<PAGE>
PROSPECTUS SUPPLEMENT DATED DECEMBER 6, 1999
(to Prospectus dated August 5, 1999)
$250,000,000
Home Equity Loan-Backed Term Notes, Series 1999-3
Irwin Home Equity Loan Trust 1999-3
Issuer
Irwin Home Equity Corporation
Originator
Irwin Union Bank and Trust Company
Master Servicer
Bear Stearns Asset Backed Securities, Inc.
Depositor
- --------------------------------------------------------------------------------
You should consider carefully the risk factors beginning on page S-15 in this
prospectus supplement and page 3 in the prospectus.
- --------------------------------------------------------------------------------
The term notes will represent obligations of the trust created for Series 1999-3
and will not represent ownership interests in or obligations of Bear Stearns
Asset Backed Securities, Inc., Irwin Union Bank and Trust Company or any of
their affiliates. This prospectus supplement may be used to offer and sell the
term notes offered hereby only if accompanied by the prospectus.
Notes
The Irwin Home Equity Loan Trust 1999-3 includes three groups of
residential mortgage loans consisting of fixed-rate mortgage loans, fixed-rate
home equity loans and adjustable-rate home equity lines of credit. The trust
will also include funds on deposit in an account to be used to acquire home
equity loans and home equity lines of credit subsequent to the date of issuance
of the notes. The trust will issue three classes of term notes, the variable
funding notes and the certificates. Only the three classes of term notes are
offered hereby. You can find a list of these classes of term notes, together
with their note balances, note rates and certain other characteristics, on Page
S-5 of this prospectus supplement.
Credit Enhancement
Credit enhancement for the notes consists of:
o the portion of interest paid by the borrowers in excess of what is
necessary to pay interest earned on the notes;
o overcollateralization and limited cross-collateralization, to the extent
developed herein; and
o an irrevocable and unconditional financial guaranty insurance policy issued
by Ambac Assurance Corporation.
[Logo]
Underwriting
<TABLE>
<CAPTION>
Initial
Term Note Price to Proceeds to
Balance(1) Note Rate Public(2) Depositor(3)
<S> <C> <C> <C> <C>
Class A-1 Term Notes......... $130,000,000 7.520% 99.99577% 99.69577%
Class A-2 Term Notes......... $ 70,000,000 7.690% 99.97750% 99.67750%
Class A-3 Term Notes......... $ 50,000,000 Variable 100.00000% 99.70000%
Total...................... $250,000,000 $249,978,750 $249,228,750
</TABLE>
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(1) Plus or minus 5%.
(2) Plus accrued interest, if any, from December 1, 1999, except with respect
to the Class A-3 Term Notes.
(3) Before deducting expenses, estimated to be approximately $250,000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the term notes or determined that this
prospectus supplement or the prospectus is accurate or complete. It is illegal
for anyone to tell you otherwise.
The underwriters listed below will offer the term notes subject to
certain conditions. See "Method of Distribution" in this prospectus supplement.
Delivery of the term notes is expected to be made in book entry form on or about
December 15, 1999. The term notes will be offered in the United States and
Europe.
Bear, Stearns & Co. Inc. Prudential Securities
(1)
<PAGE>
Important notice about information presented in this prospectus supplement and
the accompanying prospectus
We provide information to you about the term notes in two separate
documents that provide progressively more detail:
o the accompanying prospectus, which provides general information, some
of which may not apply to your series of term notes; and
o this prospectus supplement, which describes the specific terms of your
series of term notes.
If the description of your term notes in this prospectus supplement differs from
the related description in the accompanying prospectus, you should rely on the
information in this prospectus supplement.
You can find a listing of the pages where capitalized terms used both in the
prospectus and prospectus supplement are defined under the caption "Index of
Defined Terms" beginning on page 88 in the accompanying prospectus and under the
caption "Index of Defined Terms" beginning on page S-86 in this prospectus
supplement.
The Depositor's principal offices are located at 245 Park Avenue, New York, New
York 10167, and its phone number is (212) 272-2000.
Table of Contents
Prospectus Supplement
Page
SUMMARY...........................................S-3
RISK FACTORS......................................S-15
INTRODUCTION......................................S-20
DESCRIPTION OF THE MORTGAGE LOANS.................S-20
IRWIN FUNDING CORP................................S-48
IRWIN HOME EQUITY CORPORATION.....................S-48
PREPAYMENT AND YIELD CONSIDERATIONS...............S-51
THE MASTER SERVICER...............................S-57
SERVICING OF THE MORTGAGE LOANS...................S-58
THE ISSUER........................................S-61
THE OWNER TRUSTEE.................................S-62
THE INDENTURE TRUSTEE.............................S-62
DESCRIPTION OF THE SECURITIES.....................S-62
DESCRIPTION OF THE MORTGAGE LOAN SALE
AGREEMENT AND THE PURCHASE AND SALE AGREEMENT S-73
DESCRIPTION OF THE SALE AND SERVICING AGREEMENT...S-76
DESCRIPTION OF THE TRUST AGREEMENT AND INDENTURE..S-77
DESCRIPTION OF THE POLICY.........................S-80
THE ENHANCER......................................S-81
CERTAIN FEDERAL INCOME TAX CONSEQUENCES...........S-83
ERISA CONSIDERATIONS..............................S-83
LEGAL INVESTMENT..................................S-84
METHOD OF DISTRIBUTION............................S-84
EXPERTS...........................................S-85
LEGAL MATTERS.....................................S-85
RATINGS...........................................S-85
INDEX OF DEFINED TERMS............................S-86
ANNEX I GLOBAL CLEARANCE, SETTLEMENT AND TAX
DOCUMENTATION PROCEDURES...................... A-I-1
Prospectus
Page
RISK FACTORS.........................................3
DESCRIPTION OF THE SECURITIES........................8
THE TRUST FUNDS.....................................13
ENHANCEMENT.........................................22
SERVICING OF LOANS..................................25
THE AGREEMENTS......................................32
CERTAIN LEGAL ASPECTS OF THE LOANS..................42
THE DEPOSITOR.......................................53
USE OF PROCEEDS.....................................53
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS...........53
STATE TAX CONSIDERATIONS............................76
FASIT SECURITIES....................................76
ERISA CONSIDERATIONS................................79
LEGAL MATTERS.......................................85
FINANCIAL INFORMATION...............................85
AVAILABLE INFORMATION...............................85
INCORPORATION OF CERTAIN INFORMATION
BY REFERENCE......................................85
RATING..............................................86
LEGAL INVESTMENT....................................87
PLAN OF DISTRIBUTION................................87
INDEX OF DEFINED TERMS..............................88
S-2
<PAGE>
SUMMARY
The following summary is a general overview of the term notes offered
hereby and does not contain all of the information that you should consider in
making your investment decision. To understand the terms of the term notes, you
should read carefully this entire document and the accompanying prospectus.
