<PAGE>
Pursuant to Rule 424(b)(5)
File No. 333-9532
PROSPECTUS SUPPLEMENT DATED JANUARY 28, 1999
TO PROSPECTUS DATED JUNE 4, 1998
$150,000,000
IRWIN HOME EQUITY ASSET BACKED CERTIFICATES,
SERIES 1999-1
IRWIN UNION BANK AND TRUST COMPANY
MASTER SERVICER
IRWIN HOME EQUITY CORPORATION
ORIGINATOR
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
THE TRUST --
o The Irwin Home Equity Trust 1999-1 will issue the
certificates described in the table below. The
trust's main source of funds for making payments
on the certificates will be collections on a pool
consisting of two groups of closed-end,
fixed-rate mortgage loans evidenced by promissory
notes and secured by first or second mortgages or
deeds of trust on residential one- to four-family
properties.
o Interest will be payable monthly on the 15th day
of each month, beginning in March 1999.
o Principal payments will also be payable monthly
to the extent described herein.
CREDIT ENHANCEMENT WILL BE PROVIDED BY --
o The availability, if any, of Excess Interest;
o Overcollateralization in certain circumstances,
as described herein; and
o A certificate guaranty insurance policy issued by
Ambac Assurance Corporation, which will protect
holders of the certificates against certain
shortfalls in amounts due to be distributed at
the times and to the extent described herein.
[LOGO]
<TABLE>
<CAPTION>
Initial Principal Balance Pass-Through Rate Description
<S> <C> <C> <C>
Class A-1 Certificates.................... $62,000,000 (1) Floating Rate
Class A-2 Certificates.................... $22,600,000 5.97% Fixed Rate
Class A-3 Certificates.................... $21,400,000 6.27% Fixed Rate
Class A-4 Certificates.................... $19,000,000 6.57% Fixed Rate
Class A-5 Certificates.................... $25,000,000 6.21% Fixed Rate
</TABLE>
(1) The Class A-1 Certificate will bear interest at a variable rate equal to
the sum of (i) LIBOR plus (ii) 0.30% per annum. The initial Pass-Through Rate
for the Class A-1 Certificates will be determined two business days before the
Issue Date.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE CERTIFICATES OFFERED BY THIS
PROSPECTUS SUPPLEMENT OR DETERMINED THAT THIS PROSPECTUS SUPPLEMENT OR THE
ACCOMPANYING PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The certificates are offered by the underwriter when, as and if issued,
delivered to and accepted by the underwriter and subject to certain other
conditions. We expect that delivery of the certificates will be made in
book-entry form only through the facilities of The Depository Trust Company,
Cedel or the Euroclear System on or about February 25, 1999.
BEAR, STEARNS & CO. INC.
<PAGE>
BEFORE YOU DECIDE TO INVEST IN ANY
CERTIFICATES, READ THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS,
ESPECIALLY THE RISK FACTORS
BEGINNING ON PAGE S-19 HEREIN AND
ON PAGE 18 OF THE PROSPECTUS.
THE CERTIFICATES WILL BE
OBLIGATIONS OF THE TRUST ONLY. THE
CERTIFICATES AND THE ASSETS OF THE
TRUST WILL NOT BE OBLIGATIONS OF
IRWIN UNION BANK AND TRUST COMPANY,
BEAR STEARNS ASSET BACKED
SECURITIES, INC., OR ANY OF THEIR
RESPECTIVE AFFILIATES.
THE CERTIFICATES ARE NOT DEPOSITS
AND NEITHER THE CERTIFICATES NOR
THE UNDERLYING MORTGAGE LOANS ARE
INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY OR
INSTRUMENTALITY.
<PAGE>
The Certificates:
o represent beneficial interests in a trust, the primary assets of which are
a pool consisting of two groups of closed-end, fixed-rate mortgage loans
evidenced by promissory notes and secured by first or second mortgages and
deeds of trust on residential one- to four- family properties;
o currently have no trading market;
o are not guaranteed by any governmental agency; and
o will be purchased by the underwriter in the manner described under "Plan of
Distribution", from the depositor and will be offered by the underwriter to
the public in negotiated transactions or otherwise at varying prices to be
determined, in each case, at the time of sale.
o For complete information about the certificates, read both this prospectus
supplement and the prospectus. This prospectus supplement must be
accompanied by the prospectus if it is being used to offer and sell the
certificates.
Content of Prospectus Supplement and Prospectus
o You should rely only on the information contained in this prospectus
supplement and the prospectus. We have not authorized anyone to provide you
with different information. You should not assume that the information in
this prospectus supplement or the prospectus is accurate as of any date
other than the date on the front of this document.
o We provide information to you about the certificates in two separate
documents that progressively provide more detail: (a) the prospectus, which
provides general information, some of which may not apply to the
certificates, and (b) this prospectus supplement, which describes the
specific terms of the certificates.
o If the terms relating to the certificates vary between this prospectus
supplement and the accompanying prospectus, you should rely on the
information in this prospectus supplement.
o We include cross-references in this prospectus supplement and the
prospectus to captions in these materials where you can find further
related discussions. The table of contents on page S-3 herein provides the
pages on which these captions are located.
o You can find a listing of the pages where capitalized terms used in this
prospectus supplement and the prospectus are defined under the caption
"Index of Defined Terms" beginning on page S-76 herein and under the
caption "Glossary of Terms" beginning on page 98 in the prospectus.
o 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.
Limitations on Offers or Solicitations
We do not intend this document to be an offer or solicitation:
o if used in a jurisdiction in which such offer or solicitation is
not authorized;
o if the person making such offer or solicitation is not qualified
to do so; or
o if such offer or solicitation is made to anyone to whom it is
unlawful to make such offer or solicitation.
Reports To Certificateholders
Unless and until definitive certificates are issued under the limited
circumstances described herein, the master servicer will prepare and send
unaudited monthly and annual reports, containing information concerning the
trust fund, on behalf of the trust to the trustee and Cede & Co., as registered
holder of the certificates and the nominee of The Depository Trust Company. Such
reports may be made available to certificate owners in accordance with the
rules, regulations and procedures creating and affecting The Depository Trust
Company. See "Description of the Certificates--Book-Entry Registration" and
"--Report to Certificateholders" herein. The trust does not intend to provide
any financial information to the certificate owner which has been examined and
reported upon, with an opinion expressed by, an independent public accountant.
S-2
<PAGE>
TABLE OF CONTENTS
SUMMARY TERMS OF THE CERTIFICATES.........................S-4
RISK FACTORS.............................................S-19
Unpredictability of Prepayments and its Effect
on Yields..........................................S-19
Risk of Group I Mortgage Interest Rates Reducing
the Class A-1 Pass-Through Rate on the Class
A-1 Certificates...................................S-19
Limited Operating History of the Originator.........S-19
Underwriting Standards..............................S-19
Geographic Concentration............................S-20
Amount of Borrower's Equity.........................S-20
Seasoning of Mortgage Loans.........................S-20
Subordinate Loans...................................S-20
Potential Inadequacy of Credit Enhancement..........S-20
Year 2000 Systems Risk..............................S-21
DESCRIPTION OF THE MORTGAGE LOANS........................S-21
General.............................................S-21
Solicitation Process................................S-22
Mandatory Repurchase or Substitution of Mortgage
Loans..............................................S-38
IRWIN FUNDING CORP.......................................S-38
IRWIN HOME EQUITY CORPORATION............................S-38
General.............................................S-38
As Subservicer......................................S-39
Delinquency and Loss Experience of the
Originator's Servicing Portfolio...................S-40
PREPAYMENT AND YIELD CONSIDERATIONS......................S-42
DESCRIPTION OF THE CERTIFICATES..........................S-50
General.............................................S-50
Book-Entry Registration.............................S-50
Definitive Certificates.............................S-53
Assignment of Mortgage Loans........................S-53
Representations and Warranties of IUB and the
Transferor.........................................S-55
Payments on the Mortgage Loans......................S-56
Servicing Fees and Other Compensation and Payment
of Expenses........................................S-58
Overcollateralization...............................S-58
Flow of Funds.......................................S-58
Calculation of LIBOR................................S-61
Report to Certificateholders........................S-62
SERVICING OF THE MORTGAGE LOANS..........................S-62
The Master Servicer.................................S-62
Collection and Other Servicing Procedures;
Mortgage Loan Modifications........................S-62
Realization Upon or Sale of Defaulted Mortgage
Loans..............................................S-63
Servicing and Other Compensation and Payment of
Expenses...........................................S-64
Enforcement of Due-on-Sale Clauses..................S-64
Maintenance of Insurance Policies and Errors and
Omissions and Fidelity Coverage....................S-65
Master Servicer Reports.............................S-65
Removal and Resignation of Master Servicer..........S-66
Termination; Purchase of Mortgage Loans.............S-67
Amendment...........................................S-67
THE CERTIFICATE INSURANCE POLICY.........................S-68
THE TRUSTEE..............................................S-68
THE CERTIFICATE INSURER..................................S-69
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS................S-71
ERISA CONSIDERATIONS.....................................S-72
LEGAL INVESTMENT.........................................S-73
PLAN OF DISTRIBUTION.....................................S-74
EXPERTS..................................................S-74
RATINGS..................................................S-74
LEGAL MATTERS............................................S-75
INDEX OF DEFINED TERMS...................................S-76
S-3
<PAGE>
SUMMARY TERMS OF THE CERTIFICATES
Because this is a summary, it does not contain all the information that
may be important to you. You should read the entire Prospectus and Prospectus
Supplement carefully before you decide to purchase a Certificate. If capitalized
terms are not defined in this Summary, they are defined in the Prospectus.
<TABLE>
<S> <C>
Title of Securities.................................... Irwin Home Equity Asset Backed Certificates, Series 1999-1.
Certificates........................................... The Class A-1 Certificates, the Class A-2 Certificates, the Class A-3
Certificates, the Class A-4 Certificates (the "Group I Certificates")
and the Class A-5 Certificates (the "Group II Certificates" and
together with the Group I Certificates, the "Class A Certificates")
and one class of residual Certificates (the "Class R Certificates")
(the Class A Certificates together with the Class R Certificates, the
"Certificates"). Only the Class A Certificates are offered hereby.
Trust.................................................. Irwin Home Equity Trust 1999-1, a trust to be formed under the laws of
the State of New York.
Depositor ............................................. Bear Stearns Asset Backed Securities, Inc. (the "Depositor").
Master Servicer ....................................... Irwin Union Bank and Trust Company ("IUB", or in its capacity as master
servicer, the "Master Servicer") will act as Master Servicer for the
Trust Fund and, in that capacity, will (i) provide customary
servicing functions with respect to the Mortgage Loans pursuant to a
Pooling and Servicing Agreement (the "Pooling and Servicing
Agreement") among the Depositor, the Master Servicer and Norwest Bank
Minnesota, National Association (the "Trustee"), (ii) provide certain
reports to the Trustee and (iii) make certain advances.
Transferor ............................................ Irwin Funding Corp. (in its capacity as the seller to the Depositor,
the "Transferor"). The Transferor will acquire the Mortgage Loans
from IUB and sell the Mortgage Loans to the Depositor.
Originator............................................. Irwin Home Equity Corporation.
Trustee................................................ Norwest Bank Minnesota, National Association, a national banking
association.
Cut-Off Date........................................... The close of business on January 31, 1999.
Issue Date............................................. On or about February 25, 1999 (the "Issue Date").
Original Class A-1 Principal Balance................... $62,000,000
Original Class A-2 Principal Balance .................. $22,600,000
Original Class A-3 Principal Balance .................. $21,400,000
</TABLE>
S-4
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Original Class A-4 Principal Balance .................. $19,000,000
Original Class A-5 Principal Balance .................. $25,000,000
First Remittance Date.................................. March 15, 1999. Distributions on the Certificates will be made on the
15th day of each month (or, if such 15th day is not a Business Day,
on the next succeeding Business Day) (each, a "Remittance Date").
"Business Day" will be any other than (i) a Saturday or Sunday, or
(ii) any day on which banking institutions located in the States of
New York, Minnesota, Maryland, Indiana or California are authorized
or obligated by law or executive order to close.
Certificate Ratings.................................... It is a condition to the issuance of the Class A Certificates that the
Class A Certificates shall have been rated not lower than AAA by
Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
("Standard & Poor's") and Aaa by Moody's Investors Service, Inc.
("Moody's", and together with Standard & Poor's, the "Rating
Agencies") based on the presence of the Certificate Insurance Policy.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time
by the assigning rating organization. The ratings do not address the
possibility that Class A Certificateholders may suffer a lower than
anticipated yield.
Description of Certificates; Denominations............. General. The Trust Fund will be formed and the Certificates will be
issued pursuant to the Pooling and Servicing Agreement. The
Certificates will represent the entire beneficial ownership interest
in a trust fund (the "Trust Fund") which is composed primarily of the
principal balances as of the Cut-Off Date of a pool consisting of two
groups ("Group I" and "Group II", respectively, and each, a "Loan
Group") of closed-end, fixed-rate mortgage loans (the "Mortgage
Loans"), evidenced by promissory notes and secured by first or second
mortgages or deeds of trust on residential one-to four-family
properties (such properties, the "Mortgaged Properties"). Group I
consists of Mortgage Loans (the "Group I Mortgage Loans") secured by
first and second priority liens on Mortgaged Properties. Group II
consists of Mortgage Loans (the "Group II Mortgage Loans") with (i)
original principal balances no greater than $240,000 and secured by
first priority liens or (ii) original principal balances no greater
than $120,000 and secured by second priority liens.
In addition, the Depositor has caused Ambac Assurance Corporation
(the "Certificate Insurer") to issue a certificate guaranty
insurance policy (the "Certificate Insurance Policy"), for the
benefit of the Class A Certificateholders, pursuant to which it will
guarantee certain payments to the Trustee for the benefit of the
Class A Certificateholders, as described herein.
</TABLE>
S-5
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<TABLE>
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Book-Entry Form. The Class A Certificates initially will be issued
in book-entry form, in minimum denominations of $1,000 and integral
multiples thereof (except for one Certificate of each class which
may be issued in a greater or lesser amount). The Class A
Certificates are sometimes referred to as "Book-Entry Certificates""
No person acquiring an interest in the Book-Entry Certificates (a
"Beneficial Owner") will be entitled to receive a definitive
certificate representing such person's interest in the Trust Fund,
except under limited circumstances as described herein. Beneficial
Owners may elect to hold their interests through The Depository
Trust Company ("DTC"), in the United States, or Cedel ("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.
The Mortgage Loan Groups............................... The statistical information regarding the Mortgage Loans and the
Mortgaged Properties is based upon the characteristics of the Loan
Groups as of the close of business on the Cut-Off Date. Unless
otherwise indicated, all percentages set forth herein are based upon
the aggregate Principal Balance of the Group I Mortgage Loans and the
Group II Mortgage Loans as of the Cut-Off Date, which was
$125,000,005.96 and $25,000,041.52, respectively.
The Mortgage Loans will consist of fixed rate, closed-end mortgage
loans secured by first or second priority liens and having original
terms to maturity of not greater than 30 years. The security for the
Mortgage Loans will be mortgages or deeds of trust on the Mortgaged
Properties, which provide for substantially equal payments in an
amount sufficient to amortize the Mortgage Loan over its term.
The monthly payments (the "Monthly Payments") for each Mortgage Loan
will be due on the fifteenth day of each month or, in the case of
certain Mortgage Loans, the first day of each month (each, a "Due
Date").
The Mortgage Loans were underwritten in accordance with the
underwriting standards of Irwin Home Equity Corporation (the
"Originator") developed at the direction of IUB. As of the Cut-Off
Date, when measured by aggregate principal balance, (i) with respect
to Group I, approximately 34.31% of the Mortgage Loans are secured
by Mortgaged Properties located in California, approximately 8.71%
of the Mortgage Loans are secured by Mortgaged Properties located in
selected metropolitan markets in Florida, approximately 7.72% of the
Mortgage Loans are secured by Mortgaged Properties located in
selected metropolitan markets in Ohio, approximately 7.37% of the
Mortgage Loans are secured by Mortgaged
</TABLE>
S-6
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<TABLE>
<S> <C>
Properties located in selected metropolitan markets in Michigan and
approximately 7.37% of the Mortgage Loans are secured by Mortgaged
Properties located in selected metropolitan markets in Illinois, and
(ii) with respect to Group II, approximately 33.97% of the Mortgage
Loans are secured by Mortgaged Properties located in California,
approximately 13.62% of the Mortgage Loans are secured by Mortgaged
Properties located in selected metropolitan markets in Florida,
approximately 5.77% of the Mortgage Loans are secured by Mortgaged
Properties located in selected metropolitan markets in Ohio,
approximately 6.46% of the Mortgage Loans are secured by Mortgaged
Properties located in selected metropolitan markets in Michigan and
approximately 9.86% of the Mortgage Loans are secured by Mortgaged
Properties located in selected metropolitan markets in Illinois.
Mortgage Interest Rate................................. The "Mortgage Interest Rate" of each Mortgage Loan is the per annum
interest rate required to be paid by the mortgagor under the terms of
the related note. The Mortgage Interest Rate borne by each Mortgage
Loan is fixed as of the date of origination of such Mortgage Loan. As
of the Cut-Off Date, the weighted average Mortgage Interest Rate for
the Group I Mortgage Loans was approximately 10.512%, and the Group
II Mortgage Loans was approximately 10.510%.
Interest; Class A-1 Pass-Through Rate.................. The Class A-1 Pass-Through Rate will be equal to the lesser of (i) the
sum of LIBOR plus a fixed margin of 0.30% per annum and (ii) the Net
Mortgage Interest Rate of the Group I Mortgage Loans, as described
herein under "Description of the Certificates - Flow of Funds".
Interest on the Class A-1 Certificates will accrue during the period
beginning on the immediately preceding Remittance Date (or beginning
on the Issue Date, in the case of the first Remittance Date) and
ending on the date immediately preceding the related Remittance Date
(each, the "Interest Period" relating to the Class A-1 Certificates)
at the Class A-1 Pass-Through Rate on the Class A-1 Principal Balance
as of the last Remittance Date (after giving effect to principal
distributed on such last Remittance Date)(such interest, net of
interest shortfalls not covered by Compensating Interest, the "Class
A-1 Interest Distribution Amount"). For purposes of accrual and
payment of interest on the Class A-1 Certificates, all calculations
will be based on an assumed year of 360 days and the actual number of
days elapsed since the previous Remittance Date.
Interest; Class A-2 Pass-Through Rate.................. 5.97% per annum. Interest on the Class A-2 Certificates will accrue
during the period beginning on the first day of the month immediately
preceding the related Remittance Date and ending on the last day of
such month (each, the "Interest Period" relating to the Class A-2,
Class A-3, Class A-4 and Class A-5 Certificates) at the Class A-2
Pass-Through Rate on the Class A-2
</TABLE>
S-7
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<TABLE>
<S> <C>
Principal Balance as of the last Remittance Date (after giving
effect to principal distributed on such last Remittance Date)(such
interest, net of interest shortfalls not covered by Compensating
Interest, the "Class A-2 Interest Distribution Amount"). For
purposes of accrual and payment of interest on the Class A-2
Certificates, all calculations will be based on an assumed year of
360 days consisting of twelve 30-day months.
Interest; Class A-3 Pass-Through Rate.................. 6.27% per annum. Interest on the Class A-3 Certificates will accrue
during the Interest Period relating to the Class A-3 Certificates at
the Class A-3 Pass-Through Rate on the Class A-3 Principal Balance as
of the last Remittance Date (after giving effect to principal
distributed on such last Remittance Date)(such interest, net of
interest shortfalls not covered by Compensating Interest, the "Class
A-3 Interest Distribution Amount"). For purposes of accrual and
payment of interest on the Class A-3 Certificates, all calculations
will be based on an assumed year of 360 days consisting of twelve
30-day months.
Interest; Class A-4 Pass-Through Rate.................. 6.57% per annum. The Class A-4 Pass-Through Rate after the Optional
Termination Date shall be increased by 0.75% (75 basis points) per
annum. Interest on the Class A-4 Certificates will accrue during the
Interest Period at the Class A-4 Pass-Through Rate on the Class A-4
Principal Balance as of the last Remittance Date (after giving effect
to principal distributed on such last Remittance Date)(such interest,
net of interest shortfalls not covered by Compensating Interest, the
"Class A-4 Interest Distribution Amount"). For purposes of accrual
and payment of interest on the Class A-4 Certificates, all
calculations will be based on an assumed year of 360 days consisting
of twelve 30-day months.
Interest; Class A-5 Pass-Through Rate.................. 6.21% per annum. The Class A-5 Pass-Through Rate after the Optional
Termination Date shall be increased by 0.75% (75 basis points) per
annum. Interest on the Class A-5 Certificates will accrue during the
Interest Period at the Class A-5 Pass-Through Rate on the Class A-5
Principal Balance as of the last Remittance Date (after giving effect
to principal distributed on such last Remittance Date)(such interest,
net of interest shortfalls not covered by Compensating Interest, the
"Class A-5 Interest Distribution Amount"). For purposes of accrual
and payment of interest on the Class A-5 Certificates, all
calculations will be based on an assumed year of 360 days consisting
of twelve 30-day months.
Principal; Class A Principal Balance................... The "Principal Balance" of any Mortgage Loan (or related REO Property)
is the outstanding principal balance of such Mortgage Loan as of the
end of the calendar month preceding such date of determination. The
"Class A-1 Principal Balance" represents the maximum specified dollar
amount of principal to which the Holders of the Class A-1
Certificates are entitled from the future cash
</TABLE>
S-8
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<TABLE>
<S> <C>
flow on the assets in the Trust Fund. The "Class A-1 Principal
Balance" at any time is equal to the Class A-1 Principal Balance as
of the Issue Date (the "Original Class A-1 Principal Balance") minus
the aggregate, cumulative amounts actually distributed as principal
to the Class A-1 Certificateholders. The "Class A-2 Principal
Balance" represents the maximum specified dollar amount of principal
to which the Holders of the Class A-2 Certificates are entitled from
the future cash flow on the assets in the Trust Fund. The "Class A-2
Principal Balance" at any time is equal to the Class A-2 Principal
Balance as of the Issue Date (the "Original Class A-2 Principal
Balance") minus the aggregate, cumulative amounts actually
distributed as principal to the Class A-2 Certificateholders. The
"Class A-3 Principal Balance" represents the maximum specified
dollar amount of principal to which the Holders of the Class A-3
Certificates are entitled from the future cash flow on the assets in
the Trust Fund. The "Class A-3 Principal Balance" at any time is
equal to the Class A-3 Principal Balance as of the Issue Date (the
"Original Class A-3 Principal Balance") minus the aggregate,
cumulative amounts actually distributed as principal to the Class
A-3 Certificateholders. The "Class A-4 Principal Balance" represents
the maximum specified dollar amount of principal to which the
Holders of the Class A-4 Certificates are entitled from the future
cash flow on the assets in the Trust Fund. The "Class A-4 Principal
Balance" at any time is equal to the Class A-4 Principal Balance as
of the Issue Date (the "Original Class A-4 Principal Balance") minus
the aggregate, cumulative amounts actually distributed as principal
to the Class A-4 Certificateholders. The "Class A-5 Principal
Balance" represents the maximum specified dollar amount of principal
to which the Holders of the Class A-5 Certificates are entitled from
the future cash flow on the assets in the Trust Fund. The "Class A-5
Principal Balance" at any time is equal to the Class A-5 Principal
Balance as of the Issue Date (the "Original Class A-5 Principal
Balance") minus the aggregate, cumulative amounts actually
distributed as principal to the Class A-5 Certificateholders. The
"Class A Principal Balance" refers to each of the Class A-1
Principal Balance, the Class A-2 Principal Balance, the Class A-3
Principal Balance, the Class A-4 Principal Balance and the Class A-5
Principal Balance.
The Holders of Class A Certificates are entitled to receive certain
monthly distributions of principal on each Remittance Date which
generally reflect collections of principal on the Mortgage Loans in
the related Loan Group during the prior calendar month (the "Due
Period"). The Class A-1, Class A-2, Class A-3 and Class A-4
Certificates are generally entitled to receive collections on the
Group I Mortgage Loans; the Class A-5 Certificates are generally
entitled to receive collections on the Group II Mortgage Loans.
</TABLE>
S-9
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<TABLE>
<S> <C>
The "Class A Principal Distribution Amount" for any Remittance Date
and either Loan Group will be the lesser of:
(a) the excess of (x) the related Group I Available Amount or Group
II Available Amount plus any Group I Excess Spread or Group II
Excess Spread (less any Overcollateralization Increase Amounts with
respect to such Group), as applicable, plus any Insured Payment over
(y) either (i) the sum of the Class A-1 Interest Distribution
Amount, the Class A-2 Interest Distribution Amount, the Class A-3
Interest Distribution Amount and the Class A-4 Interest Distribution
Amount or (ii) the Class A-5 Interest Distribution Amount, as
applicable, and
(b) an amount equal to (X) the sum, without duplication, of:
(i) that portion of all scheduled installments of principal in
respect of the Mortgage Loans in the related Loan Group which is
received during the related Due Period together with all unscheduled
recoveries of principal (including Prepayments, Curtailments and
Deficient Valuations) on such Mortgage Loans actually collected by
the Master Servicer during the prior calendar month,
(ii) the Principal Balance of each Mortgage Loan in the related Loan
Group that was, effective on such Remittance Date, either
repurchased by the Transferor or IUB or purchased by the Master
Servicer during the preceding Due Period, but only to the extent the
amount equal to such Principal Balance is actually received by the
Trustee,
(iii) any Substitution Adjustment amounts delivered by the
Transferor or IUB on the related Remittance Date in connection with
a substitution of a Mortgage Loan in the related Loan Group, to the
extent such Substitution Adjustments are actually received by the
Trustee,
(iv) with respect to each Mortgage Loan in the related Loan Group
that became a Liquidated Mortgage Loan during the prior calendar
month, the Principal Balance of such Mortgage Loan immediately prior
to the time when such Mortgage Loan became a Liquidated Mortgage
Loan,
(v) any Overcollateralization Increase Amount with respect to the
related Loan Group,
(vi) to the extent of any Subordination Deficit, the excess, if any,
of (A) the sum of the Class A-1 Certificate Principal Balance, the
Class A-2 Certificate Principal Balance, the Class A-3 Certificate
Principal Balance and the Class A-4 Certificate Principal Balance
</TABLE>
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<S> <C>
over the Group I Principal Balance in the case of Group I, and (B)
the Class A-5 Certificate Principal Balance over the Group II
Principal Balance in the case of Group II, and
(vii) the proceeds received by the Trust Fund following any
termination of the Trust Fund, carried out in accordance with a plan
of complete liquidation or pursuant to the optional termination of
any of the Trust Fund by the Master Servicer, the Holder of the
Class R Certificate or the Certificate Insurer in accordance with
the Pooling and Servicing Agreement,
minus (Y) any Overcollateralization Release Amount.
The "Group I Available Amount" for any Remittance Date equals (i)
the Master Servicer Remittance Amount for Group I on such Remittance
Date minus any prepayment penalties included in such amount minus
(ii) such Loan Group's Proportional Share of (A) the Trustee Fee and
(B) the amount owed to the Certificate Insurer as premium for the
Certificate Insurance Policy. The "Group II Available Amount" for
any Remittance Date equals (i) the Master Servicer Remittance Amount
for Group II on such Remittance Date minus any prepayment penalties
included in such amount minus (ii) such Loan Group's Proportional
Share of (A) the Trustee Fee and (B) the amount owed to the
Certificate Insurer as premium for the Certificate Insurance Policy.
A Loan Group's "Proportional Share" is equal to (i)(A) the sum of
the A-1 Principal Balance, the Class A-2 Principal Balance, the
Class A-3 Principal Balance and the Class A-4 Principal Balance in
the case of Group I or (B) the Class A-5 Principal Balance in the
case of Group II, divided by (ii) the aggregate Certificate
Principal Balance of all Classes.
The "Group I Excess Spread" for any Remittance Date equals the
excess, if any, of the Group I Available Amount over the sum of the
Class A-1 Interest Distribution Amount, the Class A-2 Interest
Distribution Amount, the Class A-3 Interest Distribution Amount, the
Class A-4 Interest Distribution Amount and the Base Principal
Distribution Amount for Loan Group I. The "Group II Excess Spread"
for any Remittance Date equals the excess, if any, of Group II
Available Amount over the sum of the Class A-5 Interest Distribution
Amount and the Base Principal Distribution Amount for Loan Group II.
The "Base Principal Distribution Amount" determined separately for
each Loan Group is equal to (A) the sum of clauses (b)(i), (ii),
(iii), (iv), (vi) and (vii) of the definition of Class A Principal
Distribution Amount minus (B) any related Overcollateralization
Release Amount.
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The "Master Servicer Remittance Amount" is generally equal to the
sum of (i) all unscheduled collections of principal and interest on
the Mortgage Loans in the related Loan Group collected by the Master
Servicer during the related Due Period, all scheduled Monthly
Payments (net of the Servicing Fee) on the Mortgage Loans in the
related Loan Group due on the related Due Date and received on or
prior to the Business Day preceding such Master Servicer Remittance
Date and any prepayment penalties collected, (ii) all Periodic
Advances made by the Master Servicer with respect to interest
payments due to be received on the Mortgage Loans in the related
Loan Group on the related Due Date and (iii) any other amounts
required to be placed in a Collection Account by the Master Servicer
in respect of the Mortgage Loans in the related Loan Group pursuant
to the Pooling and Servicing Agreement. The "Master Servicer
Remittance Date" is the third Business Day prior to the related
Remittance Date.
The "Overcollateralization Increase Amount" with respect to each of
Group I and Group II, as applicable, is equal to the lesser of (i)
the Group I Excess Spread and the Group II Excess Spread,
respectively, and (ii) the related Overcollateralization Deficiency
Amount.
The "Overcollateralization Deficiency Amount" with respect
to each Loan Group and any date of determination, is equal to the
excess, if any, of the related Overcollateralization Target Amount
over the related Overcollateralization Amount.
The "Overcollateralization Target Amount" with respect to each Loan
Group will be established pursuant to the Pooling and Servicing
Agreement and may increase or decrease over time and may be modified
from time to time by agreement of the Certificate Insurer and IUB.
The "Overcollateralization Release Amount" with respect to each Loan
Group and any date of determination, is equal to the excess, if any,
of the related Overcollateralization Amount over the related
Overcollateralization Target Amount.
The "Overcollateralization Amount" with respect to each Loan Group
and each Remittance Date, is the excess, if any, of (i) the
aggregate Principal Balance of the Group I Mortgage Loans (with
respect to Group I) or the aggregate Principal Balance of the Group
II Mortgage Loans (with respect to Group II), as applicable, as of
the close of business on the last day of the related Due Period over
(ii) the aggregate Certificate Principal Balance of the Group I
Certificates or Group II Certificates, as applicable, as of such
Remittance Date (after taking into account the distribution of the
related Base Principal Distribution Amount, on such Remittance
Date).
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The actual amount distributed with respect to the Class A-1
Certificates on any Remittance Date is the "Class A-1 Distribution
Amount" for such Remittance Date. The actual amount distributed with
respect to the Class A-2 Certificates on any Remittance Date is the
"Class A-2 Distribution Amount" for such Remittance Date. The actual
amount distributed with respect to the Class A-3 Certificates on any
Remittance Date is the "Class A-3 Distribution Amount" for such
Remittance Date. The actual amount distributed with respect to the
Class A-4 Certificates on any Remittance Date is the "Class A-4
Distribution Amount" for such Remittance Date. The actual amount
distributed with respect to the Class A-5 Certificates on any
Remittance Date is the "Class A-5 Distribution Amount" for such
Remittance Date.
A "Liquidated Mortgage Loan" is, in general, a defaulted Mortgage
Loan as to which the Master Servicer has determined that all amounts
that it expects to recover on such Mortgage Loan have been recovered
(exclusive of any possibility of a deficiency judgment). To the
extent of the Available Amount for the related Loan Group, a loss on
a Liquidated Mortgage Loan in the related Loan Group (a "Liquidated
Loan Loss") will be recovered by the Holders of the Group I
Certificates or the Group II Certificates, as applicable, on the
Remittance Date which immediately follows the event of loss. Any
Liquidated Loan Loss that results in a Subordination Deficit will
require payment of an Insured Payment if not otherwise available
from the Group I Available Amount or Group II Available Amount, as
applicable. The Certificate Insurer will insure the timely payment
of interest and the ultimate payment of principal on the Class A
Certificates.
The "Subordination Deficit" for the Mortgage Loans and any
Remittance Date, is the excess, if any, of (a) the aggregate of the
Certificate Principal Balance of all Classes, on such Remittance
Date, after taking into account the payment of the related Principal
Distribution Amount on such Remittance Date (except for amounts
payable under the Certificate Insurance Policy) over (b) the
aggregate Principal Balance of the Mortgage Loans, as of the end of
the related Due Period.
The "Principal Balance" of any Mortgage Loan as of any date of
determination is the principal balance of such Mortgage Loan as of
the Cut-Off Date, after giving effect to prepayments received on or
prior to the latest Due Date, Deficient Valuations incurred prior to
such Due Date and the payment of principal due on such Due Date and
irrespective of any delinquency in payment by the related Mortgagor.
The Principal Balance of a Mortgage Loan which becomes a Liquidated
Mortgage Loan on or prior to such Due Date shall be zero.
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Credit Enhancement..................................... The credit enhancement provided for the benefit of the Class A
Certificateholders consists of (a) excess interest, (b) the
Overcollateralization Amounts and (c) the Certificate Insurance
Policy.
Excess Interest
Because the amount of interest collected on the Mortgage Loans for
each Due Period is expected to be higher than the Interest
Distribution Amount for the Class A Certificates for the related
Remittance Date, excess interest will be generated. This excess
interest will be applied to create and maintain the required
Overcollateralization Amount prior to being paid to the holders of
the Class R Certificates.
Overcollateralization
On the Closing Date, the Overcollateralization Amount will equal
zero. As a result of the application of the Excess Spread in
reduction of the principal balance of the Class A Certificates, the
applicable Overcollateralization Amount is expected to increase over
time until it reaches the applicable Overcollateralization Target
Amount; however the Pooling and Servicing Agreement provides that,
subject to certain trigger tests, the required percentage level of
overcollateralization may increase or decrease over time.
While the distribution of the Available Amount to the holders of the
Class A Certificates in reduction of the Class A Principal Balance
has been designed to produce and maintain a given level of
overcollateralization with respect to the Class A Certificates and
each Loan Group, there can be no assurance that the Master Servicer
Remittance Amount will be sufficient to ensure that such
overcollateralization level will be achieved or maintained at all
times.
The Certificate Insurance Policy
The Class A Certificateholders will have the benefit of the
Certificate Insurance Policy, discussed more fully below.
The Certificate Insurer ............................... Ambac Assurance Corporation (the "Certificate Insurer").
Certificate Insurance Policy........................... The Certificate Insurer will issue a Certificate Guaranty Insurance
Policy (the "Certificate Insurance Policy"), pursuant to which it
will irrevocably and unconditionally guaranty payment on each
Remittance Date of Insured Payments to the Trustee for the benefit of
the Holders of the Class A Certificates. The Certificate Insurer will
generally be required to make available to the Trustee (a) on each
Remittance Date, the
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sum of (i) the excess, if any, of the sum of the Class A-1 Interest
Distribution Amount, the Class A-2 Interest Distribution Amount, the
Class A-3 Interest Distribution Amount and the Class A-4 Interest
Distribution Amount or the Class A-5 Interest Distribution Amount,
as applicable, over the related Available Amount and the applicable
Group I or Group II Excess Spread and (ii) any Subordination Deficit
and (b) any unpaid Preference Amount (as defined in the related
Policy). The Certificate Insurance Policy does not guarantee the
Class A Certificates any specified rate of principal payments. A
payment by the Certificate Insurer under the Certificate Insurance
Policy is referred to herein as an "Insured Payment". The
Certificate Insurer will be entitled to reimbursement for all
Insured Payments together with interest thereon.
Servicing of the Mortgage Loans........................ The Master Servicer has agreed to service the Mortgage Loans on a
"scheduled/actual" basis (i.e., the Master Servicer is responsible
for advancing scheduled payments of interest) in accordance with the
Pooling and Servicing Agreement and to cause the Mortgage Loans to be
serviced with the same care as it customarily employs in servicing
and administering mortgage loans for its own account in accordance
with accepted mortgage servicing practices of prudent lending
institutions and giving due consideration to the Certificate
Insurer's and the Certificateholders' reliance on the Master Servicer.
