) interest on such excess (to the extent permitted by
applicable law) at the applicable Pass-Through Rate.
Distributions of Principal. On each Distribution Date, the Principal
Distribution Amount for such Distribution Date is required to be distributed as
follows until the Principal Distribution Amount has been fully distributed:
(i) to the Residual Certificates, the Certificate Principal
Balance thereof (an amount not in excess of $1,001);
(ii) to the Class A Certificates, the Class A Principal
Distribution Amount;
(iii) to the Class M-1 Certificates, the Class M-1 Principal
Distribution Amount;
(iv) to the Class M-2 Certificates, the Class M-2 Principal
Distribution Amount;
(v) to the Class B Certificates, the Class B Principal
Distribution Amount; and
(vi) any remainder to be distributed as described under
"-Overcollateralization Provisions" below.
"Principal Distribution Amount", with respect to each Distribution
Date, is the sum of (i) the Principal Funds for such Distribution Date and (ii)
any Extra Principal Distribution Amount for such Distribution Date.
"Class A Principal Distribution Amount" is (i) with respect to any
Distribution Date prior to the Stepdown Date or as to which a Trigger Event
exists, 100% of the Principal Distribution Amount for such Distribution Date and
(ii) with respect to any Distribution Date on or after the Stepdown Date and as
to which a Trigger Event does not exist, the excess of (A) the Certificate
Principal Balance of the Class A Certificates immediately prior to such
Distribution Date over (B) the lesser of (I) 66.41% of the Stated Principal
Balances of the Mortgage Loans on the preceding Due Date and (II) the Stated
Principal Balances of the Mortgage Loans on the preceding Due Date less an
amount equal to 0.50% of the Cut-off Date Pool Principal Balance.
"Class M-1 Principal Distribution Amount", with respect to any
Distribution Date on or after the Stepdown Date, is 100% of the Principal
Distribution Amount if the Certificate Principal Balance of the Class A
Certificates has been reduced to zero and a Trigger Event exists, or, if the
Class A Certificates are still outstanding, and as long as a Trigger Event is
not in effect, is the excess of (i) the sum of (A) the Certificate Principal
Balance of the Class A Certificates (after taking into account distributions of
the Class A Principal Distribution Amount for such Distribution Date) and (B)
the Certificate Principal Balance of the Class M-1 Certificates immediately
prior to such Distribution Date over (ii) the lesser of (A) 80.09% of the Stated
Principal Balances of the Mortgage Loans on the preceding Due Date and (B) the
Stated Principal Balances of the Mortgage Loans on the preceding Due Date less
an amount equal to 0.50% of the Cut-off Date Pool Principal Balance.
"Class M-2 Principal Distribution Amount", with respect to any
Distribution Date on or after the Stepdown Date, is 100% of the Principal
Distribution Amount if the Certificate Principal Balance of the Class A and
Class M-1 Certificates has been reduced to zero and a Trigger Event exists, or,
if the Class A and Class M-1 Certificates are still outstanding and as long as a
Trigger Event is not in effect, is the excess of (i) of the sum of (A) the
Certificate Principal Balance of the Class A Certificates (after taking into
account distributions of the Class A Principal Distribution Amount for such
Distribution Date), (B) the Certificate Principal Balance of the Class M-1
Certificates (after taking into account distributions of the Class M-1 Principal
Distribution Amount for such Distribution Date) and (C) the Certificate
Principal Balance of the Class M-2 Certificates immediately prior to such
Distribution Date over (ii) the lesser of (A) 88.71% of the Stated Principal
Balances of the Mortgage Loans on the preceding Due Date and (B) the Stated
Principal Balances of the Mortgage Loans on the preceding Due Date less an
amount equal to 0.50% of the Cut-off Date Pool Principal Balance.
S-32
<PAGE>
"Class B Principal Distribution Amount", with respect to any
Distribution Date on or after the related Stepdown Date and as long as a Trigger
Event is not in effect, is the excess of (i) the sum of (A) the Certificate
Principal Balance of the Class A Certificates (after taking into account
distributions of the Class A Principal Distribution Amount for such Distribution
Date), (B) the Certificate Principal Balance of the Class M-1 Certificates
(after taking into account distributions of the Class M-1 Principal Distribution
Amount for such Distribution Date), (C) the Certificate Principal Balance of the
Class M-2 Certificates (after taking into account distributions of the Class M-2
Principal Distribution Amount for such Distribution Date) and (D) the
Certificate Principal Balance of the Class B Certificates immediately prior to
such Distribution Date over (ii) the lesser of (A) 95.60% of the Stated
Principal Balances of the Mortgage Loans on the preceding Due Date and (B) the
Stated Principal Balances of the Mortgage Loans on the preceding Due Date less
an amount equal to 0.50% of the Cut-off Date Pool Principal Balance; provided,
however, that after the Certificate Principal Balances of the Class A, Class M-1
and Class M-2 Certificates are reduced to zero, the Class B Principal
Distribution Amount for such Distribution Date will equal 100% of the Principal
Distribution Amount.
"Extra Principal Distribution Amount", with respect to any Distribution
Date, is the lesser of (i) the excess, if any, of the Specified
Overcollateralization Amount for such Distribution Date over the
Overcollateralization Amount for such Distribution Date (after giving effect to
distributions of principal other than any Extra Principal Distribution Amount)
and (ii) the Excess Cashflow for such Distribution Date.
"Excess Cashflow" with respect to any Distribution Date, is the excess,
if any, of the Interest Funds and Principal Funds for such Distribution Date
over the required distributions of interest and principal (excluding any Extra
Principal Distribution Amount) on the Offered Certificates on such Distribution'
Date.
"Specified Overcollateralization Amount" means, prior to the Stepdown
Date, an amount equal to 2.20% of the Cut-off Date Principal Balance of the
Mortgage Loans, and on and after the Stepdown Date, an amount equal to 4.40% of
the Stated Principal Balance of the Mortgage Loans as of the preceding Due Date,
subject to a minimum amount equal to 0.50% of the Cut-off Date Principal Balance
of the Mortgage Loans; provided, however, that, if on any Distribution Date, a
Trigger Event has occurred, the Specified Overcollateralization Amount will not
be reduced to the applicable percentage of the then current Stated Principal
Balance of the Mortgage Loans until the Distribution Date on which a Trigger
Event no longer exists.
"Overcollateralization Amount" with respect to any Distribution Date,
is the excess, if any, of (a) the aggregate Stated Principal Balance of the
Mortgage Loans immediately following such Distribution Date, over (b) the
aggregate Certificate Principal Balance of all Offered Certificates as of such
date (after taking into account the payment of principal on such Certificates on
such Distribution Date other than any Extra Principal Distribution Amount).
"Stepdown Date", is the later to occur of (i) the Distribution Date in
July, 2001 or (ii) the first Distribution Date on which (A) the Certificate
Principal Balance of the Class A Certificates is less than or equal to (B)
66.41% of the aggregate Stated Principal Balance of the Mortgage Loans as of the
preceding Due Date.
A "Trigger Event", with respect to any Distribution Date after the
Stepdown Date, exists if the product of (i) 2 times and (ii) the quotient of (A)
the aggregate Stated Principal Balance of all Mortgage Loans 60 or more days
delinquent (including Mortgage Loans in foreclosure and REO Properties) and (B)
the aggregate Stated Principal Balance of the Mortgage Loans as of the preceding
Master Servicer Advance Date equals or exceeds the Required Percentage.
A "Required Percentage", with respect to any Distribution Date after
the Stepdown Date, is equal to the quotient of (x) the excess (I) the aggregate
Stated Principal Balance of the Mortgage Loans as of the preceding Due Date over
(II) the Certificate Principal Balance of the most senior Class of Certificates
outstanding as of the preceding Master Servicer Advance Date and (y) the
aggregate Stated Principal Balance of the Mortgage Loans as of the preceding Due
Date.
S-33
<PAGE>
Overcollateralization Provisions
As set forth below, the Excess Cashflow will be required to be applied
as an Extra Principal Distribution Amount whenever the Overcollateralization
Amount is less than the Specified Overcollateralization Amount. If on any
Distribution Date, after giving effect to any Extra Principal Distribution
Amount, the aggregate Certificate Principal Balances of the Offered Certificates
exceed the Stated Principal Balances of the Mortgage Loans, the Certificate
Principal Balances of the Subordinate Certificates (but not the Class A
Certificates) will be reduced, in inverse order of seniority (i.e., beginning
with the Class B Certificates) by an amount equal to such excess. Any such
reduction is an "Applied Realized Loss Amount".
If the Certificate Principal Balance of a Class of Subordinate
Certificates is reduced, that Class thereafter will be entitled to distributions
of interest and principal only with respect to the Certificate Principal Balance
as so reduced. On subsequent Distribution Dates, however, as described below,
Excess Cashflow will be applied to reduce Unpaid Realized Loss Amounts
previously allocated to such Certificates in order of seniority.
On each Distribution Date, the Excess Cashflow will be required to be
distributed as follows:
(i) as part of the Extra Principal Distribution Amount;
(ii) to the Class M-1 Certificates, any Interest Shortfall
Amount for such Class;
(iii) to the Class M-1 Certificates, any Unpaid Realized Loss
Amount for such Class;
(iv) to the Class M-2 Certificates, any Interest Shortfall
Amount for such Class;
(v) to the Class M-2 Certificates, any Unpaid Realized Loss
Amount for such Class;
(vi) to the Class B Certificates, any Interest Shortfall
Amount for such Class;
(vii) to the Class B Certificates, any Unpaid Realized Loss
Amount for such Class;
(viii) to the Offered Certificates, on a pro rata basis, any
Certificate Interest Carryover Amount (to be treated as paid from and
to the extent of funds on deposit in the Carryover Reserve Fund, after
giving effect to distributions pursuant to clause (ix) below);
(ix) to the Class X Certificates, first, for deposit in the
Carryover Reserve Fund (for distribution (if any) pursuant to clause
(viii) above) in an amount equal to the Carryover Reserve Fund Deposit,
and then for distribution on the Class X Certificates, in each case as
provided in the Pooling and Servicing Agreement;
(x) to pay the Master Servicer an extra master servicing fee
as provided in the Pooling and Servicing Agreement (the "Extra Master
Servicing Fee"); and
(xi) to the Residual Certificates, any remaining amount.