Title of the offered securities...... Home Equity Loan-Backed Term Notes,
Series 1999-3.
Issuer............................... Irwin Home Equity Loan Trust 1999-3.
Depositor............................ Bear Stearns Asset Backed Securities,
Inc.
Transferor........................... Irwin Funding Corp.
Originator........................... Irwin Home Equity Corporation.
Master servicer...................... Irwin Union Bank and Trust Company.
Owner trustee........................ Wilmington Trust Company.
Indenture trustee.................... Norwest Bank Minnesota, National
Association.
Enhancer............................. Ambac Assurance Corporation.
Mortgage loans....................... Initially, 1,907 closed-end fixed-rate
mortgage loans, 1,326 closed-end,
fixed-rate home equity loans with
combined loan-to-value ratios in excess
of 100% and 1,833 adjustable-rate home
equity lines of credit with an
aggregate principal balance of
approximately $166,813,828.60, as of
the statistical calculation date,
secured by primarily first, second or
more junior mortgages or deeds of trust
on one- to four-family residential
properties. Additional fixed-rate
mortgage loans, fixed-rate home equity
loans, adjustable-rate home equity
lines of credit and additional draws on
the initial home equity lines of
credit, originated or acquired by the
transferor prior to the closing date
will be sold to the issuer on the
closing date. Along with the initial
mortgage loans and the additional
mortgage loans, the issuer will also
purchase from Irwin Union Bank and
Trust Company fixed-rate mortgage
loans, fixed-rate home equity loans and
adjustable-rate home equity lines of
credit prior to May 31, 2000 and
additional draws on previously acquired
home-equity lines of credit prior to
December 31, 2003.
Statistical calculation date......... The close of business on October 31,
1999.
S-3
<PAGE>
Cut-off date......................... The close of business on November 30,
1999 will be the initial cut-off date.
In the case of any mortgage loan
originated after that date and sold to
the trust, the applicable date as of
which such mortgage loan is sold to the
Trust.
Closing date......................... On or about December 15, 1999.
Payment dates........................ Beginning in January 2000 on the 25th
day of each month or, if the 25th day
is not a business day, on the next
business day.
Form of term notes................... Book-entry form, same day funds through
DTC, Cedel or Euroclear.
S-4
<PAGE>
Term Notes
<TABLE>
<CAPTION>
Initial
Note Term Note Initial Rating Final Scheduled
Class Rate Balance (Moody's/S&P)(1) Payment Date(2) Designations
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
A-1 7.520%(3) $130,000,000 Aaa/AAA November 25, 2009 Senior/Fixed Rate
A-2 7.690%(4) $70,000,000 Aaa/AAA October 25, 2009 Senior/Fixed Rate
A-3 Variable(5) $50,000,000 Aaa/AAA February 25, 2012 Senior/Variable
Rate
Total
Term $250,000,000
Notes
</TABLE>
(1) See "Ratings" in this prospectus supplement.
(2) Based on the assumption that the Master Servicer has exercised its option
to repurchase all of the mortgage loans in the related loan group and the
other assumptions described in this prospectus supplement. See "Prepayment
and Yield Considerations" herein. Due to losses and prepayments on the
mortgage loans in each loan group, the final payment dates on each class of
term notes may be substantially earlier than such dates. Under certain
circumstances, the final payment dates on each class of term notes may be
later than such dates.
(3) The note rate will be 8.020% per annum after the related Step-Up Date. The
"Step-Up Date" for loan group I is the first payment date on which the
aggregate outstanding principal balance of the mortgage loans in such loan
group is less than 10% of the sum of (x) the aggregate principal balance of
the mortgage loans in such loan group as of the related cut-off date and
(y) the amount on deposit in the pre-funding account on the closing date
that is available to be used to purchase mortgage loans for such loan
group.
(4) The note rate will be 8.190% per annum after the related Step-Up Date. The
"Step-Up Date" for loan group II is the first payment date on which the
aggregate outstanding principal balance of the mortgage loans in such loan
group is less than 10% of the sum of (x) the aggregate principal balance of
the mortgage loans in such loan group as of the related cut-off date and
(y) the amount on deposit in the pre-funding account on the closing date
that is available to be used to purchase mortgage loans for such loan
group.
(5) On any payment date, equal to the least of (i) LIBOR plus 0.370% (or, for
any payment after the related Step-Up Date, LIBOR plus 0.740%) per annum,
(ii) the weighted average net mortgage interest rate of the mortgage loans
in loan group III, and (iii) 14.50% per annum. The "Step-Up Date" for loan
group III is the first payment date on which the aggregate outstanding
principal balance of the mortgage loans in such loan group is less than 10%
of the sum of (x) the aggregate principal balance of the mortgage loans in
such loan group as of the related cut-off date and (y) the amount on
deposit in the pre-funding account on the closing date that is available to
be used to purchase mortgage loans for such loan group.