Periodic Advances...................................... Subject to the Master Servicer's determination that such action would
not constitute a Nonrecoverable Advance (as defined herein), the
Master Servicer is required to deposit into the Certificate Account
no later than the close of business on the third Business Day prior
to the related Remittance Date (such day, the "Determination Date")
an amount equal to the sum of (a) the interest portion of the Monthly
Payments on each Mortgage Loan due by the related Due Date but not
received by the Master Servicer as of the close of business on the
related Determination Date, net of the Servicing Fee and (b) with
respect to each REO Property which was acquired during or prior to
the related Due Period and as to which an REO disposition did not
occur during the related Due Period, an amount equal to the excess,
if any, of interest on the Principal Balance of the Mortgage Loan
related to such REO Property at the related Mortgage Interest Rate,
net of the Servicing Fee, for the related Due Period over the net
income from the REO Property to be transferred to the Certificate
Account for such Remittance Date pursuant to the Pooling and
Servicing Agreement (the "Periodic Advance"). Such Periodic Advances
by the Master Servicer are reimbursable to the Master Servicer
subject to certain conditions and restrictions and are intended to
provide both sufficient funds for the payment of interest to the
Holders of the Class A Certificates and to pay the
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premium due the Certificate Insurer. In the event that,
notwithstanding the Master Servicer's good faith determination at
the time such Periodic Advance was made that it would not be a
Nonrecoverable Advance, such Periodic Advance becomes a
Nonrecoverable Advance, the Master Servicer will be entitled to
reimbursement therefor from the Trust Fund.
Prepayment Interest Shortfalls......................... Not later than the close of business on the Business Day immediately
following each Determination Date, the Master Servicer is required to
remit to the Certificate Account, an amount equal to the lesser of
(a) the aggregate of the Prepayment Interest Shortfalls for the
related Remittance Date resulting from principal prepayments in full
during the related Due Period and (b) its aggregate Servicing Fees
received in the related Due Period and shall not have the right to
reimbursement therefor (the "Compensating Interest"). With respect to
any Remittance Date and any Mortgage Loan, the "Prepayment Interest
Shortfall" will be an amount equal to the excess, if any, of (a) 30
days' interest on the outstanding Principal Balance of such Mortgage
Loan at a per annum rate equal to the related Mortgage Interest Rate,
any reduction as a result of a bankruptcy proceeding (a "Deficient
Valuation") and/or any reduction by a court of the monthly payment
due on such Mortgage Loan (a "Debt Service Reduction")), minus the
rate at which the Servicing Fee is calculated, over (b) the amount of
interest actually remitted by the Mortgagor in connection with such
principal prepayment in full less the Servicing Fee for such Mortgage
Loan in such month.
Servicing Advances..................................... Subject to the Master Servicer's determination that such action would
not constitute a Nonrecoverable Advance and that a prudent mortgage
lender would make a like advance if it or an affiliate owned the
related Mortgage Loan, the Master Servicer is required to advance
amounts with respect to the Mortgage Loans ("Servicing Advances")
constituting "out-of-pocket" costs and expenses relating to (a) the
preservation and restoration of the Mortgaged Property, (b)
enforcement proceedings, including foreclosures, (c) expenditures
relating to the purchase or maintenance of a first lien not included
in the 1999-1 REMIC on the Mortgaged Property, and (d) certain other
customary amounts described in the Pooling and Servicing Agreement.
Such Servicing Advances by the Master Servicer are reimbursable to
the Master Servicer subject to certain conditions and restrictions.
In the event that, notwithstanding the Master Servicer's good faith
determination at the time such Servicing Advance was made, that it
would not be a Nonrecoverable Advance, in the event such Servicing
Advance becomes a Nonrecoverable Advance, the Master Servicer will be
entitled to reimbursement therefor from the Trust Fund.
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Servicing Fee.......................................... As compensation for servicing the Mortgage Loans, the Master Servicer
is entitled to a servicing fee (the "Servicing Fee") calculated and
payable monthly from the interest portion of Monthly Payments, Net
Liquidation Proceeds and certain other proceeds.
Optional Termination................................... The Master Servicer may, at its option (and if such option is not
exercised by the Master Servicer, the Certificate Insurer or the
holder of the Class R Certificate may, at its option) repurchase all
but not less than all of the Mortgage Loans in the Trust on any date
(the "Optional Termination Date") on which the aggregate Principal
Balance of the Mortgage Loans, as of such date of determination, is
less than 10% of the aggregate Principal Balances of the Mortgage
Loans as of the Cut-Off Date, by purchasing from the 1999-1 REMIC on
the next succeeding Remittance Date, all of the property of the Trust
at a price equal to the sum of (a) the greater of (i) 100% of the
aggregate Principal Balances of each outstanding Mortgage Loan and
each REO Property acquired in respect of a Mortgage Loan and (ii) the
fair market value (disregarding accrued interest) of the Principal
Balances of such Mortgage Loans and such REO Properties, determined
as the average of three written bids (copies of which are to be
delivered to the Trustee and the Certificate Insurer by the Master
Servicer and the reasonable cost of which may be deducted from the
final purchase price) made by nationally-recognized dealers and based
on a valuation process which would be used to value comparable
mortgage loans and REO properties, (b) the greater of (i) the
aggregate amount of accrued and unpaid interest on the Principal
Balances of the Mortgage Loans through the related Due Period and
(ii) 30 days' accrued interest thereon computed at a rate equal to
the related Mortgage Interest Rate, in each case net of the Servicing
Fee, and (c) any unreimbursed amounts due to the Certificate Insurer
under the Pooling and Servicing Agreement, any accrued and unpaid
Insured Payments and any accrued and unpaid Trustee Fees.
ERISA Considerations.................................. A fiduciary of any employee benefit plan or other retirement
arrangement subject to ERISA, or the Internal Revenue Code of 1986,
as amended (the "Code") should carefully review with its legal
advisors whether the purchase or holding of Class A Certificates
could give rise to a transaction prohibited or not otherwise
permissible under ERISA or the Code. The U.S. Department of Labor has
issued an individual exemption, Prohibited Transaction Exemption
90-30, to the Underwriter, which generally exempts from the
application of certain of the prohibited transaction provisions of
ERISA, and the excise taxes imposed on such prohibited transactions
by Section 4975(a) and (b) of the Code and Section 502(i) of ERISA,
transactions relating to the purchase, sale and holding of
pass-through certificates such as the Class A Certificates and
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the servicing and operation of asset pools such as the 1999-1 REMIC,
provided that certain conditions are satisfied.
Legal Investment....................................... The Class A Certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984.
Federal Income Tax Status.............................. An election will be made to treat the Trust Fund as a real estate
mortgage investment conduit ( "1999-1 REMIC") for federal income tax
purposes. The Class A Certificates will be designated as the regular
interests in the 1999-1 REMIC and the Class R Certificates will be
designated as the residual interest in the 1999-1 REMIC.
The Class A Certificates generally will be treated as newly
originated debt instruments for federal income tax purposes.
Beneficial Owners of the Class A Certificates will be required to
report income thereon in accordance with the accrual method of
accounting.
In addition, if the Class A Certificates are issued with original
issue discount for federal income tax purposes, such event generally
will result in recognition of some taxable income in advance of the
receipt of the cash attributable to such income.
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RISK FACTORS
In addition to the matters described elsewhere in this prospectus
supplement and the accompanying prospectus, you should carefully consider the
following risk factors before deciding to purchase a certificate.
Unpredictability of Prepayments and its Effect on Yields
Approximately 28.39% of the mortgagors may, without penalty, prepay
their mortgage loans in whole or in part at any time. We cannot predict the rate
at which borrowers will repay their mortgage loans. A prepayment of a mortgage
loan would result in a prepayment on the related certificates.
o If you purchase your certificates at a discount and principal is repaid
slower than you anticipate, then your yield may be lower than you
anticipate.
o If you purchase your certificates at a premium and principal is repaid
faster than you anticipate, then your yield may be lower than you
anticipate.
o The rate of prepayments on the mortgage loans will be sensitive to
prevailing interest rates. Generally, if prevailing interest rates decline
significantly below the interest rates on the mortgage loans, those
mortgage loans are more likely to prepay than if prevailing rates remain
above the interest rates on such mortgage loans. Conversely, if prevailing
interest rates rise significantly, the prepayments on the mortgage loans
are likely to decrease.
o So long as credit enhancement is available, liquidations of defaulted
mortgage loans generally will have the same effect on the related
certificates as a prepayment of a mortgage loan.
o If the rate of default and the amount of losses on the mortgage loans
related to your certificate is higher than you expect, then your yield may
be lower than you expect.
Risk of Group I Mortgage Interest Rates Reducing the Class A-1 Pass-Through Rate
on the Class A-1 Certificates
The pass-through rate on the Class A-1 Certificates will be a floating
rate equal to the lesser of (i) LIBOR plus a fixed margin of 0.30% per annum and
(ii) the Net Mortgage Interest Rate of the Group I Mortgage Loans, as described
herein under "Description of the Certificates - Flow of Funds". The mortgage
interest rates of the mortgage loans are fixed and do not adjust. As a result,
if LIBOR rises, the foregoing limitations on the Class A-1 Pass-Through Rate
could result in certificateholders receiving interest at a rate less than LIBOR
plus the specified margin. In addition, the weighted average mortgage interest
rate of the Group I Mortgage Loans will change, and may decrease, over time due
to scheduled amortization of the Group I Mortgage Loans, prepayments of Group I
Mortgage Loans and removal of Group I Mortgage Loans by the Seller. There can be
no assurance that the weighted average mortgage interest rate of the Group I
Mortgage Loans will not decrease after the Issue Date.
Limited Operating History of the Originator
The originator of the mortgage loans, Irwin Home Equity Corporation,
was incorporated in September 1994. Because the originator began originating
mortgage loans only in January 1995, it does not have significant historical
delinquency, bankruptcy, foreclosure or default information that would be
helpful to you in trying to estimate the future delinquency and loss experience
of such loans.
Underwriting Standards
The originator's closed-end, fixed-rate, second mortgage products are
targeted primarily as debt consolidation loans for repeat or frequent borrowers
with strong credit ratings. Borrowers with similarly strong credit ratings are
targeted for the Originator's first mortgage refinance program. Such borrowers
are drawn from the most creditworthy and profitable customer segments within the
originator's targeted mailing lists and are solicited by mail. Since the
mortgage loans are originated by mail solicitation, you should be aware that
delinquencies and defaults with respect to the pool of
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mortgage loans may differ from those of a pool of similar mortgage loans
originated through other means of solicitation. In addition, because the
original combined loan-to-value ratio of the mortgage loans may be high relative
to that of other similar mortgage loans, recoveries on defaulted mortgage loans
may be lower than the level of recoveries experienced by such other defaulted
mortgage loans. There can be no assurance as to the level of delinquencies and
defaults that may be experienced by the mortgage loans.
Geographic Concentration
When measured by aggregate principal balance of the related Loan Group
as of the Cut-Off Date, mortgaged properties located in (i) California secure
approximately 34.31% of the Group I Mortgage Loans and 33.97% of the Group II
Mortgage Loans, (ii) Florida secure approximately 8.71% of the Group I Mortgage
Loans and 13.62% of the Group II Mortgage Loans, (iii) Ohio secure approximately
7.72% of the Group I Mortgage Loans and 5.77% of the Group II Mortgage Loans;
(iv) Michigan secure approximately 7.37% of the Group I Mortgage Loans and 6.46%
of the Group II Mortgage Loans, and (v) Illinois secure approximately 7.37% of
the Group I Mortgage Loans and 9.86% of the Group II Mortgage Loans. This
geographic concentration might magnify the effect on the mortgage pool of
adverse economic conditions or of special hazards in these areas and therefore
might increase the rate of delinquencies, defaults and losses on the mortgage
loans in the related Loan Group more than would be the case if the mortgaged
properties were more geographically diversified. In recent years, property
values of residential real estate generally have declined in Florida. Further,
Mortgage Loans in the State of California are subject to "one action" and
"anti-deficiency" laws which generally means that in the event of default on
Mortgage Loans in that state, the lender, in this case the Master Servicer, on
behalf of the Trustee, must elect either (i) to seek a judicial foreclosure of
the Mortgaged Property and, in the event the loan balance exceeds the sales
price at the foreclosure sale, seek a deficiency judgment against the borrower
or (ii) to seek a non-judicial foreclosure, in which case any such deficiency
would be waived.
Amount of Borrower's Equity
Approximately 87.13% of the Group I Mortgage loans and approximately
90.01% of the Group II Mortgage Loans (based on principal balance on the Cut-Off
Date) had original combined loan-to-value ratios that were greater than 80% but
do not have primary mortgage insurance. The value of the mortgaged properties
may have declined since those mortgage loans were originated or the borrowers
may have obtained additional financing on the properties. If a borrower on one
of those mortgage loans defaults, there may not be enough value in the property
to repay the mortgage loan and the trust may suffer a loss.
Seasoning of Mortgage Loans
Defaults on mortgage loans tend to occur at higher rates during the
early years of the mortgage loans. Substantially all of the mortgage loans were
originated within twelve months prior to sale to the trust. As a result, the
trust may experience higher rates of default than if the mortgage loans had been
outstanding for a longer period of time.
Subordinate Loans
Certain of the mortgage loans evidence a lien that is subordinate to
the rights of the mortgagee under a senior mortgage or mortgages. The proceeds
from any liquidation, insurance or condemnation proceedings will be available to
satisfy the outstanding principal balance of such junior loans only to the
extent that the claims of such senior mortgages have been satisfied in full,
including any foreclosure costs. In circumstances where the servicer determines
that it would be uneconomical to foreclose on the related mortgaged property,
the servicer may write off the entire outstanding principal balance of the
related loan as bad debt. The foregoing considerations will be particularly
applicable to junior loans that have high combined loan-to-value ratios because
in such cases, the servicer is more likely to determine that foreclosure would
be uneconomical. You should consider the risk that to the extent losses on
mortgage loans are not covered by available credit enhancement, such losses will
be borne by the holders of the certificates.
Potential Inadequacy of Credit Enhancement
Each group of mortgage loans is expected to generate more interest than
is needed to pay interest on the related group of certificates since the
weighted average interest rate on the related mortgage loans is expected to be
higher than the weighted average interest rate on the related group of
certificates. If the related Mortgage Loans generate more interest than is
needed to pay interest on the related group of certificates and certain fees and
expenses of the trust, the remaining interest will be used to compensate for
losses on the related mortgage loans. After these financial obligations of the
trust have been satisfied, any available excess interest will be used to create
and maintain overcollateralization. We cannot assure you, however, that enough
excess interest will be generated to maintain the required level of
overcollateralization.
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The excess interest available on any payment date will be affected by
the actual amount of interest received, collected or recovered in respect of the
Mortgage Loans during the preceding month. Such amount will be influenced by
changes in the weighted average of the mortgage interest rates resulting from
prepayments and liquidations of the related mortgage loans.
The Pooling and Servicing Agreement requires the Trustee to make a
claim for an Insured Payment under the Certificate Insurance Policy not later
than the second Business Day prior to any Remittance Date as to which the
Trustee has determined that an Insured Payment will be necessary. Investors in
the Class A Certificates should realize that, under extreme loss or delinquency
scenarios, they may temporarily receive no distributions of principal.
If the protection afforded by overcollateralization is insufficient and
if the certificate insurer is unable to meet its obligations under the
certificate insurance policy, then the holders of the certificates could
experience a loss on their investment.
Year 2000 Systems Risk
As is the case with most companies using computers in their operations,
the master servicer is faced with the task of completing its compliance goals in
connection with the year 2000 issue. The year 2000 issue is the result of
computer programs being written using two digits, rather than four digits, to
define the applicable year. Any of the master servicer's computer programs that
have time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. Any such occurrence could result in major computer
system failure or miscalculations. The master servicer is presently engaged in
various procedures with the goal of attaining year 2000 compliance for its
computer systems and software. However, in the event that the master servicer,
or any of its suppliers, customers, brokers or agents do not successfully and
timely achieve year 2000 compliance, the performance of obligations of the
master servicer under the pooling and servicing agreement could be materially
adversely affected.
DESCRIPTION OF THE MORTGAGE LOANS
General
The statistical information regarding the Mortgage Loans which is
presented in this Prospectus Supplement is based upon the characteristics of the
Group I Mortgage Loans and the Group II Mortgage Loans as of the close of
business on January 31, 1999 (the "Cut-Off Date"). Unless otherwise indicated,
all percentages set forth in this Prospectus Supplement are based upon the
aggregate Principal Balances of the Group I Mortgage Loans and Group II Mortgage
Loans, which was $125,000,005.96 and $25,000,041.52, respectively.
The Mortgage Loans are evidenced by Mortgage Notes (each, a "Mortgage
Note"), secured by mortgages or deeds of trust (the "Mortgages"), of which
approximately 59.31% are second lien Mortgages (and the remainder are first lien
Mortgages) with respect to the Group I Mortgage Loans and of which approximately
58.91% are second lien Mortgages (and the remainder are first lien Mortgages)
with respect to the Group II Mortgage Loans, on one- to four-family residential
properties (the "Mortgaged Properties") and have the additional characteristics
described below.
The Group I Mortgage Loans have original terms to stated maturity of up
to 30 years. Each Group I Mortgage Loan was selected for inclusion in the Trust
Fund from among those that met the following criteria as of the Cut-Off Date:
(i) a current Principal Balance of no less than $2,587.70 and (ii) not more than
59 days past due. The Group I Mortgage Loans were selected by the Originator
from the mortgage loans in IUB's portfolio that met the above criteria using a
selection process believed by the Originator not to be adverse to the
Certificateholders or to the Certificate Insurer. As of the Cut-Off Date, the
average principal balance of the Group I Mortgage Loans was approximately
$53,533.19. As of the Cut-Off Date, the weighted average Mortgage Interest Rate
of the Group I Mortgage Loans was 10.512%. The weighted average "Combined
Loan-to-Value Ratio" (calculated by dividing the sum of (x) any outstanding
first mortgage balance as of the date of origination of the related Group I
Mortgage Loan plus (y) the Principal Balance of such Group I Mortgage Loan as of
the Cut-Off Date, by the Appraised Value of such Mortgaged Property at
origination) of the Group I Mortgage Loans was approximately 91.13%. The
weighted average remaining term to maturity was 245 months and the latest
scheduled maturity of any Group I Mortgage Loan is February 15, 2029; however
the actual date on which any Mortgage Loan is paid in full may be earlier than
the stated maturity date due to unscheduled payments of principal.
Based on information supplied by the Mortgagors in connection with
their loan applications at origination, 2,314 of the Mortgaged Properties
securing the Group I Mortgage Loans, which secure approximately 99.08% of the
outstanding
S-21
<PAGE>
principal balance of the Group I Mortgage Loans, will be owner
occupied primary residences and 21 of the Mortgaged Properties securing the
Group I Mortgage Loans, which secure approximately 0.92% of the outstanding
principal balance of the Group I Mortgage Loans, will be non-owner occupied or
second homes.
The Group II Mortgage Loans have original terms to stated maturity of
up to 30 years. Each Group II Mortgage Loan was selected for inclusion in the
Trust Fund from among those that met the following criteria of the Cut-Off Date:
(i) an original Principal Balance no greater than $240,000, in the case of Group
II Mortgage Loans secured by Mortgages with a first lien priority, or $120,000,
in the case of Group II Mortgage Loans secured by Mortgages with a second
priority lien, (ii) a current Principal Balance of no less than $9,988.94
and,(iii) not more than 59 days past due. The Group II Mortgage Loans were
selected by the Originator from the mortgage loans in IUB's portfolio that met
the above criteria using a selection process believed by the Originator not to
be adverse to the Certificateholders or to the Certificate Insurer. As of the
Cut-Off Date, the average principal balance of the Group II Mortgage Loans was
approximately $50,813.09. As of the Cut-Off Date, the weighted average Mortgage
Interest Rate of the Group II Mortgage Loans was 10.510%. The weighted average
"Combined Loan-to-Value Ratio" (calculated by dividing the sum of (x) any
outstanding first mortgage balance as of the date of origination of the related
Group II Mortgage Loan plus (y) the Principal Balance under the Group II
Mortgage Loan as of the Cut-Off Date, by the appraised value of such Mortgaged
Property at origination) of the Group II Mortgage Loans was approximately
91.54%. The weighted average remaining term to stated maturity was approximately
245 months and the latest scheduled maturity of any Group II Mortgage Loan is
February 1, 2029; however the actual date on which any Mortgage Loan is paid in
full may be earlier than the stated maturity date due to unscheduled payments of
principal.
Based on information supplied by the Mortgagors in connection with
their loan applications at origination, 488 of the Mortgaged Properties securing
the Group II Mortgage Loans, which secure approximately 98.75% of the
outstanding principal balance of the Group II Mortgage Loans, will be owner
occupied primary residences and 4 of the Mortgaged Properties securing the Group
II Mortgage Loans, which secure approximately 1.25% of the outstanding principal
balance of the Group II Mortgage Loans, will be non-owner occupied or second
homes.
Approximately 72.60% of the Group I Mortgage Loans and 74.08% of the
Group II Mortgage Loans provide for penalties upon full prepayment during the
first two, three, four or five years after origination thereof. Each of the
Mortgage Loans is subject to a due-on-sale clause. See "Certain Legal Aspects of
the Mortgage Loans - Due-on-Sale Clauses in Mortgage Loans" in the Prospectus.
The Monthly Payment on each Mortgage Loan includes interest plus an
amount that will amortize the outstanding principal balance of the Mortgage Loan
over its remaining term.
Solicitation Process
By monitoring geographic and economic trends, the Originator attempts
to identify selected real estate markets demonstrating past, present and, the
Originator believes, future economic viability. The assessment of regional
markets is accomplished through MBA, MIC, SMR and other data sources at the MSA
level to study the general economic climate and performance specific to the real
estate and mortgage markets. The regional assessment effort identifies emerging
market opportunities and risk. Among the factors considered in such regional
analysis are (i) MBA: total payroll employment, personal income, population,
existing home sales, existing home prices and housing permits by MSA, (ii) MIC:
first mortgage "A" paper and "B&C" paper delinquency by MSA and (iii) SMR:
consumer, real estate secured, bad debt and bankruptcy filing rates by MSA.
Since January 1995, the Originator has processed over 200,000 responses from a
geographic mailing base that includes areas within 29 states. The Originator
expects to originate its mortgage loan product line through a variety of
origination channels in other states meeting the criteria set forth above.
The Originator uses pre-screening and list processing (response
modeling) techniques in connection with direct-mail methods to contact the most
creditworthy and profitable customer segments within its targeted mail base. The
Originator also uses direct-mail to contact individuals identified in public
records as having a second mortgage.
Underwriting Standards
The Mortgage Loans were underwritten by the Originator in accordance
with underwriting standards of the Originator developed at the direction of IUB.
The following is a brief description of the various underwriting standards and
procedures applicable to the Mortgage Loans. However, there can be no assurance
that the quality or performance of all Mortgage Loans will be equivalent in
every respect under all circumstances.
S-22
<PAGE>
Each prospective mortgagor completes a mortgage loan application that
includes information with respect to the applicant's liabilities, income, credit
history, employment history and personal information. At least one credit report
on each applicant from national credit reporting companies is required. The
report typically contains information relating to such matters as credit history
with local and national merchants and lenders, installment debt payments and
record of any defaults, bankruptcies, repossessions or judgments. Appraisals and
property valuations range from full appraisals to use of stated value. Title
searches and insurance range from full ALTA policies to property profiles. The
appraisal and title requirements obtained in connection with each loan vary
based on loan amount, lien position and property type and location.
The Originator's underwriting requirements for certain types of home
loans may change from time to time, which in certain instances may result in
less stringent underwriting requirements. Depending on the dates on which
Mortgage Loans are originated, such Mortgage Loans may have been originated by
7he Originator pursuant to different underwriting requirements, and accordingly,
certain Mortgage Loans included in the Trust may be of a different credit
quality and have different loan characteristics than other Mortgage Loans. To
the extent that certain Mortgage Loans were originated using less stringent
underwriting requirements, such Mortgage Loans may be more likely to experience
higher rates of delinquencies, defaults and losses than those Mortgage Loans
originated pursuant to more stringent underwriting requirements.
Mortgage Loan Closing Procedures
The mortgage loans are closed and the loan files are reviewed, verified
and completed in accordance with procedures developed by the Originator and the
Master Servicer. Closing procedures may vary based upon loan amount and property
location. Following the customer's acceptance of the loan offer, the account
executive responsible for the loan delivers the loan file to the closing area.
The loan documents are drafted after verifying that the file contains a "signing
confirmation request" from the applicable title company; for loans qualifying
for limited title and appraisal, the "signing confirmation request" is not
required. All files are audited for completeness. Once the loan documents are
prepared, the loan file is delivered to the Quality Review area for further
audit. Following Quality Review approval, the loan documents are delivered by
overnight delivery to the closing agent. For loans qualifying for limited title
and appraisal, the documents are forwarded directly to the borrower with
detailed signing and notary instructions. If the loan is closed by a closing
agent, the closing agent reviews each loan file for completeness using a funding
audit checklist prepared by the Originator. At the time of funding, the
individual responsible for closing the loan will fund the appropriate account.
Every loan funded is audited for completeness using post-closing procedures
developed by the Originator.
Statistical Information
Set forth below is a description of certain additional characteristics
of the Mortgage Loans as of the Cut-Off Date (except as otherwise indicated).
Dollar amounts and percentages may not add up to totals due to rounding.
S-23
<PAGE>
LIEN POSITION OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate Unpaid
Number of Percentage of Cut-Off Date Principal Balance of
Mortgage Aggregate Principal Balance Group I Mortgage
Lien Position Loans of all Group I Mortgage Loans Loans
------------- --------- ----------------------------- --------------------
<S> <C> <C> <C>
First Lien............................... 376 40.69% $ 50,860,408.03
Second Lien.............................. 1,959 59.31 74,139,597.93
----- ------- ---------------
Total.................. 2,335 100.00% $125,000,005.96
===== ====== ===============
</TABLE>
MORTGAGE INTEREST RATES OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate Unpaid
Percentage of Cut-Off Date Principal Balance of
Number of Aggregate Principal Balance Group I Mortgage
Mortgage Interest Rates (%) Mortgage Loans of all Group I Mortgage Loans Loans
--------------------------- -------------- ----------------------------- ---------------------
<S> <C> <C> <C>
6.501 to 7.000.............. 2 0.27% $ 331,257.28
7.001 to 7.500.............. 7 1.09 1,361,014.47
7.501 to 8.000.............. 60 7.43 9,284,841.65
8.001 to 8.500.............. 130 12.38 15,469,318.69
8.501 to 9.000.............. 155 11.25 14,067,719.80
9.001 to 9.500.............. 132 11.24 14,055,294.31
9.501 to 10.000.............. 131 6.66 8,327,885.62
10.001 to 10.500.............. 123 4.38 5,476,287.63
10.501 to 11.000.............. 198 6.62 8,269,588.85
11.001 to 11.500.............. 197 6.51 8,136,931.71
11.501 to 12.000.............. 215 6.45 8,061,240.29
12.001 to 12.500.............. 159 4.81 6,017,898.20
12.501 to 13.000.............. 242 7.53 9,417,228.45
13.001 to 13.500.............. 129 3.26 4,072,462.00
13.501 to 14.000.............. 142 3.56 4,454,830.19
14.001 to 14.500.............. 149 3.63 4,540,824.07
14.501 to 15.000.............. 60 1.26 1,573,080.88
15.001 to 15.500.............. 61 1.10 1,369,003.83
15.501 to 16.000.............. 27 0.37 457,611.53
16.001 to 16.500.............. 16 0.20 255,686.51
------- ------- ------------------
Total.................. 2,335 100.00% $ 125,000,005.96
===== ====== ==================
</TABLE>
The weighted average Mortgage Interest Rate of the Group I Mortgage
Loans will be approximately 10.512% per annum.
S-24
<PAGE>
ORIGINAL TERM TO MATURITY OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate Unpaid
Percentage of Cut-Off Date Principal Balance
Original Term to Maturity Number of Aggregate Principal Balance of Group I Mortgage
(months) Mortgage Loans of all Group I Mortgage Loans Loans
------------------------- -------------- ----------------------------- -------------------
<S> <C> <C> <C>
97 to 120.................. 260 6.37% $ 7,962,081.31
121 to 180.................. 1,709 52.93 66,165,419.52
181 to 240.................. 4 0.32 394,881.71
241 to 300.................. 8 0.38 476,700.00
301 to 360.................. 354 40.00 50,000,923.42
----- ------- ------------------
Total.................... 2,335 100.00% $ 125,000,005.96
===== ====== ==================
</TABLE>
The weighted average original term to Maturity is approximately 249
months.
REMAINING TERM TO MATURITY OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of Cut-Off Date Aggregate Unpaid
Aggregate Principal Balance of
Number of Principal Balance of all Group I Mortgage
Remaining Months to Maturity Mortgage Loans Group I Mortgage Loans Loans
- ---------------------------- -------------- -------------------------- --------------------
<S> <C> <C> <C>
61 to 96.................... 30 0.71% $ 889,219.14
97 to 120.................... 230 5.66 7,072,862.17
121 to 180.................... 1,709 52.93 66,165,419.52
181 to 240.................... 4 0.32 394,881.71
241 to 300.................... 8 0.38 476,700.00
301 to 360.................... 354 40.00 50,000,923.42
------ ------- ------------------
Total.................... 2,335 100.00% $ 125,000,005.96
===== ====== ==================
</TABLE>
The calculated weighted average remaining term of the Group I Mortgage
Loans will be approximately 245 months.
S-25
<PAGE>
YEAR OF ORIGINATION OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of Cut-Off Date Aggregate Unpaid
Aggregate Principal Balance Principal Balance of
Number of of all Group I Mortgage
Year of Origination Mortgage Loans Group I Mortgage Loans Loans
------------------- -------------- --------------------------- --------------------
<S> <C> <C> <C>
1995...................................... 1 0.03% $ 32,845.52
1996...................................... 29 0.69 856,373.62
1997...................................... 14 0.32 396,355.71
1998...................................... 2,252 95.46 119,326,931.12
1999...................................... 39 3.51 4,387,499.99
------ ------- ------------------
Total...................... 2,335 100.00% $ 125,000,005.96
===== ====== ==================
</TABLE>
The earliest month and year of origination of any Group I Mortgage Loan
is October 1995 and the latest month and year of origination is January 1999.
MORTGAGED PROPERTIES SECURING GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate Unpaid
Percentage of Cut-Off Date Principal Balance
Number of Aggregate Principal Balance of Group I
Property Type Mortgage Loans of all Group I Mortgage Loans Mortgage Loans
------------- -------------- ----------------------------- -----------------
<S> <C> <C> <C>
Condominium............................... 118 5.43% $ 6,787,386.69
Multi-Family.............................. 14 0.44 544,759.68
Planned Unit Development.................. 162 9.81 12,256,887.05
Single-Family Dwelling.................... 2,041 84.33 105,410,972.54
----- ------ ------------------
Total..................... 2,335 100.00% $ 125,000,005.96
===== ====== ==================
</TABLE>
S-26
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate Unpaid
Percentage of Cut-Off Date Principal Balance of
Combined Loan-to-Value Number of Aggregate Principal Balance Group I
Ratio (%) Mortgage Loans of all Group I Mortgage Loans Mortgage Loans
- ----------------------- -------------- ----------------------------- --------------------
<S> <C> <C> <C>
20.01 to 25.00................ 3 0.08% $ 105,214.42
25.01 to 30.00................ 2 0.13 159,096.60
30.01 to 35.00................ 2 0.09 117,980.81
35.01 to 40.00................ 5 0.18 228,729.17
40.01 to 45.00................ 5 0.16 195,824.39
45.01 to 50.00................ 6 0.33 407,121.93
50.01 to 55.00................ 10 0.24 298,668.94
55.01 to 60.00................ 15 0.65 808,481.64
60.01 to 65.00................ 17 1.35 1,683,594.81
65.01 to 70.00................ 38 2.00 2,506,102.74
70.01 to 75.00................ 47 2.39 2,989,051.08
75.01 to 80.00................ 152 5.27 6,586,727.46
80.01 to 85.00................ 240 12.62 15,780,125.13
85.01 to 90.00................ 369 16.74 20,927,631.38
90.01 to 95.00................ 359 15.79 19,742,632.61
95.01 to 100.00................ 1,063 41.90 52,374,009.12
100.01 to 105.00................ 2 0.07 89,013.73
----- ------ ----------------
Total.................... 2,335 100.00% $ 125,000,005.96
===== ====== ================
</TABLE>
The minimum and maximum Combined Loan-to-Value Ratios of the Group I
Mortgage Loans as of the Cut-Off Date are approximately 21.05% and 100.04%,
respectively, and the weighted average Combined Loan-to-Value Ratio as of the
Cut-Off Date of the Group I Mortgage Loans is approximately 91.13%. The
"Combined Loan-to-Value Ratio" of a Group I Mortgage Loan as of the Cut-Off Date
is the ratio, expressed as a percentage, equal to the sum of any outstanding
first mortgage balance as of the date of origination of the related Group I
Mortgage Loan plus the Principal Balance of such Group I Mortgage Loan as of the
Cut-Off Date divided by the appraised value of the Mortgaged Property.
S-27
<PAGE>
CUT-OFF DATE MORTGAGE LOAN PRINCIPAL BALANCES
OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of Cut-Off
Date Aggregate Aggregate Unpaid
Principal Balance of Principal Balance
Cut-Off Date Mortgage Loan Number of all Group I Mortgage of Group I
Principal Balance Mortgage Loans Loans Mortgage Loans
-------------------------- -------------- ---------------------- -----------------
<S> <C> <C> <C>
$0.01 to $10,000.00....... 18 0.13% $ 167,026.11
$10,000.01 to $20,000.00....... 298 3.99 4,992,096.66
$20,000.01 to $30,000.00....... 582 11.81 14,767,146.45
$30,000.01 to $40,000.00....... 446 12.36 15,447,749.21
$40,000.01 to $50,000.00....... 271 9.96 12,449,345.95
$50,000.01 to $60,000.00....... 148 6.50 8,121,850.20
$60,000.01 to $70,000.00....... 100 5.20 6,499,218.58
$70,000.01 to $80,000.00....... 82 4.91 6,136,118.30
$80,000.01 to $90,000.00....... 72 4.90 6,123,487.28
$90,000.01 to $100,000.00....... 78 6.05 7,559,114.50
$100,000.01 to $110,000.00....... 30 2.54 3,180,583.84
$110,000.01 to $120,000.00....... 23 2.13 2,658,530.87
$120,000.01 to $130,000.00....... 30 3.01 3,766,673.20
$130,000.01 to $140,000.00....... 17 1.83 2,284,768.48
$140,000.01 to $150,000.00....... 22 2.54 3,174,165.52
$150,000.01 to $160,000.00....... 14 1.74 2,172,811.49
$160,000.01 to $170,000.00....... 8 1.06 1,324,353.55
$170,000.01 to $180,000.00....... 12 1.67 2,084,570.85
$180,000.01 to $190,000.00....... 7 1.03 1,292,323.45
$190,000.01 to $200,000.00....... 5 0.78 977,047.73
$200,000.01 to $225,000.00....... 23 3.89 4,863,975.93
$225,000.01 to $250,000.00....... 10 1.89 2,365,787.86
$250,000.01 to $275,000.00....... 12 2.52 3,151,354.30
$275,000.01 to $300,000.00....... 8 1.84 2,298,780.59
$300,000.01 to $325,000.00....... 4 0.99 1,240,532.90
$325,000.01 to $350,000.00....... 5 1.35 1,691,935.44
$350,000.01 to $375,000.00....... 2 0.58 723,635.51
$375,000.01 to $400,000.00....... 3 0.93 1,159,718.75
$400,000.01 to $425,000.00....... 1 0.34 424,201.97
$425,000.01 to $450,000.00....... 1 0.36 449,657.59
$450,000.01 to $475,000.00....... 1 0.37 465,101.82
$475,000.01 to $500,000.00....... 2 0.79 986,341.08
----- ------ -------------------
Total..................... 2,335 100.00% $ 125,000,005.96
===== ====== ===================
</TABLE>
As of the Cut-Off Date, the average unpaid principal balance of the
Group I Mortgage Loans will be approximately $53,533.19.
S-28
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES SECURING GROUP I
MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Unpaid
Percentage of Cut-Off Date Principal
Aggregate Principal Balance Balance of
Number of of all Group I
State Mortgage Loans Group I Mortgage Loans Mortgage Loans
- ----- -------------- --------------------------- ---------------
<S> <C> <C> <C>
Arizona................................... 12 0.49% $ 613,992.91
California................................ 615 34.31 42,883,378.13
Colorado.................................. 26 0.81 1,012,646.52
Connecticut............................... 2 0.49 608,827.71
Florida................................... 197 8.71 10,889,596.61
Georgia................................... 123 4.00 5,002,202.00
Illinois.................................. 144 7.37 9,216,318.74
Kentucky.................................. 5 0.24 296,960.72
Louisiana................................. 67 1.56 1,947,192.54
Maryland.................................. 65 2.82 3,522,887.58
Massachusetts............................. 190 5.35 6,688,675.57
Michigan.................................. 173 7.37 9,207,814.59
Missouri.................................. 18 0.53 665,518.42
New Jersey................................ 111 4.57 5,712,760.98
North Carolina............................ 73 1.69 2,108,580.98
Ohio...................................... 198 7.72 9,651,184.68
Oregon.................................... 34 1.28 1,597,836.64
Pennsylvania.............................. 52 1.27 1,585,406.19
South Carolina............................ 24 0.52 655,301.49
Utah...................................... 9 0.27 334,559.11
Virginia.................................. 56 1.99 2,488,684.82
Washington................................ 125 6.16 7,697,835.40
Wisconsin................................. 16 0.49 611,843.63
----- ------ ------------------
Total..................... 2,335 100.00% $ 125,000,005.96
===== ====== ==================
</TABLE>
No more than approximately 0.72% of the Group I Mortgage Loans will be
secured by Mortgaged Properties located in any one zip code.