"Applied Realized Loss Amount", with respect to any Class of
Subordinate Certificates and as to any Distribution Date, means the sum of the
Realized Losses with respect to Mortgage Loans which have been applied in
reduction of the Certificate Principal Balance of such Class.
"Realized Loss" is the excess of the Stated Principal Balance of a
defaulted Mortgage Loan over the net liquidation proceeds with respect thereto
that are allocated to principal.
"Unpaid Realized Loss Amount", with respect to any Class of the
Subordinate Certificates and as to any Distribution Date, is the excess of (i)
Applied Realized Loss Amounts with respect to such Class over (ii) the sum of
all distributions in reduction of the Applied Realized Loss Amounts on all
previous Distribution Dates. Any amounts
S-34
<PAGE>
distributed to a Class of Subordinate Certificates in respect of any Unpaid
Realized Loss Amount will not be applied to reduce the Certificate Principal
Balance of such Class.
In the event that the Specified Overcollateralization Amount is
permitted to decrease or "step down" on a Distribution Date in the future, or in
the event that the Excess Overcollateralization Amount (as defined below) is, or
would be, greater than zero on a Distribution Date in the future, the Excess
Cash Flow (after giving effect to distributions pursuant to clauses (i) through
(viii) above) will be distributed to the holders of the Class X Certificates, to
the Master Servicer as an Extra Master Servicing Fee and to the holders of the
Residual Certificates (in each case as provided in the Pooling and Servicing
Agreement) on such Distribution Date until the Excess Overcollateralization
Amount is reduced to zero. This will have the effect of decelerating the
amortization of the Certificates relative to the amortization of the Mortgage
Loans, and of reducing the Overcollateralization Amount to the Specified
Overcollateralization Amount. The "Excess Overcollateralization Amount" with
respect to any Distribution Date is the excess, if any, of (a) the
Overcollateralization Amount for such Distribution Date over (b) the Specified
Overcollateralization Amount on such Distribution Date.
Calculation of One-Month LIBOR
On the second LIBOR Business Day (as defined below) preceding the
commencement of each Accrual Period for the Offered Certificates (each such
date, an "Interest Determination Date"), the Trustee will determine the London
interbank offered rate for one-month United States dollar deposits ("One-Month
LIBOR") for such Accrual Period on the basis of such rate as it appears on
Telerate Screen Page 3750, as of 11:00 a.m. (London time) on such Interest
Determination Date. If such rate does not appear on such page (or such other
page as may replace that page on that service, or if such service is no longer
offered, such other service for displaying LIBOR or comparable rates as may be
reasonably selected by the Trustee after consultation with the Seller),
One-Month LIBOR for the applicable Accrual Period will be the Reference Bank
Rate as defined herein. If no such quotations can be obtained and no Reference
Bank Rate is available, One-Month LIBOR will be the One-Month LIBOR applicable
to the preceding Accrual Period. The "Reference Bank Rate" with respect to any
Accrual Period, means the arithmetic mean (rounded upwards, if necessary, to the
nearest whole multiple of 0.03125%) of the offered rates for United States
dollar deposits for one month that are quoted by the Reference Banks as of 11:00
a.m., New York City time, on the related Interest Determination Date to prime
banks in the London interbank market for a period of one month in amounts
approximately equal to the aggregate Certificate Principal Balance of all
Offered Certificates for such Accrual Period, 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 (rounded upwards, if necessary,
to the nearest whole multiple of 0.03125%) of the rates quoted by one or more
major banks in New York City, selected by the Trustee after consultation with
the Seller, as of 11:00 a.m., New York City time, on such date for loans in U.S.
dollars to leading European banks for a period of one month in amounts
approximately equal to the Certificate Principal Balance of all Offered
Certificates for such Accrual Period. As used in this section, "LIBOR Business
Day" means a day on which banks are open for dealing in foreign currency and
exchange in London and New York City; and "Reference Banks", means leading banks
selected by the Trustee and engaged in transactions in Eurodollar deposits in
the international Eurocurrency market (i) with an established place of business
in London, (ii) which have been designated as such by the Trustee and (iii)
which are not controlling, controlled by, or under common control with, the
Depositor, the Seller or the Master Servicer.
The establishment of One-Month LIBOR on each Interest Determination
Date by the Trustee and the Trustee's calculation of the rate of interest
applicable to the Offered Certificates for the related Accrual Period will (in
the absence of manifest error) be final and binding.
Carryover Reserve Fund
The Pooling and Servicing Agreement contains an interest rate cap
agreement (the "Interest Rate Cap Agreement") which establishes an account (the
"Carryover Reserve Fund"), which is held in trust by the Trustee on behalf of
the Offered Certificateholders. The Carryover Reserve Fund will not be an asset
of any REMIC. Holders of the Offered Certificates will be entitled to receive
payments from the Carryover Reserve Fund pursuant to the Interest Rate Cap
Agreement in an amount equal to any Certificate Interest Carryover Amount for
such Certificates as described herein under "--Overcollateralization
Provisions". The amount required to be deposited in the Carryover Reserve Fund
on any Distribution Date (the "Carryover Reserve Fund Deposit") will equal any
S-35
<PAGE>
Certificate Interest Carryover Amount for such Distribution Date, or, if no
Certificate Interest Carryover Amount is payable on such Distribution Date, an
amount such that when added to other amounts already on deposit in the Carryover
Reserve Fund, the aggregate amount on deposit therein is equal to $5,000. Any
investment earnings on amounts on deposit in the Carryover Reserve Fund will be
paid to (and for the benefit of) the holders of the Class X Certificates and
will not be available to pay any Certificate Interest Carryover Amount.
Reports to Certificateholders
On each Distribution Date, the Trustee will forward to each
Certificateholder, the Master Servicer, the Rating Agencies, the Seller and the
Depositor a statement generally setting forth, among other information:
(i) the amount of the related distribution to holders of the
Offered Certificates allocable to principal, separately identifying (A)
the aggregate amount of any Principal Prepayments included therein, (B)
the aggregate of all scheduled payments of principal included therein
and (C) the Extra Principal Distribution Amount;
(ii) the amount of such distribution to holders of the Offered
Certificates allocable to interest;
(iii) the Interest Shortfall Amount;
(iv) the Certificate Principal Balance of the Offered
Certificates after giving effect to the distribution of principal on
such Distribution Date;
(v) the Pool Stated Principal Balance for the following
Distribution Date;
(vi) the amount of the Servicing Fee paid to or retained by
the Master Servicer for the related Due Period;
(vii) the Pass-Through Rate for each Class of Offered
Certificates for such Distribution Date;
(viii) the amount of Advances included in the distribution on
such Distribution Date;
(ix) the number and aggregate principal amounts of Mortgage
Loans (A) delinquent (exclusive of Mortgage Loans in foreclosure) (1)
30 days, (2) 31 to 60 days, (3) 61 to 90 days and (4) 91 or more days,
and (B) in foreclosure and delinquent (1) 30 days, (2) 31 to 60 days,
(3) 61 to 90 days and (4) 91 or more days, in each case as of the close
of business on the last day of the calendar month preceding such
Distribution Date;
(x) with respect to any Mortgage Loan that became an REO
Property during the preceding calendar month, the loan number and
Stated Principal Balance of such Mortgage Loan as of the close of
business on the Determination Date preceding such Distribution Date and
the date of acquisition thereof;
(xi) whether a Trigger Event exists;
(xii) the total number and principal balance of any REO
Properties as of the close of business on the Determination Date
preceding such Distribution Date; and
(xiii) any Certificate Interest Carryover Amount paid and all
remaining Certificate Interest Carryover Amount remaining on each Class
of the Offered Certificate on such Distribution Date.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will prepare and deliver to each Certificateholder of
record during the previous calendar year a statement containing information
necessary to enable Certificateholders to prepare their tax returns. Such
statements will not have been examined and reported upon by an independent
public accountant.
S-36
<PAGE>
Amendment
The Pooling and Servicing Agreement may be amended by the Depositor,
the Master Servicer, the Seller and the Trustee, without the consent of
Certificateholders, for any of the purposes to cure any ambiguity, to correct or
supplement any provisions therein, or to make such other provisions with respect
to matters or questions arising under the Pooling and Servicing Agreement as
shall not be inconsistent with any other provisions therein. In addition, the
Pooling and Servicing Agreement may be amended by the Depositor, the Master
Servicer, the Seller and the Trustee and the holders of Certificates evidencing
51% or more of the Voting Rights of each Class of Certificates affected thereby
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the Pooling and Servicing Agreement or of
modifying in any manner the rights of the Certificateholders; provided, however,
that no such amendment may (i) reduce in any manner the amount of, or delay the
timing of, payments required to be distributed on any Certificate without the
consent of the holder of such Certificate; (ii) adversely affect in any material
respect the interests of the holders of any Class of Certificates in a manner
other than as described in clause (i) above, without the consent of the holders
of Certificates of such Class evidencing 66% or more of the Voting Rights of
such Class; or (iii) reduce the aforesaid percentages of Certificates the
holders of which are required to consent to any such amendment, without the
consent of the holders of all such Certificates then outstanding.