S-5
<PAGE>
The Trust
The depositor will establish the Irwin Home Equity Loan Trust 1999-3, a Delaware
business trust. The trust will be established pursuant to a trust agreement,
dated as of November 30, 1999, between the depositor and the owner trustee. The
trust will issue the notes pursuant to an indenture dated as of November 30,
1999, between the issuer and the indenture trustee. The assets of the trust will
include:
o the unpaid principal balance of the mortgage loans as of the close of
business on the initial cut-off date;
o the unpaid principal balance as of the related cut-off date of mortgage
loans added to the property of the trust after the closing date; and
o any additions to the home equity lines of credit as a result of draws or
new advances of money made pursuant to the applicable loan agreement after
the cut-off date or related subsequent cut-off date.
The unpaid principal balance of a home equity line of credit on any day will be
equal to:
o its cut-off date balance,
o plus any additional balances relating to that home equity line of credit
sold to the issuer before that day,
o minus all collections credited against the principal balance of that home
equity line of credit in accordance with the related loan agreement since
the cut-off date or related subsequent cut-off date. The principal balance
of a liquidated home equity line of credit after the final recovery of
related liquidation proceeds will be zero.
In addition to the mortgage loans conveyed to the trust on the closing date, the
property of the trust will include cash on deposit in certain accounts,
including the pre-funding account, the funding account, and other collections on
the mortgage loans. The trust will also include a financial guaranty insurance
policy provided by Ambac Assurance Corporation, which will guarantee certain
payments on the notes.
Payments of interest and principal on the notes will be made only from payments
received in connection with the mortgage loans and the financial guaranty
insurance policy to the extent described herein.
Mortgage Loans
The statistical information presented in this prospectus supplement reflects the
pool of initial mortgage loans as of the statistical calculation date. Along
with the initial mortgage loans to be acquired by the trust on the closing date,
it is expected that the trust will also acquire on the closing date certain
additional mortgage loans. It is expected that the aggregate principal balance
of such additional mortgage loans will be approximately $23,000,000. The
additional mortgage loans will be selected using generally the same criteria
used to select the initial mortgage loans.
The mortgage loans to be acquired by the trust on the closing date will include
initial mortgage loans with the following characteristics as of the statistical
calculation date:
o fixed-rate, closed-end mortgage loans secured by first or second mortgages
or deeds of trust on residential properties with original terms to maturity
of up to 30 years. No more than approximately 68.58% of these mortgage
loans (by statistical calculation date balance) are secured by second
mortgages or deeds of trust and the remainder are secured by first
mortgages or deeds of trust. These mortgage loans are expected to have an
aggregate principal balance of approximately $81,922,554.82 as of the
statistical calculation date;
o fixed-rate, closed-end home equity loans with combined loan-to-value ratios
in excess of 100% and fixed-rate immediate credit loans with combined
loan-to-value ratios generally less than 100% and original principal
balances less than or equal to $20,000, secured by first, second or more
junior mortgages or deeds of trust on residential properties. No more than
approximately 99.81% of these mortgage loans (by statistical calculation
date balances) are secured by second or more junior mortgages or deeds of
S-6
<PAGE>
trust and the remainder are secured by first mortgages or deeds of trust.
These mortgage loans are expected to have an aggregate principal balance of
approximately $42,776,444.15 as of the statistical calculation date;
o adjustable-rate home equity lines of credit evidenced by the related loan
agreements, with combined loan-to-value ratios in excess of 100% and
adjustable-rate immediate credit home equity lines of credit with combined
loan-to-value ratios which may be greater than 100% and original principal
balances less than or equal to $20,000, secured by first, second or more
junior mortgages or deeds of trust on residential properties. No more than
approximately 99.95% of these mortgage loans (by statistical calculation
date balances) are secured by second or more junior mortgages or deeds of
trust and the remainder are secured by first mortgages or deeds of trust.
These mortgage loans are expected to have an aggregate principal balance of
approximately $42,114,829.63 as of the statistical calculation date;
Mortgage Loan Groups
The mortgage loans assigned and transferred to the issuer and pledged to the
indenture trustee as of the closing date will be divided into three loan groups.
Loan group I is expected to include initial mortgage loans which have an
aggregate principal balance of approximately $81,922,554.82 as of the
statistical calculation date and which consist solely of (i) fixed-rate,
closed-end mortgage loans secured by first mortgages or deeds of trust on
residential properties and (ii) fixed-rate, closed-end home equity loans secured
by first or second mortgages or deeds of trust on residential properties with
combined loan-to-value ratios generally less than or equal to 100%. Loan group
II is expected to include initial mortgage loans which have an aggregate
principal balance of approximately $42,776,444.15 as of the statistical
calculation date and which consist solely of (i) fixed-rate, closed-end home
equity loans secured by first or second mortgages or deeds of trust on
residential properties with combined loan-to-value ratios in excess of 100% and
(ii) fixed rate immediate credit loans secured by first, second or more junior
mortgages or deeds of trust on residential properties with combined
loan-to-value ratios generally less than 100% and original principal balances
less than or equal to $20,000. Loan Group III is expected to include initial
mortgage loans which have an aggregate principal balance of approximately
$42,114,829.63 as of the statistical calculation date and which consist solely
of (i) adjustable-rate home equity lines of credit secured by first or second
mortgages or deeds of trust on residential properties with combined
loan-to-value ratios in excess of 100% and (ii) adjustable-rate immediate credit
home equity lines of credit secured by first, second or more junior mortgages or
deeds of trust on residential properties with combined loan-to-value ratios
which may be greater than 100% and original principal balances less than or
equal to $20,000.