S-29
<PAGE>
DEBT-TO-INCOME RATIOS OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of Cut-Off Date Aggregate Unpaid Principal
Aggregate Principal Balance Balance
Debt-to-Income Ratios Number of Mortgage of all Group I Mortgage of Group I
(%) Loans Loans Mortgage Loans
---------------------- ------------------ --------------------------- --------------------------
<S> <C> <C> <C>
0.01 to 5.00.... 1 0.09% $ 115,000.00
5.01 to 10.00.... 2 0.03 37,679.16
10.01 to 15.00.... 4 0.17 211,623.72
15.01 to 20.00.... 23 1.00 1,255,428.98
20.01 to 25.00.... 92 3.50 4,371,204.85
25.01 to 30.00.... 240 9.25 11,567,970.47
30.01 to 35.00.... 379 14.93 18,663,838.08
35.01 to 40.00.... 500 20.94 26,178,391.99
40.01 to 45.00.... 587 27.38 34,224,939.70
45.01 to 50.00.... 416 18.98 23,724,269.20
50.01 to 55.00.... 91 3.72 4,649,659.81
------ ------- --------------------
Total.......... 2,335 100.00% $ 125,000,005.96
===== ======= ====================
The weighted average Debt-to-Income Ratio of the Group I Mortgage Loans is approximately 38.84%
</TABLE>
OCCUPANCY TYPE OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate Unpaid Principal
Percentage of Cut-Off Date Balance
Number of Mortgage Aggregate Principal Balance of Group I
Occupancy Type Loans of all Group I Mortgage Loans Mortgage Loans
-------------- ------------------ ----------------------------- --------------------------
<S> <C> <C> <C>
Owner Occupied................ 2,314 99.08% $ 123,844,636.13
Non Owner Occupied............ 21 0.92 1,155,369.83
------ ------- -------------------
Total.......... 2,335 100.00% $ 125,000,005.96
===== ====== ==================
</TABLE>
S-30
<PAGE>
CREDIT QUALITY OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of Cut-Off Date
Aggregate Aggregate Unpaid
Principal Balance Principal Balance
Number of Mortgage of all Group I of Group I
Credit Quality Loans Mortgage Loans Mortgage Loans
-------------- ------------------ -------------------------- -----------------
<S> <C> <C> <C>
Excellent..................... 1,949 82.26% $ 102,821,558.57
Superior...................... 270 11.92 14,894,732.08
Good.......................... 90 4.50 5,627,673.52
Fair.......................... 26 1.32 1,656,041.79
----- ------ ------------------
Total.......... 2,335 100.00% $ 125,000,005.96
===== ====== ==================
</TABLE>
S-31
<PAGE>
LIEN POSITION OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of Cut-Off Date Aggregate Unpaid
Aggregate Principal Balance Principal Balance
Number of of all of Group II
Lien Position Mortgage Loans Group II Mortgage Loans Mortgage Loans
------------- -------------- --------------------------- -----------------
<S> <C> <C> <C>
First Lien........................... 92 41.09% $ 10,272,089.34
Second Lien.......................... 400 58.91 14,727,952.18
--- ------ -----------------
Total................. 492 100.00% $ 25,000,041.52
=== ====== =================
</TABLE>
MORTGAGE INTEREST RATES OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of Cut-Off Date Aggregate Unpaid Principal
Aggregate Principal Balance Balance
Number of of all Group II Mortgage of Group II
Mortgage Interest Rates (%) Mortgage Loans Loans Mortgage Loans
--------------------------- -------------- --------------------------- --------------------------
<S> <C> <C> <C>
7.001 to 7.500........ 1 0.41% $ 103,500.00
7.501 to 8.000........ 15 8.12 2,029,529.79
8.001 to 8.500........ 26 11.17 2,792,540.77
8.501 to 9.000........ 33 12.39 3,098,740.79
9.001 to 9.500........ 37 12.53 3,132,195.07
9.501 to 10.000........ 29 4.73 1,182,986.66
10.001 to 10.500........ 33 5.30 1,326,004.15
10.501 to 11.000........ 38 6.48 1,619,608.46
11.001 to 11.500........ 42 7.60 1,899,468.98
11.501 to 12.000........ 51 7.35 1,837,800.00
12.001 to 12.500........ 37 5.03 1,256,547.91
12.501 to 13.000........ 35 4.91 1,227,393.97
13.001 to 13.500........ 32 4.59 1,148,223.63
13.501 to 14.000........ 20 2.88 719,846.52
14.001 to 14.500........ 35 4.15 1,037,706.81
14.501 to 15.000........ 10 0.98 245,633.59
15.001 to 15.500........ 10 0.79 197,873.29
15.501 to 16.000........ 6 0.44 110,529.80
16.001 to 16.500........ 1 0.04 10,271.71
16.501 to 17.000........ 1 0.09 23,639.62
--- ------ ----------------
Total............. 492 100.00% $ 25,000,041.52
=== ====== ================
</TABLE>
The weighted average Mortgage Interest Rate of the Group II Mortgage
Loans will be approximately 10.510% per annum.
S-32
<PAGE>
ORIGINAL TERM TO MATURITY OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of Cut-Off Date Aggregate Unpaid
Aggregate Principal Balance Principal Balance
Number of of all Group II Mortgage of Group II
Original Term to Maturity (months) Mortgage Loans Loans Mortgage Loans
---------------------------------- -------------- --------------------------- -----------------
<S> <C> <C> <C>
97 to 120............. 53 5.81% $ 1,451,667.64
121 to 180............. 355 54.19 13,547,914.43
301 to 360............. 84 40.00 10,000,459.45
--- ------ --------------------
Total................ 492 100.00% $ 25,000,041.52
=== ====== ====================
</TABLE>
The weighted average original term to Maturity is approximately 249
months.
REMAINING TERM TO MATURITY OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate Unpaid
Percentage of Cut-Off Date Principal Balance
Number of Aggregate Principal Balance of Group II
Remaining Months to Maturity Mortgage Loans of all Group II Mortgage Loans Mortgage Loans
---------------------------- -------------- ------------------------------ -----------------
<S> <C> <C> <C>
61 to 96............ 5 0.44% $ 109,337.25
97 to 120............ 48 5.37 1,342,330.39
121 to 180............ 355 54.19 13,547,914.43
301 to 360............ 84 40.00 10,000,459.45
--- ------ ----------------
Total................ 492 100.00% $ 125,000,041.52
=== ====== ================
</TABLE>
The calculated weighted average remaining term of the Group II Mortgage
Loans is approximately 245 months.
YEAR OF ORIGINATION OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of Cut-Off Date Aggregate Unpaid Principal
Number of Aggregate Principal Balance Balance
Mortgage of all Group II Mortgage of Group II
Year of Origination Loans Loans Mortgage Loans
- ------------------- --------- --------------------------- --------------------------
<S> <C> <C> <C>
1996.................................. 5 0.44% $ 109,337.25
1997.................................. 7 0.82 204,976.81
1998.................................. 478 97.82 24,455,727.46
1999.................................. 2 0.92 230,000.00
--- ------ -----------------
Total................... 492 100.00% $ 25,000,041.52
=== ====== =================
</TABLE>
The earliest month and year of origination of any Group II Mortgage
Loan is March 1996 and the latest month and year of origination is January 1999.
S-33
<PAGE>
MORTGAGED PROPERTIES SECURING GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of Cut-Off Date Aggregate Unpaid Principal
Aggregate Principal Balance
Number of Balance of all Group II of Group II
Property Type Mortgage Loans Mortgage Loans Mortgage Loans
------------- -------------- ------------------------- --------------------------
<S> <C> <C> <C>
Condominium........................... 29 4.60% $ 1,150,858.89
Multi-Family.......................... 3 0.85 212,674.58
Planned Unit Development.............. 41 11.42 2,856,155.89
Single-Family Dwelling................ 419 83.12 20,780,352.16
--- ------ ------------------
Total................... 492 100.00% $ 25,000,041.52
=== ====== ==================
</TABLE>
COMBINED LOAN-TO-VALUE RATIOS OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of Cut-Off Date Aggregate Unpaid
Aggregate Principal Balance Principal Balance
Number of of all Group II Mortgage of Group II
Combined Loan-to-Value Ratio (%) Mortgage Loans Loans Mortgage Loans
-------------------------------- -------------- --------------------------- -----------------
<S> <C> <C> <C>
10.01 to 15.00............ 1 0.04% $ 10,029.02
25.01 to 30.00............ 1 0.18 45,000.00
50.01 to 55.00............ 5 0.99 248,164.94
55.01 to 60.00............ 3 0.52 131,113.54
60.01 to 65.00............ 8 0.83 206,750.30
65.01 to 70.00............ 4 0.39 97,809.67
70.01 to 75.00............ 10 1.55 388,397.47
75.01 to 80.00............ 30 5.48 1,369,437.62
80.01 to 85.00............ 62 14.51 3,628,091.76
85.01 to 90.00............ 84 19.07 4,767,472.76
90.01 to 95.00............ 87 18.01 4,501,525.58
95.01 to 100.00............ 197 38.42 9,606,248.86
--- ------ ----------------
Total.................. 492 100.00% $ 25,000,041.52
=== ====== ================
</TABLE>
The minimum and maximum Combined Loan-to-Value Ratios of the Group II
Mortgage Loans as of the Cut-Off Date are approximately 12.81% and 100.00%,
respectively, and the weighted average Combined Loan-to-Value Ratio as of the
Cut-Off Date of the Group II Mortgage Loans is approximately 91.54%. The
"Combined Loan-to-Value Ratio" of a Group II Mortgage Loan as of the Cut-Off
Date is the ratio, expressed as a percentage, equal to the sum of any
outstanding first mortgage balance as of the date of origination plus the
Principal Balance of such Group II Mortgage Loan as of the Cut-Off Date
divided by the appraised value of the Mortgaged Property at origination.
S-34
<PAGE>
CUT-OFF DATE MORTGAGE LOAN PRINCIPAL BALANCES
OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of Cut-Off Aggregate Unpaid
Date Aggregate Principal Balance
Cut-Off Date Mortgage Loan Principal Number of Principal Balance of all of Group II
Balance Mortgage Loans Group II Mortgage Loans Mortgage Loans
------------------------------------ -------------- --------------------- -------------------
<S> <C> <C> <C>
$0.01 to $10,000.00...... 2 0.08% $ 19,988.94
$10,000.01 to $20,000.00...... 59 3.88 970,772.60
$20,000.01 to $30,000.00...... 129 13.03 3,258,201.17
$30,000.01 to $40,000.00...... 93 12.60 3,150,762.70
$40,000.01 to $50,000.00...... 49 9.01 2,252,892.65
$50,000.01 to $60,000.00...... 34 7.44 1,861,129.97
$60,000.01 to $70,000.00...... 23 5.96 1,490,871.67
$70,000.01 to $80,000.00...... 20 5.99 1,498,146.40
$80,000.01 to $90,000.00...... 11 3.78 946,127.08
$90,000.01 to $100,000.00...... 18 6.91 1,727,450.77
$100,000.01 to $110,000.00...... 11 4.62 1,155,548.10
$110,000.01 to $120,000.00...... 10 4.59 1,148,375.62
$120,000.01 to $130,000.00...... 1 0.52 129,720.12
$130,000.01 to $140,000.00...... 10 5.42 1,353,915.11
$140,000.01 to $150,000.00...... 4 2.36 589,570.82
$150,000.01 to $160,000.00...... 2 1.27 316,260.21
$160,000.01 to $170,000.00...... 3 2.02 503,884.82
$170,000.01 to $180,000.00...... 1 0.71 178,242.98
$180,000.01 to $190,000.00...... 4 2.94 734,221.52
$190,000.01 to $200,000.00...... 1 0.79 197,588.52
$200,000.01 to $225,000.00...... 6 5.16 1,289,736.19
$225,000.01 to $250,000.00...... 1 0.91 226,633.56
--- ------ -----------------
Total.................... 492 100.00% $ 25,000,041.52
=== ====== =================
</TABLE>
As of the Cut-Off Date, the average unpaid principal balance of the
Group II Mortgage Loans is approximately $50,813.09.
S-35
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES SECURING GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of Cut-Off Date Aggregate Unpaid Principal
Aggregate Principal Balance
Number of Balance of all Group II of Group II
State Mortgage Loans Mortgage Loans Mortgage Loans
- ----- -------------- -------------------------- --------------------------
<S> <C> <C> <C>
Arizona.......................... 4 0.71% $ 178,387.92
California....................... 140 33.97 8,491,958.11
Colorado......................... 4 0.46 115,729.83
Florida.......................... 51 13.62 3,405,032.45
Georgia.......................... 27 3.81 951,700.88
Illinois......................... 35 9.86 2,464,737.86
Kentucky......................... 2 0.37 91,416.78
Louisiana........................ 15 1.51 378,045.91
Maryland......................... 9 1.23 306,881.03
Massachusetts.................... 43 5.81 1,453,019.83
Michigan......................... 33 6.46 1,615,019.36
Missouri......................... 2 0.47 117,441.26
New Jersey....................... 17 2.19 548,225.09
North Carolina................... 19 2.27 566,802.17
Ohio............................. 30 5.77 1,442,978.05
Oregon........................... 7 3.42 855,217.31
Pennsylvania..................... 14 1.87 468,440.94
South Carolina................... 10 1.09 272,873.16
Utah............................. 2 0.16 40,072.98
Virginia......................... 7 1.39 346,815.97
Washington....................... 18 3.16 789,336.87
Wisconsin........................ 3 0.40 99,907.76
--- ------ ----------------
Total............. 492 100.00% $ 25,000,041.52
=== ====== ================
</TABLE>
No more than approximately 1.04% of the Group II Mortgage Loans will be
secured by Mortgaged Properties located in any one zip code.
S-36
<PAGE>
DEBT-TO-INCOME RATIOS OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of Cut-Off Date
Aggregate Principal Balance Aggregate Unpaid Principal
Number of of all Group II Mortgage Balance
Debt-to-Income Ratios (%) Mortgage Loans Loans of Group II Mortgage Loans
------------------------- -------------- --------------------------- --------------------------
<S> <C> <C> <C>
10.01 to 15.00........ 1 0.08% $ 19,493.61
15.01 to 20.00........ 12 1.48 371,246.44
20.01 to 25.00........ 22 3.83 957,944.29
25.01 to 30.00........ 44 9.78 2,445,129.70
30.01 to 35.00........ 90 19.09 4,773,737.82
35.01 to 40.00........ 99 19.66 4,915,458.17
40.01 to 45.00........ 112 24.38 6,095,475.93
45.01 to 50.00........ 94 17.73 4,433,521.90
50.01 to 55.00........ 18 3.95 988,033.66
--- ------ ----------------
Total.......................... 492 100.00% $ 25,000,041.52
=== ====== ================
</TABLE>
The weighted average Debt-to-Income Ratio of the Group II Mortgage
Loans is approximately 38.21%.
OCCUPANCY TYPE OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of Cut-Off Date Aggregate Unpaid Principal
Aggregate Balance
Number of Principal Balance of all of Group II
Occupancy Type Mortgage Loans Group II Mortgage Loans Mortgage Loans
-------------- -------------- -------------------------- --------------------------
<S> <C> <C> <C>
Owner Occupied...................... 488 98.75% $ 24,687,264.92
Non Owner Occupied.................. 4 1.25 312,776.60
--- ------ ----------------
Total................. 492 100.00% $ 25,000,041.52
=== ====== ================
</TABLE>
S-37
<PAGE>
CREDIT QUALITY OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of Cut-Off Date Aggregate Unpaid
Aggregate Principal Balance Principal Balance
Number of of all Group II of Group II
Credit Quality Mortgage Loans Mortgage Loans Mortgage Loans
-------------- -------------- --------------------------- -----------------
<S> <C> <C> <C>
Excellent........................... 409 81.52% $ 20,378,991.51
Superior............................ 56 13.06 3,264,458.88
Good................................ 20 4.06 1,014,888.83
Fair................................ 7 1.37 341,702.30
--- ------ ----------------
Total................. 492 100.00% $ 25,000,041.52
=== ====== ================
</TABLE>
The information set forth in the preceding section "Description of the
Mortgage Loans" has been based upon information provided by the Originator and
tabulated by the Depositor. None of the Depositor, the Trustee or the
Certificate Insurer make any representation as to the accuracy or completeness
of such information.
Mandatory Repurchase or Substitution of Mortgage Loans
The Transferor is required, with respect to Mortgage Loans that are
found by the Trustee to have defective documentation, or in respect of which the
Transferor has breached a representation or warranty, to repurchase such
Mortgage Loans or substitute such Mortgage Loan with a Qualified Substitute
Mortgage Loan. See "Prepayment and Yield Considerations" and "Description of the
Certificates -- Assignment of Mortgage Loans; Representations and Warranties of
the Transferor" herein.
IRWIN FUNDING CORP.
Irwin Funding Corp., a Delaware corporation headquartered in Columbus,
Indiana, is a wholly-owned subsidiary of IUB, incorporated in the State of
Delaware on June 10, 1998. Irwin Funding Corp. was organized for limited
purposes, which include purchasing mortgage loans from IUB and its affiliates,
selling and transferring such mortgage loans to third parties and any activities
incidental to and necessary or convenient for the accomplishment of such
purposes. The principal executive offices of Irwin Funding Corp. are located at
500 Washington Street, Columbus, Indiana 47201. The telephone number of such
offices is (812) 376-1909.
IRWIN HOME EQUITY CORPORATION
General
Irwin Home Equity Corporation (the "Originator") is an Indiana
corporation with a single origination and servicing facility in San Ramon,
California. The Originator will initially be the sole subservicer of the
Mortgage Loans. The Originator is a direct substantially wholly-owned subsidiary
of Irwin Financial Corporation ("IFC"), a specialized financial services company
headquartered in Columbus, Indiana. The Originator originates and services
mortgage loans in selected markets nationwide using a combination of direct mail
and telemarketing. The Originator's home equity line of credit and closed-end,
fixed rate products are marketed primarily as debt consolidation loans for
repeat or frequent borrowers with strong credit ratings. Borrowers with
similarly strong credit ratings are targeted for the Originator's first mortgage
refinance program. As of December 31, 1998, the Originator had over $313.2
million in assets, had originated $860.7 million in mortgage loans and was a
FHLMC approved seller-servicer. The Originator underwrites first and second lien
mortgage loans secured by one- to four-family residences located primarily in
selected metropolitan markets in the United States.
The Originator, in accordance with the underwriting standards of IUB,
underwrote all the Mortgage Loans which IUB will sell to the Transferor pursuant
to a mortgage loan sale agreement and the Transferor has sold to the Depositor
S-38
<PAGE>
pursuant to a mortgage loan purchase agreement between the Transferor and the
Depositor (the "Mortgage Sale Agreement"). On the Issue Date, the Depositor will
acquire the Mortgage Loans from the Transferor and simultaneously therewith
transfer the Mortgage Loans to the Trust.
As Subservicer
The Trust will appoint Irwin Union Bank and Trust Company as Master
Servicer pursuant to the Pooling and Servicing Agreement. However, the
Originator will subservice the Mortgage Loans pursuant to a Subservicing
Agreement between Irwin Home Equity Corporation and Irwin Union Bank and Trust
Company. Notwithstanding such subservicing arrangement, Irwin Union Bank and
Trust Company shall remain responsible to the Trust for the servicing of the
Mortgage Loans.
The Originator engages in mortgage loan servicing, including servicing
of previously securitized loans, which involves, among other things, the
processing and administration of mortgage loan payments in return for a
servicing fee. At December 31, 1998, the Originator serviced 14,578 mortgage
loans with an outstanding principal balance of approximately $581.2 million.
At December 31, 1998, the Originator had approximately 295 employees.
Its offices are located at 12677 Alcosta Boulevard, Suite 500, San Ramon,
California, 94583 and its telephone number is (925) 277-2001.
The following table sets forth certain information regarding the
principal balance of one- to four-family residential mortgage loans included in
the Originator's servicing portfolio. The Originator's servicing portfolio
includes mortgage loans held for sale and mortgage loans held for investment
that were originated by the Originator's mortgage banking operations.
S-39
<PAGE>
The Originator's Servicing Portfolio
<TABLE>
<CAPTION>
Year ended Year ended Year Ended Year Ended
December 31, 1995 December 31, 1996 December 31, 1997 December 31, 1998
------------------- --------------------- ---------------------- -----------------
<S> <C> <C> <C> <C>
Beginning servicing 0 $ 85,787,401 $ 230,449,915 $ 358,165,795
portfolio Add:
Loans originated $ 87,419,680 $ 169,119,113 $ 214,517,880 $ 389,673,129
Deduct: Prepayments (net $ (1,632,279) $ (24,456,600) $ (86,802,000) $(166,595,726)
of subsequent draws)
Sale of 0 0 0 0
servicing rights
Loans sold, 0 0 0 0
servicing
released
Ending servicing portfolio $ 85,787,401 $ 230,449,915 $ 358,165,795 $ 581,243,178
Number of loans serviced 2,682 7,247 10,800 14,578
Average loan size $ 31,986 $ 31,799 $ 33,163 $ 39,871
</TABLE>
Delinquency and Loss Experience of the Originator's Servicing Portfolio
The following tables summarize the delinquency and loss experience for
closed-end, fixed-rate first and second mortgage loans and adjustable-rate, home
equity lines of credit originated by the Originator. The data presented in the
following tables is for illustrative purposes only, and there is no assurance
that the delinquency and loss experience of the Mortgage Loans will be similar
to that set forth below.
S-40
<PAGE>
Delinquency Experience
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------
1995 1996 1997 1998
---- ---- ---- ----
Number Dollar Number Dollar Number Dollar Number Dollar
Accounts Managed of Loans Amount of Loans Amount of Loans Amount of Loans Amount
- ---------------- ---------- --------- ---------- ---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aggregate
Principal Balance.. 2,682 $85,787 7,247 $230,450 10,800 $358,166 14,578 $581,243
Principal Balance
of Mortgage Loans:
- --------------------
30--59 Days Past
Due (1)............ 10 $354 50 $1,427 80 $2,516 108 $3,590
60-89 Days Past
Due (1)............ 2 $ 94 10 $287 12 $372 13 $352
90+ Days Past Due
(1)................ 0 $ 0 8 $176 28 $905 31 $991
Foreclosures....... 0 $ 0 8 $371 38 $1,546 62 $2,151
REO Properties
(2)................ 0 $ 0 5 $322 3 $150 8 $277
</TABLE>
- ----------
(1) Contractually past due excluding mortgage loans in the process of
foreclosure.
(2) "Real estate owned" properties - properties relating to mortgages
foreclosed or for which deeds in lieu of foreclosure have been
accepted, and held by the Master Servicer pending disposition.
<TABLE>
<CAPTION>
Loss Experience
(Dollars in Thousands)
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------
1995 1996 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Aggregate Principal
Balance Outstanding... $85,787 $230,450 $358,166 $581,243
Net Charge-offs (1)... $0 $37 $1,026 $2,141
Total Loans in
Foreclosure........... $0 $693 $1,696 $2,428
Net Charge-offs as a
Percentage of
Aggregate Amount
Outstanding at
year-end.............. 0.00% 0.02% 0.29% 0.37%
</TABLE>
- ----------
(1) Net Charge-offs refers to writedowns on properties prior to
liquidation and the actual liquidated loss incurred on a mortgaged property when
sold net of recoveries.
The Originator commenced receiving applications for mortgage loans
under its lending programs only in 1995 and the Originator, through IUB, funded
its first loan in March, 1995. Accordingly, the Originator has insufficient
historical delinquency, bankruptcy, foreclosure or default experience that may
be referred to for purposes of estimating the future delinquency and loss
experience of mortgage loans similar to the Mortgage Loans being sold to the
Trust.
S-41
<PAGE>
The information set forth in this section concerning the Originator has
been provided by Irwin Home Equity Corporation. None of the Depositor, the
Trustee or the Certificate Insurer make any representation as to the accuracy or
completeness of such information.
PREPAYMENT AND YIELD CONSIDERATIONS
General
The yield to maturity of a Class A Certificate will depend on the price
paid by the related Certificateholder for such Class A Certificate, the related
Pass-Through Rate and the rate and timing of principal payments (including
payments in excess of the Monthly Payment, prepayments in full or terminations,
liquidations and repurchases) on the Mortgage Loans in the related Loan Group.
Approximately 72.60% of the Group I Mortgage Loans and 74.08% of the Group II
Mortgage Loans provide for the payment of a penalty in connection with
prepayment in full during the first two, three, four or five years after
origination thereof.
The rate of principal prepayments on the Mortgage Loans in the related
Loan Group will be 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
Mortgage Loans at any time because of specific factors relating to such Mortgage
Loans, such as the age of the Mortgage Loans, the geographic location of the
related Mortgaged Properties and the extent of the related Mortgagors' equity in
such Mortgaged Properties, and changes in the Mortgagors' housing needs, job
transfers and employment. In general, if prevailing interest rates fall
significantly below the interest rates at the time of origination, mortgage
loans may be subject to higher prepayment rates than if prevailing interest
rates remain at or above those at the time such mortgage loans were originated.
Conversely, if prevailing interest rates rise appreciably above the interest
rates at the time of origination, mortgage loans may experience a lower
prepayment rate than if prevailing interest rates remained at or below those
existing at the time such mortgage loans were originated. Further, the rate of
prepayments may vary as between Group I Mortgage Loans and Group II Mortgage
Loans. There can be no assurance as to the prepayment rate of the Mortgage Loans
in the related Loan Group, or that the Mortgage Loans in the related Loan Group
will conform to the prepayment experience of other mortgage loans or to any past
prepayment experience or any published prepayment forecast.
In general, if a Class A Certificate is purchased at a premium over its
face amount and payments of principal of such Class A Certificate occur at a
rate faster than that assumed at the time of purchase, the purchaser's actual
yield to maturity will be lower than that anticipated at the time of purchase.
Conversely, if a Class A Certificate is purchased at a discount from its face
amount and payments of principal of such Class A Certificate occur at a rate
that is slower than that assumed at the time of purchase, the purchaser's actual
yield to maturity will be lower than originally anticipated.
The rate and timing of defaults on the Mortgage Loans in the related
Loan Group will also affect the rate and timing of principal payments on the
Mortgage Loans in the related Loan Group and thus the yield on the Class A
Certificates. There can be no assurance as to the rate of losses or
delinquencies on any of the Mortgage Loans. To the extent that any losses are
incurred on any of the Mortgage Loans that are not covered by Excess Spread or
an Insured Payment, the Class A Certificateholders will bear the risk of losses
resulting from default by Mortgagors. See "Risk Factors" herein and in the
Prospectus.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security to the date of distribution to
the investor thereof of each dollar distributed in reduction of principal of
such security (assuming no losses). The weighted average life of the Class A
Certificates will be influenced by, among other factors, the rate of principal
payments on the Mortgage Loans in the related Loan Group.
The primary source of information available to investors concerning the
Class A Certificates will be the monthly statements discussed herein under
"Servicing of the Mortgage Loans--Servicer Reports" and in the Prospectus under
"Description of the Securities-Reports to Holders", which will include
information as to the outstanding Class A Certificate Balance. There can be no
assurance that any additional information regarding the Class A Certificates
will be available through any other source. In addition, the Depositor is not
aware of any source through which price information about the Class A
Certificates will be generally available on an ongoing basis. The limited nature
of such information regarding the Class A Certificates may adversely affect the
liquidity of the Class A Certificates, even if a secondary market for the Class
A Certificates becomes available.
S-42
<PAGE>
Tables
The Constant Prepayment Rate ("CPR") model is used herein. The CPR
model assumes that the outstanding principal balance of a pool of mortgage loans
prepays at a specified constant annual rate of CPR. In generating monthly cash
flows, this rate is converted to an equivalent constant monthly rate. To assume
15% CPR or any other CPR percentage is to assume that the stated percentage of
the Pool Balance is prepaid over the course of a year. No representation is made
that the Mortgage Loans in the related Loan Group will prepay at that or any
other rate.
The tables set forth below are based on a CPR, constant draw rate and
optional termination assumptions as indicated in the tables below. The Mortgage
Loans are assumed to consist of sub-pools of Mortgage Loans with the
characteristics set forth below in the table captioned "Assumed Mortgage Loan
Characteristics".
In addition, it was assumed that (i) payments are made in accordance
with the description set forth under "Description of the Class A Certificates
- -Flow of Funds", (ii) no extension past the scheduled maturity date of a
Mortgage Loan is made, (iii) no delinquencies or defaults occur, (iv) the
Mortgage Loans pay on the basis of a 30-day month and a 360-day year, (v) the
scheduled Due Date for each Mortgage Loan is the fifteenth day of each calendar
month, (vi) the Issue Date is February 25, 1999, (vii) for each Remittance Date
LIBOR is equal to 4.95% per annum, (vii) the initial Class A Certificate Balance
is as set forth on the cover page hereof and (viii) unless otherwise noted, the
Master Servicer has not exercised the optional termination as set forth in
"Servicing of the Mortgage Loans - Termination; Purchase of Mortgage Loans"
below.
The actual characteristics and performance of the Mortgage Loans in the
related Loan Group will likely differ from the assumptions used in constructing
the tables set forth below, which are hypothetical in nature and are provided
only to give a general sense of how the principal cash flows might behave under
varying prepayment scenarios. For example, it is very unlikely that the Mortgage
Loans in the related Loan Group will prepay at a constant rate until maturity or
that all Mortgage Loans in the related Loan Group will prepay at the same rate.
Moreover, the diverse remaining terms to stated maturity of the Mortgage Loans
in the related Loan Group could produce slower or faster principal distributions
than indicated in the tables at the various assumptions specified, even if the
weighted average remaining term to stated maturity of the Mortgage Loans in the
related Loan Group is as assumed. Any difference between such assumptions and
the actual characteristics and performance of the Mortgage Loans in the related
Loan Group, or actual prepayment experience, will affect the percentages of
initial Certificate Balances outstanding over time and the weighted average life
of the Class A Certificates. Neither the CPR model nor any other prepayment
model or assumption purports to be an historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool of
mortgage loans, including the Mortgage Loans. Variations in the actual
prepayment experience and the Principal Balances of the Mortgage Loans that
prepay may increase or decrease each weighted average life shown in the
following tables. Such variations may occur even if the average prepayment
experience of all Mortgage Loans equals the CPR.
S-43
<PAGE>
Assumed Mortgage Loan Characteristics
of Group I Mortgage Loans
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
Remaining Term
Initial Gross Original Term to to Stated
Outstanding Mortgage Stated Maturity Maturity
Sub-Pool Principal Balance Interest Rate (months) (months)
-------- ----------------- ------------- ---------------- --------------
<S> <C> <C> <C> <C>
1
$ 8,314,650.62 12.507% 116 112
2 $65,460,627.56 11.807% 180 176
3 $51,224,721.82 8.642% 357 354
---------------------------------------
Sub-Total $125,000,000.00
---------
</TABLE>
Assumed Mortgage Loan Characteristics
of Group II Mortgage Loans
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
Remaining Term
Initial Gross Original Term to to Stated
Outstanding Mortgage Stated Maturity Maturity
Sub-Pool Principal Balance Interest Rate (months) (months)
-------- ----------------- ------------- ---------------- --------------
<S> <C> <C> <C> <C>
1 $ 1,662,930.12 12.507% 116 112
2 $ 13,092,125.52 11.807% 180 176
3 $ 10,244,944.36 8.642% 357 354
---------------------------------------
Sub-Total $ 25,000,000.00
---------
Total $150,000,000.00
-----
---------------------------------------
</TABLE>
S-44
<PAGE>
Percentage of Certificate Balance (1)
Class A-1
<TABLE>
<CAPTION>
Payment Date CPR
- ------------ -------------------------------------------------------
0% 10% 22% 30% 40%
--- --- --- --- ---
<S> <C> <C> <C> <C> <C>
Initial........................................ 100 100 100 100 100
February 2000.................................. 89 69 45 30 11
February 2001.................................. 84 47 8 0 0
February 2002.................................. 78 28 0 0 0
February 2003.................................. 72 10 0 0 0
February 2004.................................. 66 0 0 0 0
February 2005.................................. 58 0 0 0 0
February 2006.................................. 49 0 0 0 0
February 2007.................................. 40 0 0 0 0
February 2008.................................. 29 0 0 0 0
February 2009.................................. 19 0 0 0 0
February 2010.................................. 8 0 0 0 0
February 2011.................................. 0 0 0 0 0
February 2012.................................. 0 0 0 0 0
February 2013.................................. 0 0 0 0 0
February 2014.................................. 0 0 0 0 0
February 2015.................................. 0 0 0 0 0
February 2016.................................. 0 0 0 0 0
February 2017.................................. 0 0 0 0 0
February 2018.................................. 0 0 0 0 0
February 2019.................................. 0 0 0 0 0
February 2020.................................. 0 0 0 0 0
February 2021.................................. 0 0 0 0 0
February 2022.................................. 0 0 0 0 0
February 2023.................................. 0 0 0 0 0
February 2024.................................. 0 0 0 0 0
February 2025.................................. 0 0 0 0 0
February 2026.................................. 0 0 0 0 0
February 2027.................................. 0 0 0 0 0
February 2028.................................. 0 0 0 0 0
February 2029.................................. 0 0 0 0 0
Weighted Average Life to 10% call (years) (2).. 6.4113 2.0239 1.0002 0.7310 0.5362
Weighted Average Life to maturity (years) (3).. 6.4113 2.0239 1.0002 0.7310 0.5362
</TABLE>
(1) All percentages are rounded to the nearest 1%.
(2) Assumes that an optional termination is exercised on the first
Remittance Date on which the aggregate mortgage balance as of the last
date of the related Due Period is less than or equal to 10% of the
Cut-Off Date mortgage balance.
(3) Assumes the Certificates pay to maturity.
S-45
<PAGE>
Percentage of Certificate Balance (1)
Class A-2
<TABLE>
<CAPTION>
Payment Date CPR
- ------------ -------------------------------------------------------
0% 10% 22% 30% 40%
--- --- --- --- ---
<S> <C> <C> <C> <C> <C>
Initial........................................ 100 100 100 100 100
February 2000.................................. 100 100 100 100 100
February 2001.................................. 100 100 100 61 0
February 2002.................................. 100 100 45 0 0
February 2003.................................. 100 100 0 0 0
February 2004.................................. 100 84 0 0 0
February 2005.................................. 100 47 0 0 0
February 2006.................................. 100 14 0 0 0
February 2007.................................. 100 0 0 0 0
February 2008.................................. 100 0 0 0 0
February 2009.................................. 100 0 0 0 0
February 2010.................................. 100 0 0 0 0
February 2011.................................. 88 0 0 0 0
February 2012.................................. 53 0 0 0 0
February 2013.................................. 15 0 0 0 0
February 2014.................................. 0 0 0 0 0
February 2015.................................. 0 0 0 0 0
February 2016.................................. 0 0 0 0 0
February 2017.................................. 0 0 0 0 0
February 2018.................................. 0 0 0 0 0
February 2019.................................. 0 0 0 0 0
February 2020.................................. 0 0 0 0 0
February 2021.................................. 0 0 0 0 0
February 2022.................................. 0 0 0 0 0
February 2023.................................. 0 0 0 0 0
February 2024.................................. 0 0 0 0 0
February 2025.................................. 0 0 0 0 0
February 2026.................................. 0 0 0 0 0
February 2027.................................. 0 0 0 0 0
February 2028.................................. 0 0 0 0 0
February 2029.................................. 0 0 0 0 0
Weighted Average Life to 10% call (years) (2).. 13.0691 5.9692 3.0010 2.1404 1.5306
Weighted Average Life to maturity (years) (3).. 13.0691 5.9692 3.0010 2.1404 1.5306
</TABLE>
(1) All percentages are rounded to the nearest 1%.
(2) Assumes that an optional termination is exercised on the first
Remittance Date on which the aggregate mortgage balance as of the last
date of the related Due Period is less than or equal to 10% of the
Cut-Off Date mortgage balance.
(3) Assumes the Certificates pay to maturity.