Optional Termination
The Seller will have the right to repurchase all remaining Mortgage
Loans and REO Properties and thereby effect early retirement of all the
Certificates, subject to the Stated Principal Balance of the Mortgage Loans and
REO Properties at the time of repurchase being less than or equal to 10% of
Cut-off Date Pool Principal Balance (an "Optional Termination Date"). In the
event such option is exercised by the Seller, the repurchase will be made at a
price equal to the sum of (i) 100% of the Stated Principal Balance of each
Mortgage Loan (other than in respect of REO Property) plus accrued interest
thereon at the applicable Mortgage Rate, net of the Servicing Fee and the
Trustee Fee, (ii) the appraised value of any REO Property (up to the Stated
Principal Balance of the related Mortgage Loan), and (iii) any unreimbursed
out-of-pocket costs and expenses and the principal portion of Advances, in each
case previously incurred by the Master Servicer in the performance of its
servicing obligations. Proceeds from such repurchase will be distributed to the
Certificateholders in the priority described above. The proceeds from any such
distribution may not be sufficient to distribute the full amount to which each
Class of Certificates is entitled if the purchase price is based in part on the
appraised value of any REO Property and such appraised value is less than the
Stated Principal Balance of the related Mortgage Loan. Any repurchase of the
Mortgage Loans and REO Properties will result in an early retirement of the
Certificates.
Optional Purchase of Defaulted Loans
As to any Mortgage Loan which is delinquent in payment by 91 days or
more, the Seller or with consent of Seller, the Master Servicer may, at its
option, purchase such Mortgage Loan at a price equal to 100% of the Stated
Principal Balance thereof plus accrued interest thereon at the applicable
Mortgage Rate, from the date through which interest was last paid by the related
mortgagor or advanced to the first day of the month in which such amount is to
be distributed.
Events of Default
Events of Default will consist of: (i) any failure by the Master
Servicer to deposit in the Certificate Account or the Distribution Account the
required amounts or remit to the Trustee any payment (including an Advance
required to be made under the terms of the Pooling and Servicing Agreement)
which continues unremedied for five Business Days after written notice of such
failure shall have been given to the Master Servicer by the Trustee or the
Depositor, or to the Master Servicer and the Trustee by holders of Certificates
evidencing not less than 25% of the Voting Rights evidenced by the Certificates;
(ii) any failure by the Master Servicer to observe or perform in any material
respect any other of its covenants or agreements, or any breach of a
representation or warranty made by the Master Servicer, in the Pooling and
Servicing Agreement, which continues unremedied for 60 days after the giving of
written notice of such failure to the Master Servicer by the Trustee or the
Depositor, or to the Master Servicer and the Trustee by the holders of
Certificates evidencing not less than 25% of the Voting Rights evidenced by the
Certificates; or (iii) insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings, and
S-37
<PAGE>
certain actions by or on behalf of the Master Servicer indicating its insolvency
or inability to pay its obligations. As of any date of determination, (i)
holders of the Offered Certificates will be allocated 95% of all Voting Rights,
allocated among the Offered Certificates in proportion to their respective
outstanding Certificate Principal Balances and (ii) holders of the Class X
Certificates and the Residual Certificates will be allocated all of the
remaining Voting Rights. Voting Rights will be allocated among the Certificates
of each such Class in accordance with their respective Percentage Interests.
Rights Upon Event of Default
So long as an Event of Default under the Pooling and Servicing
Agreement remains unremedied, the Trustee shall, but only upon the receipt of
instructions from the holders of Certificates having not less than 25% of the
Voting Rights evidenced by the Certificates, terminate all of the rights and
obligations of the Master Servicer under the Pooling and Servicing Agreement and
in and to the Mortgage Loans, whereupon the Trustee will succeed to all of the
responsibilities and duties of the Master Servicer under the Pooling and
Servicing Agreement, including the obligation to make Advances. No assurance can
be given that termination of the rights and obligations of the Master Servicer
under the Pooling and Servicing Agreement would not adversely affect the
servicing of the Mortgage Loans, including the delinquency experience of the
Mortgage Loans.
No Certificateholder, solely by virtue of such holder's status as a
Certificateholder, will have any right under the Pooling and Servicing Agreement
to institute any proceeding with respect thereto, unless such holder previously
has given to the Trustee written notice of the continuation of an Event of
Default and unless the holders of Certificates having not less than 25% of the
Voting Rights evidenced by the Certificates have made written request to the
Trustee to institute such proceeding in its own name as Trustee thereunder and
have offered to the Trustee reasonable indemnity and the Trustee for 60 days has
neglected or refused to institute any such proceeding.
The Trustee
Bankers Trust Company of California, N.A., will be the Trustee under
the Pooling and Servicing Agreement. The Depositor, the Master Servicer and the
Seller may maintain other banking relationships in the ordinary course of
business with the Trustee. Offered Certificates may be surrendered at the
Corporate Trust Office of the Trustee located at 123 Washington Street, New
York, New York 10006, Attention: Securities Transfer Department or at such other
addresses as the Trustee may designate from time to time.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
General
The weighted average life of, and the yield to maturity on each Class
of the Offered Certificates will be directly related to the rate of payment of
principal (including prepayments) of the Mortgage Loans. The actual rate of
principal prepayments on pools of mortgage loans is influenced by a variety of
economic, tax, geographic, demographic, social, legal and other factors and has
fluctuated considerably in recent years. In addition, the rate of principal
prepayments may differ among pools of mortgage loans at any time because of
specific factors relating to the mortgage loans in the particular pool,
including, among other things, the age of the mortgage loans, the geographic
locations of the properties securing the loans, the extent of the mortgagor's
equity in such properties, and changes in the mortgagors' housing needs, job
transfers and employment status.
The timing of changes in the rate of prepayments may significantly
affect the actual yield to investors who purchase the Offered Certificates at
prices other than par, even if the average rate of principal prepayments is
consistent with the expectations of investors. In general, the earlier the
payment of principal of the Mortgage Loans the greater the effect on an
investor's yield to maturity. As a result, the effect on an investor's yield of
principal prepayments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of the Offered Certificates may not be offset by a subsequent like reduction (or
increase) in the rate of principal prepayments. Investors must make their own
decisions as to the appropriate prepayment assumptions to be used in deciding
whether to purchase any of the Offered Certificates. The Depositor
S-38
<PAGE>
does not make any representations or warranties as to the rate of prepayment or
the factors to be considered in connection with such determinations.
The weighted average life and yield to maturity of each Class of
Offered Certificates will also be influenced by the amount of Excess Cashflow
generated by the Mortgage Loans and applied in reduction of the Certificate
Principal Balances of such Certificates. The level of Excess Cashflow available
on any Distribution Date to be applied in reduction of the Certificate Principal
Balances of the Offered Certificates will be influenced by, among other factors,
(i) the overcollateralization level at such time (i.e., the extent to which
interest on the Mortgage Loans is accruing on a higher Stated Principal Balance
than the Certificate Principal Balance of the related Offered Certificates);
(ii) the delinquency and default experience of the Mortgage Loans, (iii) the
level of One-Month LIBOR and the Mortgage Index for the Mortgage Loans, and (iv)
the provisions of the Pooling and Servicing Agreement that permit any Excess
Cashflow to be distributed to the Class X Certificates and the Residual
Certificates and to the Master Servicer as an Extra Master Servicing Fee (in
each case as provided in the Pooling and Servicing Agreement) when required
overcollateralization levels have been met. To the extent that greater amounts
of Excess Cashflow are distributed in reduction of the Certificate Principal
Balances of a Class of Offered Certificates, the weighted average life thereof
can be expected to shorten. No assurance, however, can be given as to the amount
of Excess Cashflow distributed at any time or in the aggregate. See "DESCRIPTION
OF THE OFFERED CERTIFICATES--Overcollateralization Provisions" herein.
Prepayments and Yields for Offered Certificates
Generally, if purchased at other than par, the yield to maturity on the
Offered Certificates will be affected by the rate of the payment of principal of
the Mortgage Loans. If the actual rate of payments on the Mortgage Loans is
slower than the rate anticipated by an investor who purchases the Offered
Certificates at a discount, the actual yield to such investor will be lower than
such investor's anticipated yield. If the actual rate of payments on the
Mortgage Loans is faster than the rate anticipated by an investor who purchases
the Offered Certificates at a premium, the actual yield to such investor will be
lower than such investor's anticipated yield.
All the Mortgage Loans are adjustable rate mortgage loans. As is the
case with conventional fixed rate mortgage loans, the Mortgage Loans may be
subject to a greater rate of principal prepayments in a declining interest rate
environment. For example, if prevailing interest rates fall significantly, the
Mortgage Loans could be subject to higher prepayment rates than if prevailing
interest rates remain constant because the availability of fixed rate mortgage
loans at lower interest rates may encourage mortgagors to refinance their
Mortgage Loans to a lower fixed interest rate. Nevertheless, no assurance can be
given as to the level of prepayment that the Mortgage Loans will experience.
Although the Mortgage Rates on the Mortgage Loans are subject to
adjustment, the Mortgage Rates adjust less frequently than the Pass-Through Rate
on the Offered Certificates and adjust by reference to the Mortgage Index.