Approximately 31.42% of the mortgage loans in loan group I, as of the
statistical calculation date, are secured by first mortgages or deeds of trust,
and the remainder are secured by second mortgages or deeds of trust. In
addition, the mortgage loans in loan group I have the following characteristics
as of the statistical calculation date:
Range of principal balances $2,395.69 to
$485,424.07
Average principal balance $42,958.86
Range of mortgage interest rates 7.250% to
19.400%
Weighted average mortgage interest rate 11.576%
Range of original terms to maturity 120 to 360 months
Weighted average original term to maturity 232 months
Range of remaining terms to maturity 113 to 360 months
Weighted average remaining term to maturity 228 months
Range of combined loan-to-value ratios 10.20% to 100.00%
Weighted average combined loan-to-value ratios 91.04%
Approximately 0.19% of the mortgage loans in loan group II, as of the
statistical calculation date, are secured by first mortgages or deeds of trust,
and the remainder are secured by second or more junior mortgages or deeds of
trust. In addition, the mortgage loans in loan group II have the following
characteristics as of the statistical calculation date:
S-7
<PAGE>
Range of principal balances $9,839.86 to
$88,300.00
Average principal balance $32,259.76
Range of mortgage interest rates 6.000% to 19.900%
Weighted average mortgage interest rate 14.623%
Range of original terms to maturity 120 to 360 months
Weighted average original term to maturity 186 months
Range of remaining terms to maturity 104 to 359 months
Weighted average remaining term to maturity 183 months
Range of combined loan-to-value ratios 11.04% to 158.33%
Weighted average combined loan-to-value ratios 116.13%
Approximately 0.05% of the mortgage loans in loan group III, as of the
statistical calculation date, are secured by first mortgages or deeds of trust,
and the remainder are secured by second or more junior mortgages or deeds of
trust or have an indeterminate lien status. In addition, the mortgage loans in
loan group III have the following characteristics as of the statistical
calculation date:
Range of principal balances $1,350.00 to
$80,000.00
Average principal balance $22,975.90
Range of mortgage interest rates 8.240% to 24.900%
Weighted average mortgage interest rate 14.320%
Range of maximum mortgage interest rates 15.990% to 28.000%
Range of minimum mortgage interest rates 5.400% to 17.150%
Weighted average maximum mortgage interest rates 21.061%
Weighted average minimum mortgage interest rates 12.120%
Range of original terms to maturity 180 to 240 months
Weighted average original term to maturity 240 months
Range of remaining terms to maturity 175 to 241 months
Weighted average remaining term to maturity 234 months
Range of combined loan-to-value ratios 10.63% to 162.82%
Weighted average combined loan-to-value ratios 111.97%
See "Description of the Mortgage Loans" in this prospectus supplement.
The Class A-1 Term Notes will be generally entitled to receive collections on
the mortgage loans in loan group I, the Class A-2 Term Notes will be generally
entitled to receive collections on the mortgage loans in loan group II and the
Class A-3 Term Notes and variable funding notes will be generally entitled to
receive collections on the mortgage loans in loan group III.
The Variable Funding Notes
In addition to the term notes, the trust will also issue Home Equity Loan-Backed
Variable Funding Notes, Series 1999-3. The variable funding notes will not be
offered by this prospectus supplement.
The Certificates
The trust will also issue Home Equity Loan-Backed Certificates, Series 1999-3,
which will not be offered by this prospectus supplement. The certificates will
be issued pursuant to the trust agreement and will represent the beneficial
ownership interests in the trust.
Pre-Funding Account
On the closing date, an amount equal to the excess of the aggregate initial
principal balance of the term notes plus the initial overcollateralization
amount, if any, required by the enhancer, over the aggregate principal balance
of the initial mortgage loans and the additional mortgage loans acquired by the
trust on the closing date will be deposited from the proceeds of the sale of the
term notes into a pre-funding account. Approximately $41,400,000 will be
allocated to purchasing subsequent mortgage loans for loan group I,
approximately $19,500,000 will be allocated to purchasing subsequent home equity
loans for loan group II and approximately $5,800,000 will be allocated to
purchasing subsequent home equity lines of credit for loan group III. The
transferor will be obligated to sell mortgage loans to the trust after the
closing date and the trust will be obligated, subject to the consent of the
enhancer, to purchase such subsequent mortgage loans from funds on deposit in
the pre-funding account during the period from the closing date until the
earliest of (i) the date on which the amount on deposit in the pre-funding
account is less than $100,000, (ii) May 31, 2000 and (iii) the occurrence, if
any, of a servicer default under the sale and servicing agreement, a managed
amortization event or a rapid amortization event, as further described herein.
The subsequent mortgage loans, as well as the initial mortgage loans and the
additional mortgage loans, will conform to certain specified characteristics.
Amounts on deposit in the pre-funding account will be invested in permitted
investments specified in the
S-8
<PAGE>
indenture. Any amount remaining in the pre-funding account at the end of the
pre-funding period described above that was allocated to purchase subsequent
mortgage loans for loan groups I and II will be paid to the related class of
noteholders as a payment of principal. Any amount remaining in the pre-funding
account at the end of the pre-funding period described above that was allocated
to purchase subsequent home equity lines of credit for loan group III will be
used to purchase additional balances through the end of the managed amortization
period for the Class A-3 Term Notes, as described in this prospectus supplement,
subject to certain conditions.
We refer you to "Description of the Mortgage Loans--Conveyance of Subsequent
Mortgage Loans, the Pre-Funding Account and the Funding Account" in this
prospectus supplement for further information.
Capitalized Interest Account
On the closing date, the transferor, if required by the enhancer, will make a
cash deposit from the proceeds of the sale of the notes into a capitalized
interest account held by the indenture trustee, unless a letter of credit
evidencing the availability of such amount is delivered to the owner trustee on
the closing date. Any letter of credit must be in form and substance, and from a
provider, acceptable to the enhancer. Amounts on deposit in the capitalized
interest account will be withdrawn, or drawings under such letter of credit will
be made, on each payment date during the pre-funding period to fund portions of
the interest payments on the notes to the extent set forth in the indenture and
the sale and servicing agreement.
We refer you to "Description of the Securities , Capitalized Interest Account"
in this prospectus supplement for further information.