S-46
<PAGE>
Percentage of Certificate Balance (1)
Class A-3
<TABLE>
<CAPTION>
Payment Date CPR
--------------------------------------------------------
0% 10% 22% 30% 40%
--- --- --- --- ----
<S> <C> <C> <C> <C> <C>
Initial........................................ 100 100 100 100 100
February 2000.................................. 100 100 100 100 100
February 2001.................................. 100 100 100 100 92
February 2002.................................. 100 100 100 77 8
February 2003.................................. 100 100 92 28 0
February 2004.................................. 100 100 47 0 0
February 2005.................................. 100 100 12 0 0
February 2006.................................. 100 100 0 0 0
February 2007.................................. 100 83 0 0 0
February 2008.................................. 100 55 0 0 0
February 2009.................................. 100 31 0 0 0
February 2010.................................. 100 10 0 0 0
February 2011.................................. 100 0 0 0 0
February 2012.................................. 100 0 0 0 0
February 2013.................................. 100 0 0 0 0
February 2014.................................. 84 0 0 0 0
February 2015.................................. 77 0 0 0 0
February 2016.................................. 71 0 0 0 0
February 2017.................................. 63 0 0 0 0
February 2018.................................. 55 0 0 0 0
February 2019.................................. 46 0 0 0 0
February 2020.................................. 37 0 0 0 0
February 2021.................................. 26 0 0 0 0
February 2022.................................. 15 0 0 0 0
February 2023.................................. 2 0 0 0 0
February 2024.................................. 0 0 0 0 0
February 2025.................................. 0 0 0 0 0
February 2026.................................. 0 0 0 0 0
February 2027.................................. 0 0 0 0 0
February 2028.................................. 0 0 0 0 0
February 2029.................................. 0 0 0 0 0
Weighted Average Life to 10% call (years) (2).. 19.2753 9.3038 5.0032 3.6123 2.4938
Weighted Average Life to maturity (years) (3).. 19.2753 9.3038 5.0032 3.6123 2.4938
</TABLE>
(1) All percentages are rounded to the nearest 1%.
(2) Assumes that an optional termination is exercised on the first
Remittance Date on which the aggregate mortgage balance as of the last
date of the related Due Period is less than or equal to 10% of the
Cut-Off Date mortgage balance.
(3) Assumes the Certificates pay to maturity.
S-47
<PAGE>
Percentage of Certificate Balance (1)
Class A-4
<TABLE>
<CAPTION>
Payment Date CPR
--------------------------------------------------------
0% 10% 22% 30% 40%
--- --- --- --- ----
<S> <C> <C> <C> <C> <C>
Initial........................................ 100 100 100 100 100
February 2000.................................. 100 100 100 100 100
February 2001.................................. 100 100 100 100 100
February 2002.................................. 100 100 100 100 100
February 2003.................................. 100 100 100 100 71
February 2004.................................. 100 100 100 89 41
February 2005.................................. 100 100 100 59 22
February 2006.................................. 100 100 84 39 11
February 2007.................................. 100 100 62 25 5
February 2008.................................. 100 100 45 15 1
February 2009.................................. 100 100 31 8 0
February 2010.................................. 100 100 21 4 0
February 2011.................................. 100 89 14 1 0
February 2012.................................. 100 70 8 0 0
February 2013.................................. 100 53 4 0 0
February 2014.................................. 100 40 2 0 0
February 2015.................................. 100 34 * 0 0
February 2016.................................. 100 29 0 0 0
February 2017.................................. 100 24 0 0 0
February 2018.................................. 100 20 0 0 0
February 2019.................................. 100 17 0 0 0
February 2020.................................. 100 13 0 0 0
February 2021.................................. 100 10 0 0 0
February 2022.................................. 100 8 0 0 0
February 2023.................................. 100 6 0 0 0
February 2024.................................. 87 3 0 0 0
February 2025.................................. 71 2 0 0 0
February 2026.................................. 53 * 0 0 0
February 2027.................................. 32 0 0 0 0
February 2028.................................. 9 0 0 0 0
February 2029.................................. 0 0 0 0 0
Weighted Average Life to 10% call (years) (2).. 26.1135 13.0858 7.7181 5.7042 4.1109
Weighted Average Life to maturity (years) (3).. 27.0271 15.7024 9.2466 6.9333 5.0432
</TABLE>
(1) All percentages are rounded to the nearest 1%.
(2) Assumes that an optional termination is exercised on the first
Remittance Date on which the aggregate mortgage balance as of the last
date of the related Due Period is less than or equal to 10% of the
Cut-Off Date mortgage balance.
(3) Assumes the Certificates pay to maturity. * Less than 0.5% but greater
than 0%.
S-48
<PAGE>
Percentage of Certificate Balance (1)
Class A-5
<TABLE>
<CAPTION>
Payment Date CPR
- ------------ --------------------------------------------------------
0% 10% 22% 30% 40%
--- --- --- --- ----
<S> <C> <C> <C> <C> <C>
Initial........................................ 100 100 100 100 100
February 2000.................................. 94 85 73 66 56
February 2001.................................. 92 74 55 43 31
February 2002.................................. 89 64 41 28 17
February 2003.................................. 86 55 31 20 11
February 2004.................................. 83 48 23 14 6
February 2005.................................. 79 41 17 9 3
February 2006.................................. 75 35 13 6 2
February 2007.................................. 70 29 9 4 1
February 2008.................................. 65 25 7 2 *
February 2009.................................. 60 20 5 1 0
February 2010.................................. 54 17 3 1 0
February 2011.................................. 48 14 2 * 0
February 2012.................................. 42 11 1 0 0
February 2013.................................. 35 8 1 0 0
February 2014.................................. 30 6 * 0 0
February 2015.................................. 28 5 * 0 0
February 2016.................................. 27 4 0 0 0
February 2017.................................. 26 4 0 0 0
February 2018.................................. 25 3 0 0 0
February 2019.................................. 23 3 0 0 0
February 2020.................................. 21 2 0 0 0
February 2021.................................. 20 2 0 0 0
February 2022.................................. 18 1 0 0 0
February 2023.................................. 16 1 0 0 0
February 2024.................................. 13 1 0 0 0
February 2025.................................. 11 * 0 0 0
February 2026.................................. 8 * 0 0 0
February 2027.................................. 5 0 0 0 0
February 2028.................................. 1 0 0 0 0
February 2029.................................. 0 0 0 0 0
Weighted Average Life to 10% call (years) (2).. 12.8145 5.6675 3.0711 2.2379 1.5975
Weighted Average Life to maturity (years) (3).. 12.9533 6.0652 3.3035 2.4248 1.7392
</TABLE>
(1) All percentages are rounded to the nearest 1%.
(2) Assumes that an optional termination is exercised on the first
Remittance Date on which the aggregate mortgage balance as of the last
date of the related Due Period is less than or equal to 10% of the
Cut-Off Date mortgage balance.
(3) Assumes the Certificates pay to maturity. * Less than 0.5% but greater
than 0%.
S-49
<PAGE>
There is no assurance that prepayments will occur or, if they do occur,
that they will occur at any percentage of CPR.
None of the Certificate Insurer, the Trust Fund, the Trustee, the
Depositor or the Master Servicer will be liable to any Certificateholder for any
loss or damage incurred by such Certificateholder as a result of a reduced rate
of return experienced by such Certificateholder relative to the Pass-Through
Rate, upon reinvestment of the funds received in connection with any premature
repayment of principal on the Certificates, including, without limitation, any
such repayment resulting from prepayments, liquidations, or repurchases of, or
substitutions for, any Mortgage Loan.
DESCRIPTION OF THE CERTIFICATES
General
The Class A Certificates and Class R Certificates will represent the
entire beneficial interest in the assets of the Trust Fund. The Class R
Certificates have been designated as the single "residual interest" for purposes
of the Code. The Class R Certificates are not being offered hereby. Pursuant to
the Purchase and Sale Agreement, the Class R Certificates will be transferred to
the Transferor on the Issue Date as part of the consideration for the transfer
of the Mortgage Loans to the Depositor.
Each Class A Certificate represents a certain fractional undivided
ownership interest in the Trust Fund created and held pursuant to the Pooling
and Servicing Agreement described below, subject to the limits and the priority
of distribution described therein. The Trust Fund consists of (a) the Principal
Balances of the Mortgage Loans, together with (i) all collections thereon and
proceeds thereof collected after the Cut-Off Date, and (ii) all mortgage files
relating thereto, (b) such assets as from time to time are identified as REO
Property and collections thereon and proceeds thereof, (c) assets that are
deposited in the Certificate Account, including amounts on deposit in the
Certificate Account and invested in Permitted Investments, (d) the Trustee's
rights with respect to the Mortgage Loans under all insurance policies, required
to be maintained pursuant to the Pooling and Servicing Agreement and any
insurance proceeds, (e) Liquidation Proceeds, (f) released mortgaged property
proceeds and (g) the Certificate Insurance Policy.
Book-Entry Registration
The Class A Certificates will be issued only in book-entry form, in
denominations of $1,000 initial principal balance with integral multiples
thereof, except that one Certificate for each Class may be issued in a different
amount.
Each Class of Certificates will initially be represented by a single
physical certificate in each case registered in the name of Cede, as nominee of
DTC, which will be the "Holder" or "Certificateholder" of the Class A
Certificates as such terms are used in the Pooling and Servicing Agreement. No
Beneficial Owner will be entitled to receive a certificate representing such
person's interest in the Class A Certificates, except as set forth below under
"Definitive Certificates". Unless and until Definitive Class A Certificates are
issued under the limited circumstances described herein, all references to
actions taken by Certificateholders or holders shall, in the case of Class A
Certificates, refer to actions taken by DTC upon instructions from its
Participants (as defined below), and all references herein to distributions,
notices, reports and statements to Certificateholders or holders shall, in the
case of Class A Certificates, refer to distributions, notices, reports and
statements to DTC or Cede, as the registered holder of the Class A Certificates,
as the case may be, for distribution to Beneficial Owners in accordance with DTC
procedures.
The Beneficial Owners may elect to hold their Class A Certificates
through DTC in the United States, or Cedel or Euroclear (in Europe) if they are
participants of such systems ("Participants"), or indirectly through
organizations which are Participants in such systems. The Book-Entry
Certificates will be issued in one or more certificates per class of Class A
Certificates which in the aggregate equal the principal balance of such Class A
Certificates and will initially be registered in the name of Cede, the nominee
of DTC. Cedel and Euroclear will hold omnibus positions on behalf of their
Participants through customers' securities accounts in Cedel's and Euroclear's
names on the books of their respective depositaries which in turn will hold such
positions in customers' securities accounts in the depositaries' names on the
books of DTC. Chase will act as depositary for Cedel and Morgan Guaranty Trust
Company of New York 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 principal amounts of $1,000.
Except as described below, no Beneficial Owner will be entitled to receive a
physical certificate representing such Certificate (a "Definitive Certificate").
Unless and until Definitive Certificates are issued, it is anticipated that the
only "Owner" of such Class A Certificates will be Cede, as nominee of DTC.
Beneficial
S-50
<PAGE>
Owners will not be Holders as that term is used in the Pooling and Servicing
Agreement. Beneficial Owners are only permitted to exercise their rights
indirectly through 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 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).
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York UCC and a "clearing agency"
registered pursuant to Section 17A of the Securities Exchange Act of 1934, as
amended. DTC was created to hold securities for its participating organizations
("Participants") and to facilitate the clearance and settlement of securities
transactions between Participants through electronic book-entries, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers (including the Underwriter), banks, trust
companies and clearing corporations. Indirect access to the DTC system also is
available to others 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").
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
of Book-Entry Certificates, such as the Class A Certificates, among Participants
on whose behalf it acts with respect to the Book-Entry Certificates and to
receive and transmit distributions of principal of and interest on the
Book-Entry Certificates. Participants and Indirect Participants with which
Beneficial Owners have accounts with respect to the Book-Entry Certificates
similarly are required to make book-entry transfers and receive and transmit
such payments on behalf of their respective Beneficial Owners.
Beneficial Owners that are not Participants or Indirect Participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Book-Entry Certificates may do so only through Participants and
Indirect Participants. In addition, Beneficial Owners will receive all
distributions of principal and interest from the Trustee, or a paying agent on
behalf of the Trustee, through DTC Participants. DTC will forward such
distributions to its Participants, which thereafter will forward them to
Indirect Participants or Beneficial Owners. Beneficial Owners will not be
recognized by the Trustee, the Master Servicer or any paying agent as
Certificateholders, as such term is used in the Pooling and Servicing Agreement
and Beneficial Owners will be permitted to exercise the rights of
Certificateholders only indirectly through DTC and its Participants.
Because of time zone differences, credits of securities received in
Cedel or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedel Participants on such business day. Cash received in Cedel or
Euroclear as a result of sales of securities by or through a Cedel Participant
(as defined below) or Euroclear Participant (as defined below) to a DTC
Participant will be received with value on the DTC settlement date but will be
available in the relevant Cedel or Euroclear cash account only as of the
business day following settlements in DTC. For information with respect to tax
documentation procedures relating to the Certificates, see "Certain Federal
Income Tax Consequences--REMIC Certificates" in the Prospectus.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participant organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions
S-51
<PAGE>
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 31 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 securities through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Remittance Date by the Trustee to Cede, as nominee of DTC. DTC will be
responsible for crediting the amount of such payments to the accounts of the
applicable DTC Participants in accordance with DTC's normal procedures. Each DTC
Participant will be responsible for disbursing such payment to the Beneficial
Owners of the Book-Entry 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, as nominee of DTC.
Distributions with respect to Class A 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. 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 Certificates in the secondary market since
certain potential investors may be unwilling to purchase Certificates for which
they cannot obtain physical certificates.
Monthly and annual reports on the Trust provided by 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 the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such Beneficial Owners are credited.
S-52
<PAGE>
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Beneficial
Owner to pledge Book-Entry Certificates to persons or entities that do not
participate in the DTC system, or to otherwise act with respect to such
Book-Entry Certificates, may be limited due to the lack of a physical
certificate for such Book-Entry Certificates. In addition, under a book-entry
format, Beneficial Owners may experience delays in their receipt of payments,
since distributions will be made by the Trustee, to Cede, as nominee for DTC.
DTC has advised the Depositor and the Master Servicer that it will take
any action permitted to be taken by a Certificateholder under the Pooling and
Servicing Agreement only at the direction of one or more Participants to whose
accounts with DTC the Book-Entry Certificates are credited. Additionally, DTC
has advised the Depositor that it will take such actions with respect to
specified percentages of voting rights only at the direction of and on behalf of
Participants whose holdings of Book-Entry Certificates evidence such specified
percentages of voting rights. DTC may take conflicting actions with respect to
percentages of voting rights to the extent that Participants whose holdings of
Book-Entry Certificates evidence such percentages of voting rights authorize
divergent action.
None of the Depositor, the Master Servicer, the Certificate Insurer or
the Trustee will have any responsibility for any aspect of the records relating
to or payments made on account of beneficial ownership interests of the
Book-Entry Certificates held by Cede, as nominee for DTC, or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Class A 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.
Definitive Certificates
The Class A Certificates, which will be issued initially as Book-Entry
Certificates, will be converted to Definitive Certificates and reissued to
Beneficial Owners or their nominees, rather than to DTC or its nominee, only if
(a) the Depository or the Master Servicer advises the Trustee in writing that
DTC is no longer willing or able to discharge properly its responsibilities as
depository with respect to the Book-Entry Certificates and the Depository or the
Master Servicer is unable to locate a qualified successor or (b) the Trustee, at
its option, elects to terminate the book-entry system through DTC.
Upon the occurrence of any event described in the immediately preceding
paragraph, DTC will be required to notify all Participants of the availability
through DTC of Definitive Certificates. Upon delivery of Definitive
Certificates, the Trustee will reissue the Book-Entry Certificates as Definitive
Certificates to Beneficial Owners. Distributions of principal of, and interest
on, the Book-Entry Certificates will thereafter be made by the Trustee, or a
paying agent on behalf of the Trustee, directly to holders of Definitive
Certificates in accordance with the procedures set forth in the Pooling and
Servicing Agreement.
Definitive Certificates will be transferable and exchangeable at the
offices of the Trustee or the certificate registrar. No service charge will be
imposed for any registration of transfer or exchange, but the Trustee may
require payment by the Beneficial Owner of a sum sufficient to cover any tax or
other governmental charge imposed in connection therewith.
Assignment of Mortgage Loans
Pursuant to the Mortgage Loan Sale Agreement between IUB and the
Transferor, IUB will sell, transfer, assign, set over and otherwise convey the
Mortgage Loans without recourse to the Transferor on the Issue Date. Pursuant to
the Purchase and Sale Agreement between the Transferor and the Depositor, the
Transferor will sell, transfer, assign, set over and otherwise convey the
Mortgage Loans without recourse to the Depositor on the Issue Date. Pursuant to
the Pooling and Servicing Agreement, the Depositor will sell, transfer, assign,
set over and otherwise convey without recourse to the Trust in trust for the
benefit of the Certificateholders and the Certificate Insurer all right, title
and interest in and to each Mortgage Loan. Each such transfer will convey all
right, title and interest in and to (a) principal due to the extent of the
Principal Balance and (b) interest accrued after the Cut-Off Date; provided,
however, that the Transferor will not convey, and the Transferor reserves and
retains all its right, title and interest in and to principal (including
principal prepayments in full and curtailments (i.e., partial prepayments))
received on each such Mortgage Loan on or prior to the Cut-Off Date.
In connection with such transfer and assignment, the Depositor will
cause to be delivered to the Trustee on the Issue Date the following documents
(collectively, with respect to each Mortgage Loan, the "Trustee's Mortgage
File") with respect to each Mortgage Loan:
S-53
<PAGE>
(a) The original Mortgage Note, endorsed by the holder of
record without recourse in the following form: "Pay to the order of
__________________________ without recourse" and signed in the name of
the holder of record, and if by the Transferor, by an authorized
officer;
(b) The original Mortgage with evidence of recording indicated
thereon; provided, however, that if such Mortgage has not been returned
from the applicable recording office, then such recorded Mortgage shall
be delivered when so returned;
(c) An assignment of the original Mortgage, in suitable form
for recordation in the jurisdiction in which the related Mortgaged
Property is located, in the name of the holder of record of the
Mortgage Loan by an authorized officer (with evidence of submission for
recordation of such assignment in the appropriate real estate recording
office for such Mortgaged Property to be received by the Trustee within
60 days of the Issue Date); provided, however, that assignments of
mortgages shall not be required to be submitted for recording with
respect to any Mortgage Loan which relates to the Trustee's Mortgage
File if the Trustee, each of the Rating Agencies and the Certificate
Insurer shall have received an opinion of counsel satisfactory to the
Trustee, each of the Rating Agencies and the Certificate Insurer
stating that, in such counsel's opinion, the failure to record such
assignment shall not have a materially adverse effect on the security
interest of the Trustee in the Mortgage Loan; provided, further, that
any assignment not submitted for recordation within 60 days of the
Issue Date shall be recorded upon the earlier to occur of (i) receipt
by the Trustee of the Certificate Insurer's written direction to record
such assignment, (ii) the occurrence of any Event of Default, as such
term is defined in the Pooling and Servicing Agreement, or (iii) a
bankruptcy or insolvency proceeding involving the Mortgagor is
initiated or foreclosure proceedings are initiated against the
Mortgaged Property as a consequence of an event of default under the
Mortgage Loan; provided, further, that if the related Mortgage has not
been returned from the applicable recording office, then such
assignment shall be delivered when so returned (and a blanket
assignment with respect to such Mortgage shall be delivered on the
Issue Date);
(d) Any intervening assignments of the Mortgage with
evidence of recording thereon; and
(e) Any assumption, modification, consolidation or extension
agreements.
Pursuant to the Pooling and Servicing Agreement, the Trustee agrees to
execute and deliver on or prior to the Issue Date an acknowledgment of receipt
of the Certificate Insurance Policy and, for each Mortgage Loan, the original
Mortgage Note, item (a) above, with respect to the Mortgage Loans (with any
exceptions noted). The Trustee agrees, for the benefit of the Certificateholders
and the Certificate Insurer, to review (or cause to be reviewed) each Trustee's
Mortgage File within 90 days after the Issue Date (or, with respect to any
Qualified Substitute Mortgage Loan, within 90 days after the receipt by the
Trustee thereof) and to deliver a certification generally to the effect that, as
to each Mortgage Loan listed in the Mortgage Loan Schedule, (a) all documents
required to be delivered to it pursuant to the Mortgage Loan Sale Agreement are
in its possession, (b) each such document has been reviewed by it and has not
been mutilated, damaged, torn or otherwise physically altered, appears regular
on its face and relates to such Mortgage Loan, and (c) based on its examination
and only as to the foregoing documents, certain information set forth on the
Mortgage Loan Schedule accurately reflects the information set forth in the
Trustee's Mortgage File delivered on such date.
If the Trustee or the Certificate Insurer during the process of
reviewing the Trustee's Mortgage Files finds any document constituting a part of
a Trustee's Mortgage File which is not executed, has not been received or is
unrelated to the Mortgage Loans, or that any Mortgage Loan does not conform to
the requirements above or to the description thereof as set forth in the
Mortgage Loan Schedule, the Trustee or the Certificate Insurer, as applicable,
shall promptly so notify the Trustee, the Master Servicer, the Transferor and
the Certificate Insurer. The Transferor agrees to use reasonable efforts to
cause to be remedied a material defect in a document constituting part of a
Trustee's Mortgage File of which it is so notified by the Trustee. If, however,
within 120 days after the Trustee's notice to it respecting such defect the
Transferor has not caused to be remedied the defect and the defect materially
and adversely affects the interest of the Holders in the Principal Balance of
the Mortgage Loan or the interests of the Certificate Insurer, the Transferor
will either (i) substitute in lieu of such Mortgage Loan a Qualified Substitute
Mortgage Loan and, if the then outstanding principal balance of such Qualified
Substitute Mortgage Loan is less than the applicable Principal Balance of such
Mortgage Loan as of the date of such substitution plus accrued and unpaid
interest thereon, deliver to the Master Servicer as part of the related monthly
remittance remitted by the Master Servicer the amount of any such shortfall (the
"Substitution Adjustment") or (ii) purchase such Mortgage Loan at a price equal
to the outstanding Principal Balance of such Mortgage Loan as of the date of
purchase, plus the greater of (x) all accrued and unpaid interest thereon or (y)
30 days' interest thereon, computed at the related Mortgage Interest Rate, plus
the amount of any unreimbursed Servicing Advances made by the Master Servicer,
which purchase price shall be deposited in the Collection Account or Trustee
Collection Account on the next succeeding
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Determination Date after deducting therefrom any amounts received in respect of
such repurchased Mortgage Loan or Mortgage Loans and being held in the
Collection Account or Trustee Collection Account for future distribution to the
extent such amounts have not yet been applied to principal or interest on such
Mortgage Loan or Mortgage Loans (see " -- Flow of Funds" below); provided,
however, that the Transferor may not purchase the Principal Balance of any
Mortgage Loan that is not in default or as to which no default is imminent
pursuant to the preceding clause (ii) unless the Transferor has theretofore
caused to be delivered to the Trustee an opinion of counsel knowledgeable in
federal income tax matters which states that such a purchase would not
constitute a prohibited transaction under the Code.
A "Qualified Substitute Mortgage Loan" is defined in the Pooling and
Servicing Agreement as any mortgage loan or mortgage loans which will be
assigned to the same Loan Group as the deleted Mortgage Loan which (i) relates
or relate to a detached one-family residence or to the same type of residential
dwelling as the deleted Mortgage Loan and in each case has or have the same or a
better lien priority as the deleted Mortgage Loan with a Borrower having the
same or better traditionally ranked credit status and is an owner-occupied
Mortgaged Property, (ii) matures or mature no later than (and not more than one
year earlier than) the deleted Mortgage Loan, (iii) has or have a Combined
Loan-to-Value Ratio or Combined Loan-to-Value Ratios at the time of such
substitution no higher than the Combined Loan-to-Value Ratio of the deleted
Mortgage Loan, (iv) has or have a principal balance or principal balances (after
application of all payments received on or prior to the date of
substitution)(which shall be the Principal Balance or Principal Balances
thereof) not substantially less and not more than the Principal Balance of the
deleted Mortgage Loan as of such date, (v) satisfies or satisfy the criteria set
forth from time to time in the definition of "qualified replacement mortgage" at
Section 860G(a)(4) of the Code (or any successor statute thereto) and (vi)
complies or comply as of the date of substitution with each representation and
warranty set forth in the Purchase and Sale Agreement.
Representations and Warranties of IUB and the Transferor
IUB and the Transferor will represent, among other things, with respect
to each Mortgage Loan, as of the Issue Date, the following:
(a) The information set forth in the Mortgage Loan Schedule
with respect to each Mortgage Loan is true and correct;
(b) Immediately prior to the sale of the Mortgage Loans to the
Depositor, the Transferor was the sole owner and holder thereof free
and clear of any and all liens and security interests; and
(c) The Mortgage Loan Sale Agreement constitutes a legal,
valid and binding obligation of IUB and the Transferor and the Purchase
and Sale Agreement constitutes a valid transfer and assignment to the
Depositor of all right, title and interest of the Transferor in and to
the Mortgage Loans and the proceeds thereof.
The benefit of the representations and warranties assigned or made to
the Depositor by the Transferor in the Purchase and Sale Agreement will be
assigned by the Depositor to the Trust pursuant to the Pooling and Servicing
Agreement.
Pursuant to the Pooling and Servicing Agreement, upon the discovery by
any of the Certificateholders, the Master Servicer, the Transferor, the
Certificate Insurer or the Trustee that any of the representations and
warranties contained in the Mortgage Loan Sale Agreement or the Purchase and
Sale Agreement have been breached in any material respect as of the Issue Date,
with the result that the interests of the Certificateholders in the related
Mortgage Loan or the interests of the Certificate Insurer were materially and
adversely affected (notwithstanding that such representation and warranty was
made to the Transferor's best knowledge), the party discovering such breach is
required to give prompt written notice to the others of such breach. Subject to
certain provisions of the Mortgage Loan Sale Agreement and the Purchase and Sale
Agreement, within 120 days of the earlier to occur of the Transferor's or IUB's
discovery or its receipt of written notice of any such breach, the Transferor or
IUB will (a) promptly cure such breach in all material respects, (b) remove each
Mortgage Loan which has given rise to the requirement for action by the
Transferor or IUB to substitute one or more Qualified Substitute Mortgage Loans
and, if the outstanding principal amount of such Qualified Substitute Mortgage
Loans as of the date of such substitution is less than the outstanding Principal
Balance, plus accrued and unpaid interest thereon of the replaced Mortgage Loans
as of the date of substitution, deliver to the Trust Fund as part of the amounts
remitted by the Master Servicer on such Remittance Date the amount of such
shortfall, or (c) purchase such Mortgage Loan at a price equal to the Principal
Balance of such Mortgage Loan as of the date of purchase plus the greater of (i)
all accrued and unpaid interest thereon and (ii) 30 days' interest thereon
computed at the Mortgage Interest Rate, plus the amount of any unreimbursed
Servicing Advances made by the Master Servicer, and deposit such purchase price
into the Trustee Collection Account on the next succeeding Determination Date
after deducting therefrom any amounts received in respect of such repurchased
Mortgage Loan or Loans and being held in the Trustee Collection Account or the
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Certificate Account for future distribution to the extent such amounts have not
yet been applied to principal or interest on such Mortgage Loan; provided,
however, that any substitution of one or more Qualified Substitute Mortgage
Loans pursuant to the preceding clause (b) must be effected not later than two
years after the Issue Date unless the Trustee and the Certificate Insurer
receive an opinion of counsel that such substitution would not constitute a
prohibited transaction for purposes of the REMIC provisions of the Code and,
provided, further, that the Transferor may not purchase such Mortgage Loan that
is not in default or as to which no default is imminent pursuant to the
preceding clause (c) unless the Transferor has theretofore caused to be
delivered to the Trustee and the Certificate Insurer an opinion of counsel
knowledgeable in Federal income tax matters in form and substance satisfactory
to the Trustee to the effect that such a purchase would not constitute a
prohibited transaction for purposes of the REMIC provisions of the Code or cause
the Trust Fund to fail to qualify as a REMIC at any time any Certificates are
outstanding. The obligation of the Transferor to cure such breach or to
substitute or purchase any Mortgage Loan constitutes the sole remedy respecting
a material breach of any such representation or warranty to the
Certificateholders, the Trustee and the Certificate Insurer.
Payments on the Mortgage Loans
The Pooling and Servicing Agreement provides that the Master Servicer,
for the benefit of the Certificateholders, shall establish and maintain one or
more Collection Accounts (each, a "Collection Account") and may maintain a
Collection Account with the Trustee (the "Trustee Collection Account"), and that
each Collection Account will generally be a trust account maintained with a
depository institution acceptable to each Rating Agency and the Certificate
Insurer (any such account, an "Eligible Account"). The Master Servicer shall
have the right to choose and relocate the Collection Account at any time,
provided each Collection Account shall otherwise comply with the requirements of
the preceding sentence. The Pooling and Servicing Agreement permits the Master
Servicer to direct any depository institution maintaining a Collection Account
to invest the funds in such Collection Account in one or more Permitted
Investments, as defined below, that mature, unless payable on demand, no later
than the Business Day preceding the date on which the Master Servicer is
required to transfer any amounts included in such funds from such Collection
Account to the Trustee Collection Account or to the Certificate Account, or, in
the case of funds held in the Trustee Collection Account invested in any such
Permitted Investments, from the Trustee Collection Account to the Certificate
Account described below.
The Master Servicer is obligated to deposit or cause to be deposited in
the Collection Account on a daily basis, amounts representing the following
payments received and collections made by it after the Cut-Off Date: (i) all
payments on account of principal, including Principal Prepayments, on the
Mortgage Loans; (ii) all payments on account of interest on the Mortgage Loans;
(iii) all Liquidation Proceeds and all Insurance Proceeds to the extent such
proceeds are not to be applied to the restoration of the related Mortgaged
Property or released to the related borrower in accordance with the express
requirements of law or in accordance with prudent and customary servicing
practices; (iv) all net revenues with respect to a Mortgaged Property held by
the Trust Fund; (v) all other amounts required to be deposited in the Collection
Account pursuant to the Pooling and Servicing Agreement; and (vi) any amounts
required to be deposited in connection with net losses realized on investments
of funds in the Collection Account. The Pooling and Servicing Agreement further
provides that all funds deposited in any Collection Account that are to be
included in the Master Servicer Remittance Amount related to a particular
Remittance Date be transferred to the Certificate Account not later than the
close of business on the third Business Day prior to such Remittance Date.
The Trustee will be obligated to set up an account (the "Certificate
Account"), which is required to be an Eligible Account, into which the Master
Servicer will deposit or cause to be deposited the Master Servicer Remittance
Amount on the third Business Day prior to the related Remittance Date (the
"Master Servicer Remittance Date").
Subject to the Master Servicer's determination that such action would
not constitute a Nonrecoverable Advance (as defined herein), the Master Servicer
is required to deposit into the Trustee Collection Account no later than the
close of business on the third Business Day prior to the related Remittance Date
(such day, the "Determination Date") an amount equal to the sum of (a) the
interest portion of the Monthly Payments on each Mortgage Loan due by the
related Due Date but not received by the Master Servicer as of the close of
business on the related Determination Date, net of the Servicing Fee and (b)
with respect to each REO Property which was acquired during or prior to the
related Due Period and as to which an REO disposition did not occur during the
related Due Period, an amount equal to the excess, if any, of interest on the
Principal Balance of the Mortgage Loan related to such REO Property at the
related Mortgage Interest Rate, net of the Servicing Fee, for the related Due
Period for the related Mortgage Loan over the net income from the REO Property
to be transferred to the Certificate Account for such Remittance Date pursuant
to the Pooling and Servicing Agreement (the "Periodic Advance"). Such Periodic
Advances by the Master Servicer are reimbursable to the Master Servicer subject
to certain conditions and restrictions and are intended to provide both
sufficient funds for the payment of interest to the Holders of the Class A
Certificates and to pay the premium due the Certificate Insurer. In the event
that, notwithstanding the Master Servicer's good faith determination at the time
such Periodic Advance was made that it would not be a
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Nonrecoverable Advance, such Periodic Advance becomes a Nonrecoverable Advance,
the Master Servicer will be entitled to reimbursement therefor from the Trust
Fund.
Subject to the Master Servicer's determination that such action would
not constitute a Nonrecoverable Advance and that a prudent mortgage lender would
make a like advance if it or an affiliate owned the related Mortgage Loan, the
Master Servicer is required to advance amounts with respect to the Mortgage
Loans ("Servicing Advances") constituting "out-of-pocket" costs and expenses
relating to (a) the preservation and restoration of the Mortgaged Property, (b)
enforcement proceedings, including foreclosures, (c) expenditures relating to
the purchase or maintenance of a first lien not included in the Trust on the
Mortgaged Property, and (d) certain other customary amounts described in the
Pooling and Servicing Agreement. Such Servicing Advances by the Master Servicer
are reimbursable to the Master Servicer subject to certain conditions and
restrictions. In the event that, notwithstanding the Master Servicer's good
faith determination at the time such Servicing Advance was made, that it would
not be a Nonrecoverable Advance, in the event such Servicing Advance becomes a
Nonrecoverable Advance, the Master Servicer will be entitled to reimbursement
therefor from the Trust Fund.
Not later than the close of business on the Business Day immediately
following each Determination Date, the Master Servicer is required to remit to
the Certificate Account, an amount equal to the lesser of (a) the aggregate of
the Prepayment Interest Shortfalls for the related Remittance Date resulting
from principal prepayments during the related Due Period and (b) its aggregate
Servicing Fees received in the related Due Period and shall not have the right
to reimbursement therefor (the "Compensating Interest"). With respect to any
Remittance Date and any Mortgage Loan, the "Prepayment Interest Shortfall" will
be an amount equal to the excess, if any, of (a) 30 days' interest on the
outstanding Principal Balance of such Mortgage Loan at a per annum rate equal to
the related Mortgage Interest Rate, any reduction as a result of a bankruptcy
proceeding (a "Deficient Valuation") and/or any reduction by a court of the
monthly payment due on such Mortgage Loan (a "Debt Service Reduction"), minus
the rate at which the Servicing Fee is calculated, over (b) the amount of
interest actually remitted by the Mortgagor in connection with such principal
prepayment in full less the Servicing Fee for such Mortgage Loan in such month.
The "Master Servicer Remittance Amount" for a Master Servicer
Remittance Date and the indicated Loan Group is equal to the sum of (i) all
unscheduled collections of principal and interest on the related Group I
Mortgage Loans in the case of Group I and Group II Mortgage Loans in the case of
Group II (including Principal Prepayments, Net REO Proceeds and Liquidation
Proceeds, if any) collected by the Master Servicer during the related Due
Period, all scheduled Monthly Payments on the Group I Mortgage Loans in the case
of Group I and Group II Mortgage Loans in the case of Group II due on the
related Due Date and received on or prior to the Business Day preceding such
Master Servicer Remittance Date and any prepayment penalties collected, (ii) all
Periodic Advances made by the Master Servicer with respect to interest payments
due to be received on the Group I Mortgage Loans in the case of Group I and
Group II Mortgage Loans in the case of Group II on the related Due Date and
(iii) any other amounts required to be placed in a Collection Account by the
Master Servicer in respect of the Group I Mortgage Loans in the case of Group I
and Group II Mortgage Loans in the case of Group II pursuant to the Pooling and
Servicing Agreement but excluding the following:
(a) amounts received on particular Group I Mortgage Loans in
the case of Group I and Group II Mortgage Loans in the case of Group II
as late payments of interest and respecting which the Master Servicer
has previously made an unreimbursed Periodic Advance;
(b) the portion of Liquidation Proceeds used to reimburse any
unreimbursed Periodic Advances made with respect to the Group I
Mortgage Loans in the case of Group I and Group II Mortgage Loans in
the case of Group II by the Master Servicer;
(c) those portions of each payment of interest on a particular
Group I Mortgage Loan in the case of Group I and Group II Mortgage Loan
in the case of Group II which represent the Servicing Fee;
(d) all income from Permitted Investments that is held in the
Collection Account for the account of the Master Servicer;
(e) all amounts in respect of late fees, assumption fees,
prepayment fees and similar fees;
(f) certain other amounts which are reimbursable to the Master
Servicer, as provided in the Pooling and Servicing Agreement; and
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(g) that portion of Net Foreclosure Profits with respect to
Group I Mortgage Loans in the case of Group I and Group II Mortgage
Loans in the case of Group II otherwise due to the Master Servicer as
provided in the Pooling and Servicing Agreement.
On each Remittance Date, any amount remaining on deposit in the
Certificate Account following the deposit of the Master Servicer Remittance
Amount in excess of (i) the amount of any Insured Payment, the Certificate
Insurance Premium Amount and any Trustee Fees then due the Trustee; (ii) the
Class A Distribution Amount and (iii) any Reimbursement Amount (as defined
herein) or other amount owed to the Certificate Insurer shall, in accordance
with the Pooling and Servicing Agreement, be distributed to the holder of the
Class R Certificate.