Changes in One-Month LIBOR may not correlate with changes in the Mortgage Index
and also may not correlate with prevailing interest rates. It is possible that
an increased level of One-Month LIBOR could occur simultaneously with a lower
level of prevailing interest rates which would be expected to result in faster
prepayments, thereby reducing the weighted average life of the Offered
Certificates. The Mortgage Rate applicable to all or substantially all of the
Mortgage Loans and any Adjustment Date will be based on the Mortgage Index value
most recently announced generally as of a date 45 days prior to such Adjustment
Date. Thus, if the Mortgage Index value with respect to a Mortgage Loan rises,
the lag in time before the corresponding Mortgage Rate increases will, all other
things being equal, slow the upward adjustment of the Available Funds Cap on the
Offered Certificates. In addition, all of the Mortgage Loans are 2/28 Mortgage
Loans, the Mortgage Rates on which will not adjust for a substantial period of
time. See "THE MORTGAGE POOL" herein.
Although amounts deposited in the Carryover Reserve Fund will be
available to pay any Adjustable Rate Carryover, there is no assurance that funds
will be available to pay such amount. The ratings assigned to the Offered
Certificates do not address the likelihood of the payment of any such amount.
The extent to which the yield to maturity of the Offered Certificates
may vary from the anticipated yield will depend upon the degree to which it is
purchased at a discount or premium and, correspondingly, the degree to which the
timing of payments thereon is sensitive to prepayments, liquidations and
purchases of the Mortgage
S-39
<PAGE>
Loans. In particular, in the case of an Offered Certificate purchased at a
discount, an investor should consider the risk that a slower than anticipated
rate of principal payments, liquidations and purchases of the Mortgage Loans
could result in an actual yield to such investor that is lower than the
anticipated yield and, in the case of an Offered Certificate purchased at a
premium, the risk that a faster than anticipated rate of principal payments,
liquidations and purchases of such Mortgage Loans could result in an actual
yield to such investor that is lower than the anticipated yield.
The Latest Possible Maturity Date for each Class of the Offered
Certificates is the Distribution Date following the first anniversary of the
scheduled maturity date of the Mortgage Loan in the Trust Fund having the latest
scheduled maturity date as of the Cut-off Date. The actual final Distribution
Date with respect to each Class of Offered Certificates could occur
significantly earlier than its Latest Possible Maturity Date because (i)
prepayments are likely to occur which will be applied to the payment of the
Certificate Principal Balances thereof, (ii) any Excess Cashflow to the extent
available will be applied as an accelerated payment of principal on the Offered
Certificates as described herein and (iii) the Seller may purchase all the
Mortgage Loans when outstanding Stated Principal Balances thereof has declined
to 10% or less of the Cut-off Date Pool Principal Balance.
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. The models used in this Prospectus Supplement
("Prepayment Models") are based on an assumed rate of prepayment each month of
the then unpaid principal balance of a pool of mortgage loans similar to the
Mortgage Loans. The Prepayment Model used in this Prospectus Supplement
("Constant Prepayment Rate" or "CPR") is a prepayment assumption which
represents a constant assumed rate of prepayment each month relative of the then
outstanding principal balance of a pool of mortgage loans for the life of such
mortgage loans. 25% CPR, assumes a constant prepayment rate of 25% per annum.
There is no assurance, however, that prepayments on the Mortgage Loans
will conform to any level of the Prepayment Model, and no representation is made
that the Mortgage Loans will prepay at the prepayment rates shown or any other
prepayment rate. The rate of principal payments on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors,
including the level of interest rates. Other factors affecting prepayment of
mortgage loans include changes in obligors' housing needs, job transfers and
unemployment. In the case of mortgage loans in general, if prevailing interest
rates fall significantly below the interest rates on such mortgage loans, the
mortgage loans are likely to be subject to higher prepayment rates than if
prevailing interest rates remain at or above the rates borne by such mortgage
loans. Conversely, if prevailing interest rates rise above the interest on such
mortgage loans, the rate of prepayment would be expected to decrease.
The following tables have been prepared on the basis of the following
assumptions (collectively, the "Modeling Assumptions"): (i) the Mortgage Loans
prepay at the indicated percentage of the Prepayment Model; (ii) distributions
on the Offered Certificates are received, in cash, on the 25th day of each
month, commencing July 25, 1998, in accordance with the payment priorities
defined herein; (iii) no defaults or delinquencies in, or modifications, waivers
or amendments respecting, the payment by the Mortgagors of principal and
interest on the Mortgage Loans occur; (iv) scheduled payments are assumed to be
received on the first day of each month commencing in June 1998, and prepayments
represent payment in full of individual Mortgage Loans and are assumed to be
received on the last day of each month, commencing in June 1998, and include 30
days' interest thereon; (v) the level of the six-month LIBOR Mortgage Index
remains constant at 5.75000% per annum and the level of One-Month LIBOR remains
constant at 5.65625% per annum; (vi) the Pass-Through Margin for the Offered
Certificates remains constant at the rates applicable prior to the related
Optional Termination Date and the Pass-Through Margin for the Offered
Certificates is adjusted accordingly on any Distribution Date following the
related Optional Termination Date; (vii) the Closing Date for the Certificates
is June 30, 1998; (viii) the Mortgage Interest Rate for each Mortgage Loan is
adjusted on its next Adjustment Date (and on subsequent Adjustment Dates, if
necessary) to equal the sum of (a) the assumed level of the Mortgage Index and
(b) the respective Gross Margin (such sum being subject to the applicable
periodic adjustment caps and floors); (ix) except as indicated with respect to
the weighted average lives, no optional termination is exercised on the Optional
Termination Date; and (x) the Mortgage Loans have the approximate
characteristics described below:
S-40
<PAGE>
Mortgage Loans With a Six -Month LIBOR Mortgage Index(1)
<TABLE>
<CAPTION>
Number of
Reset Months Until
Net Original Remaining Initial Change Next
Current Mortgage Mortgage Term Term Gross Periodic Period Frequency Adjustment
Balance Rate Rate (in months) (in months) Margin Cap Cap (in months) Date
------- -------- -------- ----------- ----------- ------ -------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$98,942,226.82 9.32% 8.81% 360 358 6.21% 1.47% 1.60% 6 22
</TABLE>
- ---------
(1) For a description of the Six-Month LIBOR Mortgage Index see "THE MORTGAGE
POOL-General" herein.
S-41
<PAGE>
Percent of the Initial Class Certificate Principal Balance
at the Respective Percentages of the
Prepayment Model
<TABLE>
<CAPTION>
Class A Class M-1
---------------------------------------- ----------------------------------------
CPR 0% 10% 20% 25% 30% 40% 0% 10% 20% 25% 30% 40%
- --- -- --- --- --- --- --- -- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Payment Date
- ------------
Initial Percentage........... 100 100 100 100 100 100 100 100 100 100 100 100
June 25, 1999................ 97 85 73 68 62 50 100 100 100 100 100 100
June 25, 2000................ 96 74 54 45 37 22 100 100 100 100 100 100
June 25, 2001................ 95 64 39 29 20 5 100 100 100 100 100 100
June 25, 2002................ 95 55 31 24 18 5 100 100 80 62 47 84
June 25, 2003................ 94 47 25 18 13 5 100 100 64 46 33 24
June 25, 2004................ 93 40 20 13 9 3 100 100 51 34 23 9
June 25, 2005................ 92 36 16 10 6 2 100 91 40 26 16 5
June 25, 2006................ 91 32 12 7 4 1 100 82 32 19 11 1
June 25, 2007................ 90 28 10 5 3 1 100 73 25 14 8 0
June 25, 2008................ 89 25 8 4 2 * 100 65 20 10 5 0
June 25, 2009................ 87 22 6 3 1 0 100 57 16 8 2 0
June 25, 2010................ 86 20 5 2 1 0 100 51 12 6 0 0
June 25, 2011................ 84 18 4 2 * 0 100 45 10 3 0 0
June 25, 2012................ 82 15 3 1 * 0 100 40 8 * 0 0
June 25, 2013................ 80 14 2 1 0 0 100 35 6 0 0 0
June 25, 2014................ 77 12 2 * 0 0 100 31 4 0 0 0
June 25, 2015................ 74 10 1 * 0 0 100 27 2 0 0 0
June 25, 2016................ 71 9 1 0 0 0 100 23 0 0 0 0
June 25, 2017................ 67 8 1 0 0 0 100 20 0 0 0 0
June 25, 2018................ 63 7 * 0 0 0 100 17 0 0 0 0
June 25, 2019................ 58 6 * 0 0 0 100 15 0 0 0 0
June 25, 2020................ 53 5 0 0 0 0 100 12 0 0 0 0
June 25, 2021................ 47 4 0 0 0 0 100 10 0 0 0 0
June 25, 2022................ 40 3 0 0 0 0 100 8 0 0 0 0
June 25, 2023................ 35 2 0 0 0 0 90 6 0 0 0 0
June 25, 2024................ 29 2 0 0 0 0 75 5 0 0 0 0
June 25, 2025................ 23 1 0 0 0 0 59 1 0 0 0 0
June 25, 2026................ 16 1 0 0 0 0 40 0 0 0 0 0
June 25, 2027................ 8 0 0 0 0 0 19 0 0 0 0 0
June 25, 2028................ 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (in
years)(1).................... 20.64 6.97 3.64 2.84 2.27 1.44 27.35 13.66 7.19 5.76 4.99 4.75
Weighted Average Life (in
years)(1)(2)................. 20.61 6.62 3.34 2.60 2.07 1.31 27.27 12.83 6.52 5.21 4.55 4.32
</TABLE>
- -------------
(1) The weighted average life of the Offered Certificates is determined by (i)
multiplying the amount of each principal payment by the number of years from
the date of issuance to the related Distribution Date, (ii) adding the
results, and (iii) dividing the sum by the initial respective Certificate
Principal Balance for such Class of Offered Certificates.