Funding Account
An account designated the "funding account" will be set up with the indenture
trustee on the closing date. On each payment date during the revolving period
for the Class A-1 Term Notes and the managed amortization period for the Class
A-3 Term Notes, the indenture trustee will deposit principal collections, with
respect to loan group I, and the amount equal to the additional balances arising
under home equity lines of credit, with respect to loan group III, for the
related collection period into the funding account, and will apply them to buy
more mortgage loans, with respect to loan group I, and such additional balances,
with respect to loan group III, to the extent they are available. If not all
amounts deposited in the funding account have been applied to buy mortgage loans
and additional balances at the end of the revolving period or the managed
amortization period, as the case may be, for the related Class of notes, the
amount left in the funding account will be paid to the related noteholders as a
payment of principal.
We refer you to "Description of the Mortgage Loans--Conveyance of Subsequent
Mortgage Loans, the Pre-Funding Account and the Funding Account" in this
prospectus supplement for further information.
Interest Payments
Interest payments on each class of the notes will be made monthly on each
payment date, beginning in January 2000, at the respective note rates described
on page S-5 in this prospectus supplement. The interest period for the Class A-1
and Class A-2 Term Notes for each payment date will be the calendar month
preceding the month in which that payment date occurs. Interest on the Class A-3
Term Notes for each payment date will accrue from the preceding payment date
(or, in the case of the first payment date, from the closing date) through the
day before that payment date, on the basis of the actual number of days in that
interest period and a 360-day year.
All interest payments on the notes for any payment date will be allocated to the
notes based on their respective interest accruals. All interest payments on the
Class A-3 Term Notes and the variable funding notes will be allocated to such
classes of notes pro rata based on their respective interest accruals. The
interest rate on the variable funding notes for any payment date will not
significantly exceed the note rate on the Class A-3 Term Notes for the related
interest period.
S-9
<PAGE>
Principal Payments
With respect to any payment date during the revolving period for the Class A-1
Term Notes, no principal will be paid on the Class A-1 Term Notes, and all
principal collections for the related loan group will be deposited into the
funding account and used to purchase additional mortgage loans for such loan
group. On each payment date during the managed amortization period for the Class
A-3 Term Notes, the aggregate amount payable as principal of the Class A-3 Term
Notes will be equal to net principal collections for the related loan group for
that payment date, as further described in this prospectus supplement. The Class
A-1 and Class A-2 Term Notes will not have a managed amortization period. The
Class A-2 and Class A-3 Term Notes will not have a revolving period. On each
payment date during the rapid amortization period for each class of notes, the
aggregate amount payable as principal of such class of notes will be equal to
principal collections for that payment date for the related loan group. In
addition, on each payment date, to the extent of funds available for that
purpose, holders of the related class of term notes and the holders of the
variable funding notes will be entitled to get certain additional amounts in
reduction of the note balance of the related notes, generally equal to
liquidation loss amounts, as further described in this prospectus supplement.
All principal payments due and payable on the Class A-3 Term Notes and the
variable funding notes will be allocated to such classes of notes pro rata based
on the outstanding term note balances or variable funding balances thereof until
paid in full. In no event will principal payments on each class of notes on any
payment date exceed the related term note balance (or the variable funding
balance in the case of the variable funding notes) of those notes on that
payment date. On the final payment date, principal will be due and payable on
the notes in an amount equal to the related term note balance (or the variable
funding balance in the case of the variable funding notes) remaining outstanding
on that payment date.
As to the Class A-1 Term Notes, the revolving period will be the period
beginning on the closing date and ending on the earlier of (i) April 30, 2000
and (ii) the occurrence of certain rapid amortization events; and the rapid
amortization period will be the period beginning on the first payment date
following the end of the revolving period and ending upon the termination of the
issuer.
As of the Class A-2 Term Notes, the rapid amortization period will be the period
beginning on the closing date and ending upon the termination of the issuer.
As to the Class A-3 Term Notes, the managed amortization period will be the
period beginning on the closing date and ending on the earlier of December 31,
2003 and the occurrence of certain rapid amortization events; and the rapid
amortization period will be the period beginning on the earlier of the first
payment date following the end of the managed amortization period and the
occurrence of certain rapid amortization events, and ending upon the termination
of the issuer.
The amortization periods refer to the rapid amortization period, in the case of
the Class A-1 and Class A-2 Term Notes, and to the managed amortization period
and the rapid amortization period, in the case of the Class A-3 Term Notes.
We refer you to "Description of the Securities--Priority of Distributions" in
this prospectus supplement for a description of the allocation of principal
payments on the term notes.
Reserve Account
An account designated the "reserve account" will be set up with the indenture
trustee on the closing date. On each payment date, if the aggregate
overcollateralization amount for all loan groups is less than the aggregate
overcollateralization target amount for all loan groups, the amount of any
remaining excess spread for each loan group will be deposited in the reserve
account to be applied to cover any unpaid current interest with respect to the
term notes backed by any loan group and any liquidation losses for each loan
group not otherwise covered by principal and interest collections from such loan
group. To the extent that the aggregate overcollateralization amount for all
loan groups (including amounts, if any, on deposit in the funding account, the
pre-funding account and the reserve account) equals or exceeds the aggregate
overcollateralization
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target amount for all loan groups, any funds on deposit in the reserve account
above the amount required to achieve such overcollateralization target amount,
as of such date, will no longer be available to cover unpaid current interest or
liquidation losses.
We refer you to "Description of the Securities--Priority of Distributions" in
this prospectus supplement for further information.
Priority of Payments on the Notes
Payments of principal and interest on the mortgage loans will be collected each
month. After retaining its master servicing fee and amounts that reimburse the
master servicer or the subservicer for reimbursable expenses, the master
servicer will forward all collections on the mortgage loans to the indenture
trustee.
The aggregate amount of such monthly collections is described under the heading
"Description of the Sale and Servicing Agreement , Collections" in this
prospectus supplement.
o With respect to each payment date, the portion of interest collections for
each loan group available to be applied towards the payment of interest on
the related class of notes will equal interest collections for such loan
group for such payment date.
o The portion of principal collections for each loan group available to be
applied towards the payment of principal on the related class of notes will
equal:
o at any time during the applicable revolving period, if any, zero,
o at any time during the applicable managed amortization period, if any,
net principal collections on the home equity lines of credit and the
immediate credit home equity lines of credit for such payment date and
o at any time during the rapid amortization periods, principal
collections for such loan group for such payment date.