Servicing Fees and Other Compensation and Payment of Expenses
As compensation for its activities as Master Servicer under the Pooling
and Servicing Agreement, the Master Servicer shall be entitled with respect to
each Mortgage Loan to the Servicing Fee, which shall be payable monthly from
amounts on deposit in the Collection Account. The "Servicing Fee" shall be an
amount equal to interest at one-twelfth of the Servicing Fee Rate for such
Mortgage Loan on the scheduled Principal Balance of such Mortgage Loan at the
end of the applicable Due Period. The "Servicing Fee Rate" with respect to each
Mortgage Loan secured by a second priority lien will be 1.00% per annum and with
respect to all other Mortgage Loans will be 0.50% per annum. In the case that
IUB is no longer acting as Master Servicer, the Successor Servicer will be
entitled to a Servicing Fee calculated at a Servicing Fee Rate of up to 1.00%
per annum. In addition, the Master Servicer shall be entitled to receive, as
additional servicing compensation, to the extent permitted by applicable law and
the related Mortgage Notes, any late payment charges, assumption fees or similar
items. The Master Servicer shall also be entitled to withdraw from the
Collection Account any interest or other income earned on deposits therein. The
Master Servicer shall pay all expenses incurred by it in connection with its
servicing activities under the Pooling and Servicing Agreement and shall not be
entitled to reimbursement therefor except as specifically provided in the
Pooling and Servicing Agreement.
The Master Servicer may recover Periodic Advances and Servicing
Advances from the Collection Account or the Trustee Collection Account to the
extent permitted by the Pooling and Servicing Agreement and by the terms of the
Mortgage Loans or, if not recovered from the Mortgagor on whose behalf such
Periodic Advance or Servicing Advance was made, from late collections on the
related Mortgage Loan, including liquidation proceeds, released mortgaged
property proceeds, insurance proceeds and such other amounts as may be collected
by the Master Servicer from the Mortgagor or otherwise relating to the Mortgage
Loan, or, in the case of Periodic Advances, from late collections of interest on
any Mortgage Loan. In the event a Periodic Advance or a Servicing Advance
becomes a Nonrecoverable Advance, the Master Servicer may be reimbursed for such
advance from the Certificate Account.
The Master Servicer shall not be required to make any Periodic Advance
or Servicing Advance which it determines would be a nonrecoverable Periodic
Advance or nonrecoverable Servicing Advance (each a "Nonrecoverable Advance"). A
Periodic Advance or Servicing Advance is "nonrecoverable" if in the good faith
judgment of the Master Servicer, such Periodic Advance or Servicing Advance is
not ultimately recoverable.
Overcollateralization
On the Closing Date, the Overcollateralization Amount will equal zero.
As a result of the application of the Available Amount in reduction of the
principal balance of the related Class A Certificates, the applicable
Overcollateralization Amount is expected to increase over time until it reaches
the applicable Overcollateralization Target Amount; however the Pooling and
Servicing Agreement provides that, subject to certain trigger tests, the
required percentage level of overcollateralization may increase or decrease over
time.
While the distribution of the Available Amount to the holders of the
Class A Certificates in reduction of the Class A Principal Balance has been
designed to produce and maintain a given level of overcollateralization with
respect to the Class A Certificates, there can be no assurance that the Master
Servicer Remittance Amount will be sufficient to ensure that such
overcollateralization level will be achieved or maintained at all times.
Flow of Funds
On each Remittance Date, the Trustee shall distribute, to the extent of
funds on deposit in the Certificate Account and Insured Payments on deposit in
the Certificate Account as follows:
(a) To the Holder of the Class R Certificate, any prepayment
penalties collected on the Mortgage Loans during the related Due
Period;
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(b) to the Certificate Insurer, the Certificate Insurance
Policy Premium Amount;
(c) to the Trustee, an amount equal to the Trustee Fee then
due to it;
(d) from amounts then on deposit in the Certificate Account
constituted by the Group I Available Amount plus any Group II Excess
Spread plus any Insured Payments to the Class A-1 Certificateholders an
amount equal to the Class A-1 Interest Distribution Amount to the Class
A-2 Certificateholders an amount equal to the Class A-2 Interest
Distribution Amount, to the Class A-3 Certificateholders an amount
equal to the Class A-3 Interest Distribution Amount and to the Class
A-4 Certificateholders an amount equal to the Class A-4 Interest
Distribution Amount and from amounts then on deposit in the Certificate
Account constituted by the Group II Available Amount plus any Group I
Excess Spread plus any Insured Payments to the Class A-5
Certificateholders an amount equal to the Class A-5 Interest
Distribution Amount;
(e) from amounts then on deposit in the Certificate Account
constituted by the Group I Available Amount plus any Group II Excess
Spread plus any Insured Payments relating to Group I, to the Class A-1
Certificateholders an amount equal to the Principal Distribution Amount
for Group I net of any Overcollateralization Increase Amount included
therein until the Class A-1 Principal Balance has been reduced to zero,
thereafter to the Class A-2 Certificateholders an amount equal to the
Principal Distribution Amount for Group I net of any
Overcollateralization Increase Amount included therein until the Class
A-2 Principal Balance has been reduced to zero, thereafter to the Class
A-3 Certificateholders an amount equal to the Principal Distribution
Amount for Group I net of any Overcollateralization Increase Amount
included therein until the Class A-3 Principal Balance has been reduced
to zero and thereafter to the Class A-4 Certificateholders an amount
equal to the Principal Distribution Amount for Group I net of any
Overcollateralization Increase Amount included therein until the Class
A-4 Principal Balance has been reduced to zero and from amounts then on
deposit in the Certificate Account constituted by the Group II
Available Amount plus any Group I Excess Spread plus any Insured
Payments to the Class A-5 Certificateholders an amount equal to the
Principal Distribution Amount for Group II net of any
Overcollateralization Increase Amount included therein until the Class
A-5 Principal Balance has been reduced to zero;
(f) from amounts then on deposit in the Certificate Account
(excluding any Insured Payments) to the Certificate Insurer the lesser
of (x) the excess of (i) such amount over (ii) the amount of any
Insured Payment for such Remittance Date and (y) the amount of all
Insured Payments and other payments made by the Certificate Insurer
pursuant to the Certificate Insurance Policy which have not been
previously repaid together with interest thereon at the rate set forth
in the Certificate Insurance Agreement (the "Reimbursement Amount") as
of such Remittance Date;
(g) from amounts then on deposit in the Certificate Account
constituted by the Group I Available Amount an amount equal to the
Overcollateralization Increase Amount for Group I and from amounts then
on deposit in the Certificate Account constituted by the Group II
Available Amount an amount equal to the Overcollateralization Increase
Amount for Group II; and
(h) following the making by the Trustee of all allocations,
transfers and disbursements described above, from amounts then on
deposit in the Certificate Account, the Trustee shall distribute to the
Holders of the Class R Certificates, the amount remaining on such
Remittance Date, if any.
The "Class A Principal Distribution Amount" for any Remittance Date and
either Loan Group will be the lesser of:
(a) the excess of (i) the related Available Amount plus any
Group I Excess Spread or Group II Excess Spread (less any
Overcollateralization Increase Amounts with respect to such Group), as
applicable, plus the applicable portion of any Insured Payment over
(ii) the sum of the Class A-1 Interest Distribution Amount, the Class
A-2 Interest Distribution Amount, the Class A-3 Interest Distribution
Amount and the Class A-4 Interest Distribution Amount or the Class A-5
Interest Distribution Amount, as applicable, and
(b) an amount equal to (X) the sum, without duplication, of:
(i) that portion of all scheduled installments of principal in
respect of the Mortgage Loans in the related Loan Group which is
received during the related Due Period together with all unscheduled
recoveries of
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principal (including Prepayments, Curtailments and Deficient
Valuations) on such Mortgage Loans actually collected by the Master
Servicer during the prior calendar month,
(ii) the Principal Balance of each Mortgage Loan in the
related Loan Group that was, effective on such Remittance Date, either
repurchased by the Transferor or IUB or purchased by the Master
Servicer during the preceding Due Period, but only to the extent the
amount equal to such Principal Balance is actually received by the
Trustee,
(iii) any Substitution Adjustment amounts delivered by the
Transferor or IUB on the related Remittance Date in connection with a
substitution of a Mortgage Loan in the related Loan Group, to the
extent such Substitution Adjustments are actually received by the
Trustee,
(iv) with respect to each Mortgage Loan in the related Loan
Group that became a Liquidated Mortgage Loan during the prior calendar
month, the Principal Balance of such Mortgage Loan immediately prior to
the time when such Mortgage Loan became a Liquidated Mortgage Loan,
(v) any Overcollateralization Increase Amounts with respect to
the related Loan Group,
(vi) to the extent of any Subordination Deficit, the excess,
if any, of (A) the sum of the Class A-1 Certificate Principal Balance,
the Class A-2 Certificate Principal Balance, the Class A-3 Certificate
Principal Balance and the Class A-4 Certificate Principal Balance over
the Group I Principal Balance in the case of Group I, and (B) the Class
A-5 Certificate Principal Balance over the Group II Principal Balance
in the case of Group II,
(vii) the proceeds received by the Trust Fund following any
termination of the Trust Fund carried out in accordance with a plan of
complete liquidation or pursuant to the optional termination of any of
the Trust Fund, the 1999-1 REMIC or the related Loan Group by the
Master Servicer, the Holder of the Class R Certificate or the
Certificate Insurer in accordance with the Pooling and Servicing
Agreement,
minus (Y) any Overcollateralization Release Amount.
The "Group I Available Amount" for any Remittance Date equals (i) the
Master Servicer Remittance Amount for Group I on such Remittance Date minus (ii)
such Group's Proportional Share of (A) the Trustee Fee for Group I and (B) the
amount owed to the Certificate Insurer as premium for the Certificate Insurance
Policy with respect to Group I. The "Group II Available Amount" for any
Remittance Date equals (i) the Master Servicer Remittance Amount for Group II on
such Remittance Date minus (ii) such Group's Proportional Share of (A) the
Trustee Fee for Group II and (B) the amount owed to the Certificate Insurer as
premium for the Certificate Insurance Policy with respect to Group II. A Loan
Group's "Proportional Share" is equal to (i)(A) the sum of the A-1 Principal
Balance, the Class A-2 Principal Balance, the Class A-3 Principal Balance and
the Class A-4 Principal Balance in the case of Group I or (B) the Class A-5
Principal Balance in the case of Group II, divided by (ii) the aggregate
Certificate Principal Balance of all Classes.
The "Group I Excess Spread" for any Remittance Date equals the excess,
if any, of the Group I Available Amount over the sum of the Class A-1 Interest
Distribution Amount, the Class A-2 Interest Distribution Amount, the Class A-3
Interest Distribution Amount, the Class A-4 Interest Distribution Amount and the
Base Principal Distribution Amount for Loan Group I. The "Group II Excess
Spread" for any Remittance Date equals the excess, if any, of Group II Available
Amount over the sum of the Class A-5 Interest Distribution Amount and the Base
Principal Distribution Amount for Loan Group II.
The "Base Principal Distribution Amount" determined separately for each
Loan Group is equal to (A) the sum of clauses (b)(i), (ii), (iii), (iv), (vi)
and (vii) of the definition of Class A Principal Distribution Amount minus (B)
any related Overcollateralization Release Amount.
The "Overcollateralization Increase Amount" with respect to each of
Group I and Group II, as applicable, is equal to the lesser of (i) the Group I
Excess Spread and the Group II Excess Spread, respectively, and (ii) the related
Overcollateralization Deficiency Amount.
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The "Overcollateralization Deficiency Amount" with respect to each Loan
Group and any date of determination, is equal to the excess, if any, of the
related Overcollateralization Target Amount over the related
Overcollateralization Amount.
The "Overcollateralization Target Amount" with respect to each Loan
Group will be established pursuant to the Pooling and Servicing Agreement and
may increase or decrease over time and may be modified from time to time by
agreement of the Certificate Insurer and IUB.
The "Overcollateralization Release Amount" with respect to each Loan
Group and any date of determination, is equal to the excess, if any, of the
related Overcollateralization Amount over the related Overcollateralization
Target Amount.
The "Overcollateralization Amount" with respect to each Loan Group and
each Remittance Date, is the excess, if any, of (i) the aggregate Principal
Balance of the Group I Mortgage Loans (with respect to Group I) or the aggregate
Principal Balance of the Group II Mortgage Loans (with respect to Group II), as
applicable, as of the close of business on the last day of the related Due
Period over (ii) the aggregate Certificate Principal Balance of the Group I
Certificates or Group II Certificates, as applicable, as of such Remittance Date
(after taking into account the related Base Principal Distribution Amount, for
such Remittance Date).
The "Net Mortgage Interest Rate" means, with respect to either Loan
Group and any Remittance Date, the weighted average of the Mortgage Interest
Rates on the Group I Mortgage Loans or Group II Mortgage Loans, as applicable,
net of the premium rate on the Certificate Insurance Policy and the rate of the
fee of each of the Master Servicer and the Trustee.
The actual amount distributed with respect to the Class A-1
Certificates on any Remittance Date is the "Class A-1 Distribution Amount" for
such Remittance Date. The actual amount distributed with respect to the Class
A-2 Certificates on any Remittance Date is the "Class A-2 Distribution Amount"
for such Remittance Date. The actual amount distributed with respect to the
Class A-3 Certificates on any Remittance Date is the "Class A-3 Distribution
Amount" for such Remittance Date. The actual amount distributed with respect to
the Class A-4 Certificates on any Remittance Date is the "Class A-4 Distribution
Amount" for such Remittance Date. The actual amount distributed with respect to
the Class A-5 Certificates on any Remittance Date is the "Class A-5 Distribution
Amount" for such Remittance Date.
A "Liquidated Mortgage Loan" is, in general, a defaulted Mortgage Loan
as to which the Master Servicer has determined that all amounts that it expects
to recover on such Mortgage Loan have been recovered (exclusive of any
possibility of a deficiency judgment). To the extent of the related Available
Amount, a loss on a Liquidated Mortgage Loan (a "Liquidated Loan Loss") will be
recovered by the Holders of the related Class A Certificates on the Remittance
Date which immediately follows the event of loss. Any Liquidated Loan Loss that
results in a Subordination Deficit will require payment of an Insured Payment.
The Certificate Insurer will insure the timely payment of interest and the
ultimate payment of principal on the Class A Certificates.
The "Subordination Deficit" for the Mortgage Loans and any Remittance
Date, is the excess, if any, of (a) the aggregate of the sum of the Class A-1
Principal Balance, the Class A-2 Principal Balance, the Class A-3 Principal
Balance and the Class A-4 Principal Balance, and the Class A-5 Principal
Balance, on such Remittance Date, after taking into account the payment of the
related Principal Distribution Amounts on such Remittance Date (except for
amounts payable under the Certificate Insurance Policy) over (b) the aggregate
Principal Balance of the Mortgage Loans as of the end of the related Due Period.
The "Principal Balance" of any Mortgage Loan as of any date of
determination is the principal balance of such Mortgage Loan as of the Cut-Off
Date, after giving effect to prepayments received on or prior to the latest Due
Date, Deficient Valuations incurred prior to such Due Date and the payment of
principal due on such Due Date and irrespective of any delinquency in payment by
the related Mortgagor. The Principal Balance of a Mortgage Loan which becomes a
Liquidated Mortgage Loan on or prior to such Due Date shall be zero.
Calculation of LIBOR
On each Remittance Date, LIBOR will be established by the Trustee. As
to the Interest Period relating to the Class A-1 Certificates, LIBOR will equal,
for any Interest Period other than the first Interest Period, the rate for
United States dollar deposits for one month that appears on the Telerate Screen
Page 3750 as of 11:00 a.m., London, England
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time, on the second LIBOR Business Day prior to the first day of such Interest
Period. With respect to the first Interest Period, the rate for United States
dollar deposits for one month that appears on the Telerate Screen Page 3750 as
of 11:00 a.m., London, England time, two LIBOR Business Days prior to the Issue
Date. If such rate does not appear on such page (or such other page as may
replace such page on such service, or if such service is no longer offered, such
other service for displaying LIBOR or comparable rates as may be reasonably
selected by the Trustee after consultation with the Master Servicer), the rate
will be the Reference Bank Rate. If no such quotations can be obtained and no
Reference Bank Rate is available, LIBOR will be LIBOR applicable to the
preceding Remittance Date.
"Telerate Page 3750" means the display page so designated on the Bridge
Telerate Service (or such other page as may replace page 3750 on such service
for the purpose of displaying London interbank offered rates of major banks). If
such rate does not appear on such page (or such other page as may replace such
page on such service, or if such service is no longer offered, such other
service for displaying LIBOR or comparable rates as may be selected by the
Issuer after consultation with the Trustee), the rate will be the Reference Bank
Rate.
The "Reference Bank Rate" will be, with respect to any Interest Period,
as follows: the arithmetic mean (rounded upwards, if necessary, to the nearest
one sixteenth of one percent) of the offered rates for United States dollar
deposits for one month which are offered by the Reference Banks (which shall be
four major banks specified in the Pooling and Servicing Agreement) as of 11:00
a.m., London, England time, on the second LIBOR Business Day prior to the first
day of such Interest Period to prime banks in the London interbank market for a
period of one month in amounts approximately equal to the sum of the outstanding
Certificate Balance of the Certificates; provided, that at least two such
Reference Banks provide such rate. If fewer than two offered rates appear, the
Reference Bank Rate will be the arithmetic mean of the rates quoted by one or
more major banks in New York City, selected by the Trustee after consultation
with the Master Servicer, as of 11:00 a.m., New York time, on such date for
loans in U.S. Dollars to leading European Banks for a period of one month in
amounts approximately equal to the aggregate Certificate Balance of the
Certificates. If no such quotations can be obtained, the Reference Bank Rate
will be the Reference Bank Rate applicable to the preceding Interest Period.
"LIBOR Business Day" means any day other than (i) a Saturday or a
Sunday or (ii) a day on which banking institutions in the city of London,
England are required or authorized by law to be closed.
The establishment of LIBOR as to each Interest Period by the Trustee
and the Trustee's calculation of the rate of interest applicable to the
Certificates for the related Interest Period will, in the absence of manifest
error, be final and binding.
Report to Certificateholders
Pursuant to the Pooling and Servicing Agreement, on each Remittance
Date the Trustee will deliver to the Certificate Insurer, each Certificateholder
and the Depositor a written report, based solely on information provided by the
Master Servicer, containing information including, without limitation, the
amount of the distribution on such Remittance Date, the amount of such
distribution allocable to principal and allocable to interest, the aggregate
outstanding principal balance of each Class of the Class A Certificates as of
such Remittance Date, the amount of any Insured Payment included in such
distributions on such Remittance Date and such other information as required by
the Pooling and Servicing Agreement.
SERVICING OF THE MORTGAGE LOANS
The Master Servicer
Irwin Union Bank and Trust Company will act as the Master Servicer of
the 1999-1 REMIC and the Trust Fund. Irwin Union Bank and Trust Company will
engage the Originator as a subservicer pursuant to a Subservicing Agreement. See
"Irwin Home Equity Corporation."
Collection and Other Servicing Procedures; Mortgage Loan Modifications
The Master Servicer will be obligated under the Pooling and Servicing
Agreement to service and administer the Mortgage Loans, on behalf of the 1999-1
REMIC, for the benefit of the Certificateholders and the Certificate Insurer in
accordance with the terms of the Pooling and Servicing Agreement, and will have
full power and authority to do any and all things in connection with such
servicing and administration which it may deem necessary or desirable. The
Master Servicer may perform any of its obligations under the Pooling and
Servicing Agreement through one or more subservicers (including, without
limitation, the Originator). Notwithstanding any such subservicing arrangement,
the Master Servicer
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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. The Master Servicer will be obligated under the Pooling and
Servicing Agreement to make reasonable efforts to collect all payments called
for under the terms and provisions of the Mortgage Notes and will be obligated,
consistent with the other terms of the Pooling and Servicing Agreement, to
follow such collection procedures as it would normally follow with respect to
mortgage loans comparable to the Mortgage Loans and which are required to
generally conform to the mortgage servicing practices of prudent mortgage
lending institutions which service mortgage loans of the same type as the
Mortgage Loans for their own account in the jurisdictions in which the related
Mortgaged Properties are located. Consistent with the above, the Master Servicer
will be permitted, in its discretion, to (i) waive any late payment charge or
other charge in connection with any Mortgage Loan, and (ii) arrange a schedule,
running for no more than 180 days after the due date of any installment due
under the related Mortgage Note, for the liquidation of delinquent items.
Realization Upon or Sale of Defaulted Mortgage Loans
Except as described below, the Master Servicer will be required to
foreclose upon or otherwise comparably convert the ownership of properties
securing such of the Mortgage 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 Master
Servicer will be required to follow such procedures as it follows with respect
to similar mortgage loans held in its own portfolio. However, the Master
Servicer shall not be required to expend its own funds in connection with any
foreclosure or to restore any damaged property unless it shall determine that
(i) such foreclosure and/or restoration will increase the proceeds of
liquidation of the Mortgage Loan to Certificateholders after reimbursement to
itself for such expenses and (ii) such expenses shall be recoverable to it
through liquidation proceeds (respecting which it shall reimburse itself for
such expense prior to the deposit in the Collection Account of such proceeds).
The Master Servicer will be permitted to foreclose against the
Mortgaged Property securing a defaulted Mortgage Loan either by foreclosure, by
sale or by strict foreclosure, and in the event a deficiency judgment is
available against the Mortgagor or any other person, may proceed for the
deficiency.
In the event that title to any Mortgaged Property is acquired in
foreclosure or by deed in lieu of foreclosure, the deed or certificate of sale
will be required to be issued to the Trustee, or to the Master Servicer on
behalf of the Trustee, the Certificate Insurer and the Certificateholders.
Notwithstanding any such acquisition of title and cancellation of the related
Mortgage Loan, such Mortgage Loan is required to be considered to be a Mortgage
Loan held in the 1999-1 REMIC until such time as the related Mortgaged Property
is sold and such Mortgage Loan becomes a Liquidated Mortgage Loan. Consistent
with the foregoing, for purposes of all calculations under the Pooling and
Servicing Agreement, so long as such Mortgage Loan is an outstanding Mortgage
Loan:
(i) It will be assumed that, notwithstanding that the
indebtedness evidenced by the related Mortgage Note shall have
been discharged, such Mortgage Note and the related
amortization schedule in effect at the time of any such
acquisition of title (after giving effect to any previous
partial prepayments and before any adjustment thereto by
reason of any bankruptcy or similar proceeding or any
moratorium or similar waiver or grace period) remain in
effect, except that such schedule shall be adjusted to reflect
the application of proceeds received in any month pursuant to
the succeeding clause.
(ii) Net proceeds (after payment of Master Servicer's
expenses related to disposition) from such property received
in any month shall be deemed to have been received first in
payment of the accrued interest that remained unpaid on the
date that title to the related Mortgaged Property was
acquired by the 1999-1 REMIC, with the excess thereof, if
any, being deemed to have been received in respect of the
delinquent principal installments that remained unpaid on
such date. Thereafter, net proceeds from such property
received in any month shall be applied to the payment of
installments of principal and accrued interest on such
Mortgage Loan deemed to be due and payable in accordance with
the terms of such Mortgage Note and such amortization
schedule. If such net proceeds exceed the then unpaid REO
amortization, the excess shall be treated as a partial
principal prepayment received in respect of such Mortgage
Loan.
(iii) Only that portion of such net proceeds on such
a Mortgage Loan allocable to interest that bears the same
relationship to the total amount of net proceeds allocable to
interest as the rate at which the Servicing Fee is determined
bears to the Mortgage Interest Rate borne by such Mortgage
Loan shall be allocated to the Servicing Fee with respect
thereto.
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In the event that the 1999-1 REMIC acquires any Mortgaged Property as
aforesaid or otherwise in connection with a default or imminent default on a
Mortgage Loan, such Mortgaged Property will be required to be disposed of by or
on behalf of the 1999-1 REMIC within three years after its acquisition by the
1999-1 REMIC unless (a) the Trustee and the Certificate Insurer shall have
received an opinion of counsel to the effect that the holding by the 1999-1
REMIC of such Mortgaged Property subsequent to three years after its acquisition
(and specifying the period beyond such three-year period for which the Mortgaged
Property may be held) will not cause the 1999-1 REMIC to be subject to the tax
on prohibited transactions imposed by Code Section 860F(a)(1), otherwise subject
the Trust Fund or the 1999-1 REMIC to tax or cause the 1999-1 REMIC to fail to
qualify as a REMIC at any time that any Certificates are outstanding, or (b) the
Trustee (at the Master Servicer's expense) or the Master Servicer shall have
applied for, prior to the expiration of such three year period, an extension of
such three-year period in the manner contemplated by Code Section 856(e)(3), in
which case the three-year period shall be extended by the applicable period. The
Master Servicer will also be required to ensure that the Mortgaged Property is
administered so that it constitutes "foreclosure property" within the meaning of
Code Section 860G(a)(8) at all times, that the sale of such property does not
result in the receipt by the 1999-1 REMIC of any income from non-permitted
assets as described in Code Section 860F(a)(2)(B), and that the 1999-1 REMIC
does not derive any "net income from foreclosure property" within the meaning of
Code Section 860G(c)(2), with respect to such property.
In lieu of foreclosing upon any defaulted Mortgage Loan, the Master
Servicer may, in its discretion, permit the assumption of such Mortgage Loan if,
in the Master Servicer's judgment, such default is unlikely to be cured and if
the assuming borrower satisfies the Master Servicer's underwriting guidelines
with respect to mortgage loans owned by the Master Servicer. In connection with
any such assumption, the Mortgage Interest Rate of the related Mortgage Note and
the payment terms will not be permitted to be changed. Any fee collected by the
Master Servicer for entering into an assumption agreement will be retained by
the Master Servicer as servicing compensation. Alternatively, the Master
Servicer may encourage the refinancing of any defaulted Mortgage Loan by the
Mortgagor.
Notwithstanding the foregoing, prior to instituting foreclosure
proceedings or accepting a deed-in-lieu of foreclosure with respect to any
Mortgaged Property, the Master Servicer shall make, or cause to be made,
inspection of the Mortgaged Property in accordance with accepted servicing
procedures, and, with respect to environmental hazards, substantially comparable
to such procedures as are required by the provisions of the Federal National
Mortgage Association's Selling and Servicing Guide applicable to single-family
homes and in effect on the date hereof. The Master Servicer shall be entitled to
rely upon the results of any such inspection made by others. In cases where the
inspection reveals that such Mortgaged Property is potentially contaminated with
or affected by hazardous wastes or hazardous substances, the Master Servicer
shall promptly give written notice of such fact to the Certificate Insurer, the
Trustee and each Class A Certificateholder. The Master Servicer shall not
commence foreclosure proceedings or accept a deed-in-lieu of foreclosure for any
Mortgaged Property where such inspection reveals potential contamination by
hazardous waste without obtaining the consent of the Certificate Insurer.
Servicing and Other Compensation and Payment of Expenses
In addition to the Servicing Fee, the Master Servicer is entitled under
the Pooling and Servicing Agreement to retain additional servicing compensation
in the form of prepayment fees, assumption and other administrative fees,
release fees, bad check charges, any other servicing-related fees, Net
Liquidation Proceeds not otherwise required to be deposited in the Certificate
Account pursuant to the Pooling and Servicing Agreement, earnings paid on
Permitted Investments and amounts held on deposit as investment earnings on a
Collection Account. Such amounts shall be retained by or remitted to the Master
Servicer to the extent not required to be remitted to the Trustee for deposit in
the Certificate Account. The Master Servicer shall be required to pay all
expenses incurred by it in connection with its servicing activities under the
Pooling and Servicing Agreement and shall not be entitled to reimbursement
therefor except as specifically provided for therein.
Enforcement of Due-on-Sale Clauses
When a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Master Servicer shall, to the extent it has knowledge of such
conveyance or prospective conveyance, exercise its rights to accelerate the
maturity of the related Mortgage Loan under any "due-on-sale" clause contained
in the related Mortgage or Mortgage Note; provided, however, that the Master
Servicer shall not exercise any such right if the "due-on-sale" clause, in the
reasonable belief of the Master Servicer, is not enforceable under applicable
law. In such event, the Master Servicer may enter into an assumption and
modification agreement with the person to whom such property has been or is
about to be conveyed, pursuant to which such person becomes liable under the
Mortgage Note and, unless prohibited by applicable law or the Mortgage or
Mortgage Note, the Mortgagor remains liable thereon; provided, however, that the
Mortgage Interest Rate of the related Mortgage Note and the payment terms shall
not be changed. The Master Servicer is also authorized, with the
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prior approval of the Certificate Insurer except as provided in the Pooling and
Servicing Agreement, to enter into a substitution of liability agreement with
such person, pursuant to which the original Mortgagor is released from liability
and such person is substituted as Mortgagor and becomes liable under the
Mortgage Note.
Maintenance of Insurance Policies and Errors and Omissions and Fidelity Coverage
Generally, the underwriting requirements of the Originator require
mortgagors to obtain fire and casualty insurance as a condition to approving the
related mortgage loan, but the existence and/or maintenance of such fire and
casualty insurance is not in all cases monitored by the Originator. Title
insurance is not required on all mortgage loans. The Master Servicer will follow
such practices with respect to the Mortgage Loans. Accordingly, if a Mortgaged
Property suffers any hazard or casualty losses, or if the Mortgagor thereunder
is found not to have clear title to such Mortgaged Property, Certificateholders
may bear the risk of loss resulting from a default by the related Mortgagor to
the extent such losses are not covered by foreclosure or liquidation proceeds on
such defaulted Mortgage Loan or by the applicable credit enhancement. To the
extent that the related Mortgage documents require the Mortgagor under a
Mortgage Loan to maintain a fire and hazard insurance policy with extended
coverage on the related Mortgaged Property in an amount not less than the lesser
of the full insurable value of such Mortgaged Property or the unpaid Principal
Balance of such Mortgage Loan and any senior liens, the Master Servicer will
monitor the status of such insurance in varying degrees based upon certain
characteristics of the related Mortgage Loans, and will cause such insurance to
be maintained on a case-by-case basis. Further, with respect to each property
acquired by the Trust by foreclosure or by deed in lieu of foreclosure, the
Master Servicer will maintain or cause to be maintained fire and hazard
insurance thereon with extended coverage in an amount at least equal to the
lesser of (i) the full insurable value of the improvements that are a part of
such property and (ii) the Principal Balance owing on the related Mortgage Loan
at the time of such foreclosure or deed in lieu of foreclosure, plus accrued
interest thereon and related liquidation expenses. Such insurance on property
acquired by foreclosure or deed in lieu of foreclosure may not, however, be less
than the minimum amount required to fully compensate for any loss or damage on a
replacement cost basis.
Any cost incurred by the Master Servicer in maintaining any insurance
will not, for the purpose of calculating distributions to the
Certificateholders, be added to the unpaid Principal Balance of the related
Mortgage Loan, notwithstanding that the terms of such Mortgage Loan may so
permit. No earthquake or other additional insurance other than flood insurance
will be, under the Pooling and Servicing Agreement, required to be maintained by
any Mortgagor or the Master Servicer, other than pursuant to the terms of the
related Mortgage documents and such applicable laws and regulations as shall at
any time be in force and as shall require such additional insurance.
The Master Servicer will also be required under the Pooling and
Servicing Agreement to maintain in force (i) a policy or policies of insurance
covering errors and omissions in the performance of its obligations as Master
Servicer and (ii) a fidelity bond in respect of its officers, employees or
agents.
No pool insurance policy, title insurance policy, blanket hazard
insurance policy, special hazard insurance policy, bankruptcy bond or repurchase
bond will be required to be maintained with respect to the Mortgage Loans, nor
will any Mortgage Loan be insured by any government or government agency.
Master Servicer Reports
The Master Servicer is required to deliver to the Certificate Insurer,
the Trustee, Standard & Poor's and Moody's, not later than the last day of the
fifth month following the end of the Master Servicer's fiscal year (beginning
with May 31, 2000), an Officers' Certificate stating that (i) the Master
Servicer has fully complied with the servicing provisions of the Pooling and
Servicing Agreement, (ii) a review of the activities of the Master Servicer
during the preceding fiscal year and of performance under the Pooling and
Servicing Agreement has been made under such officers' supervision, and (iii) to
the best of such officers' knowledge, based on such review, the Master Servicer
has fulfilled all its obligations under the Pooling and Servicing Agreement for
such year, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default known to such officers and the nature
and status thereof including the steps being taken by the Master Servicer to
remedy such default. The first such Officers' Certificate shall be delivered by
the Master Servicer in 2000.
Not later than the last day of the fifth month following the end of the
Master Servicer's fiscal year (beginning with May 31, 2000), the Master
Servicer, at its expense, is required to cause to be delivered to the
Certificate Insurer, the Trustee, Standard & Poor's and Moody's from a firm of
independent certified public accountants (who may also render other services to
the Master Servicer) a statement to the effect that such firm has examined
certain documents and records relating to the servicing of the Mortgage Loans
during the preceding calendar year (or such longer period from the Issue Date to
the end of the following calendar year) and that, on the basis of such
examination conducted substantially in compliance with generally accepted
auditing standards and the requirements of the Uniform Single Attestation
Program
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for Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC, such
servicing has been conducted in compliance with the Pooling and Servicing
Agreement except for such significant exceptions or errors in records that, in
the opinion of such firm, generally accepted auditing standards and the Uniform
Single Audit Program for Mortgage Bankers or the Attestation Program for
Mortgages serviced for FHLMC require it to report, in which case such exceptions
and errors shall be so reported.
Removal and Resignation of Master Servicer
The Trustee, only at the direction of the Certificate Insurer or the
majority Certificateholders, with the consent of the Certificate Insurer (in the
case of any direction of the majority Certificateholders), may remove the Master
Servicer upon the occurrence and continuation beyond the applicable cure period
of an event described below:
(a) any failure by the Master Servicer to remit to the Trustee
any payment required to be made by the Master Servicer under the terms
of the Pooling and Servicing Agreement which continues unremedied
beyond any grace period permitted by the Certificate Insurer;
(b) the failure by the Master Servicer to make any required
Servicing Advance which failure continues unremedied for a period of 30
days after the date on which written notice of such failure, requiring
the same to be remedied, shall have been given to the Master Servicer
by the Trustee or to the Master Servicer and the Trustee by any
Certificateholder or the Certificate Insurer;
(c) any failure on the part of the Master Servicer duly to
observe or perform in any material respect any other of the covenants
or agreements on the part of the Master Servicer contained in the
Pooling and Servicing Agreement, or the breach of any representation
and warranty set forth in the Pooling and Servicing Agreement, which
continues unremedied for a period of 30 days after the date on which
written notice of such failure or breach, requiring the same to be
remedied, shall have been given to the Master Servicer by the Depositor
or the Trustee, or to the Master Servicer and the Trustee by any
Certificateholder or the Certificate Insurer;
(d) a decree or order of a court or agency or supervisory
authority having jurisdiction in an involuntary case under any present
or future federal or state bankruptcy, insolvency or similar law or for
the appointment of a conservator or receiver or liquidator in any
insolvency, readjustment of debt, marshalling of assets and liabilities
or similar proceedings, or for the winding-up or liquidation of its
affairs, shall have been entered against the Master Servicer and such
decree or order shall have remained in force, undischarged or unstayed
for a period of 60 days;
(e) the Master Servicer shall consent to the appointment of a
conservator or receiver or liquidator in any insolvency, readjustment
of debt, marshalling of assets and liabilities or similar proceedings
of or relating to the Master Servicer or of or relating to all or
substantially all of the Master Servicer's property;
(f) the Master Servicer shall admit in writing its inability
to pay its debts as they become due, file a petition to take advantage
of any applicable insolvency or reorganization statute, make an
assignment for the benefit of its creditors, or voluntarily suspend
payment of its obligations; or
(g) the delinquency or loss experience of the Mortgage Loan
pool exceeds certain levels specified in the Pooling and Servicing
Agreement.
The Master Servicer may not assign its obligations under the Pooling
and Servicing Agreement nor resign from the obligations and duties thereby
imposed on it except by mutual consent of the Master Servicer, IUB (if IUB is
not the Master Servicer), the Certificate Insurer and the Trustee, or upon the
determination that the Master Servicer's duties thereunder are no longer
permissible under applicable law and such incapacity cannot be cured by the
Master Servicer without the incurrence, in the reasonable judgment of the
Certificate Insurer, of unreasonable expense. No such resignation shall become
effective until a successor has assumed the Master Servicer's responsibilities
and obligations in accordance with the Pooling and Servicing Agreement.