(2) To the respective Optional Termination Date.
* indicates less than 0.5%.
(Table continued on next page)
S-42
<PAGE>
Percent of the Initial Class Certificate Principal Balance
at the Respective Percentages of the
Prepayment Model
<TABLE>
<CAPTION>
Class M-2 Class B
----------------------------------------- -----------------------------------------
CPR 0% 10% 20% 25% 30% 40% 0% 10% 20% 25% 30% 40%
- --- -- -- --- --- --- --- -- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Payment Date
- ------------
Initial Percentage.... 100 100 100 100 100 100 100 100 100 100 100 100
June 25, 1999......... 100 100 100 100 100 100 100 100 100 100 100 100
June 25, 2000......... 100 100 100 100 100 100 100 100 100 100 100 100
June 25, 2001......... 100 100 100 100 100 100 100 100 100 100 100 100
June 25, 2002......... 100 100 80 62 47 25 100 100 80 62 47 25
June 25, 2003......... 100 100 64 46 33 15 100 100 64 46 33 10
June 25, 2004......... 100 100 51 34 23 9 100 100 51 34 23 *
June 25, 2005......... 100 91 40 26 16 1 100 91 40 26 11 0
June 25, 2006......... 100 82 32 19 11 0 100 82 32 17 3 0
June 25, 2007......... 100 73 25 14 6 0 100 73 25 9 0 0
June 25, 2008......... 100 65 20 10 * 0 100 65 18 3 0 0
June 25, 2009......... 100 57 16 6 0 0 100 57 11 0 0 0
June 25, 2010......... 100 51 12 2 0 0 100 51 6 0 0 0
June 25, 2011......... 100 45 10 0 0 0 100 45 1 0 0 0
June 25, 2012......... 100 40 6 0 0 0 100 40 0 0 0 0
June 25, 2013......... 100 35 2 0 0 0 100 35 0 0 0 0
June 25, 2014......... 100 31 0 0 0 0 100 31 0 0 0 0
June 25, 2015......... 100 27 0 0 0 0 100 27 0 0 0 0
June 25, 2016......... 100 23 0 0 0 0 100 23 0 0 0 0
June 25, 2017......... 100 20 0 0 0 0 100 18 0 0 0 0
June 25, 2018......... 100 17 0 0 0 0 100 14 0 0 0 0
June 25, 2019......... 100 15 0 0 0 0 100 9 0 0 0 0
June 25, 2020......... 100 12 0 0 0 0 100 6 0 0 0 0
June 25, 2021......... 100 10 0 0 0 0 100 2 0 0 0 0
June 25, 2022......... 100 7 0 0 0 0 100 0 0 0 0 0
June 25, 2023......... 90 3 0 0 0 0 90 0 0 0 0 0
June 25, 2024......... 75 0 0 0 0 0 75 0 0 0 0 0
June 25, 2025......... 59 0 0 0 0 0 59 0 0 0 0 0
June 25, 2026......... 40 0 0 0 0 0 40 0 0 0 0 0
June 25, 2027......... 19 0 0 0 0 0 17 0 0 0 0 0
June 25, 2028......... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)(1)......... 27.35 13.56 7.08 5.64 4.79 4.08 27.31 13.20 6.79 5.38 4.55 3.73
Weighted Average Life
(in years)(1)(2)...... 27.27 12.83 6.52 5.18 4.43 3.82 27.27 12.82 6.51 5.16 4.37 3.61
</TABLE>
- -------------------
(1) The weighted average life of the Offered Certificates is determined by (i)
multiplying the amount of each principal payment by the number of years from the
date of issuance to the related Distribution Date, (ii) adding the results, and
(iii) dividing the sum by the initial respective Certificate Principal Balance
for such Class of Offered Certificates.
(2) To the respective Optional Termination Date.
* indicates less than 0.5%.
(Table continued from previous page.)
Additional Information
The Depositor will file certain additional yield tables and other
computational materials with respect to the Offered Certificates with the
Securities and Exchange Commission in a report on Form 8-K. Such tables and
materials were prepared by the Underwriter at the request of certain prospective
investors, based on assumptions provided by, and satisfying the special
requirements of, such prospective investors. Such tables and assumptions may be
based on assumptions that differ from the Structuring Assumptions. Accordingly,
such tables and other materials may not be relevant to or appropriate for
investors other than those specifically requesting them.
S-43
<PAGE>
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Offered
Certificates against the purchase price of the Mortgage Loans.
FEDERAL INCOME TAX CONSEQUENCES
The Pooling and Servicing Agreement provides that the Trust Fund,
exclusive of the assets held in the Carryover Reserve Fund, will comprise
several Lower Tier REMICs (as defined in the Pooling and Servicing Agreement)
and an Upper Tier REMIC (as defined in the Pooling and Servicing Agreement)
organized in a tiered REMIC structure. Each Lower Tier REMIC will issue
uncertificated regular interests and those interests will be held entirely by
the REMIC immediately above it in the tiered structure. Each of the Lower Tier
REMICs and the Upper Tier REMIC will designate a single class of interests as
the residual interest in that REMIC. The Residual Certificate will represent
ownership of the residual interests in each of the REMICs. Elections will be
made to treat each Lower Tier REMIC and the Upper Tier REMIC as a REMIC for
federal income tax purposes.
The Upper Tier REMIC will issue 8 classes of regular interests. Each
class of Offered Certificates and the Class X Certificates will represent
beneficial ownership of regular interests issued by the Upper Tier REMIC. In
addition, each of the Offered Certificates will represent a beneficial interest
in the right to receive payments from the Carryover Reserve Fund pursuant to an
interest rate cap agreement included in the Pooling and Servicing Agreement (the
"Interest Rate Cap Agreement").
Upon the issuance of the Offered Certificates, Brown & Wood LLP ("Tax
Counsel"), will deliver its opinion concluding, assuming compliance with the
Pooling and Servicing Agreement, for federal income tax purposes, each Lower
Tier REMIC and the Upper Tier REMIC will qualify as a REMIC within the meaning
of Section 860D of the Internal Revenue Code of 1986, as amended (the "Code")
and the Offered Certificates represent regular interests in a REMIC. In
addition, Tax Counsel will deliver an opinion concluding that the Carryover
Reserve Fund is an "outside reserve fund" that is beneficially owned by the
holders of the Class X Certificates. Moreover, Tax Counsel will deliver an
opinion concluding that the rights of the holders of the Offered Certificates to
receive payments from the Carryover Reserve Fund pursuant to the Interest Rate
Cap Agreement represent, for federal income tax purposes, interests in an
interest rate cap agreement.
Taxation of Regular Interests
A holder of a Certificate of any Class of Offered Certificates will be
treated for federal income tax purposes as owning an interest in regular
interests in the Upper Tier REMIC. The Offered Certificates will also represent
beneficial ownership of an interest in a limited recourse interest rate cap
agreement. A holder of an Offered Certificate must allocate its purchase price
for the Offered Certificate between its two components--the REMIC regular
interest component and the Interest Rate Cap Agreement component. For
information reporting purposes, the Trustee will assume that, with respect to
any Offered Certificate, the Interest Rate Cap Agreement component will have
only nominal value relative to the value of the regular interest component. The
IRS could, however, argue that the Interest Rate Cap Agreement component has
significant value, and if that argument were to be sustained, the regular
interest component could be viewed as having been issued with an additional
amount of original issue discount ("OID") (which could cause the total amount of
discount to exceed a statutorily defined de minimis amount). See "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS--Taxation of Regular Interest Certificates" in
the Prospectus.
Upon the sale, exchange, or other disposition of an Offered
Certificate, the holder must allocate the amount realized between the two
components of the Offered Certificate based on the relative fair market values
of those components at the time of sale. Assuming that an Offered Certificate is
held as a "capital asset" within the meaning of section 1221 of the Code, gain
or loss on the disposition of an interest in the Interest Rate Cap Agreement
component should be capital gain or loss, and, gain or loss on, the disposition
of the regular interest component should, subject to the limitation described
below, be capital gain or loss. Gain attributable to the regular interest
component of an Offered Certificate will be treated as ordinary income, however,
to the extent such gain does not exceed the excess, if any, of (i) the amount
that would have been includable in the holder's gross income with respect to the
regular interest component had income thereon accrued at a rate equal to 110% of
the applicable
S-44
<PAGE>
federal rate as defined in section 1274(d) of the Code determined as of the date
of purchase of the Offered Certificate over (ii) the amount actually included in
such holder's income.
The maximum tax rate on noncorporate taxpayer's on capital gain
realized upon the disposition of Offered Certificates is 20 percent if the
Offered Certificates are held for at least 18 months, and 28 percent if the
Offered Certificates are held for more than one year but not more than 18
months.
Interest on a regular interest must be included in income by a holder
under the accrual method of accounting, regardless of the holder's regular
method of accounting. In addition, a Regular interest could be considered to
have been issued with OID. See "Certain Federal Income Tax
Considerations--Taxation of Regular Interest Certificates" in the Prospectus.
The prepayment assumption that will be used to in determining the accrual of any
OID, market discount, or bond premium, if any, will be a rate equal to 100% of
the applicable Prepayment Model as described above. No representation is made
that the Mortgage Loans will prepay at such a rate or at any other rate. OID
must be included in income as it accrues on a constant yield method, regardless
of whether the holder receives currently the cash attributable to such OID.