During the revolving period for the Class A-1 Term Notes, principal collections
for the related loan group will be applied by the trust to buy mortgage loans
for such loan group, to the extent mortgage loans are available. During the
period from the closing date to the end of the managed amortization period for
the Class A-3 Term Notes, principal collections will also be applied to purchase
additional balances for the related loan group, to the extent additional
balances are available. Principal collections will no longer be applied to
acquire mortgage loans after the end of the revolving period for the Class A-1
Term Notes and will no longer be applied to buy additional balances after the
end of the managed amortization period for the Class A-3 Term Notes.
On each payment date, principal and interest collections with respect to each
loan group will be allocated, together with any insured payment by the enhancer,
as follows:
Step 1
To pay any prepayment penalties collected on the mortgage loans in such loan
group to the holder of the certificates;
Step 2
To pay the enhancer the accrued and unpaid premium for the policy, and to pay
the indenture trustee any accrued and unpaid indenture trustee fees;
Step 3
To pay accrued and unpaid interest due on the related class of term notes and,
in the case of the Class A-3 Term Notes, the variable funding notes, pro rata;
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Step 4
To pay the principal distribution amount for loan groups I and II, to the
holders of the Class A-1 and Class A-2 term notes, respectively, until the
respective note balance thereof has been reduced to zero; and the principal
distribution amount for loan group III, during the managed amortization period,
to the holders of the Class A-3 Term Notes and, during the rapid amortization
period, to the holders of the Class A-3 Term Notes and variable funding notes,
pro rata, until the respective note balances thereof have been reduced to zero;
Step 5
To reimburse the enhancer for any prior draws on the policy;
Step 6
During the revolving period for the Class A-1 Term Notes, to the funding
account, the amount (but not in excess of the related excess spread) necessary
to be applied on such payment date so that the overcollateralization amount for
the related loan group is not less than the overcollateralization target amount
for such loan group;
Step 7
During the amortization periods for each class of term notes, to the note
payment account, the amount (but not in excess of the related excess spread for
the related loan group) necessary to be applied on such payment date so that the
overcollateralization amount for such loan group is not less than the
overcollateralization target amount for such loan group;
Step 8
If the aggregate overcollateralization amount for all loan groups is less than
the aggregate overcollateralization target amount for all loan groups, the
remaining excess spread for each loan group shall be deposited in the reserve
account to be applied pursuant to step 9 below or, at such time, if any, that
the aggregate overcollateralization amount for all loan groups equals or exceeds
the aggregate overcollateralization target amount for all loan groups, the
remaining excess spread for each loan group, together with any funds on deposit
in the reserve account, shall be applied pursuant to steps 10 through 13 below;
Step 9
From any funds on deposit in the reserve account, the amount (but not in excess
of the amount on deposit in the reserve account) of any current interest not
paid pursuant to step 3 above or liquidation loss amounts for each loan group
not otherwise covered by payments pursuant to steps 4, 6 and 7 above, for
payment to the holders of the related class of term notes and, if applicable,
variable funding notes, pro rata, based on the amount of the unpaid current
interest or liquidation loss amounts;
Step 10
To pay the enhancer any other amounts owed pursuant to the insurance agreement;
Step 11
To the extent remaining unpaid by the master servicer, to pay the indenture
trustee any amount owing it under the indenture;
Step 12
To pay the holders of the Class A-3 Term Notes and variable funding notes pro
rata, any interest carry-forward amounts from any prior payment date, together
with interest thereon at the applicable note rate; and
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Step 13
To pay any remaining amount to the holder of the certificates.
Principal payments on the term notes will be made in the amounts and in the
order described under "Description of the Notes , Priority of Distributions" in
this prospectus supplement.
Credit Enhancement
The credit enhancement provided for the benefit of the notes consists of:
Excess Spread. The weighted average mortgage loan rate is generally expected to
be higher than the sum of (a) the servicing fees, (b) the trustee fees, (c) the
weighted average note rate and (d) the premium payable to the enhancer. On each
payment date, excess spread generated during the related collection period will
be available to cover losses and build overcollateralization.
Overcollateralization and Limited Cross-collateralization. During the revolving
period for the Class A-1 Term Notes, excess spread, to the extent available,
will be deposited in the funding account to be applied towards acquiring
subsequent mortgage loans such that the overcollateralization amount for loan
group I is not less than the overcollateralization target amount for such loan
group. In addition, during the amortization periods, a portion or all of the
excess spread, to the extent available, will be applied to make principal
payments on the notes; such application will cause the aggregate note balance of
the notes to amortize more rapidly than the mortgage loans, resulting in
overcollateralization.
As described in step 9 above, the indenture will allow any remaining excess
spread for a loan group to be deposited into the reserve account to be applied
to cover any remaining current interest or liquidation losses on other loan
groups that are not otherwise covered by interest collections and liquidation
collections for such other loan groups. Such application of any remaining excess
spread will continue until the aggregate overcollateralization amount for all
loan groups equals or exceeds the aggregate overcollateralization target amount
for all loan groups.
Financial Guaranty Insurance Policy. The enhancer will unconditionally and
irrevocably guarantee, subject to the provisions in the policy: (a) timely
payment of current interest, (b) the amount of any losses not covered by excess
spread, over-collateralization, crosscollateralization or withdrawals from the
reserve account, and (c) the payment of any outstanding principal on the term
notes and the variable funding notes on the final insured payment date of June
25, 2031. The financial guaranty insurance policy is not cancelable for any
reason.
See "Description of the Policy" herein and "Enhancement" in the prospectus.
Optional Redemption
With respect to each of the three loan groups, the master servicer may, at its
option repurchase all but not less than all of the mortgage loans in a loan
group on any payment date on which the aggregate outstanding principal balance
of the mortgage loans in such loan group (after applying payments received in
the related collection period) is less than 10% of the sum of (x) the aggregate
principal balance of the mortgage loans in such loan group as of the related
cut-off date and (y) the amount on deposit in the pre-funding account on the
closing date that is available to be used to purchase mortgage loans for such
loan group. No such optional repurchase will be permitted without the prior
written consent of the enhancer if it would result in a draw on the financial
guaranty insurance policy.