Upon removal or resignation of the Master Servicer, the Trustee has
agreed to be the Successor Servicer (the "Successor Servicer"), provided,
however, that the transfer of servicing will be effected over a period of time
not to exceed 90 days. Immediately upon such resignation or removal, the
Trustee, as Successor Servicer, will be obligated to make Periodic Advances and
Servicing Advances and certain other advances unless it determines reasonably
and in good faith
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that such advances would not be recoverable. If, however, the Trustee is
unwilling or unable to act as Successor Servicer, or if the majority
Certificateholders (with the consent of the Certificate Insurer) or the
Certificate Insurer so requests, the Trustee shall appoint, or petition a court
of competent jurisdiction to appoint, in accordance with the provisions of the
Pooling and Servicing Agreement and subject to the approval of the Certificate
Insurer any established mortgage loan servicing institution acceptable to the
Certificate Insurer having a net worth of not less than $15,000,000 as the
Successor Servicer in the assumption of all or any part of the responsibilities,
duties or liabilities of the Master Servicer.
The Trustee and any other Successor Servicer in such capacity is
entitled to the same reimbursement for advances and no more than the same
servicing compensation as the Master Servicer. See "Servicing and Other
Compensation and Payment of Expenses" above.
Termination; Purchase of Mortgage Loans
The 1999-1 REMIC will terminate upon notice to the Trustee of either:
(a) the later of the distribution to Certificateholders of the final payment or
collection with respect to the last Mortgage Loan (or Periodic Advances of same
by the Master Servicer), or the disposition of all funds with respect to the
last Mortgage Loan and the remittance of all funds due under the Pooling and
Servicing Agreement and the payment of all amounts due and payable to the
Certificate Insurer and the Trustee or (b) mutual consent of the Master
Servicer, the Certificate Insurer and all Certificateholders in writing.
The Master Servicer may, at its option and at its sole cost and expense
(and if such option is not exercised by the Master Servicer, the Certificate
Insurer or the holder of the Class R Certificate may, in accordance with the
provisions of the Pooling and Servicing Agreement, at its option and at its sole
cost and expense), terminate the Trust on any date on which the aggregate
Principal Balance of the Mortgage Loans, as of such date of determination, is
less than 10% of the aggregate initial Principal Balances of the Mortgage Loans
by purchasing, on the next succeeding Remittance Date, all of the property of
the Trust at a price equal to the sum of (a) the greater of (i) 100% of the
Principal Balance of each related outstanding Mortgage Loan and each related REO
Property and (ii) the fair market value (disregarding accrued interest) of the
Mortgage Loans and REO Properties, determined as the average of three written
bids (copies of which are to be delivered to the Trustee and the Certificate
Insurer by the Master Servicer and the reasonable cost of which may be deducted
from the final purchase price) made by nationally recognized dealers and based
on a valuation process which would be used to value comparable mortgage loans
and REO property, (b) the greater of (i) aggregate amount of accrued and unpaid
interest on the Principal Balances of the Mortgage Loans through the related Due
Period and (ii) 30 days' accrued interest thereon at a rate equal to the
Mortgage Interest Rate, in each case net of the Servicing Fee, and (c) any
unreimbursed amounts due to the Certificate Insurer under the Pooling and
Servicing Agreement or the Certificate Insurance Agreement. No such termination
is permitted without the prior written consent of the Certificate Insurer if
such termination would result in a draw on the Certificate Insurance Policy.
Amendment
The Pooling and Servicing Agreement may be amended from time to time by
the Depositor, the Master Servicer and the Trustee by written agreement, upon
the prior written consent of the Certificate Insurer (which consent shall not be
withheld if, in the opinion of counsel addressed to the Trustee and the
Certificate Insurer, failure to amend would adversely affect the interests of
the Certificateholders unless such consent would adversely affect the interests
of the Certificate Insurer), without notice to, or consent of, the
Certificateholders, to cure any ambiguity, to correct or supplement any
provisions therein, to comply with any changes in the Code, or to make any other
provisions with respect to matters or questions arising under the Pooling and
Servicing Agreement which shall not be inconsistent with the provisions of the
Pooling and Servicing Agreement, provided that such action shall not, as
evidenced by an opinion of counsel delivered to, but not obtained at the expense
of, the Trustee, adversely affect in any material respect the interests of any
certificateholder of any outstanding Series (or 100% of the class of
certificateholders so affected shall have consented); and provided, further,
that no such amendment shall reduce in any manner the amount of, or delay the
timing of, payments received on Mortgage Loans which are required to be
distributed on any Certificate without the consent of the Holder of such
Certificate, or change the rights or obligations of any other party to the
Pooling and Servicing Agreement without the consent of such party.
The Pooling and Servicing Agreement may be amended from time to time by
the Depositor, the Master Servicer and the Trustee with the consent of the
Certificate Insurer (which consent shall not be withheld if, in the opinion of
counsel addressed to the Trustee and the Certificate Insurer, failure to amend
would adversely affect the interests of the Certificateholders unless such
consent would adversely affect the interests of the Certificate Insurer), and
the Holders of the majority of the Percentage Interest in the Class A
Certificates 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 any Supplement or of
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modifying in any manner the rights of the Holders; provided, however, that no
such amendment shall be made unless the Trustee and the Certificate Insurer
receives an opinion of counsel, at the expense of the party requesting the
change, that such change will not adversely affect the status of the 1999-1
REMIC as a REMIC or cause a tax to be imposed on the Trust Fund or the 1999-1
REMIC, and provided further, that no such amendment shall reduce in any manner
the amount of, or delay the timing of, payments received on Mortgage Loans which
are required to be distributed on any Certificate without the consent of the
Holder of such Certificate or reduce the percentage for each Class the Holders
of which are required to consent to any such amendment without the consent of
the Holders of 100% of each Class of Certificates affected thereby.
The Mortgage Loan Sale Agreement and the Purchase and Sale Agreement
each contains substantially similar restrictions regarding amendment.
THE TRUSTEE
Norwest Bank Minnesota, National Association, a national banking
association, has been named Trustee pursuant to the Pooling and Servicing
Agreement. The Trustee will serve initially as the custodian of the Trustee's
Mortgage Files. The Pooling and Servicing Agreement provides that the Trustee
shall be entitled to a fee, which fee shall include the expenses of the Trustee
(including transition expenses) to the extent such expenses are not paid by the
Master Servicer (the "Trustee Fee") in respect of its services as Trustee.
The Trustee shall at all times be a banking association organized and
doing business under the laws of any State or the United States of America
subject to suspension or examination by federal or state authority, authorized
under such laws to exercise corporate trust powers, having a combined capital
and surplus of at least $50,000,000, whose long-term deposits, if any, are rated
at least "BBB" by Standard & Poor's and Baa2 by Moody's, or such lower rating as
may be approved in writing by the Certificate Insurer and reasonably acceptable
to the Certificate Insurer as evidenced in writing. If at any time the Trustee
shall cease to be eligible in accordance with the provisions described in this
paragraph, it shall resign immediately in the manner and with the effect
specified in the Pooling and Servicing Agreement.
Any resignation or removal of the Trustee and appointment of a
successor trustee shall become effective upon the acceptance of appointment by a
successor trustee acceptable to the Certificate Insurer.
The Trustee, or any trustee or trustees hereafter appointed, may resign
at any time in the manner set forth in the Pooling and Servicing Agreement. Upon
receiving notice of resignation, the Master Servicer shall promptly appoint a
successor trustee or trustees meeting the eligibility requirements set forth
above in the manner set forth in the Pooling and Servicing Agreement. The Master
Servicer will deliver a copy of the instrument used to appoint a successor
trustee to the Certificateholders, the Certificate Insurer and the Depositor,
and upon acceptance of appointment by a successor trustee in the manner provided
in the Pooling and Servicing Agreement, the Master Servicer will give notice
thereof to the Certificateholders. If no successor trustee shall have been
appointed and have accepted appointment within 30 days after the giving of such
notice of resignation, the resigning trustee may petition any court of competent
jurisdiction for the appointment of a successor trustee. Such court may
thereupon, after such notice, if any, as it may deem proper and prescribe,
appoint a successor trustee.
If the Trustee fails to perform in accordance with the terms of the
Pooling and Servicing Agreement, the Certificate Insurer or the majority
Certificateholders with the consent of the Certificate Insurer, may remove the
Trustee under the conditions set forth in the Pooling and Servicing Agreement
and appoint a successor trustee in the manner set forth therein.
At any time, for the purpose of meeting any legal requirements of any
jurisdiction in which any part of the Trust Fund or the 1999-1 REMIC or property
securing the same may at the time be located, the Master Servicer and the
Trustee acting jointly shall have the power and shall execute and deliver all
instruments to appoint one or more persons approved by the Trustee to act as
co-trustee or co-trustees, jointly with the Trustee, or separate trustee or
separate trustees, of all or any part of the Trust Fund, including the 1999-1
REMIC, and to vest in such person or persons, in such capacity, such title to
the Trust Fund or the 1999-1 REMIC, or any part thereof, and, subject to the
provisions of the Pooling and Servicing Agreement, such powers, duties,
obligations, rights and trusts as the Master Servicer and the Trustee may
consider necessary or desirable.
THE CERTIFICATE INSURANCE POLICY
The following summary of the terms of the Certificate Insurance Policy
does not purport to be complete and is qualified in its entirety by reference to
the Certificate Insurance Policy. The information in this section regarding the
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Certificate Insurance Policy has been supplied by the Certificate Insurer for
inclusion herein. Only the Class A Certificates will be entitled to the benefit
of the Certificate Insurance Policy to be issued by the Certificate Insurer.
On the Issue Date, the Certificate Insurer will issue the Certificate
Insurance Policy in favor of the Trustee. The Certificate Insurance Policy will
unconditionally and irrevocably guarantee Insured Payments on the Class A
Certificates.
The Certificate Insurer's obligation under the Certificate Insurance
Policy will be discharged to the extent that funds are received by the Trustee
for distribution to the Holders, whether or not such funds are properly
distributed by the Trustee.
For purposes of the Certificate Insurance Policy, "Holder" as to a
particular Class A Certificate does not and may not include the Master Servicer,
the Originator, the Transferor or the Depositor.
"Insured Payment" means (x) with respect to any Loan Group and for any
Remittance Date the excess, if any, of (i) the sum of (a) the amount of interest
accrued on the Principal Balances of the related Class A Certificates, at the
applicable Pass-Through Rate during the related Interest Period exceeds the
amount on deposit in the Certificate Account available for such payments
(excluding any Relief Act Shortfalls), (b) the Subordination Deficit and (c) any
related Preference Amounts (without duplication) over (ii) the Total Available
Funds for such Remittance Date and (y) on the final Remittance Date, the
outstanding Principal Balance of all Classes of Class A Certificates then
outstanding, to the extent not otherwise paid on such date. The Certificate
Insurance Policy expires and terminates without any action on the part of the
Certificate Insurer or any other person on the date that is one year and one day
following the date on which the Class A Certificates have been paid in full.
"Preference Amount" means any amount previously distributed to a holder
of a Class A Certificate that is recoverable and sought to be recovered as a
voidable preference by a trustee in bankruptcy pursuant to the United States
Bankruptcy Code (11 U.S.C.) as amended from time to time, in accordance with a
final non-appealable order of a court having competent jurisdiction.
"Principal Balance" means as of any date of determination and with
respect to each Class of Class A Certificates, the principal balance of the
related Class of Class A Certificates on the Closing Date less any amounts
actually distributed as principal thereon on all prior Remittance Dates.
"Relief Act Shortfalls" are interest shortfalls resulting from the
application of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended.
See "Certain Legal Aspects of Loans - Soldiers' and Sailors' Civil Relief Act"
in the Prospectus.
"Total Available Funds" with respect to each Class of Class A
Certificates and on any Remittance Date is the sum of (i) the Group I Available
Amount or Group II Available Amount for the related Class of Class A
Certificates and (ii) any Excess Spread available from the other Loan Group for
the related Class of Class A Certificates.
The Certificate Insurance Policy will be non-cancelable.
The Certificate Insurance Policy will be issued pursuant to, and shall
be construed under, the laws of the State of New York, without giving effect to
the conflict of laws principles thereof.
THE CERTIFICATE INSURANCE POLICY IS NOT COVERED BY THE
PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW
YORK INSURANCE LAW.
THE CERTIFICATE INSURER
The following information has been supplied by Ambac Assurance
Corporation (the "Certificate Insurer") for inclusion in this Prospectus
Supplement. No representation is made by the Originator, the Seller, the
Depositor, the Master Servicer, the Trustee, the Underwriter or any of their
respective affiliates as to the accuracy or completeness of such information.
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The Certificate Insurer is a Wisconsin-domiciled stock insurance
corporation regulated by the Office of the Commissioner of Insurance of the
State of Wisconsin and licensed to do business in 50 states, the District of
Columbia, the Commonwealth of Puerto Rico and Guam. The Certificate Insurer
primarily insures newly-issued municipal and structured finance obligations. The
Certificate Insurer is a wholly-owned subsidiary of Ambac Financial Group, Inc.
(formerly AMBAC Inc.), a 100% publicly-held company. Moody's, Standard & Poor's
and Fitch have each assigned a triple-A financial strength rating to the
Certificate Insurer.
The consolidated financial statements of the Certificate Insurer and
its subsidiaries as of December 31, 1997 and December 31, 1996 and for the three
years ended December 31, 1997 prepared in accordance with generally accepted
accounting principles, included in the Annual Report on Form 10-K of Ambac
Financial Group, Inc. (which was filed with the Securities and Exchange
Commission (the "Commission") on March 31, 1998; Commission File No. 1-10777)
and the unaudited consolidated financial statements of the Certificate Insurer
and its subsidiaries as of September 30, 1998 and for the periods ending
September 30, 1998 and September 30, 1997, included in the Quarterly Report on
Form 10-Q of Ambac Financial Group, Inc. for the period ended September 30, 1998
(which was filed with the Commission on November 13, 1998) are hereby
incorporated by reference into this Prospectus Supplement and shall be deemed to
be a part hereof. Any statement contained in a document incorporated herein by
reference shall be modified or superseded for the purposes of this Prospectus
Supplement to the extent that a statement contained herein by reference herein
also modified or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus Supplement.
All financial statements of the Certificate Insurer and its
subsidiaries included in documents filed by Ambac Financial Group, Inc. with the
Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended, subsequent to the date of this Prospectus
Supplement and prior to the termination of the offering of the Certificates
shall be deemed to be incorporated by reference into this Prospectus Supplement
and to be a part hereof from the respective dates of filing such documents.
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The following table sets forth the capitalization of the Certificate
Insurer as of December 31, 1995, December 31, 1996, December 31, 1997 and
September 30, 1998, respectively, in conformity with generally accepted
accounting principles.
Ambac Assurance Corporation
Capitalization Table
(Dollars in Millions)
<TABLE>
<CAPTION>
December 31, December 31, December 31, September 30,
1995 1996 1997 1998
------------ ------------ ------------ -------------
(unaudited)
<S> <C> <C> <C> <C>
Unearned premiums............................ $ 906 $ 995 $1,184 $1,260
Other liabilities............................ 295 259 562 803
------ ------ ------ ------
Total Liabilities............................ $1,201 $1,254 $1,746 $2,063
------ ------ ------ ------
Stockholder's equity(1)
Common stock............................. $ 82 $ 82 $ 82 $ 82
Additional paid-in capital............... 481 515 521 527
Accumulated other comprehensive income... 87 66 118 167
Retained earnings........................ 907 992 1,180 1,341
------ ------ ------ ------
Total stockholder's equity................... $1,557 $1,655 $1,901 $2,117
------ ------ ------ ------
Total liabilities and stockholder's equity... $2,758 $2,909 $3,647 $4,180
====== ====== ====== ======
</TABLE>
- ----------
(1) Components of stockholder's equity have been restated for all periods
presented to reflect "Accumulated other comprehensive income" in
accordance with the Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" adopted by the Certificate Insurer
effective January 1, 1998. As this new standard only requires
additional information in the financial statements, it does not affect
the Certificate Insurer's financial position or results of operations.
For additional financial information concerning the Certificate
Insurer, see the audited and unaudited financial statements of the Certificate
Insurer incorporated by reference herein. Copies of the financial statements of
the Certificate Insurer incorporated by reference and copies of the Certificate
Insurer's annual statement for the year ended December 31, 1997 prepared in
accordance with statutory accounting standards are available, without charge,
from the Certificate Insurer. The address of the Certificate Insurer's
administrative offices and its telephone number are One State Street Plaza, 17th
Floor, New York, New York 10004 and (212) 668-0340.
The Certificate Insurer makes no representation regarding the
Certificates or the advisability of investing in the Certificates and makes no
representation regarding, nor has it participated in the preparation of, this
Prospectus Supplement other than the information supplied by the Certificate
Insurer and presented under the headings "Description of the Policy" and "The
Certificate Insurer" and in the financial statements incorporated herein by
reference.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
An election will be made to treat the 1999-1 REMIC as a REMIC for
federal income tax purposes. Brown & Wood LLP, New York, New York, counsel to
the Depositor, will deliver its opinion that, assuming compliance with the
Pooling and Servicing Agreement, the 1999-1 REMIC will be treated as a REMIC for
Federal income tax purposes. The Class A Certificates will be designated as the
regular interests in the 1999-1 REMIC, and the Class R Certificates will be
designated as the residual interest in the 1999-1 REMIC. The Class R
Certificates are "Residual Certificates" for purposes of the Prospectus.
The Certificates will be treated as "qualifying real property loans"
for mutual savings banks and domestic building and loan associations, "regular
or residual interests in a REMIC" for domestic building and loan associations,
and "real estate assets" for real estate investment trusts, to the extent
described in the Prospectus.
The Class A Certificates generally will be treated as debt instruments
for Federal income tax purposes. Beneficial owners (or registered holders, in
the case of Definitive Certificates) of the Class A Certificates will be
required to report income on such Certificates in accordance with the accrual
method of accounting.
The Class A Certificates (other than the Class A-1 Certificates, which
will be issued with original issue discount) may be issued with original issue
discount for Federal income tax purposes. The Prepayment Assumption (as defined
in the Prospectus) that is to be used in determining the rate of accrual of
original issue discount and whether the original issue
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discount is considered de minimis, and that may be used by a holder of a Class A
Certificate to amortize premium, will be calculated using 22% CPR. See "Certain
Federal Income Tax Consequences --Federal Income Tax Consequences for REMIC
Certificates -Taxation of Regular Certificates" in the Prospectus. No
representation is made as to the actual rate at which the Mortgage Loans will
prepay.
If the method of computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to any class
of Class A Certificates, the amount of original issue discount allocable to such
period would be zero and a beneficial owner of such Certificates will be
permitted to offset such negative amount only against future original issue
discount (if any) attributable to such Certificates.
The Class A-1 Certificates will qualify as regular interests under the
REMIC rules because they will receive interest at a variable rate subject to a
"funds-available cap." The funds-available cap will limit the amount of interest
to be paid on the Class A-1 Certificates to the aggregate payments of interest
and principal concurrently made on the underlying mortgage loans (net of certain
fees and other amounts). The Class A-1 Certificates will be issued with original
issue discount because under certain circumstances all or a portion of the
interest that has accrued at the variable rate may not be paid currently.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code impose certain restrictions on (a) employee benefit
plans (as defined in Section 3(3) of ERISA), (b) plans described in section
4975(e)(1) of the Code, including individual retirement accounts or Keogh plans,
(c) any entities whose underlying assets include plan assets by reason of a
plan's investment in such entities (each a "Plan") and (d) persons who have
certain specified relationships to such Plans ("Parties-in-Interest" under ERISA
and "Disqualified Persons" under the Code). Moreover, based on the reasoning of
the United States Supreme Court in John Hancock Life Ins. Co. v. Harris Trust
and Savings. Bank, 114 S. Ct. 517 (1993), an insurance company's general account
may be deemed to include assets of the Plans investing in the general account
(e.g., through the purchase of an annuity contract), and the insurance company
might be treated as a Party- in- Interest with respect to a Plan by virtue of
such investment. ERISA also imposes certain duties on persons who are
fiduciaries of Plans subject to ERISA and prohibits certain transactions between
a Plan and Parties- in- Interest or Disqualified Persons with respect to such
Plans. There are certain exemptions issued by the United States Department of
Labor (the "DOL") that may be applicable to an investment by an ERISA Plan in
the Certificates, including Prohibited Transaction Class Exemption 83-1 ("PTE
83-1"). For further discussion of PTE 83-1, including the necessary conditions
to its applicability and other important factors to be considered by an ERISA
Plan contemplating investing in the Certificates, see "ERISA Considerations" in
the Prospectus.
On May 24, 1990, the DOL issued to the Underwriter an individual
administrative exemption, Prohibited Transaction Exemption 90-30, 55 Fed. Reg.
21461 (the "Exemption"), from certain of the prohibited transaction rules of
ERISA with respect to the initial purchase, the holding and the subsequent
resale by an ERISA Plan of certificates in pass-through trusts that meet the
conditions and requirements of the Exemption. Among the conditions that must be
satisfied for the Exemption to apply are the following:
1. The Acquisition of the Class A Certificates by a Plan is on
terms (including the price for the Class A 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 interests evidenced by the Class A
Certificates acquired by the Plan are not subordinated to the rights
and interests evidenced by other certificates of the Trust;
3. The Class A Certificates acquired by the Plan have received
a rating at the time of such acquisition that is in one of the three
highest generic rating categories from either Standard & Poor's,
Moody's, Duff & Phelps Inc. ("D&P") or Fitch IBCA, Inc. ("Fitch");
4. The sum of all payments made to the Underwriter in
connection with the distribution of the Class A Certificates represents
not more than reasonable compensation for underwriting the Class A
Certificates. The sum of all payments made to and retained by the
Master Servicer represents not more than reasonable compensation for
the Master Servicer's services under the Agreement and reimbursement of
the Master Servicer's reasonable expenses in connection therewith;
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5. The Trustee must not be an affiliate of any other member of
the Restricted Group (as defined below); and
6. The Plan investing in the Class A 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 also must meet the following requirements:
a. The corpus of the Trust Fund must consist solely of assets
of the type which have been included in other investment pools;
b. certificates in such other investment pools must have been
rated in one of the three highest rating categories of Standard &
Poor's, Moody's, D&P or Fitch for at least one year prior to the Plan's
acquisition of certificates; and
c. 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 Class A Certificates.
In order for the Exemption to apply to certain self-dealing/conflict of
interest prohibited transactions that may occur when a Plan fiduciary causes the
Plan to acquire Class A Certificates, the Exemption requires, among other
matters, that: (i) in the case of an acquisition in connection with the initial
issuance of Certificates, at least fifty percent of each class of certificates
in which Plans have invested is acquired by persons independent of the
Restricted Group and at least fifty percent of the aggregate interest in the
Trust Fund is acquired by persons independent of the Restricted Group (as
defined below); (ii) such fiduciary (or its affiliate) is an obligor with
respect to 5 percent or less of the fair market value of the obligations
contained in the Trust; (iii) the Plan's investment in Class A Certificates does
not exceed twenty-five percent (25%) of all of the certificates 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 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 certain prohibited transactions in the
case of Plans sponsored by the Underwriter, the Trustee, the Master Servicer,
any obligor with respect to the Mortgage Loans included in the Trust, any entity
deemed to be a "sponsor" of the Trust Fund as such term is defined in the
exemption, or any affiliate of any such party (the "Restricted Group").
Subject to the foregoing, the Depositor believes that the Exemption
will apply to the acquisition and holding of the Class A Certificates by Plans
and that all conditions of such exemption other than those within the control of
the investors have been met.
Before purchasing a Class A Certificate, a fiduciary of an ERISA Plan
should make its own determination as to the availability of the exemptive relief
provided in the Exemption or the availability of any other prohibited
transaction exemptions (including PTE 83-1), and whether the conditions of any
such exemption will be applicable to the Class A Certificates. Any fiduciary of
an ERISA Plan considering whether to purchase a Class A Certificate should also
carefully review with its own legal advisors the applicability of the fiduciary
duty and prohibited transaction provisions of ERISA and the Code to such
investment. See "ERISA Considerations" in the Prospectus.
A governmental plan as defined in Section 3(32) of ERISA is not subject
to ERISA, or Code Section 4975. However, such a governmental plan may be subject
to a federal, state, or local law, which is, to a material extent, similar to
the provisions of ERISA or Code Section 4975 ("Similar Law"). A fiduciary of a
governmental plan should make its own determination as to the need for and the
availability of any exemptive relief under Similar Law.
The sale of Certificates to an ERISA Plan is in no respect a
representation by the Depositor or the Underwriter that this investment meets
all relevant legal requirements with respect to investments by ERISA Plans
generally or any particular ERISA Plan, or that this investment is appropriate
for ERISA Plans generally or any particular ERISA Plan.
LEGAL INVESTMENT
The Class A Certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA").
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Institutions subject to the jurisdiction of the Office of the
Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation, the Office of Thrift
Supervision, the National Credit Union Administration or state banking or
insurance authorities should review applicable rules, supervisory policies and
guidelines of these agencies before purchasing any of the Class A Certificates,
since such Class A Certificates may be deemed to be unsuitable investments under
one or more of these rules, policies and guidelines and certain restrictions may
apply to such investments. It should also be noted that certain states have
enacted legislation limiting to varying extents the ability of certain entities
(in particular, insurance companies) to invest in mortgage related securities.
Investors should consult with their own legal advisors in determining whether
and to what extent the Class A Certificates constitute legal investments for
such investors. See "Legal Investment" in the Prospectus.
PLAN OF DISTRIBUTION
Subject to the terms and conditions of the Underwriting Agreement dated
as of January 28, 1999 (the "Underwriting Agreement") between the Depositor and
Bear, Stearns & Co. Inc. (the "Underwriter"), the Depositor has agreed to sell
to the Underwriter and the Underwriter has agreed to purchase from the Depositor
the Class A Certificates.
The Depositor is obligated to sell, and the Underwriter is obligated to
purchase, all of the Class A Certificates offered hereby if any are purchased.
The Underwriter has advised the Depositor that it proposes to offer the
Class A Certificates purchased by the Underwriter for sale from time to time in
one or more negotiated transactions or otherwise, at market prices prevailing at
the time of sale, at prices related to such market prices or at negotiated
prices. The Underwriter may effect such transactions by selling such
Certificates to or through dealers, and such dealers may receive compensation in
the form of underwriting discounts, concessions or commissions from the
Underwriter or purchasers of the Class A Certificates for whom they may act as
agent. Any dealers that participate with the Underwriter in the distribution of
the Class A Certificates purchased by the Underwriter may be deemed to be
underwriters, and any discounts or commissions received by them or the
Underwriter and any profit on the resale of Class A Certificates by them or the
Underwriter may be deemed to be underwriting discounts or commissions under the
Securities Act.
For further information regarding any offer or sale of the Class A
Certificates pursuant to this Prospectus Supplement and the Prospectus, see
"Plan of Distribution" in the Prospectus.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriter or contribute to losses arising out of certain liabilities,
including liabilities under the Act.
EXPERTS
The consolidated financial statements of the Certificate Insurer, Ambac
Assurance Corporation, as of December 31, 1997 and 1996 and for each of the
years in the three-year period ended December 31, 1997, are incorporated by
reference herein and in the Registration Statement in reliance upon the report
of KPMG LLP, independent certified public accountants, incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing.
RATINGS
It is a condition to the original issuance of the Class A Certificates
that they will receive ratings of "AAA" by Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. ("Standard & Poor's") and "Aaa" by Moody's
Investor's Service, Inc. ("Moody's," and together with Standard & Poor's, the
"Rating Agencies"). The ratings assigned to the Class A Certificates will be
based on the financial strength rating of the Certificate Insurer. Explanations
of the significance of such ratings may be obtained from Moody's Investors
Services, Inc., 99 Church Street, New York, New York 10007 and Standard &
Poor's, a division of The McGraw-Hill Companies, Inc., 25 Broadway, New York,
New York 10004. Such ratings will be the views only of such rating agencies.
There is no assurance that any such ratings will continue for any period of time
or that such ratings will not be revised or withdrawn. Any such revision or
withdrawal of such ratings may have an adverse effect on the market price of the
Class A Certificates. A securities rating addresses the likelihood of the
receipt by the Certificateholders of distributions on the Certificates. The
ratings on the Certificates do not constitute statements regarding the
possibility that the Certificateholders might realize a lower than anticipated
yield. A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at
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any time by the assigning rating organization. Each securities rating should be
evaluated independently of similar ratings on different securities.
LEGAL MATTERS
Certain legal matters in connection with the Class A Certificates will
be passed upon for Irwin Union Bank and Trust Company, Irwin Funding Corp. and
Irwin Home Equity Corporation by Troop Steuber Pasich Reddick & Tobey, LLP, Los
Angeles, California and by Ellen Mufson, Esq. and for the Depositor and the
Underwriter by Brown & Wood LLP, New York, New York. Certain legal matters
relating to the Certificate Insurer and the Certificate Insurance Policy will be
passed upon for the Certificate Insurer by Thacher Profitt & Wood, New York, New
York.
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INDEX OF DEFINED TERMS
1999-1 REMIC........................................................S-19
Beneficial Owner.....................................................S-6
Book-Entry Certificates..............................................S-6
Business Day.........................................................S-5
Cedel................................................................S-6
Cedel Participants..................................................S-53
Certificate Account.................................................S-57
Certificate Insurance Policy...................................S-6, S-15
Certificate Insurer......................................S-6, S-15, S-71
Certificateholder...................................................S-51
Certificates.........................................................S-4
Class A Certificates.................................................S-4
Class A Principal Balance...........................................S-10
Class A Principal Distribution Amount.........................S-10, S-60
Class A-1 Distribution Amount.................................S-13, S-62
Class A-1 Interest Distribution Amount...............................S-8
Class A-1 Principal Balance..........................................S-9
Class A-2 Distribution Amount.................................S-14, S-62
Class A-2 Interest Distribution Amount...............................S-8
Class A-2 Principal Balance..........................................S-9
Class A-3 Distribution Amount.................................S-14, S-62
Class A-3 Interest Distribution Amount...............................S-8
Class A-3 Principal Balance..........................................S-9
Class A-4 Distribution Amount.................................S-14, S-62
Class A-4 Interest Distribution Amount...............................S-8
Class A-4 Principal Balance.........................................S-10
Class A-5 Distribution Amount.................................S-14, S-62
Class A-5 Interest Distribution Amount...............................S-9
Class A-5 Principal Balance.........................................S-10
Class R Certificates.................................................S-4
Code................................................................S-19
Collection Account..................................................S-57
Combined Loan-to-Value Ratio......................S-22, S-23, S-28, S-35
Commission..........................................................S-71
Compensating Interest.........................................S-17, S-58
Cooperative.........................................................S-53
CPR.................................................................S-44
Cut-Off Date........................................................S-22
D&P.................................................................S-73
Debt Service Reduction.......................................S-17, S-58
Deficient Valuation...........................................S-17, S-58
Definitive Certificate..............................................S-51
Definitive Certificates.............................................S-51
Depositor............................................................S-4
Determination Date............................................S-16, S-57
DOL.................................................................S-73
DTC..................................................................S-6
Due Date.............................................................S-7
Due Period..........................................................S-10
Eligible Account....................................................S-57
ERISA...............................................................S-73
Euroclear............................................................S-6
Euroclear Operator..................................................S-53
Euroclear Participants..............................................S-53
European Depositaries...............................................S-51
Exemption...........................................................S-73
S-76
<PAGE>
Financial Intermediary..............................................S-52
Fitch...............................................................S-73
Group I..............................................................S-5
Group I Available Amount......................................S-12, S-61
Group I Certificates.................................................S-4
Group I Mortgage Loans...............................................S-5
Group II.............................................................S-5
Group II Available Amount.....................................S-12, S-61
Group II Certificates................................................S-4
Group II Mortgage Loans..............................................S-6
Holder..............................................................S-51
IFC.................................................................S-39
Indirect Participants...............................................S-52
Insured Payment.....................................................S-16
Interest Period......................................................S-8
Issue Date...........................................................S-4
IUB..................................................................S-4
Liquidated Loan Loss..........................................S-14, S-62
Liquidated Mortgage Loan......................................S-14, S-62
Loan Group...........................................................S-5
Master Servicer......................................................S-4
Master Servicer Remittance Amount.............................S-12, S-58
Master Servicer Remittance Date...............................S-13, S-57
Monthly Payments.....................................................S-6
Moody's........................................................S-5, S-75
Mortgage Interest Rate...............................................S-7
Mortgage Loans.......................................................S-5
Mortgage Note.......................................................S-22
Mortgage Sale Agreement.............................................S-40
Mortgaged Properties...........................................S-5, S-22
Mortgages...........................................................S-22
Net Mortgage Interest Rate..........................................S-62
Nonrecoverable Advance..............................................S-59
Optional Termination Date...........................................S-18
Original Class A-1 Principal Balance.................................S-9
Original Class A-2 Principal Balance.................................S-9
Original Class A-3 Principal Balance.................................S-9
Original Class A-4 Principal Balance................................S-10
Original Class A-5 Principal Balance................................S-10
Originator.....................................................S-7, S-39
Overcollateralization Amount..................................S-13, S-62
Overcollateralization Deficiency Amount.......................S-13, S-62
Overcollateralization Increase Amount.........................S-13, S-62
Overcollateralization Release Amount..........................S-13, S-62
Overcollateralization Target Amount...........................S-13, S-62
Participants..................................................S-51, S-52
Periodic Advance..............................................S-17, S-58
Plan................................................................S-73
Pooling and Servicing Agreement......................................S-4
Prepayment Interest Shortfall.................................S-17, S-58
Principal Balance........................................S-9, S-14, S-63
Proportional Share............................................S-12, S-61
PTE 83-1............................................................S-73
Qualified Substitute Mortgage Loan..................................S-56
Rating Agencies................................................S-5, S-75
Reimbursement Amount................................................S-60
Relevant Depositary.................................................S-51
Remittance Date......................................................S-5
Residual Certificates...............................................S-72
S-77
<PAGE>
Restricted Group....................................................S-74
Rules...............................................................S-52
Servicing Advances............................................S-17, S-58
Servicing Fee.................................................S-18, S-59
Servicing Fee Rate..................................................S-59
Similar Law.........................................................S-74
SMMEA...............................................................S-74
Standard & Poor's..............................................S-5, S-75
Subordination Deficit.........................................S-14, S-62
Substitution Adjustment.............................................S-55
Successor Servicer..................................................S-68
Terms and Conditions................................................S-53
Transferor...........................................................S-4
Trust Fund...........................................................S-5
Trustee..............................................................S-4
Trustee Collection Account..........................................S-57
Trustee Fee.........................................................S-69
Trustee's Mortgage File.............................................S-55
Underwriter.........................................................S-75
Underwriting Agreement..............................................S-75
weighted average life...............................................S-43
S-78
<PAGE>
$150,000,000
Irwin Home Equity Trust 1999-1
Irwin Union Bank and Trust Company
Master Servicer
Irwin Home Equity Corporation
Originator
Bear Stearns Asset Backed Securities, Inc.
Depositor
Irwin Home Equity Asset Backed Certificates, Series 1999-1
$62,000,000 Class A-1 Certificates
$22,600,000 Class A-2 Certificates
$21,400,000 Class A-3 Certificates
$19,000,000 Class A-4 Certificates
$25,000,000 Class A-5 Certificates
-----------
PROSPECTUS SUPPLEMENT
-----------
Bear, Stearns & Co. Inc.
January 28, 1999
No person has been authorized to give any information or to make any
representation other than those contained in this prospectus supplement or the
prospectus and, if given or made, such information or representation must not be
relied upon. This prospectus supplement and the prospectus do not constitute an
offer to sell or a solicitation of an offer to buy any securities other than the
certificates offered hereby, nor an offer of the certificates in any State or
jurisdiction in which, or to any person to whom, such offer would be unlawful.
The delivery of this prospectus supplement or the prospectus at any time does
not imply that information herein or therein is correct as of any time
subsequent to its date; however, if any material change occurs while this
prospectus supplement or the prospectus is required by law to be delivered, this
prospectus supplement or the prospectus will be amended or supplemented
accordingly.
<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.
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
5
<PAGE>
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
6
<PAGE>
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 as specified in
7
<PAGE>
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
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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
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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
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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
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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
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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
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<PAGE>
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
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<PAGE>
income or tax liability attributable to
REMIC taxable income for a particular
period in excess of cash distributions for
such period or have an after-tax return
that is less than the after-tax return on
comparable debt instruments. In addition,
a portion (or, in some cases, all) of the
income from a Residual Interest (i) may
not be subject to offset by losses from
other activities or investments, (ii) for
a Holder that is subject to tax under the
Code on unrelated business taxable income,
may be treated as unrelated business
taxable income and (iii) for a foreign
Holder, may not qualify for exemption from
or reduction of withholding. In addition,
(i) Residual Interests are subject to
transfer restrictions and (ii) certain
transfers of Residual Interests will not
be recognized for federal income tax
purposes. Further, individual Holders are
subject to limitations on the
deductibility of expenses of the REMIC.