Status of the Offered Certificates
The Regular Interest component of the Offered Certificates will be
treated as assets described in Section 7701(a)(19)(C) of the Code, and as "real
estate assets" under Section 856(c)(5)(B) of the Code, generally, in the same
proportion that the assets of the Trust Fund, exclusive of the Carryover Reserve
Fund, would be so treated. In addition, to the extent a regular interest
represents real estate assets under section 856(c)(5)(B) of the Code, the
interest derived from that component would be interest on obligations secured by
interests in real property for purposes of section 856(c)(3) of the Code. The
Interest Rate Cap Agreement component of an Offered Certificate will not,
however, qualify as an asset described in Section 7701(a)(19)(C) of the Code or
as a real estate asset under Section 856(c)(5)(B) of the Code.
The Carryover Reserve Fund
As indicated above, a portion of the purchase price paid by a holder to
acquire an Offered Certificate will be attributable to the Interest Rate Cap
Agreement component of the Offered Certificate. The portion of the overall
purchase price attributable to the Interest Rate Cap Agreement component must be
amortized over the life of the Offered Certificate, taking into account the
declining balance of the related Regular Interest component. Treasury
regulations concerning notional principal contracts provide alternative methods
for amortizing the purchase price of an interest rate cap contract. Under one
method--the level yield constant interest method--the price paid for an interest
rate cap agreement is amortized over the life of the cap as though it were the
principal amount of a loan bearing interest at a reasonable rate. Holders are
urged to consult their tax advisors concerning the methods that can be employed
to amortize the portion of the purchase price paid for the Interest Rate Cap
Agreement component of an Offered Certificate.
Any payments made to a holder from the Carryover Reserve Fund will be
treated as periodic payments on an interest rate cap agreement. To the extent
the sum of such periodic payments for any year exceed that year's amortized cost
of the Interest Rate Cap Agreement component, such excess is ordinary income. If
for any year the amount of that year's amortized cost exceeds the sum of the
periodic payments, such excess is allowable as an ordinary deduction.
Prohibited Transactions Tax and Other Taxes
The Code imposes a tax on REMICs equal to 100% of the net income
derived from "prohibited transactions" (the "Prohibited Transactions Tax"). In
general, subject to certain specified exceptions, a prohibited transaction means
the disposition of a Mortgage Loan, the receipt of income from a source other
than a Mortgage Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Loans for temporary investment pending
distribution on the Certificates. It is not anticipated that the Trust Fund will
engage in any prohibited transactions in which it would recognize a material
amount of net income.
S-45
<PAGE>
In addition, certain contributions to a trust fund that elects to be
treated as a REMIC made after the day on which such trust fund issues all of its
interests could result in the imposition of a tax on the trust fund equal to
100% of the value of the contributed property (the "Contributions Tax"). The
Trust Fund will not accept contributions that would subject it to such tax.
In addition, a trust fund that elects to be treated as a REMIC may also
be subject to federal income tax at the highest corporate rate on "net income
from foreclosure property," determined by reference to the rules applicable to
real estate investment trusts. "Net income from foreclosure property" generally
means gain from the sale of a foreclosure property other than qualifying rents
and other qualifying income for a real estate investment trust. It is not
anticipated that the Trust Fund will recognize net income from foreclosure
property subject to federal income tax.
Where any Prohibited Transactions Tax, Contributions Tax, tax on net
income from foreclosure property or state or local income or franchise tax that
may be imposed on the REMIC arises out of a breach of the Master Servicer's or
the Trustee's obligations, as the case may be, under the Pooling and Servicing
Agreement and in respect of compliance with then applicable law, such tax will
be borne by the Master Servicer or Trustee in either case out of its own funds.
In the event that either the Master Servicer or the Trustee, as the case may be,
fails to pay or is not required to pay any such tax as provided above, such tax
will be paid by the Trust Fund first with amounts otherwise distributable to the
holders of Certificates in the manner provided in the Pooling and Servicing
Agreement. It is not anticipated that any material state or local income or
franchise tax will be imposed on the Trust Fund.
For further information regarding the federal income tax consequences
of investing in the Offered Certificates, see "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES--REMIC Certificates" in the Prospectus.
STATE TAXES
The Depositor makes no representations regarding the tax consequences
of purchase, ownership or disposition of the Offered Certificates under the tax
laws of any state. Investors considering an investment in the Offered
Certificates should consult their own tax advisors regarding such tax
consequences.
All investors should consult their own tax advisors regarding the
federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the Offered Certificates.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), prohibits "parties in interest" with respect to an employee
benefit plan subject to ERISA and/or a plan or other arrangement subject to the
excise tax provisions set forth under Section 4975 of the Code (each of the
foregoing, a "Plan") from engaging in certain transactions involving such Plan
and its assets unless a statutory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes certain excise taxes on prohibited
transactions involving plans described under that Section; ERISA authorizes the
imposition of civil penalties for prohibited transactions involving plans not
covered under Section 4975 of the Code. Any Plan fiduciary which proposes to
cause a Plan to acquire the Offered Certificates should consult with its counsel
with respect to the potential consequences under ERISA and the Code of the
Plan's acquisition and ownership of such Certificates. See "ERISA
CONSIDERATIONS" in the Prospectus.
Certain employee benefit plans, including governmental plans and
certain church plans, are not subject to ERISA's requirements. Accordingly,
assets of such plans may be invested in the Class A Certificates without regard
to the ERISA considerations described herein and in the Prospectus, subject to
the provisions of other applicable federal and state law. Any such plan which is
qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code
may nonetheless be subject to the prohibited transaction rules set forth in
Section 503 of the Code.
Except as noted above, investments by Plans are subject to ERISA's
general fiduciary requirements, including the requirement of investment prudence
and diversification and the requirement that a Plan's investments
S-46
<PAGE>
be made in accordance with the documents governing the Plan. A fiduciary which
decides to invest the assets of a Plan in the Class A Certificates should
consider, among other factors, the extreme sensitivity of the investments to the
rate of principal payments (including prepayments) on the Mortgage Loans.
The U.S. Department of Labor has granted to Bear, Stearns & Co. Inc. an
administrative exemption (Prohibited Transaction Exemption 90-30; Exemption
Application No. D-8207, 55 Fed. Reg. 21461 (1990)) (the "Exemption") from
certain of the prohibited transaction rules of ERISA and the related excise tax
provisions of Section 4975 of the Code with respect to the initial purchase, the
holding and the subsequent resale by Plans of certificates in pass-through
trusts that consist of certain receivables, loans and other obligations that
meet the conditions and requirements of the Exemption. The Exemption applies to
mortgage loans such as the Mortgage Loans in the Trust Fund.
Among the conditions that must be satisfied for the Exemption to apply
are the following:
(1) the acquisition of the certificates by a Plan is 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;
(2) the rights and interest evidenced by the certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the trust fund;
(3) the certificates acquired by the Plan have received a
rating at the time of such acquisition that is one of the three highest
generic rating categories from Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. ("S&P"), Moody's Investors Service, Inc.
("Moody's"), Duff & Phelps Credit Rating Co. ("DCR") or Fitch IBCA,
Inc. ("Fitch");
(4) the trustee must not be an affiliate of any other member
of the Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the
underwriters in connection with the distribution of the certificates
represents not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the
seller pursuant to the assignment of the loans to the trust fund
represents not more than the fair market value of such loans; the sum
of all payments made to and retained by the servicer and any other
servicer represents not more than reasonable compensation for such
person's services under the agreement pursuant to which the loans are
pooled and reimbursements of such person's reasonable expenses in
connection therewith; and
(6) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933.
The trust fund must also meet the following requirements:
(i) the corpus of the trust fund must consist solely of assets
of the type that have been included in other investment pools;
(ii) certificates in such other investment pools must have
been rated in one of the three highest rating categories of S&P,
Moody's, Fitch or DCR for at least one year prior to the Plan's
acquisition of certificates; and
(iii) certificates evidencing interests in such other
investment pools must have been purchased by investors other than Plans
for at least one year prior to any Plan's acquisition of certificates.
Moreover, the Exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust as to which
the fiduciary (or its affiliate) is an obligor on the receivables held in the
trust provided that, among other requirement, (i)
S-47
<PAGE>
in the case of an acquisition in connection with the initial issuance of
certificates, at least fifty percent (50%) of each class of certificates in
which Plans have invested is acquired by persons independent of the Restricted
Group; (ii) such fiduciary (or its affiliate) is an obligor with respect to five
percent (5%) or less of the fair market value of the obligations contained in
the trust; (iii) the Plan's investment in certificates of any class does not
exceed twenty-five percent (25%) of all of the certificates of that class
outstanding at the time of the acquisition; and (iv) immediately after the
acquisition, no more than twenty-five percent (25%) of the assets of the Plan
with respect to which such person is a fiduciary are invested in certificates
representing an interest in one or more trusts containing assets sold or
serviced by the same entity. The Exemption does not apply to Plans sponsored by
the Underwriter, the Trustee, the Master Servicer, any obligor with respect to
Mortgage Loans included in the Trust Fund constituting more than five percent of
the aggregate unamortized principal balance of the assets in the Trust Fund, or
any affiliate of such parties (the "Restricted Group").
It is expected that the Exemption will apply to the acquisition and
holding of the Class A Certificates by Plans and that all conditions of the
Exemption other than those within the control of the investors will be met. In
addition, as of the date hereof, there is no single Mortgagor that is the
obligor on five percent (5%) of the Mortgage Loans included in the Trust Fund by
aggregate unamortized principal balance of the assets of the Trust Fund.