An exercise of the optional redemption for any loan group will cause the
aggregate outstanding note balance of the related class or classes of notes to
be paid in full with accrued interest sooner than it otherwise would have been
paid.
See "Description of the Securities , Maturity and Optional Redemption" in this
prospectus supplement and "The Agreements , Termination" in the prospectus.
Ratings
When issued, the term notes will receive the ratings shown on page S-5 of this
prospectus supplement. A security rating is not a recommendation to buy, sell or
hold a security and is subject to change or withdrawal at any
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time by the assigning rating agency. The ratings also do not address the rate of
principal prepayments on the mortgage loans or the likelihood of the payment of
any interest carry-forward amounts. The rate of prepayments, if different than
originally anticipated, could adversely affect the yield realized by holders of
the term notes.
See "Ratings" in this prospectus supplement.
Legal Investment
The term notes will not be "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984. You should consult your legal
advisors in determining whether and to what extent the term notes constitute
legal investments for you.
See "Legal Investment" in this prospectus supplement for important information
concerning possible restrictions on ownership of the term notes by regulated
institutions.
ERISA Considerations
Subject to important considerations, the depositor expects that the term notes
may be purchased by persons investing assets of employee benefit plans or
individual retirement accounts. Plans should consult with their legal advisors
before investing in the term notes.
See "ERISA Considerations" in the prospectus supplement and in the accompanying
prospectus.
Tax Status
For federal income tax purposes, the term notes will be treated as debt. The
trust itself will not be subject to tax.
See "Certain Federal Income Tax Consequences" in this prospectus supplement and
"Certain Federal Income Tax Considerations" in the accompanying prospectus.
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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 term note.
Unpredictability of Approximately 32.48% of the mortgagors may,
Prepayments and its Effect without penalty, prepay their mortgage loans
on Yields in whole or in part at any time. We cannot predict the
rate at which borrowers will repay their
mortgage loans. Further, revolving credit
loans such as the home equity lines of credit
have been originated in significant volume
only during the past few years and neither
the originator nor the master servicer is
aware of any publicly available studies or
statistics on the rate of prepayment thereof.
During the revolving period for the Class A-1
term notes, if Irwin Union Bank and Trust
Company does not have a sufficient amount of
mortgage loans to sell to the trust, amounts
on deposit in the funding account relating to
the Class A-1 term notes will not be fully
applied to the purchase of subsequent
mortgage loans for loan group I by the trust
by the end of the revolving period. Such
remaining amounts will be paid to the Class
A-1 noteholders as principal on the first
payment date following the end of the
revolving period.
A prepayment of a mortgage loan would result
in a prepayment on the related term notes.
o If you purchase your term notes 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 term notes 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 term notes 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 term note is higher than you
expect, then your yield may be lower
than you expect.
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<PAGE>
Risk of Mortgage Interest The note rate on the class A-3 term notes
Rates Reducing the Class A-3 will be a floating rate equal to the least of
Note Rate (i) one-month LIBOR plus a fixed margin; (ii)
the weighted average net mortgage interest
rate of the mortgage loans in loan group III
and (iii) 14.50% per annum. Substantially all
of the mortgage loans in loan Group III have
mortgage interest rates that are based on the
highest prime rate as published in the "Money
Rates" section of The Wall Street Journal
plus a specified margin. As a result, it is
possible that mortgage interest rates on the
mortgage loans in loan group III may decline
while one-month LIBOR is stable or rising. It
is also possible that mortgage interest rates
on the mortgage loans in loan group III and
one-month LIBOR may decline or increase
during the same period, but that one-month
LIBOR may decline more slowly or increase
more rapidly. Furthermore, substantially all
of the mortgage loans in loan group III have
periodic and maximum limitations on
adjustments to the related mortgage interest
rate. As a result of these factors and the
foregoing limitations on the note rate for
the class A-3 term notes, holders of the
class A-3 term notes may receive interest at
a rate less than one-month LIBOR plus the
specified margin. In addition, the net
mortgage interest rate of the mortgage loans
in all the loan groups will change, and may
decrease, over time due to scheduled
amortization of the mortgage loans and
prepayments of the mortgage loans. There can
be no assurance that the weighted average
mortgage interest rate of any loan group will
not decrease after the closing date.
Limited Operating History of The originator of the mortgage loans, Irwin
the Originator Home Equity Corporation, was incorporated in
September 1994. Because the originator began
originating mortgage loans only in January
1995, and has developed significant unique
origination procedures for mortgage loans
including some of the mortgage loans
transferred to the Issuer, 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 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. The originator's immediate credit
mortgage loans and home equity lines of
credit are targeted at borrowers with average
or better credit ratings, but who are less
frequent borrowers. Such borrowers are
solicited primarily by mail. Since the
mortgage loans are originated primarily by
mail solicitation, you should be aware that
delinquencies and defaults with respect to
the pool of 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.
Under the home equity program of the
originator relating to the home equity lines
of credit, mortgagors are generally qualified
based on an assumed payment that reflects a
mortgage interest rate significantly lower
than the related maximum mortgage interest
rate. The repayment of any home equity line
of credit may thus be dependent on the
ability of the related mortgagor to make
larger interest payments following the
adjustment of the mortgage interest rate
thereof during the life of such home equity
line of credit.
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<PAGE>
Home Equity Lines of In general, the home equity lines of credit
Credit Have Interest-Only may be drawn upon during the related draw
Feature During the Draw period. During such draw period, the related
Period mortgagor will be obligated to make monthly
payments on the related home equity line of
credit, which minimum payment amounts will
generally be equal to the finance charge for
such billing cycle plus any applicable fees.