See "Certain Federal Income Tax
Considerations."
B. Non-REMIC
Pass-Through
Securities....... If so specified in the related Prospectus
Supplement, the Trust Fund for a Series
will be treated as a grantor trust and
will not be classified as an association
taxable as a corporation for federal
income tax purposes, and Holders of
Securities of such Series ("Pass-Through
Securities") will be treated as owning
directly rights to receive certain
payments of interest or principal, or
both, on the Primary Assets held in the
Trust Fund for such Series. All income
with respect to a Stripped Security will
be accounted for as original issue
discount and, unless otherwise specified
in the related Prospectus Supplement, will
be reported by the applicable Trustee on
an accrual basis, which may be prior to
the receipt of cash associated with such
income.
C. Owner Trust
Securities....... If so specified in the Prospectus
Supplement, the Trust Fund will be treated
as a partnership for purposes of federal
and state income tax. Each Noteholder, by
the acceptance of a Note of a given
Series, will agree to treat such Note as
indebtedness; and each Certificateholder,
by the acceptance of a Certificate of a
given Series, will agree to treat the
related Trust Fund as a partnership in
which such Certificateholder is a partner
for federal income and state tax purposes.
Alternative characterizations of such
Trust Fund and such Certificates are
possible, but would not result in
materially adverse tax consequences to
Certificateholders. See "Certain Federal
Income Tax Considerations."
ERISA Considerations..... A fiduciary of any employee benefit plan
or other retirement plan or arrangement
subject to the Employee Retirement Income
Security Act of 1974, as amended
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<PAGE>
("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
16
<PAGE>
Series. See "Risk Factors--Ratings Are Not
Recommendations."
17
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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
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<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.
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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.
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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
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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:
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(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."
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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
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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
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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.
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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
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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.
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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
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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.
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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
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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
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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
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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
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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.
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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
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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
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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
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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;
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(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;
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(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
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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
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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.
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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
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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.
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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
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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
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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.
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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
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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
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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.
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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
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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.
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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.
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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
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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"
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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
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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
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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
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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
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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,"
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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.
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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,
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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
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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.
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As used herein, the term "U.S. Person" means a citizen or
resident of the United States, a corporation, partnership or other
entity created or organized in or under the laws of the United States,
any state thereof or the District of Columbia (other than a
partnership that is not treated as a United States person under any
applicable Treasury regulations), an estate whose income is subject to
U.S. federal income tax regardless of its source of income, or a trust
if a court within the United States is able to exercise primary
supervision of the trust and one or more United States persons have
the authority to control all substantial decisions of the trust.
Notwithstanding the preceding sentence, to the extent provided in
regulations, certain trusts in existence on August 20, 1996 and
treated as United States persons prior to such date that elect to
continue to be treated as United States persons shall be considered
U.S. Persons as well.
Taxation of Debt Securities
Status as Real Property Loans. Except to the extent otherwise
provided in the related Prospectus Supplement, if the Securities are
regular interests in a REMIC ("Regular Interest Securities") or
represent interests in a grantor trust, Tax Counsel is of the opinion
that: (i) Securities held by a domestic building and loan association
will constitute "loans... secured by an interest in real property"
within the meaning of Code section 7701(a)(19)(C)(v); and (ii)
Securities held by a real estate investment trust will constitute
"real estate assets" within the meaning of Code section 856(c)(4)(A)
and interest on Securities will be considered "interest on obligations
secured by mortgages on real property or on interests in real
property" within the meaning of Code section 856(c)(3)(B).
Interest and Acquisition Discount. In the opinion of Tax Counsel,
Regular Interest Securities are generally taxable to Holders in the
same manner as evidences of indebtedness issued by the REMIC. Stated
interest on the Regular Interest Securities will be taxable as
ordinary income and taken into account using the accrual method of
accounting, regardless of the Holder's normal accounting method.
Interest (other than original issue discount) on Securities (other
than Regular Interest Securities) that are characterized as
indebtedness for federal income tax purposes will be includible in
income by Holders thereof in accordance with their usual methods of
accounting. Securities characterized as debt for federal income tax
purposes and Regular Interest Securities will be referred to
hereinafter collectively as "Debt Securities."
Tax Counsel is of the opinion that Debt Securities that are
Compound Interest Securities will, and certain of the other Debt
Securities issued at a discount may, be issued with "original issue
discount" ("OID"). The following discussion is based in part on the
rules governing OID, which are set forth in Sections 1271-1275 of the
Code and the Treasury regulations issued thereunder on February 2,
1994 and amended on June 11, 1996 (the "OID Regulations"). A Holder
should be aware, however, that the OID Regulations do not adequately
address certain issues relevant to prepayable securities, such as the
Debt Securities.
In general, OID, if any, will equal the difference between the
stated redemption price at maturity of a Debt Security and its issue
price. In the opinion of Tax Counsel, a Holder of a Debt Security must
include such OID in gross income as ordinary interest income as it
accrues under a method taking into account an economic accrual of the
discount. In general, OID must be included in income in advance of the
receipt of the cash representing that income. The amount of OID on a
Debt Security will be considered to be zero if it is less than a de
minimis amount determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that Class are sold to the
public (excluding bond houses, brokers, underwriters or wholesalers).
If less than a substantial amount of a particular Class of Debt
Securities is sold for cash on or prior to the Closing Date, the issue
price for such Class will be treated as the fair market value of such
Class on the Closing Date. The issue price of a Debt Security also
includes the amount paid by an initial Debt Security
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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.
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The Internal Revenue Service (the "IRS") recently issued final
regulations (the "Contingent Payment Regulations") governing the
calculation of OID on instruments having contingent interest payments.
The Contingent Payment Regulations, represent the only guidance
regarding the views of the IRS with respect to contingent interest
instruments and specifically do not apply for purposes of calculating
OID on debt instruments subject to Code Section 1272(a)(6), such as
the Debt Security. Additionally, the OID Regulations do not contain
provisions specifically interpreting Code Section 1272(a)(6). Until
the Treasury issues guidance to the contrary, the applicable Trustee
intends to base its computation on Code Section 1272(a)(6) and the OID
Regulations as described in this Prospectus. However, because no
regulatory guidance currently exists under Code Section 1272(a)(6),
there can be no assurance that such methodology represents the correct
manner of calculating OID.
The Holder of a Debt Security issued with OID must include in
gross income, for all days during its taxable year on which it holds
such Debt Security, the sum of the "daily portions" of such original
issue discount. The amount of OID includible in income by a Holder
will be computed by allocating to each day during a taxable year a pro
rata portion of the original issue discount that accrued during the
relevant accrual period. In the case of a Debt Security that is not a
Regular Interest Security and the principal payments on which are not
subject to acceleration resulting from prepayments on the Loans, the
amount of OID includible in income of a Holder for an accrual period
(generally the period over which interest accrues on the debt
instrument) will equal the product of the yield to maturity of the
Debt Security and the adjusted issue price of the Debt Security,
reduced by any payments of qualified stated interest. The adjusted
issue price is the sum of its issue price plus prior accruals or OID,
reduced by the total payments made with respect to such Debt Security
in all prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a Holder of a debt
instrument, such as certain Classes of the Debt Securities, that is
subject to acceleration due to prepayments on other debt obligations
securing such instruments (a "Pay-Through Security"), is computed by
taking into account the anticipated rate of prepayments assumed in
pricing the debt instrument (the "Prepayment Assumption"). The amount
of OID that will accrue during an accrual period on a Pay-Through
Security is the excess (if any) of the sum of (a) the present value of
all payments remaining to be made on the Pay-Through Security as of
the close of the accrual period and (b) the payments during the
accrual period of amounts included in the stated redemption price of
the Pay-Through Security, over the adjusted issue price of the
Pay-Through Security at the beginning of the accrual period. The
present value of the remaining payments is to be determined on the
basis of three factors: (i) the original yield to maturity of the
Pay-Through Security (determined on the basis of compounding at the
end of each accrual period and properly adjusted for the length of the
accrual period), (ii) events that have occurred before the end of the
accrual period and (iii) the assumption that the remaining payments
will be made in accordance with the original Prepayment Assumption.
The effect of this method is to increase the portions of OID required
to be included in income by a Holder to take into account prepayments
with respect to the Loans at a rate that exceeds the Prepayment
Assumption, and to decrease (but not below zero for any period) the
portions of OID required to be included in income by a Holder of a
Pay-Through Security to take into account prepayments with respect to
the Loans at a rate that is slower than the Prepayment Assumption.
Although OID will be reported to Holders of Pay-Through Securities
based on the Prepayment Assumption, no representation is made to
Holders that Loans will be prepaid at that rate or at any other rate.
The Depositor may adjust the accrual of OID on a Class of Regular
Interest Securities (or other regular interests in a REMIC) in a
manner that it believes to be appropriate, to take account of realized
losses on the Loans, although the OID Regulations do not provide for
such adjustments. If the IRS were to require that OID be accrued
without such adjustments, the rate of accrual of OID for a Class of
Regular Interest Securities could increase.
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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
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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
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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
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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
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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
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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
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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.
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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
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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
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underlying Loans as payments on a single installment obligation. The
IRS could, however, assert that original issue discount must be
calculated separately for each Loan underlying a Security.
Under certain circumstances, if the Loans prepay at a rate faster
than the Prepayment Assumption, the use of the Cash Flow Bond Method
may accelerate a Holder's recognition of income. If, however, the
Loans prepay at a rate slower than the Prepayment Assumption, in some
circumstances the use of this method may decelerate a Holder's
recognition of income.
In the case of a Stripped Security that is an Interest Weighted
Security, the applicable Trustee intends, absent contrary authority,
to report income to Holders as OID, in the manner described above for
Interest Weighted Securities.
Possible Alternative Characterizations. The characterizations of
the Stripped Securities described above are not the only possible
interpretations of the applicable Code provisions. Among other
possibilities, the Internal Revenue Service could contend that (i) in
certain Series, each non-Interest Weighted Security is composed of an
unstripped undivided ownership interest in Loans and an installment
obligation consisting of stripped principal payments; (ii) the
non-Interest Weighted Securities are subject to the contingent payment
provisions of the Proposed Regulations; or (iii) each Interest
Weighted Stripped Security is composed of an unstripped undivided
ownership interest in Loans and an installment obligation consisting
of stripped interest payments.
Given the variety of alternatives for treatment of the Stripped
Securities and the different federal income tax consequences that
result from each alternative, potential purchasers are urged to
consult their own tax advisers regarding the proper treatment of the
Securities for federal income tax purposes.
Character as Qualifying Loans. In the case of Stripped
Securities, there is no specific legal authority existing regarding
whether the character of the Securities, for federal income tax
purposes, will be the same as the Loans. The IRS could take the
position that the Loans character is not carried over to the
Securities in such circumstances. Pass-Through Securities will be,
and, although the matter is not free from doubt, Stripped Securities
should be considered to represent "real estate assets" within the
meaning of Section 856(c)(4)(A) of the Code, and "loans secured by an
interest in real property" within the meaning of Section
7701(a)(19)(C)(v) of the Code; and interest income attributable to the
Securities should be considered to represent "interest on obligations
secured by mortgages on real property or on interests in real
property" within the meaning of Section 856(c)(3)(B) of the Code.
Reserves or funds underlying the Securities may cause a proportionate
reduction in the above-described qualifying status categories of
Securities.
Sale or Exchange
Subject to the discussion below with respect to Trust Funds as to
which a partnership election is made, in the opinion of Tax Counsel, a
Holder's tax basis in its Security is the price such Holder pays for a
Security, plus amounts of original issue or market discount included
in income and reduced by any payments received (other than qualified
stated interest payments) and any amortized premium. Gain or loss
recognized on a sale, exchange, or redemption of a Security, measured
by the difference between the amount realized and the Security's basis
as so adjusted, will generally be capital gain or loss, assuming that
the Security is held as a capital asset and will generally be
long-term capital gain or loss if the holding period of the Security
is one year or more and short-term capital gain or loss if the holding
period of the Security is less than one year. Non-corporate taxpayers
are subject to reduced maximum rates on long-term capital gains and
are generally subject to tax at ordinary income rates on short-term
capital gains. The deductibility of capital losses is subject to
certain limitations. Prospective investors should consult their own
tax advisors concerning these tax law provisions.
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In the case of a Security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or
loss realized on the sale or exchange of a Regular Interest Security
will be taxable as ordinary income or loss. In addition, gain from the
disposition of a Regular Interest Security that might otherwise be
capital gain will be treated as ordinary income to the extent of the
excess, if any, of (i) the amount that would have been includible in
the Holder's income if the yield on such Regular Interest Security had
equaled 110% of the applicable federal rate as of the beginning of
such Holder's holding period, over the amount of ordinary income
actually recognized by the Holder with respect to such Regular
Interest Security.
Miscellaneous Tax Aspects
Backup Withholding. Subject to the discussion below with respect
to Trust Funds as to which a partnership election is made, a Holder,
other than a Holder of a REMIC Residual Security, may, under certain
circumstances, be subject to "backup withholding" at a rate of 31%
with respect to distributions or the proceeds of a sale of
certificates to or through brokers that represent interest or original
issue discount on the Securities. This withholding generally applies
if the Holder of a Security (i) fails to furnish the applicable
Trustee with its taxpayer identification number (the "TIN"); (ii)
furnishes the applicable Trustee an incorrect TIN; (iii) fails to
report properly interest, dividends or other "reportable payments" as
defined in the Code; or (iv) under certain circumstances, fails to
provide the applicable Trustee or such Holder's securities broker with
a certified statement, signed under penalty of perjury, that the TIN
provided is its correct number and that the Holder is not subject to
backup withholding. Backup withholding will not apply, however, with
respect to certain payments made to Holders, including payments to
certain exempt recipients (such as exempt organizations) and to
certain Nonresidents (as defined below). Holders should consult their
tax advisers as to their qualification for exemption from backup
withholding and the procedure for obtaining the exemption.
The applicable Trustee will report to the Holders and to the
Servicer for each calendar year the amount of any "reportable
payments" during such year and the amount of tax withheld, if any,
with respect to payments on the Securities.
New Withholding Regulations
On October 6, 1997, the Treasury Department issued new
regulations (the "New Regulations"), which make certain modifications
to the withholding, backup withholding and information reporting rules
described above. The New Regulations attempt to unify certification
requirements and modify reliance standards. The New Regulations will
generally be effective for payments made after December 31, 1999,
subject to certain transition rules. Prospective investors are urged
to consult their own tax advisors regarding the New Regulations.
Tax Treatment of Foreign Investors
Subject to the discussion below with respect to Trust Funds as to
which a partnership election is made, under the Code, unless interest
(including OID) paid on a Security (other than a Residual Interest
Security) is considered to be "effectively connected" with a trade or
business conducted in the United States by a nonresident alien
individual, foreign partnership or foreign corporation
("Nonresidents"), in the opinion of Tax Counsel, such interest will
normally qualify as portfolio interest (except where (i) the recipient
is a holder, directly or by attribution, of 10% or more of the capital
or profits interest in the issuer, or (ii) the recipient is a
controlled foreign corporation to which the issuer is a related
person) and will be exempt from federal income tax. Upon receipt of
appropriate ownership statements, the issuer normally will be relieved
of obligations to withhold tax from such interest payments. These
provisions supersede the generally applicable provisions of United
States law that would otherwise require the issuer
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to withhold at a 30% rate (unless such rate were reduced or eliminated
by an applicable tax treaty) on, among other things, interest and other
fixed or determinable, annual or periodic income paid to Nonresidents.
Holders of Pass-Through Securities and Stripped Securities, including
Ratio Strip Securities, however, may be subject to withholding to the
extent that the Loans were originated on or before July 18, 1984.
Interest and OID of Holders who are foreign persons are not
subject to withholding if they are effectively connected with a United
States business conducted by the Holder. They will, however, generally
be subject to the regular United States income tax.
Payments to Holders of Residual Interest Securities who are
foreign persons will generally be treated as interest for purposes of
the 30% (or lower treaty rate) United States withholding tax. Holders
should assume that such income does not qualify for exemption from
United States withholding tax as "portfolio interest." It is clear
that, to the extent that a payment represents a portion of REMIC
taxable income that constitutes excess inclusion income, a Holder of a
Residual Interest Security will not be entitled to an exemption from
or reduction of the 30% (or lower treaty rate) withholding tax rule.
If the payments are subject to United States withholding tax, they
generally will be taken into account for withholding tax purposes only
when paid or distributed (or when the Residual Interest Security is
disposed of). The Treasury has statutory authority, however, to
promulgate regulations that would require such amounts to be taken
into account at an earlier time in order to prevent the avoidance of
tax. Such regulations could, for example, require withholding prior to
the distribution of cash in the case of Residual Interest Securities
that do not have significant value. Under the REMIC Regulations, if a
Residual Interest Security has tax avoidance potential, a transfer of
a Residual Interest Security to a Nonresident will be disregarded for
all federal tax purposes. A Residual Interest Security has tax
avoidance potential unless, at the time of the transfer the transferor
reasonably expects that the REMIC will distribute to the transferee
residual interest Holder amounts that will equal at least 30% of each
excess inclusion, and that such amounts will be distributed at or
after the time at which the excess inclusions accrue and not later
than the calendar year following the calendar year of accrual. If a
Nonresident transfers a Residual Interest Security to a United States
person, and if the transfer has the effect of allowing the transferor
to avoid tax on accrued excess inclusions, then the transfer is
disregarded and the transferor continues to be treated as the owner of
the Residual Interest Security for purposes of the withholding tax
provisions of the Code. See "--Excess Inclusions."
Tax Characterization of the Trust Fund as a Partnership
Tax Counsel is of the opinion that a Trust Fund structured as a
partnership will not be an association (or publicly traded
partnership) taxable as a corporation for federal income tax purposes.
This opinion is based on the assumption that the terms of the Trust
Agreement and related documents will be complied with, and on
counsel's conclusions that the nature of the income of the Trust Fund
will exempt it from the rule that certain publicly traded partnerships
are taxable as corporations or the issuance of the Certificates has
been structured as a private placement under an IRS safe harbor, so
that the Trust Fund will not be characterized as a publicly traded
partnership taxable as a corporation.
If the Trust Fund were taxable as a corporation for federal
income tax purposes, in the opinion of Tax Counsel, the Trust Fund
would be subject to corporate income tax on its taxable income. The
Trust Fund's taxable income would include all its income, possibly
reduced by its interest expense on the Notes. Any such corporate
income tax could materially reduce cash available to make payments on
the Notes and distributions on the Certificates, and
Certificateholders could be liable for any such tax that is unpaid by
the Trust Fund.
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Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. The Trust Fund will
agree, and the Noteholders will agree by their purchase of Notes, to
treat the Notes as debt for federal income tax purposes. In such a
circumstance, Tax Counsel is, except as otherwise provided in the
related Prospectus Supplement, of the opinion that the Notes will be
classified as debt for federal income tax purposes. The discussion
below assumes this characterization of the Notes is correct.
OID, Indexed Securities, etc. The discussion below assumes that
all payments on the Notes are denominated in U.S. dollars, and that
the Notes are not Indexed Securities or Strip Notes. Moreover, the
discussion assumes that the interest formula for the Notes meets the
requirements for "qualified stated interest" under the OID
Regulations, and that any OID on the Notes (i.e., any excess of the
principal amount of the Notes over their issue price) does not exceed
a de minimis amount (i.e., 0.25% of their principal amount multiplied
by the number of full years included in their term), all within the
meaning of the OID regulations. If these conditions are not satisfied
with respect to any given series of Notes, additional tax
considerations with respect to such Notes will be disclosed in the
applicable Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions,
except as discussed in the following paragraph, in the opinion of Tax
Counsel, the Notes will not be considered issued with OID. The stated
interest thereon will be taxable to a Noteholder as ordinary interest
income when received or accrued in accordance with such Noteholder's
method of tax accounting. Under the OID Regulations, a Holder of a
Note issued with a de minimis amount of OID must include such OID in
income, on a pro rata basis, as principal payments are made on the
Note. It is believed that any prepayment premium paid as a result of a
mandatory redemption will be taxable as contingent interest when it
becomes fixed and unconditionally payable. A purchaser who buys a Note
for more or less than its principal amount will generally be subject,
respectively, to the premium amortization or market discount rules of
the Code.
A Holder of a Note that has a fixed maturity date of not more
than one year from the issue date of such Note (a "Short-Term Note")
may be subject to special rules. An accrual basis Holder of a
Short-Term Note (and certain cash method Holders, including regulated
investment companies, as set forth in Section 1281 of the Code)
generally would be required to report interest income as interest
accrues on a straight-line basis over the term of each interest
period. Other cash basis Holders of a Short-Term Note would, in
general, be required to report interest income as interest is paid
(or, if earlier, upon the taxable disposition of the Short-Term Note).
However, a cash basis Holder of a Short-Term Note reporting interest
income as it is paid may be required to defer a portion of any
interest expense otherwise deductible on indebtedness incurred to
purchase or carry the Short-Term Note until the taxable disposition of
the Short-Term Note. A cash basis taxpayer may elect under Section
1281 of the Code to accrue interest income on all nongovernment debt
obligations with a term of one year or less, in which case the
taxpayer would include interest on the Short-Term Note in income as it
accrues, but would not be subject to the interest expense deferral
rule referred to in the preceding sentence. Certain special rules
apply if a Short-Term Note is purchased for more or less than its
principal amount.
Sale or Other Disposition. In the opinion of Tax Counsel, if a
Noteholder sells a Note, the Holder will recognize gain or loss in an
amount equal to the difference between the amount realized on the sale
and the Holder's adjusted tax basis in the Note. The adjusted tax
basis of a Note to a particular Noteholder will equal the Holder's
cost for the Note, increased by any market discount, acquisition
discount, OID and gain previously included by such Noteholder in
income with respect to the Note and decreased by the amount of bond
premium (if any) previously amortized and by the amount of principal
payments previously received by such Noteholder with respect to such
Note. Any such gain or loss will be capital gain or loss if the Note
was held as a capital asset, except for gain representing accrued
interest and accrued market discount not previously included in
income. Capital losses generally may be used only to offset capital
gains.
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Foreign Holders. In the opinion of Tax Counsel, interest payments
made (or accrued) to a Noteholder who is a nonresident alien, foreign
corporation or other non-United States person (a "foreign person")
generally will be considered "portfolio interest," and generally will
not be subject to United States federal income tax and withholding
tax, if the interest is not effectively connected with the conduct of
a trade or business within the United States by the foreign person and
the foreign person (i) is not actually or constructively a "10 percent
shareholder" of the Trust Fund or the Seller (including a Holder of
10% of the outstanding Certificates) or a "controlled foreign
corporation" with respect to which the Trust Fund or the Seller is a
"related person" within the meaning of the Code and (ii) provides the
Trustee or other person who is otherwise required to withhold U.S. tax
with respect to the Notes with an appropriate statement (on Form W-8
or a similar form), signed under penalties of perjury, certifying that
the beneficial owner of the Note is a foreign person and providing the
foreign person's name and address. If a Note is held through a
securities clearing organization or certain other financial
institutions, the organization or institution may provide the relevant
signed statement to the withholding agent; in that case, however, the
signed statement must be accompanied by a Form W-8 or substitute form
provided by the foreign person that owns the Note. If such interest is
not portfolio interest, then it will be subject to United States
federal income and withholding tax at a rate of 30 percent, unless
reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or
other taxable disposition of a Note by a foreign person will be exempt
from United States federal income and withholding tax; provided, that
(i) such gain is not effectively connected with the conduct of a trade
or business in the United States by the foreign person and (ii) in the
case of an individual foreign person, the foreign person is not
present in the United States for 183 days or more in the taxable year.
Backup Withholding. Each Holder of a Note (other than an exempt
Holder such as a corporation, tax-exempt organization, qualified
pension and profit-sharing trust, individual retirement account or
nonresident alien who provides certification as to status as a
nonresident) will be required to provide, under penalties of perjury,
a certificate containing the Holder's name, address, correct federal
taxpayer identification number and a statement that the Holder is not
subject to backup withholding. Should a nonexempt Noteholder fail to
provide the required certification, the Trust Fund will be required to
withhold 31 percent of the amount otherwise payable to the Holder, and
remit the withheld amount to the IRS as a credit against the Holder's
federal income tax liability.
The New Regulations described herein make certain modifications
to the backup withholding and information reporting rules. The New
Regulations generally will be effective for payments made after
December 31, 1999, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the
New Regulations.
Possible Alternative Treatments of the Notes. If, contrary to the
opinion of Tax Counsel, the IRS successfully asserted that one or more
of the Notes did not represent debt for federal income tax purposes,
the Notes might be treated as equity interests in the Trust Fund. If
so treated, the Trust Fund might be taxable as a corporation with the
adverse consequences described above (and the taxable corporation
would not be able to reduce its taxable income by deductions for
interest expense on Notes recharacterized as equity). Alternatively,
and most likely in the view of Tax Counsel, the Trust Fund might be
treated as a publicly traded partnership that would not be taxable as
a corporation because it would meet certain qualifying income tests.
Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to
certain Holders. For example, income to certain tax-exempt entities
(including pension funds) would be "unrelated business taxable
income," income to foreign Holders generally would be subject to U.S.
tax and U.S. tax return filing and withholding requirements, and
individual Holders might be subject to certain limitations on their
ability to deduct their share of the Trust Fund's expenses.
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Tax Consequences to Holders of the Certificates
Treatment of the Trust Fund as a Partnership. The Trust Fund and
the Servicer will agree, and the Certificateholders will agree by
their purchase of Certificates, to treat the Trust Fund as a
partnership for purposes of federal and state income tax, franchise
tax and any other tax measured in whole or in part by income, with the
assets of the partnership being the assets held by the Trust Fund, the
partners of the partnership being the Certificateholders, and the
Notes being debt of the partnership. However, the proper
characterization of the arrangement involving the Trust Fund, the
Certificates, the Notes, the Trust Fund and the Servicer is not clear
because there is no authority on transactions closely comparable to
that contemplated herein.
A variety of alternative characterizations are possible. For
example, because the Certificates have certain features characteristic
of debt, the Certificates might be considered debt of the Trust Fund.
Any such characterization would not result in materially adverse tax
consequences to Certificateholders as compared to the consequences
from treatment of the Certificates as equity in a partnership,
described below. The following discussion assumes that the
Certificates represent equity interests in a partnership.
Indexed Securities, etc. The following discussion assumes that
all payments on the Certificates are denominated in U.S. dollars, none
of the Certificates are Indexed Securities or Strip Certificates, and
that a Series of Securities includes a single Class of Certificates.
If these conditions are not satisfied with respect to any given Series
of Certificates, additional tax considerations with respect to such
Certificates will be disclosed in the applicable Prospectus
Supplement.
Partnership Taxation. If the Trust Fund is a partnership, in the
opinion of Tax Counsel, the Trust Fund will not be subject to federal
income tax. Rather, in the opinion of Tax Counsel, each
Certificateholder will be required to separately take into account
such Holder's allocated share of income, gains, losses, deductions and
credits of the Trust Fund. The Trust Fund's income will consist
primarily of interest and finance charges earned on the Loans
(including appropriate adjustments for market discount, OID and bond
premium) and any gain upon collection or disposition of Loans. The
Trust Fund's deductions will consist primarily of interest accruing
with respect to the Notes, servicing and other fees, and losses or
deductions upon collection or disposition of Loans.
In the opinion of Tax Counsel, the tax items of a partnership are
allocable to the partners in accordance with the Code, Treasury
regulations and the partnership agreement (here, the Trust Agreement
and related documents). The Trust Agreement will provide, in general,
that the Certificateholders will be allocated taxable income of the
Trust Fund for each month equal to the sum of (i) the interest that
accrues on the Certificates in accordance with their terms for such
month, including interest accruing at the Pass-Through Rate for such
month and interest on amounts previously due on the Certificates but
not yet distributed; (ii) any Trust Fund income attributable to
discount on the Loans that corresponds to any excess of the principal
amount of the Certificates over their initial issue price (iii)
prepayment premium payable to the Certificateholders for such month;
and (iv) any other amounts of income payable to the Certificateholders
for such month. Such allocation will be reduced by any amortization by
the Trust Fund of premium on Loans that corresponds to any excess of
the issue price of Certificates over their principal amount. All
remaining taxable income of the Trust Fund will be allocated to the
Depositor. Based on the economic arrangement of the parties, in the
opinion of Tax Counsel, this approach for allocating Trust Fund income
should be permissible under applicable Treasury regulations, although
no assurance can be given that the IRS would not require a greater
amount of income to be allocated to Certificateholders. Moreover, in
the opinion of Tax Counsel, even under the foregoing method of
allocation, Certificateholders may be allocated income equal to the
entire Pass-Through Rate plus the other items described above even
though the Trust Fund might not have sufficient cash to make current
cash distributions of such amount. Thus, cash basis Holders will in
effect be required to report income from
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the Certificates on the accrual basis and Certificateholders may become
liable for taxes on Trust Fund income even if they have not received
cash from the Trust Fund to pay such taxes. In addition, because tax
allocations and tax reporting will be done on a uniform basis for all
Certificateholders but Certificateholders may be purchasing
Certificates at different times and at different prices,
Certificateholders may be required to report on their tax returns
taxable income that is greater or less than the amount reported to them
by the Trust Fund.
In the opinion of Tax Counsel, all of the taxable income
allocated to a Certificateholder that is a pension, profit sharing or
employee benefit plan or other tax-exempt entity (including an
individual retirement account) will constitute "unrelated business
taxable income" generally taxable to such a Holder under the Code.
In the opinion of Tax Counsel, an individual taxpayer's share of
expenses of the Trust Fund (including fees to the Servicer but not
interest expense) would be miscellaneous itemized deductions. Such
deductions might be disallowed to the individual in whole or in part
and might result in such Holder being taxed on an amount of income
that exceeds the amount of cash actually distributed to such Holder
over the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to
income and allocations to Certificateholders on an aggregate basis. If
the IRS were to require that such calculations be made separately for
each Loan, the Trust Fund might be required to incur additional
expense but it is believed that there would not be a material adverse
effect on Certificateholders.
Discount and Premium. It is believed that the Loans were not
issued with OID, and, therefore, the Trust Fund should not have OID
income. However, the purchase price paid by the Trust Fund for the
Loans may be greater or less than the remaining Principal Balance of
the Loans at the time of purchase. If so, in the opinion of Tax
Counsel, the Loan will have been acquired at a premium or discount, as
the case may be. (As indicated above, the Trust Fund will make this
calculation on an aggregate basis, but might be required to recompute
it on a Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or
premium, the Trust Fund will elect to include any such discount in
income currently as it accrues over the life of the Loans or to offset
any such premium against interest income on the Loans. As indicated
above, a portion of such market discount income or premium deduction
may be allocated to Certificateholders.
Section 708 Termination. In the opinion of Tax Counsel, under
Section 708 of the Code, the Trust Fund will be deemed to terminate
for federal income tax purposes if 50% or more of the capital and
profits interests in the Trust Fund are sold or exchanged within a
12-month period. Pursuant to final Treasury regulations issued May 9,
1997 under Section 708 of the Code, if such a termination occurs, the
Trust Fund (the "old partnership") would be deemed to contribute its
assets to a new partnership (the "new partnership") in exchange for
interests in the new partnership. Such interests would be deemed
distributed to the partners of the old partnership in liquidation
thereof, which would not constitute a sale or exchange.
Disposition of Certificates. Generally, in the opinion of Tax
Counsel, capital gain or loss will be recognized on a sale of
Certificates in an amount equal to the difference between the amount
realized and the seller's tax basis in the Certificates sold. A
Certificateholder's tax basis in a Certificate will generally equal
the Holder's cost increased by the Holder's share of Trust Fund income
(includible in income) and decreased by any distributions received
with respect to such Certificate. In addition, both the tax basis in
the Certificates and the amount realized on a sale of a Certificate
would include the Holder's share of the Notes and other liabilities of
the Trust Fund. A Holder acquiring Certificates at different prices
may be
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required to maintain a single aggregate adjusted tax basis in such
Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the
Certificates sold (rather than maintaining a separate tax basis in each
Certificate for purposes of computing gain or loss on a sale of that
Certificate).
Any gain on the sale of a Certificate attributable to the
Holder's share of unrecognized accrued market discount on the Loans
would generally be treated as ordinary income to the Holder and would
give rise to special tax reporting requirements. The Trust Fund does
not expect to have any other assets that would give rise to such
special reporting requirements. Thus, to avoid those special reporting
requirements, the Trust Fund will elect to include market discount in
income as it accrues.
If a Certificateholder is required to recognize an aggregate
amount of income (not including income attributable to disallowed
itemized deductions described above) over the life of the Certificates
that exceeds the aggregate cash distributions with respect thereto,
such excess will generally give rise to a capital loss upon the
retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the
Trust Fund's taxable income and losses will be determined monthly and
the tax items for a particular calendar month will be apportioned
among the Certificateholders in proportion to the principal amount of
Certificates owned by them as of the close of the last day of such
month. As a result, a Holder purchasing Certificates may be allocated
tax items (which will affect its tax liability and tax basis)
attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by
existing regulations. If a monthly convention is not allowed (or only
applies to transfers of less than all of the partner's interest),
taxable income or losses of the Trust Fund might be reallocated among
the Certificateholders. The Trust Fund's method of allocation between
transferors and transferees may be revised to conform to a method
permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells
its Certificates at a profit (loss), the purchasing Certificateholder
will have a higher (lower) basis in the Certificates than the selling
Certificateholder had. The tax basis of the Trust Fund's assets will
not be adjusted to reflect that higher (or lower) basis unless the
Trust Fund were to file an election under Section 754 of the Code. In
order to avoid the administrative complexities that would be involved
in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust Fund will not make such
election. As a result, Certificateholders might be allocated a greater
or lesser amount of Trust Fund income than would be appropriate based
on their own purchase price for Certificates.
Administrative Matters. The Trustee is required to keep or have
kept complete and accurate books of the Trust Fund. Such books will be
maintained for financial reporting and tax purposes on an accrual
basis and the fiscal year of the Trust Fund will be the calendar year.
The Trustee will file a partnership information return (IRS Form 1065)
with the IRS for each taxable year of the Trust Fund and will report
each Certificateholder's allocable share of items of Trust Fund income
and expense to Holders and the IRS on Schedule K-1. The Trust Fund
will provide the Schedule K-l information to nominees that fail to
provide the Trust Fund with the information statement described below
and such nominees will be required to forward such information to the
beneficial owners of the Certificates. Generally, Holders must file
tax returns that are consistent with the information return filed by
the Trust Fund or be subject to penalties unless the Holder notifies
the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds
Certificates as a nominee at any time during a calendar year is
required to furnish the Trust Fund with a statement containing certain
information on the nominee, the beneficial owners and the Certificates
so held. Such information includes (i) the name,
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address and taxpayer identification number of the nominee and (ii) as
to each beneficial owner (a) the name, address and identification
number of such person, (b) whether such person is a United States
person, a tax-exempt entity or a foreign government, an international
organization or any wholly owned agency or instrumentality of either of
the foregoing, and (c) certain information on Certificates that were
held, bought or sold on behalf of such person throughout the year. In
addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund
information as to themselves and their ownership of Certificates. A
clearing agency registered under Section 17A of the Exchange Act is not
required to furnish any such information statement to the Trust Fund.
The information referred to above for any calendar year must be
furnished to the Trust Fund on or before the following January 31.
Nominees, brokers and financial institutions that fail to provide the
Trust Fund with the information described above may be subject to
penalties.
The Depositor will be designated as the tax matters partner in
the related Trust Agreement and, as such, will be responsible for
representing the Certificateholders in any dispute with the IRS. The
Code provides for administrative examination of a partnership as if
the partnership were a separate and distinct taxpayer. Generally, the
statute of limitations for partnership items does not expire before
three years after the date on which the partnership information return
is filed. Any adverse determination following an audit of the return
of the Trust Fund by the appropriate taxing authorities could result
in an adjustment of the returns of the Certificateholders, and, under
certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the Trust
Fund. An adjustment could also result in an audit of a
Certificateholder's returns and adjustments of items not related to
the income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear
whether the Trust Fund would be considered to be engaged in a trade or
business in the United States for purposes of federal withholding
taxes with respect to non-U.S. persons because there is no clear
authority dealing with that issue under facts substantially similar to
those described herein. Although it is not expected that the Trust
Fund would be engaged in a trade or business in the United States for
such purposes, the Trust Fund will withhold as if it were so engaged
in order to protect the Trust Fund from possible adverse consequences
of a failure to withhold. The Trust Fund expects to withhold on the
portion of its taxable income that is allocable to foreign
Certificateholders pursuant to Section 1446 of the Code, as if such
income were effectively connected to a U.S. trade or business, at a
rate of 35% for foreign Holders that are taxable as corporations and
39.6% for all other foreign Holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may
require the Trust Fund to change its withholding procedures. In
determining a Holder's withholding status, the Trust Fund may rely on
IRS Form W-8, IRS Form W-9 or the Holder's certification of nonforeign
status signed under penalties of perjury.