The Exemption does not apply to the initial purchase, the holding or
the subsequent resale of the Subordinate Certificates because the Subordinate
Certificates are subordinate to the Class A Certificates. Consequently,
transfers of the Subordinate Certificates will not be registered by the Trustee
unless the Trustee receives: (i) a representation from the transferee of such
Certificate, acceptable to and in form and substance satisfactory to the
Trustee, to the effect that such transferee is not an employee benefit plan
subject to Section 406 of ERISA or a plan or arrangement subject to Section 4975
of the Code, nor a person acting on behalf of any such plan or arrangement nor
using the assets of any such plan or arrangement to effect such transfer; (ii)
if the purchaser is an insurance company, a representation that the purchaser is
an insurance company which is purchasing such Certificates with funds contained
in an "insurance company general account" (as such term is defined in Section
V(e) of Prohibited Transaction Class Exemption 95-60 ("PTCE 95-60")) and that
the purchase and holding of such Certificates are covered under PTCE 95-60; or
(iii) an opinion of counsel satisfactory to the Trustee that the purchase or
holding of such Certificate by a Plan, any person acting on behalf of a Plan or
using such Plan's assets, will not result in the assets of the Trust Fund being
deemed to be "plan assets" and subject to the prohibited transaction
requirements of ERISA and the Code and will not subject the Trustee to any
obligation in addition to those undertaken in the Pooling and Servicing
Agreement. Such representation as described above shall be deemed to have been
made to the Trustee by the transferee's acceptance of a Subordinate Certificate.
In the event that such representation is violated, or any attempt to transfer to
a Plan or person acting on behalf of a Plan or using such Plan's assets is
attempted without such opinion of counsel, such attempted transfer or
acquisition shall be void and of no effect.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of PTCE 83-1
described in the Prospectus and the Exemption, and the potential consequences in
their specific circumstances, prior to making an investment in the Offered
Certificates. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification, an
investment in the Offered Certificates is appropriate for the Plan, taking into
account the overall investment policy of the Plan and the composition of the
Plan's investment portfolio.
S-48
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Depositor and Bear, Stearns & Co. Inc. (the
"Underwriter"), the Depositor has agreed to sell the Offered Certificates to the
Underwriter and the Underwriter has agreed to purchase the Offered Certificates
from the Depositor.
The Underwriting Agreement provides that the obligation of the
Underwriter to pay for and accept delivery of the Offered Certificates 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 Offered Certificates 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 Offered Certificates, before deducting expenses
payable by the Depositor, will be approximately 100% of the aggregate
Certificate Principal Balance of the Offered Certificates.
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities, including
liabilities under the Securities Act of 1933, as amended.
LEGAL MATTERS
The validity of the Certificates, including certain federal income tax
consequences with respect thereto, will be passed upon for the Depositor by
Brown & Wood LLP, New York, New York. Tobin & Tobin, a professional corporation,
San Francisco, California, will pass upon certain legal matters on behalf of the
Seller and Brown & Wood LLP, New York, New York, will pass upon certain legal
matters on behalf of the Underwriter.
RATINGS
It is a condition of the issuance of the Offered Certificates that each
Class of Offered Certificates be assigned the ratings designated below by S&P
and Fitch.
Class S&P Rating Fitch Rating
-------------- ------------ --------------
A AAA AAA
M-1 AA AA
M-2 A A
B BBB BBB
The security ratings assigned to the Offered Certificates should be
evaluated independently from similar ratings on other types of securities. A
security rating is not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal at any time by the Rating Agencies. The
ratings on the Offered Certificates do not, however, constitute statements
regarding the likelihood or frequency of prepayments on the Mortgage Loans, the
payment of the Certificate Interest Carryover Amount or the anticipated yields
in light of prepayments.
The ratings assigned by Fitch to mortgage pass-through certificates
address the likelihood of the receipt of all distributions on the mortgage loans
by the related certificateholders under the agreements pursuant to which such
certificates are issued. Fitch's ratings take into consideration the credit
quality of the related mortgage pool, including any credit support providers,
structural and legal aspects associated with such certificates, and the extent
to which the payment stream on the mortgage pool is adequate to make the
payments required by such certificates. Fitch ratings on such certificates do
not, however, constitute a statement regarding frequency of prepayments of the
mortgage loans.
The ratings assigned by S&P to mortgage pass-through certificates
address the likelihood of the receipt by certificateholders of all distributions
to which such certificateholders are entitled. S&P ratings on mortgage
pass-through certificates do not represent any assessment of the likelihood or
rate of principal prepayments. The ratings
S-49
<PAGE>
do not address the possibility that certificateholders might suffer a lower than
anticipated yield as a result of prepayments.
The Depositor has not requested a rating of the Offered Certificates by
any rating agency other than Fitch and S&P. However, there can be no assurance
as to whether any other rating agency will rate the Offered Certificates or, if
it does, what ratings would be assigned by such other rating agency. The ratings
assigned by such other rating agency to the Offered Certificates could be lower
than the respective ratings assigned by the Rating Agencies
S-50
<PAGE>
INDEX OF DEFINED TERMS
<PAGE>
2/28 Mortgage Loans.........................7, 14, 40
Accrual Period......................4, 31, 32, 35, 36
Adjustable Rate Certificate Carryover...............3
Adjustable Rate Minimum Mortgage Rate..............14
Adjustment Date....................................14
Advance............................................24
Advances............................................8
Applied Realized Loss Amount.......................34
Available Funds Cap.................................2
B&C................................................14
beneficial owner...................................25
Book-Entry Certificates............................25
Carryover Reserve Fund.............................36
Carryover Reserve Fund Deposit.....................36
Cede................................................3
CEDEL...............................................3
CEDEL Participants.................................27
Certificate Account................................29
Certificate Owners..................................3
Certificates........................................1
Chase...............................................3
Citibank............................................3
Class A Principal Distribution Amount..............32
Closing Date........................................1
Code...............................................45
Collateral Value...................................15
Compensating Interest..............................24
Constant Prepayment Rate...........................40
Contributions Tax..................................47
Cooperative........................................27
CPR................................................40
Current Interest...................................32
Cut-off Date........................................7
Cut-off Date Principal Balance......................7
DCR................................................48
debt-to-income ratio...............................21
Definitive Certificate.............................25
Deleted Mortgage Loan..............................19
Description of the Certificates--Book-Entry
Certificates......................................3
Description of the Certificates-Distributions.......4
Distribution Account...............................31
Distribution Date..................................31
DTC..............................................3, 1
Due Dates..........................................24
Due Period.........................................31
ERISA..............................................47
Euroclear...........................................3
Euroclear Operator.................................27
Euroclear Participants.............................27
European Depositaries...............................3
Excess Overcollateralization Amount................35
Exemption..........................................48
Extra Master Servicing Fee.........................35
FHLMC..............................................21
Financial Intermediary.............................26
Fitch..............................................48
FNMA...............................................21
Full Doc Program...................................21
Global Securities...................................1
Gross Margin.......................................14
Indirect Participants..............................26
Insurance Proceeds.................................29
Interest Carry Forward Amount......................32
Interest Determination Date........................35
Interest Funds.....................................30
Interest Rate Cap Agreement........................36
LIBOR Business Day.................................35
Liquidation Proceeds...............................29
Loan Group.........................................30
Loan-to-Value Ratio................................15
Master Servicer Advance Date.......................24
Maximum Mortgage Rate..............................14
Mezzanine Adjustable Rate Certificates..............1
Modeling Assumptions...............................41
Moody's............................................48
Mortgage Index.....................................14
Mortgage Loans......................................1
Mortgaged Property..................................1
Net income from foreclosure property...............47
Net Mortgage Rate..................................19
Offered Certificates................................1
OID................................................45
Optional Termination Date...........................8
overcollateralization...............................6
Overcollateralization and Crosscollateralization
Provisions.........................................5
Participants.......................................26
Pass-Through Margin.................................2
Percentage Interest................................31
Periodic Rate Cap..................................14
Plan...............................................47
Pooling and Servicing Agreement.....................1
Prepayment Interest Excess.........................24
Prepayment Interest Shortfall......................24
Prepayment Models..................................40
Principal Distribution Amount......................32
Principal Funds....................................30
Prohibited Transactions Tax........................46
PTCE 95-60.........................................49
Purchase Price.....................................19
Rating Agencies....................................10
Realized Loss......................................35
Record Date.........................................4
S-51
<PAGE>
Reference Bank Rate................................35
Reference Banks....................................35
Relevant Depositary................................25
REMIC..............................................ii
REO Property.......................................24
Replacement Mortgage Loan..........................20
Required Percentage................................34
Residual Certificates...............................1
Restricted Group...................................49
Risk Factors-Consequences of Owning Book-Entry
Certificates.......................................4
Rules..............................................26
S&P................................................48
Scheduled Payments.................................14
Servicing Fee.......................................8
Servicing Fee Rate.................................24
Simple Doc Program.................................21
SMMEA...............................................9
Specified Overcollateralization Amount..............6
Stated Income Program..............................21
Subordinated Offered Adjustable Rate Certificates...1
Tax Counsel........................................45
Terms and Conditions...............................27
Trigger Event......................................34
Trustee's Mortgage File............................19
Underwriter........................................50
Unpaid Realized Loss Amount........................35
S-52
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Bear
Stearns Asset Backed Securities, Inc., Asset-Backed Certificates, Series 1998-1
(the "Global Securities") will be available only in book-entry form. Investors
in the Global Securities may hold such Global Securities through any of The
Depository Trust Company ("DTC"), CEDEL or Euroclear. The Global Securities will
be tradeable as home market instruments in both the European and U.S. domestic
markets. Initial settlement and all secondary trades will settle in same-day
funds.
Secondary market trading between investors holding Global Securities
through CEDEL and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional Eurobond practice (i.e., seven calendar day settlement).
Secondary, market. trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior mortgage passthrough certificate
issues.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, CEDEL and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold such positions in accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to prior mortgage pass-through
certificate issues. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional Eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
pass-through certificate issues in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional Eurobonds in same-day funds.
A-1
<PAGE>
Trading between DTC Seller and CEDEL or Euroclear Purchaser. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a CEDEL Participant or a Euroclear Participant, the purchaser
will send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the respective Depositary, as the case may be, to
receive the Global Securities against payment. Payment will include interest
accrued on the Global Securities from and including the last coupon payment date
to and excluding the settlement date, on the basis of either the actual number
of days in such accrual period and a year assumed to consist of 360 days or a
360-day year of twelve 30-day months, as applicable to the related Class of
Global Securities. For transactions settling on the 31st of the month, payment
will include interest accrued to and excluding the first day of the following
month. Payment will then be made by the respective Depositary of the DTC
Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the CEDEL Participant's or Euroclear Participant's account.
The securities credit will appear the next day (European time) and the cash debt
will be back-valued to, and the interest on the Global Securities will accrue
from, the value date (which would be the preceding day when settlement occurred
in New York). If settlement is not completed on the intended value date (i.e.,
the trade fails), the CEDEL or Euroclear cash debt will be valued instead as of
the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit
to them, CEDEL Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of such overdraft charges, although this result will depend on each CEDEL
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global Securities
to the respective European Depositary for the benefit of CEDEL Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading between CEDEL or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, CEDEL Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases CEDEL
or Euroclear will instruct the respective Depositary, as appropriate, to deliver
the Global Securities to the DTC Participant's account against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment to and excluding the settlement date on the basis of either
the actual number of days in such accrual period and a year assumed to consist
of 360 days or a 360-day year of twelve 30-day months, as applicable to the
related Class of Global Securities. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. The payment will then be reflected in the account of the
CEDEL Participant or Euroclear Participant the following day, and receipt of the
cash proceeds in the CEDEL Participant's or Euroclear Participant's account
would be back-valued to the value date (which would be the preceding day, when
settlement occurred in New York). Should the CEDEL Participant or Euroclear
Participant have a line of credit with its respective clearing system and elect
to be in debt in anticipation of receipt of the sale proceeds in its account,
the back-valuation will extinguish any overdraft incurred over that one-day
period. If settlement is not completed on the intended value date (i.e., the
trade fails), receipt of the cash proceeds in the CEDEL Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date.
A-2
<PAGE>
Finally, day traders that use CEDEL or Euroclear and that purchase
Global Securities from DTC Participants for delivery to CEDEL Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until
the purchase side of the day trade is reflected in their CEDEL or
Euroclear accounts) in accordance with the clearing system's customary
procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give
the Global Securities sufficient time to be reflected in their CEDEL or
Euroclear account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of
the trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for the sale to
the CEDEL Participant or Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
CEDEL or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between such beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with Effectively Connected Income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or Reduced Rate for non-U.S. Persons Resident in Treaty
Countries (Form 1001). Non-U.S. Persons that are Certificate Owners residing in
a country that has a tax treaty with the United States can obtain an exemption
or reduced tax rate (depending on the treaty terms) by filing Form 100 1
(Ownership, Exemption or Reduced Rate Certificate). If the treaty provides only
for a reduced rate, withholding tax will be imposed at that rate unless the
filer alternatively files Form W-8. Form 1001 may be filed by the Certificate
Owners or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof or (iii) an estate the income
of which is includible in gross income for United States tax purposes,
regardless of its source or a trust if a court
A-3
<PAGE>
within the United States is able to exercise primary supervision of the
administration of the trust and one or more United States fiduciaries have the
authority to control all substantial decisions of the trust. This summary does
not deal with all aspects of U.S. Federal income tax withholding that may be
relevant to foreign holders of the Global Securities. Investors are advised to
consult their own tax advisors for specific tax advice concerning their holding
and disposing of the Global Securities.
A-4
<PAGE>
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.
2
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Securities to be offered
hereunder will, among other things, set forth with respect to such Series of
Securities: (i) the aggregate principal amount, interest rate and authorized
denominations of each Class of such Securities; (ii) certain information
concerning the Primary Assets, the Seller and any Servicer; (iii) the terms of
any Enhancement with respect to such Series; (iv) the terms of any insurance
related to the Primary Assets; (v) information concerning any other assets in
the related Trust Fund, including any Reserve Fund; (vi) the Final Scheduled
Distribution Date of each Class of such Securities; (vii) the method to be used
to calculate the amount of principal required to be applied to the Securities of
each Class of such Series on each Distribution Date, the timing of the
application of principal and the order of priority of the application of such
principal to the respective Classes and the allocation of principal to be so
applied; (viii) the Distribution Dates and any Assumed Reinvestment Rate; (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.
3
<PAGE>
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.
4
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each Series of Securities contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of Securities of such Series. Capitalized terms used and not otherwise
defined herein or in the related Prospectus Supplement shall have the meanings
set forth in the "Glossary of Terms" herein.
<TABLE>
<S> <C>
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
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
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
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
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
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
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
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
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
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
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
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
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
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
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
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
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
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
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
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
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
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
("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
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
Series. See "Risk Factors--Ratings Are Not Recommendations."
</TABLE>
17
<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
18
<PAGE>
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.
19
<PAGE>
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.
20
<PAGE>
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
21
<PAGE>
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:
22
<PAGE>
(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."
23
<PAGE>
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
24
<PAGE>
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
25
<PAGE>
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.
26
<PAGE>
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
27
<PAGE>
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.
28
<PAGE>
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
29
<PAGE>
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.
30
<PAGE>
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
31
<PAGE>
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
32
<PAGE>
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
33
<PAGE>
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
34
<PAGE>
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.
35
<PAGE>
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
36
<PAGE>
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
37
<PAGE>
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
38
<PAGE>
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;
39
<PAGE>
(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;
40
<PAGE>
(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
41
<PAGE>
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
42
<PAGE>
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.
43
<PAGE>
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
44
<PAGE>
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.
45
<PAGE>
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
46
<PAGE>
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
47
<PAGE>
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.
48
<PAGE>
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
49
<PAGE>
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
50
<PAGE>
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.
51
<PAGE>
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
52
<PAGE>
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.
53
<PAGE>
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.
54
<PAGE>
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
55
<PAGE>
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"
56
<PAGE>
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
57
<PAGE>
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
58
<PAGE>
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
59
<PAGE>
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
60
<PAGE>
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,"
61
<PAGE>
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.
62
<PAGE>
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,
63
<PAGE>
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
64
<PAGE>
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.
65
<PAGE>
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
66
<PAGE>
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.
67
<PAGE>
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 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.
68
<PAGE>
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
69
<PAGE>
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
70
<PAGE>
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
71
<PAGE>
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
72
<PAGE>
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
73
<PAGE>
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
74
<PAGE>
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.
75
<PAGE>
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
76
<PAGE>
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
77
<PAGE>
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
78
<PAGE>
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
79
<PAGE>
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
80
<PAGE>
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
81
<PAGE>
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
82
<PAGE>
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
83
<PAGE>
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.
84
<PAGE>
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
85
<PAGE>
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
86
<PAGE>
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
87
<PAGE>
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
88
<PAGE>
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.
89
<PAGE>
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
90
<PAGE>
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
91
<PAGE>
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
92
<PAGE>
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.
93
<PAGE>
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:
94
<PAGE>
(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
95
<PAGE>
(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
96
<PAGE>
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
97
<PAGE>
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.
98
<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.
99
<PAGE>
"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.
100
<PAGE>
"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.
101
<PAGE>
"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.
102
<PAGE>
"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.
103
<PAGE>
------------------------------------------------------
------------------------------------------------------
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 SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THEIR
RESPECTIVE DATES.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Summary of Terms.............................. S-1
Risk Factors.................................. S-11
The Mortgage Pool............................. S-14
Servicing of the Mortgage Loans............... S-22
Description of the Certificates............... S-25
Yield, Prepayment and Maturity
Considerations.............................. S-38
Use of Proceeds............................... S-44
Federal Income Tax Consequences............... S-44
State Taxes................................... S-46
ERISA Considerations.......................... S-46
Underwriting.................................. S-49
Legal Matters................................. S-49
Ratings....................................... S-49
Index of Defined Terms........................ S-51
Annex I....................................... A-1
PROSPECTUS
Prospectus Supplement......................... 3
Reports to Holders............................ 3
Available Information......................... 3
Incorporation of Certain Documents by
Reference................................... 4
Summary of Terms.............................. 5
Risk Factors.................................. 18
Description of the Securities................. 24
The Trust Funds............................... 28
Enhancement................................... 36
Servicing of Loans............................ 38
The Agreements................................ 45
Certain Legal Aspects of the Loans............ 54
The Depositor................................. 64
Use of Proceeds............................... 65
Certain Federal Income Tax Considerations..... 65
State Tax Considerations...................... 87
FASIT Securities.............................. 87
ERISA Considerations.......................... 91
Legal Matters................................. 96
Financial Information......................... 96
Rating........................................ 96
Legal Investment.............................. 97
Plan of Distribution.......................... 97
Glossary of Terms............................. 99
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
$98,941,000
(APPROXIMATE)
AMERICAN RESIDENTIAL
HOME EQUITY
LOAN TRUST 1998-1
[logo]
AMERICAN RESIDENTIAL
HOLDINGS, INC.
SELLER
COUNTRYWIDE HOME LOANS, INC.
MASTER SERVICER
BEAR STEARNS ASSET BACKED
SECURITIES, INC.
DEPOSITOR
------------------------
PROSPECTUS SUPPLEMENT
------------------------
BEAR, STEARNS & CO. INC.
JUNE 25, 1998
------------------------------------------------------
------------------------------------------------------