Each foreign Holder might be required to file a U.S. individual
or corporate income tax return (including, in the case of a
corporation, the branch profits tax) on its share of the Trust Fund's
income. Each foreign Holder must obtain a taxpayer identification
number from the IRS and submit that number to the Trust Fund on Form
W-8 in order to assure appropriate crediting of the taxes withheld. A
foreign Holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the Trust Fund
taking the position that no taxes were due because the Trust Fund was
not engaged in a U.S. trade or business. However, interest payments
made (or accrued) to a Certificateholder who is a foreign person
generally will be considered guaranteed payments to the extent such
payments are determined without regard to the income of the Trust
Fund. If these interest payments are properly characterized as
guaranteed payments, then the interest will not be considered
"portfolio interest." As a result, Certificateholders will be subject
to United States federal income tax and withholding tax at a rate of
30 percent, unless reduced or eliminated pursuant to an applicable
treaty. In such case, a foreign Holder would only be entitled to claim
a refund for that portion of the taxes in excess of the taxes that
should be withheld with respect to the guaranteed payments.
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Backup Withholding. Distributions made on the Certificates and
proceeds from the sale of the Certificates will be subject to a
"backup" withholding tax of 31% if, in general, the Certificateholder
fails to comply with certain identification procedures, unless the
Holder is an exempt recipient under applicable provisions of the Code.
The New Regulations described herein make certain modifications to the
backup withholding and information reporting rules. The New
Regulations will generally be effective for payments made after
December 31, 1999, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the
New Regulations.
STATE TAX CONSIDERATIONS
In addition to the federal income tax considerations described in
"Certain Federal Income Tax Considerations," potential investors
should consider the state and local income tax consequences of the
acquisition, ownership, and disposition of the Securities. State and
local income tax law may differ substantially from the corresponding
federal law, and this discussion does not purport to describe any
aspect of the income tax laws of any state or locality. Therefore,
potential investors should consult their own tax advisors with respect
to the various state and local tax consequences of an investment in
the Securities.
FASIT SECURITIES
General. The FASIT provisions of the Code were enacted by the
Small Business Job Protection Act of 1996 and create a new elective
statutory vehicle for the issuance of mortgage-backed and asset-backed
securities ("FASIT Securities"). Although the FASIT provisions of the
Code became effective on September 1, 1997, no Treasury regulations or
other administrative guidance has been issued with respect to those
provisions. Accordingly, definitive guidance cannot be provided with
respect to many aspects of the tax treatment of Holders of FASIT
Securities. Investors also should note that the FASIT discussions
contained herein constitutes only a summary of the federal income tax
consequences to Holders of FASIT Securities. With respect to each
Series of FASIT Securities, the related Prospectus Supplement will
provide a detailed discussion regarding the federal income tax
consequences associated with the particular transaction.
FASIT Securities will be classified as either FASIT Regular
Securities, which generally will be treated as debt for federal income
tax purposes, or FASIT Ownership Securities, which generally are not
treated as debt for such purposes, but rather as representing rights
and responsibilities with respect to the taxable income or loss of the
related Series. The Prospectus Supplement for each Series of
Securities will indicate whether one or more FASIT elections will be
made for such Series, and which Securities of such Series will be
designated as Regular Securities, and which, if any, will be
designated as Ownership Securities.
Qualification as a FASIT. The Trust Fund underlying a Series (or
one or more designated pools of assets held in the Trust Fund) will
qualify under the Code as a FASIT in which the FASIT Regular
Securities and the FASIT Ownership Securities will constitute the
"regular interests" and the "ownership interests," respectively, if
(i) a FASIT election is in effect, (ii) certain tests concerning (a)
the composition of the FASIT's assets and (b) the nature of the
Holders' interest in the FASIT are met on a continuing basis and (iii)
the Trust Fund is not a regulated company as defined in Section 851(a)
of the Code.
Asset Composition. In order for a Trust Fund (on one or more
designated pools of assets held by a Trust Fund) to be eligible for
FASIT status, substantially all of the assets of the Trust Fund (or
the designated pool) must consist of "permitted assets" as of the
close of the third month beginning after the Closing Date and at all
times thereafter (the "FASIT Qualification Test"). Permitted assets
include (i) cash or cash equivalents, (ii) debt instruments with fixed
terms that would qualify as REMIC regular
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interests if issued by a REMIC (generally, instruments that provide for
interest at a fixed rate, a qualifying variable rate, or a qualifying
interest-only ("IO") type rate, (iii) foreclosure property, (iv)
certain hedging instruments (generally, interest and currency rate
swaps and credit enhancement contracts) that are reasonably required to
guarantee or hedge against the FASIT's risks associated with being the
obligor on FASIT interests, (v) contract rights to acquire qualifying
debt instruments or qualifying hedging instruments, (vi) FASIT regular
interests and (vii) REMIC regular interests. Permitted assets do not
include any debt instruments issued by the Holder of the FASIT's
ownership interest or by any person related to such Holder.
Interests in a FASIT. In addition to the foregoing asset
qualification requirements, the interests in a FASIT also must meet
certain requirements. All of the interests in a FASIT must belong to
either of the following: (i) one or more Classes of regular interests
or (ii) a single Class of ownership interest that is held by a fully
taxable domestic corporation. In the case of Series that include FASIT
Ownership Securities, the ownership interest will be represented by
the FASIT Ownership Securities.
A FASIT interest generally qualifies as a regular interest if (i)
it is designated as a regular interest, (ii) it has a stated maturity
no greater than thirty years, (iii) it entitles its Holder to a
specified principal amount, (iv) the issue price of the interest does
not exceed 125% of its stated principal amount, (v) the yield to
maturity of the interest is less than the applicable Treasury rate
published by the IRS plus 5% and (vi) if it pays interest, such
interest is payable at either (a) a fixed rate with respect to the
principal amount of the regular interest or (b) a permissible variable
rate with respect to such principal amount. Permissible variable rates
for FASIT regular interests are the same as those for REMIC regular
interest (i.e., certain qualified floating rates and weighted average
rates). See "Certain Federal Income Tax Considerations--Taxation of
Debt Securities--Variable Rate Debt Securities."
If a FASIT Security fails to meet one or more of the requirements
set out in clauses (iii), (iv) or (v) above, but otherwise meets the
above requirements, it may still qualify as a type of regular interest
known as a "High-Yield Interest." In addition, if a FASIT Security
fails to meet the requirements of clause (vi), but the interest
payable on the Security consists of a specified portion of the
interest payments on permitted assets and that portion does not vary
over the life of the Security, the Security also will qualify as a
High-Yield Interest. A High-Yield Interest may be held only by
domestic corporations that are fully subject to corporate income tax
("Eligible Corporations"), other FASITs and dealers in securities who
acquire such interests as inventory, rather than for investment. In
addition, Holders of High-Yield Interests are subject to limitations
on offset of income derived from such interest. See "Certain Federal
Income Tax Considerations--FASIT Securities--Tax Treatment of FASIT
Regular Securities--Treatment of High-Yield Interests."
Consequences of Disqualification. If a Series of FASIT Securities
fails to comply with one or more of the Code's ongoing requirements
for FASIT status during any taxable year, the Code provides that its
FASIT status may be lost for that year and thereafter. If FASIT status
is lost, the treatment of the former FASIT and the interests therein
for federal income tax purposes is uncertain. The former FASIT might
be treated as a grantor trust, as a separate association taxed as a
corporation, or as a partnership. The FASIT Regular Securities could
be treated as debt instruments for federal income tax purposes or as
equity interests. Although the Code authorizes the Treasury to issue
regulations that address situations where a failure to meet the
requirements for FASIT status occurs inadvertently and in good faith,
such regulations have not yet been issued. It is possible that
disqualification relief might be accompanied by sanctions, such as the
imposition of a corporate tax on all or a portion of the FASIT's
income for a period of time in which the requirements for FASIT status
are not satisfied.
Tax Treatment of FASIT Regular Securities. Payments received by
Holders of FASIT Regular Securities generally should be accorded the
same tax treatment under the Code as payments received on
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other taxable corporate debt instruments and on REMIC Regular
Securities. As in the case of Holders of REMIC Regular Securities,
Holders of FASIT Regular Securities must report income from such
Securities under an accrual method of accounting, even if they
otherwise would have used the case receipts and disbursements method.
Except in the case of FASIT Regular Securities issued with original
issue discount or acquired with market discount or premium, interest
paid or accrued on a FASIT Regular Security generally will be treated
as ordinary income to the Holder and a principal payment on such
Security will be treated as a return of capital to the extent that the
Holder's basis is allocable to that payment. FASIT Regular Securities
issued with original issue discount or acquired with market discount or
premium generally will treat interest and principal payments on such
Securities in the same manner described for REMIC Regular Securities.
See "Certain Federal Income Tax Considerations--Taxation of Debt
Securities," "--Market Discount," and "--Premium" above. High-Yield
Securities may be held only by fully taxable domestic corporations,
other FASITs, and certain securities dealers. Holders of High-Yield
Securities are subject to limitations on their ability to use current
losses or net operating loss carryforwards or carrybacks to offset any
income derived from those Securities.
If a FASIT Regular Security is sold or exchanged, the Holder
generally will recognize gain or loss upon the sale in the manner
described above for REMIC Regular Securities. See "Certain Federal
Income Tax Considerations--Sale or Exchange." In addition, if a FASIT
Regular Security becomes wholly or partially worthless as a result of
Default and Delinquencies of the underlying assets, the Holder of such
Security should be allowed to deduct the loss sustained (or
alternatively be able to report a lesser amount of income). See
"Certain Federal Income Tax Considerations--Taxation of Debt
Instruments--Effects of Default and Delinquencies."
FASIT Regular Securities held by a REIT will qualify as "real
estate assets" within the meaning of section 856(c)(4)(A) of the Code,
and interest on such Securities will be considered Qualifying REIT
Interest to the same extent that REMIC Securities would be so
considered. FASIT Regular Securities held by a Thrift Institution
taxed as a "domestic building and loan association" will represent
qualifying assets for purposes of the qualification requirements set
forth in Code Section 7701(a)(19) to the same extent that REMIC
Securities would be so considered. See "Certain Federal Income Tax
Considerations--Taxation of Debt Securities--Status as Real Property
Loans." In addition, FASIT Regular Securities held by a financial
institution to which Section 585 of the Code applies will be treated
as evidences of indebtedness for purposes of Section 582(c)(1) of the
Code. FASIT Securities will not qualify as "Government Securities" for
either REIT or RIC qualification purposes.
Treatment of High-Yield Interests. High-Yield Interests are
subject to special rules regarding the eligibility of Holders of such
interests, and the ability of such Holders to offset income derived
from their FASIT Security with losses. High-Yield Interests may be
held only by Eligible Corporations other FASITs, and dealers in
securities who acquire such interests as inventory. If a securities
dealer (other than an Eligible Corporation) initially acquires a
High-Yield Interest as inventory, but later begins to hold it for
investment, the dealer will be subject to an excise tax equal to the
income from the High-Yield Interest multiplied by the highest
corporate income tax rate. In addition, transfers of High-Yield
Interests to disqualified Holders will be disregarded for federal
income tax purposes, and the transferor still will be treated as the
Holder of the High-Yield Interest.
The Holder of a High-Yield Interest may not use non-FASIT current
losses or net operating loss carryforwards or carrybacks to offset any
income derived from the High-Yield Interest, for either regular
federal income tax purposes or for alternative minimum tax purposes.
In addition, the FASIT provisions contain an anti-abuse rule that
imposes corporate income tax on income derived from a FASIT Regular
Security that is held by a pass-through entity (other than another
FASIT) that issues debt or equity securities backed by the FASIT
Regular Security and that have the same features as High-Yield
Interests.
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Tax Treatment of FASIT Ownership Securities. A FASIT Ownership
Security represents the residual equity interest in a FASIT. As such,
the Holder of a FASIT Ownership Security determines its taxable income
by taking into account all assets, liabilities and items of income,
gain, deduction, loss and credit of a FASIT. In general, the character
of the income to the Holder of a FASIT Ownership Interest will be the
same as the character of such income of the FASIT, except that any
tax-exempt interest income taken into account by the Holder of a FASIT
Ownership Interest is treated as ordinary income. In determining that
taxable income, the Holder of a FASIT Ownership Security must
determine the amount of interest, original issue discount, market
discount and premium recognized with respect to the FASIT's assets and
the FASIT Regular Securities issued by the FASIT according to a
constant yield methodology and under an accrual method of accounting.
In addition, Holders of FASIT Ownership Securities are subject to the
same limitations on their ability to use losses to offset income from
their FASIT Security as are the Holders of High-Yield Interests. See
"Certain Federal Income Tax Considerations--Treatment of High-Yield
Interests."
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Securities. Accordingly,
losses on dispositions of a FASIT Ownership Security generally will be
disallowed where, within six months before or after the disposition,
the seller of such Security acquires any other FASIT Ownership
Security or, in the case of a FASIT holding mortgage assets, any
interest in a Taxable Mortgage Pool that is economically comparable to
a FASIT Ownership Security. In addition, if any security that is sold
or contributed to a FASIT by the Holder of the related FASIT Ownership
Security was required to be marked-to-market under Code section 475 by
such Holder, then section 475 will continue to apply to such
securities, except that the amount realized under the mark-to-market
rules will be a greater of the securities' value under present law or
the securities' value after applying special valuation rules contained
in the FASIT provisions. Those special valuation rules generally
require that the value of debt instruments that are not traded on an
established securities market be determined by calculating the present
value of the reasonably expected payments under the instrument using a
discount rate of 120% of the applicable federal rate, compounded
semiannually.
The Holder of a FASIT Ownership Security will be subject to a tax
equal to 100% of the net income derived by the FASIT from any
"prohibited transactions." Prohibited transactions include (i) the
receipt of income derived from assets that are not permitted assets,
(ii) certain dispositions of permitted assets, (iii) the receipt of
any income derived from any loan originated by a FASIT and (iv) in
certain cases, the receipt of income representing a servicing fee or
other compensation. Any Series for which a FASIT election is made
generally will be structured in order to avoid application of the
prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration. Holders of
FASIT Securities will be subject to backup withholding to the same
extent Holders of REMIC Securities would be subject. See "Certain
Federal Income Tax Considerations--Miscellaneous Tax Aspects--Backup
Withholding." For purposes of reporting and tax administration,
Holders of record of FASIT Securities generally will be treated in the
same manner as Holders of REMIC Securities.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
HOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO
MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR
OWN TAX ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION,
OWNERSHIP, AND DISPOSITION OF THE SECURITIES.
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ERISA CONSIDERATIONS
The following describes certain considerations under ERISA and
the Code, which apply only to Securities of a Series that are not
divided into subclasses. If Securities are divided into subclasses,
the related Prospectus Supplement will contain information concerning
considerations relating to ERISA and the Code that are applicable to
such Securities and such subclasses of Securities.
ERISA imposes requirements on employee benefit plans (and on
certain other retirement plans and arrangements, including certain
individual retirement accounts and annuities, Keogh plans and
collective investment funds and separate accounts in which such plans,
accounts or arrangements are invested) (collectively "Plans") subject
to ERISA and on persons who are fiduciaries with respect to such
Plans. Generally, ERISA applies to investments made by Plans. Among
other things, ERISA requires that the assets of Plans be held in trust
and that the trustee, or other duly authorized fiduciary, have
exclusive authority and discretion to manage and control the assets of
such Plans. ERISA also imposes certain duties on persons who are
fiduciaries of Plans. Under ERISA, any person who exercises any
authority or control respecting the management or disposition of the
assets of a Plan is considered to be a fiduciary of such Plan (subject
to certain exceptions not here relevant). Certain employee benefit
plans, such as governmental plans (as defined in ERISA Section 3(32))
and, if no election has been made under Section 410(d) of the Code,
church plans (as defined in ERISA Section 3(33)), are not subject to
ERISA requirements. Accordingly, assets of such plans may be invested
in Securities without regard to the ERISA considerations described
above and below, subject to the provisions of applicable state law.
Any such plan that is qualified and exempt from taxation under Code
Sections 401(a) and 501(a), however, is subject to the prohibited
transaction rules set forth in Code Section 503.
In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA and Section 4975 of the
Code prohibit a broad range of transactions involving Plan assets and
persons ("Parties in Interest") having certain specified relationships
to a Plan and imposes additional prohibitions where Parties in
Interest are fiduciaries with respect to such Plan. Certain Parties in
Interest that participate in a prohibited transaction may be subject
to an excise tax imposed pursuant to Section 4975 of the Code, or a
penalty imposed pursuant to Section 502(i) of ERISA, unless a
statutory, regulatory or administrative exemption is available.
On November 13, 1986, the United States Department of Labor (the
"DOL") issued final regulations (Labor Reg. Section 2510.3-101)
concerning the definition of what constitutes the assets of a Plan
(the "Plan Asset Regulation"). Under this regulation, the underlying
assets and properties of corporations, partnerships and certain other
entities in which a Plan acquires an "equity" interest could be deemed
for purposes of ERISA to be assets of the investing Plan in certain
circumstances.
Under the Plan Asset Regulation, the term "equity" interest is
defined as any interest in an entity other than an instrument that is
treated as indebtedness under "applicable local law" and which has no
"substantial equity features." If the Trust Fund issues Notes that are
not treated as equity interests in the Trust Fund for purposes of the
Plan Asset Regulation, a Plan's investment in such Notes would not
cause the assets of the Trust to be deemed Plan assets. However, the
Seller, the Servicer, the Special Servicer, the Backup Servicer, the
Indenture Trustee, the Owner Trustee and the Depositor may be the
sponsor of or investment advisor with respect to one or more Plans.
Because such parties may receive certain benefits in connection with
the sale of the Notes, the purchase of Notes using Plan assets over
which any such parties (or any affiliates thereof) has investment
authority might be deemed to be a violation of the prohibited
transaction rules of ERISA and the Code for which no exemption may be
available. Accordingly, Notes may not be purchased using the assets of
any Plan if the Seller, the Servicer, the Special Servicer, the
Indenture Trustee, the Owner Trustee, the Depositor or any of their
affiliates (a) has investment or administrative discretion with
respect to such Plan assets; (b) has authority or responsibility to
give, or regularly gives, investment advice with respect to such Plan
assets for a fee and pursuant to an agreement of understanding that
such advice (i) will serve as a primary basis for investment decisions
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with respect to such Plan assets and (ii) will be based on the
particular investment needs for such Plan; or (c) is an employer
maintaining or contributing to such Plan.
In addition, the Trust Fund, any underwriter, trustee, servicer,
administrator or producer of credit support or their affiliates might
be considered or might become Parties in Interest with respect to a
Plan. Also, any holder of Notes, because of its activities or the
activities of its respective affiliates, may be deemed to be a Party
in Interest with respect to certain Plans, including but not limited
to Plans sponsored by such holder. In either case, the acquisition or
holding of Notes by or on behalf of such a Plan could be considered to
give rise to an indirect prohibited transaction within the meaning of
ERISA and the Code, unless it is subject to one or more exemptions
such as: Prohibited Transaction Class Exemption ("PTCE") 84-14, which
exempts certain transactions effected on behalf of a Plan by a
"qualified professional asset manager"; PTCE 90-1, which exempts
certain transactions involving insurance company pooled separate
accounts; PTCE 91-38, which exempts certain transactions involving
bank collective investment funds; PTCE 95-60, which exempts certain
transactions involving insurance company general accounts; or PTCE
96-23, which exempts certain transactions effected on behalf of a Plan
by certain "in-house asset managers." There can be no assurance that
any of these class exemptions will apply with respect to any
particular Plan investment in Notes, or, even if it did apply, that
any exemption would apply to all prohibited transactions that may
occur in connection with such an investment. Each prospective
purchaser or transferee of a Note that is a Plan or a person acting on
behalf or investing the assets of a Plan shall be required to
represent (or, with respect to any transfer of a beneficial interest
in a Global Note, shall be deemed to represent) to the Indenture
Trustee and the Note Registrar that the relevant conditions for
exemptive relief under at least one of the foregoing exemptions have
been satisfied.
The Plan Asset Regulation provides that, generally, the assets of
a corporation or partnership in which a Plan invests will not be
deemed for purposes of ERISA to be assets of such Plan if the equity
interest acquired by the investing Plan is a publicly-offered
security. A publicly-offered security, as defined in the Plan Asset
Regulation, is a security that is widely held, freely transferable and
registered under the Exchange Act.
If no exception under the Plan Asset Regulation applies, then if
a Plan (or a person investing Plan assets, such as an insurance
company general account) acquires an equity interest in the Trust
Fund, then the assets of the Trust Fund would be considered to be
assets of the Plan. Because the Loans held by the Trust Fund may be
deemed Plan assets of each Plan that purchases Securities, an
investment in the Securities by a Plan might be a prohibited
transaction under ERISA Sections 406 and 407 and subject to an excise
tax under Code Section 4975 and may cause transactions undertaken in
the course of operating the Trust Fund to constitute prohibited
transactions, unless a statutory or administrative exemption applies.
In Prohibited Transaction Class Exemption 83-1 ("PTCE 83-1"),
which amended Prohibited Transaction Class Exemption 81-7, the DOL
exempted from ERISA's prohibited transaction rules certain
transactions relating to the operation of residential mortgage pool
investment trusts and the purchase, sale and holding of "mortgage pool
pass-through certificates" in the initial issuance of such
certificates. PTCE 83-1 permits, subject to certain conditions,
transactions that might otherwise be prohibited between Plans and
Parties in Interest with respect to those Plans related to the
origination, maintenance and termination of mortgage pools consisting
of mortgage loans secured by first or second mortgages or deeds of
trust on single-family residential property, and the acquisition and
holding of certain mortgage pool pass-through certificates
representing an interest in such mortgage pools by Plans. If the
general conditions (discussed below) of PTCE 83-1 are satisfied,
investments by a Plan in Securities that represent interests in a Pool
consisting of Loans conforming to these requirements ("Single Family
Securities") will be exempt from the prohibitions of ERISA Sections
406(a) and 407 (relating generally to transactions with Parties in
Interest who are not fiduciaries) if the Plan purchases the Single
Family Securities at no more than fair
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market value and will be exempt from the prohibitions of ERISA Sections
406(b)(1) and (2) (relating generally to transactions with fiduciaries)
if, in addition, the purchase is approved by an independent fiduciary,
no sales commission is paid to the pool sponsor, the Plan does not
purchase more than 25% of all Single Family Securities, and at least
50% of all Single Family Securities are purchased by persons
independent of the pool sponsor or pool trustee. PTCE 83-1 does not
provide an exemption for transactions involving Subordinated
Securities. Accordingly, unless otherwise provided in the related
Prospectus Supplement, no transfer of a Subordinated Security or a
Security that is not a Single Family Security may be made to a Plan.
The discussion in this and the next succeeding paragraph applies
only to Single Family Securities. The Depositor believes that, for
purposes of PTCE 83-1, the term "mortgage pass-through certificate"
would include: (i) Securities issued in a Series consisting of only a
single Class of Securities; and (ii) Securities issued in a Series in
which there is only one Class of those particular Trust Securities;
provided, that the Securities in the case of clause (i), or the
Securities in the case of clause (ii), evidence the beneficial
ownership of both a specified percentage of future interest payments
(greater than 0%) and a specified percentage (greater than 0%) of
future principal payments on the Loans. It is not clear whether a
Class of Securities that evidences the beneficial ownership in a Trust
Fund divided into Loan groups, beneficial ownership of a specified
percentage of interest payments only or principal payments only, or a
notional amount of either principal or interest payments, or a Class
of Securities entitled to receive payments of interest and principal
on the Loans only after payments to other Classes or after the
occurrence of certain specified events would be a "mortgage
pass-through certificate" for purposes of PTCE 83-1.
PTCE 83-1 sets forth three general conditions that must be
satisfied for any transaction to be eligible for exemption: (i) the
maintenance of a system of insurance or other protection for the
pooled mortgage loans and property securing such loans, and for
indemnifying Holders against reductions in pass-through payments due
to property damage or defaults in loan payments in an amount not less
than the greater of one percent of the aggregate principal balance of
all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan; (ii) the existence of a pool
trustee who is not an affiliate of the pool sponsor; and (iii) a
limitation on the amount of the payment retained by the pool sponsor,
together with other funds inuring to its benefit, to not more than
adequate consideration for selling the mortgage loans plus reasonable
compensation for services provided by the pool sponsor to the Pool.
The Depositor believes that the first general condition referred to
above will be satisfied with respect to the Securities in a Series
issued without a subordination feature, or the unsubordinated
Securities only in a Series issued with a subordination feature;
provided, that the subordination and Reserve Account, subordination by
shifting of interests, the pool insurance or other form of credit
enhancement described herein (such subordination, pool insurance or
other form of credit enhancement being the system of insurance or
other protection referred to above) with respect to a Series of
Securities is maintained in an amount not less than the greater of one
percent of the aggregate Principal Balance of the Loans or the
Principal Balance of the largest Loan. See "Description of the
Securities" herein. In the absence of a ruling that the system of
insurance or other protection with respect to a Series of Securities
satisfies the first general condition referred to above, there can be
no assurance that these features will be so viewed by the DOL. The
Trustee will not be affiliated with the Depositor.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold Single
Family Securities must make its own determination as to whether the
first and third general conditions, and the specific conditions
described briefly in the preceding paragraph, of PTCE 83-1 have been
satisfied, or as to the availability of any other prohibited
transaction exemptions. Each Plan fiduciary should also determine
whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the Securities is appropriate
for the Plan, taking
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into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
The DOL issued to Bear, Stearns & Co. Inc., an individual
exemption (Prohibited Transaction Exemption 90-30; Exemption
Application No. D-8207, 55 Fed. Reg. 21461 (1990)) (the "Underwriter
Exemption"), which applies to certain sales and servicing of
"certificates" that are obligations of a "trust" with respect to which
Bear, Stearns & Co. Inc. is the underwriter, manager or co-manager of
an underwriting syndicate. The Underwriter Exemption provides relief
generally similar to that provided by PTCE 83-1, but is broader in
several respects.
The Underwriter Exemption contains several requirements, some of
which differ from those in PTCE 83-l. The Underwriter Exemption
contains an expanded definition of "certificate," which includes an
interest that entitles the Holder to pass-through payments of
principal, interest and/or other payments. The Underwriter Exemption
contains an expanded definition of "trust," which permits the trust
corpus to consist of secured consumer receivables. The definition of
"trust," however, does not include any investment pool unless, inter
alia, (i) the investment pool consists only of assets of the type that
have been included in other investment pools, (ii) certificates
evidencing interests in such other investment pools have been
purchased by investors other than Plans for at least one year prior to
the Plan's acquisition of certificates pursuant to the Underwriter
Exemption and (iii) certificates in such other investment pools have
been rated in one of the three highest generic rating categories of
the four credit rating agencies noted below. Generally, the
Underwriter Exemption holds that the acquisition of the certificates
by a Plan must be on terms (including the price for the certificates)
that are at least as favorable to the Plan as they would be in an
arm's length transaction with an unrelated party. The Underwriter
Exemption requires that the rights and interests evidenced by the
certificates not be "subordinated" to the rights and interests
evidenced by other certificates of the same trust. The Underwriter
Exemption requires that certificates acquired by a Plan have received
a rating at the time of their acquisition that is in one of the three
highest generic rating categories of Standard & Poor's, a division of
The McGraw-Hill Companies, Inc., Moody's Investors Service, Inc., Duff
& Phelps Credit Rating Co. or Fitch IBCA, Inc. The Underwriter
Exemption specifies that the pool trustee must not be an affiliate of
the pool sponsor, nor an affiliate of the Underwriter, the pool
servicer, any obligor with respect to mortgage loans included in the
trust constituting more than five percent of the aggregate unamortized
principal balance of the assets in the trust, or any affiliate of such
entities. Finally, the Underwriter Exemption stipulates that any Plan
investing in the certificates must be an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D of the Commission under the
Securities Act.
On July 21, 1997, the DOL published in the Federal Register an
amendment to the Underwriter Exemption, which extends exemptive relief
to certain mortgage-backed and asset-backed securities transactions
using pre-funding accounts for trusts issuing pass-through
certificates. The amendment generally allows mortgage loans or other
secured receivables (the "Obligations") supporting payments to
certificateholders, and having a value equal to no more than
twenty-five percent (25%) of the total principal amount of the
certificates being offered by the trust, to be transferred to the
trust within a 90-day or three-month period following the closing date
(the "Specified Funding Period"), instead of requiring that all such
Obligations be either identified or transferred on or before the
Closing Date. The relief is available when the following conditions
are met:
(1) The ratio of the amount allocated to the pre-funding
account to the total principal amount of the certificates
being offered (the "Specified Funding Limit") must not exceed
twenty-five percent (25%).
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(2) All Obligations transferred after the Closing Date
(the "Additional Obligations") must meet the same terms and
conditions for eligibility as the original Obligations used
to create the trust, which terms and conditions have been
approved by an Exemption Rating Agency.
(3) The transfer of such Additional Obligations to the
trust during the Specified Funding Period must not result in
the certificates to be covered by the Exemption receiving a
lower credit rating from an Exemption Rating Agency upon
termination of the Specified Funding Period than the rating
that was obtained at the time of the initial issuance of the
certificates by the trust.
(4) Solely as a result of the use of pre-funding, the
weighted average annual percentage interest rate for all of
the Obligations in the trust at the end of the Specified
Funding Period must not be more than 100 basis points lower
than the average interest rate for the Obligations
transferred to the trust on the Closing Date.
(5) In order to insure that the characteristics of the
Additional Obligations are substantially similar to the
original Obligations which were transferred to the Trust
Fund:
(i) the characteristics of the Additional
Obligations must be monitored by an insurer or other
credit support provider that is independent of the
depositor; or
(ii) an independent accountant retained by
the depositor must provide the depositor with a
letter (with copies provided to each Exemption
Rating Agency rating the certificates, the related
underwriter and the related trustee) stating whether
or not the characteristics of the Additional
Obligations conform to the characteristics described
in the related prospectus or prospectus supplement
and/or pooling and servicing agreement. In preparing
such letter, the independent accountant must use the
same type of procedures as were applicable to the
Obligations transferred to the trust as of the
Closing Date.
(6) The period of pre-funding must end no later than
three months or 90 days after the Closing Date or earlier in
certain circumstances if the pre-funding account falls below
the minimum level specified in the pooling and servicing
agreement or an Event of Default occurs.
(7) Amounts transferred to any pre-funding account and/or
capitalized interest account used in connection with the
pre-funding may be invested only in certain permitted
investments ("Permitted Investments").
(8) The related prospectus or prospectus supplement must
describe:
(i) any pre-funding account and/or
capitalized interest account used in connection with
a pre-funding account;
(ii) the duration of the period of
pre-funding;
(iii) the percentage and/or dollar amount
of the Specified Funding Limit for the trust; and
(iv) that the amounts remaining in the
pre-funding account at the end of the Specified
Funding Period will be remitted to
certificateholders as repayments of principal.
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(9) The related pooling and servicing agreement must
describe the Permitted Investments for the pre-funding
account and/or capitalized interest account and, if not
disclosed in the related prospectus or prospectus supplement,
the terms and conditions for eligibility of Additional
Obligations.
Neither PTCE 83-1 nor the Underwriter Exemption applies to a
trust which contains unsecured obligations.
Any Plan fiduciary that proposes to cause a Plan to purchase
Securities should consult with their counsel concerning the impact of
ERISA and the Code, the applicability of PTCE 83-1 and the Underwriter
Exemption, and the potential consequences in their specific
circumstances, prior to making such investment. Moreover, each Plan
fiduciary should determine whether under the general fiduciary
standards of investment procedure and diversification an investment in
the Securities is appropriate for the Plan, taking into account the
overall investment policy of the Plan and the composition of the
Plan's investment portfolio.
LEGAL MATTERS
The legality of the Securities of each Series, including certain
material federal income tax consequences with respect thereto, will be
passed upon for the Depositor by Brown & Wood LLP, One World Trade
Center, New York, New York 10048.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of
Securities, and no Trust Fund will engage in any business activities
or have any assets or obligations prior to the issuance of the related
Series of Securities. Accordingly, no financial statements with
respect to any Trust Fund will be included in this Prospectus or in
the related Prospectus Supplement.
RATING
It is a condition to the issuance of the Securities of each
Series offered hereby and by the Prospectus Supplement that they shall
have been rated in one of the four highest rating categories by the
nationally recognized statistical rating agency or agencies (each, a
"Rating Agency") specified in the related Prospectus Supplement.
Any such rating would be based on, among other things, the
adequacy of the value of the Trust Fund assets and any credit
enhancement with respect to the related Class and will reflect such
Rating Agency's assessment solely of the likelihood that the related
Holders will receive payments to which such Holders are entitled under
the related Agreement. Such rating will not constitute an assessment
of the likelihood that principal prepayments on the related Loans will
be made, the degree to which the rate of such prepayments might differ
from that originally anticipated or the likelihood of early optional
termination of the Series of Securities. Such rating should not be
deemed a recommendation to purchase, hold or sell Securities, inasmuch
as it does not address market price or suitability for a particular
investor. Such rating will not address the possibility that prepayment
at higher or lower rates than anticipated by an investor may cause
such investor to experience a lower than anticipated yield or that an
investor purchasing a Security at a significant premium might fail to
recoup its initial investment under certain prepayment scenarios.
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There is also no assurance that any such rating will remain in
effect for any given period of time or that it may not be lowered or
withdrawn entirely by the Rating Agencies in the future if in their
judgment circumstances so warrant. In addition to being lowered or
withdrawn due to any erosion in the adequacy of the value of the Trust
Fund assets or any credit enhancement with respect to a Series, such
rating might also be lowered or withdrawn because of, among other
reasons, an adverse change in the financial or other condition of a
credit enhancement provider or a change in the rating of such credit
enhancement provider's long term debt.
The amount, type and nature of credit enhancement, if any,
established with respect to a Series of Securities will be determined
on the basis of criteria established by each Rating Agency rating
Classes of such Series. Such criteria are sometimes based upon an
actuarial analysis of the behavior of mortgage loans in a larger
group. Such analysis is often the basis upon which each Rating Agency
determines the amount of credit enhancement required with respect to
each such Class. There can be no assurance that the historical data
supporting any such actuarial analysis will accurately reflect future
experience nor any assurance that the data derived from a large pool
of mortgage loans accurately predicts the delinquency, foreclosure or
loss experience of any particular pool of Loans. No assurance can be
given that values of any Properties have remained or will remain at
their levels on the respective dates of origination of the related
Loans. If the residential real estate markets should experience an
overall decline in property values such that the Principal Balances of
the Loans in a particular Trust Fund and any secondary financing on
the related Properties become equal to or greater than the value of
such Properties, the rates of delinquencies, foreclosures and losses
could be higher than those now generally experienced in the mortgage
lending industry. In additional, adverse economic conditions (which
may or may not affect real property values) may affect the timely
payment by mortgagors of scheduled payments of principal of and
interest on the Loans and, accordingly, the rates of delinquencies,
foreclosures and losses with respect to any Trust Fund. To the extent
that such losses are not covered by credit enhancement, such losses
will be borne, at least in part, by the Holders of one or more Classes
of the Securities of the related Series.
LEGAL INVESTMENT
Unless otherwise specified in the related Prospectus Supplement,
the Securities will not constitute "mortgage-related securities"
within the meaning of SMMEA. Accordingly, investors whose investment
authority is subject to legal restrictions should consult their own
legal advisors to determine whether and to what extent the Securities
constitute legal investments for them.
PLAN OF DISTRIBUTION
The Depositor may offer each Series of Securities through Bear,
Stearns & Co. Inc. ("Bear Stearns") or one or more other firms that
may be designated at the time of each offering of such Securities. The
participation of Bear Stearns in any offering will comply with
Schedule E to the By-Laws of the National Association of Securities
Dealers, Inc. The Prospectus Supplement relating to each Series of
Securities will set forth the specific terms of the offering of such
Series of Securities and of each Class within such Series, the names
of the underwriters, the purchase price of the Securities, the
proceeds to the Depositor from such sale, any securities exchange on
which the Securities may be listed, and, if applicable, the initial
public offering prices, the discounts and commissions to the
underwriters and any discounts and concessions allowed or reallowed to
certain dealers. The place and time of delivery of each Series of
Securities will also be set forth in the Prospectus Supplement
relating to such Series. Bear Stearns is an affiliate of the
Depositor.
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GLOSSARY OF TERMS
The following are abbreviated definitions of certain capitalized
terms used in this Prospectus. Unless otherwise provided in a
"Supplemental Glossary" in the Prospectus Supplement for a Series,
such definitions shall apply to capitalized terms used in such
Prospectus Supplement. The definitions may vary from those in the
related Agreement for a Series and the related Agreement for a Series
generally provides a more complete definition of certain of the terms.
Reference should be made to the related Agreement for a Series for a
more 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.
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"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.
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"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.
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"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.
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"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.
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