The minimum payment due during the repayment
period will be an amount necessary to
amortize the balance due, plus interest and
fees. Scheduled principal amortization (but
not necessarily principal from other sources,
including prepayments) may be de minimis
during the related draw periods such that
little, if any, principal payments based on
scheduled principal amortization may be paid
to the noteholders during such draw periods.
Collections on the home equity lines of
credit may also vary due to seasonal
purchasing and payment habits of the related
mortgagors.
Geographic Concentration When measured by aggregate
principal balance of the related loan group
as of the statistical calculation date,
mortgaged properties located in the following
states secure the approximate percentages of
mortgage loans in each of the indicated loan
groups:
state loan group I loan group II loan group III
----- ------------ ------------- --------------
California 30.80% 18.44% 20.80%
Florida 10.40% 12.93% 12.35%
Virginia 5.17% 7.71% 7.27%
New Jersey 6.49% 5.03% 5.50%
Illinois 5.36% 7.24% 3.65%
Ohio 4.12% 6.96% 4.67%
Michigan 5.69% 4.29% 3.04%
Washington 5.14% 4.29% 5.18%
Maryland 2.02% 5.48% 5.04%
Georgia 4.94% 4.35% 5.30%
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. 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 related
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.
High Combined Loan-to- Substantially all of the group II mortgage
Value Ratios loans (based on principal balance on the
statistical calculation date) had combined
loan-to-value ratios at origination in excess
of 100%. Approximately 86.34% of the group
III mortgage loans (based on principal
balance on the statistical calculation date)
had combined loan-to-value ratios at
origination that were greater than 100%.
Based on the appraised value, stated value or
purchase price of the related mortgaged
property at the time of origination of a
mortgage loan with a combined loan-to-value
ratio at origination greater than 100%, the
value or price of the related mortgaged
property was less than the sum of the
principal balance of the mortgage loan and
the principal balance of any related senior
mortgage(s). Mortgage loans with high
combined loan-to-value ratios, in particular
those mortgage loans with original combined
loan-to-value ratios in excess of 100%, will
be more sensitive to declining property
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<PAGE>
values than those loans with lower combined
loan-to-value ratios and may present a
greater risk of loss upon liquidation.
Amount of Borrower's Approximately 85.22% of the group I mortgage
Equity loans, approximately 99.03% of the group II
mortgage loans and approximately 96.02% of
the group III mortgage loans (based on
principal balance on the statistical
calculation date) had combined loan-to-value
ratios at origination that were greater than
80%. 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 Defaults on mortgage loans tend to occur at
Loans 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 Approximately 68.58% of the group I mortgage
loans, approximately 99.81% of the group II
mortgage loans and approximately 99.95% of
the group III mortgage loans (based on
principal balance on the statistical
calculation date) 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 master
servicer determines that it would be
uneconomical to foreclose on the related
mortgaged property, the master 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 master 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 notes.
Potential Inadequacy of Each group of mortgage loans is expected to
Credit Enhancement generate more interest than is needed to pay
interest on the related group of notes
because 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 notes. If the
related mortgage loans generate more interest
than is needed to pay interest on the related
group of notes 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
within the related group and then deposited
into a reserve account until certain
overcollateralization targets have been met.
We cannot assure you, however, that enough
excess interest will be generated to maintain
the required level of overcollateralization.
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.
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<PAGE>
The sale and servicing agreement requires the
trustee to make a claim for an insured
payment under the financial guaranty
insurance policy not later than the second
business day prior to any payment date as to
which the trustee has determined that an
insured payment will be necessary. Investors
in the term notes 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 enhancer is unable to meet its
obligations under the policy, then the
holders of the term notes 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 sale and servicing
agreement could be materially adversely
affected.
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<PAGE>
INTRODUCTION
The Irwin Home Equity Loan Trust 1999-3 (the "Issuer" or the "Trust")
will be formed pursuant to a trust agreement (the "Trust Agreement"), dated as
of November 30, 1999 between Bear Stearns Asset Backed Securities, Inc. (the
"Depositor") and Wilmington Trust Company, the Owner Trustee. The Issuer will
issue $250,000,000 aggregate principal amount of Home Equity Loan-Backed Term
Notes, Series 1999-3 (the "Term Notes"). The Term Notes will be issued pursuant
to an Indenture (the "Indenture"), to be dated as of November 30, 1999 between
the Issuer and Norwest Bank Minnesota, National Association as Indenture
Trustee. The Trust will also issue Home Equity Loan-Backed Variable Funding
Notes, Series 1999-3 (the "Variable Funding Notes", and together with the Term
Notes, the "Notes"). Pursuant to the Trust Agreement, the Issuer will issue one
class of Home Equity Loan-Backed Certificates, Series 1999-3 (the
"Certificates"). The Notes and the Certificates are collectively referred to
herein as the "Securities." Only the Term Notes are offered hereby.
DESCRIPTION OF THE MORTGAGE LOANS
General
The statistical information presented in this Prospectus Supplement is
based upon the characteristics of the pool of Mortgage Loans as of the
Statistical Calculation Date (the "Initial Mortgage Loans"). Such statistical
information is based upon the characteristics of the home equity lines of credit
(the "HELOCs") as of the Statistical Calculation Date (the "Initial HELOCs"),
the home equity loans (the "HELs") as of the Statistical Calculation Date (the
"Initial HELs"), the Immediate Credit HELs (as defined below) as of the
Statistical Calculation Date ( the "Initial Immediate Credit HELs") and the
Immediate Credit HELOCs (as defined below) as of the Statistical Calculation
Date (the "Initial Immediate Credit HELOCs"). The Immediate Credit Mortgage
Loans (as defined below), the HELOCs and the HELs are collectively referred to
herein as the "Mortgage Loans". Along with the Initial Mortgage Loans to be
acquired by the Trust on the Closing Date, it is expected that the Trust will
also acquire on the Closing Date certain additional Mortgage Loans (the
"Additional Mortgage Loans"). The Transferor expects that the aggregate
Principal Balance of the Additional Mortgage Loans will be approximately
$23,000,000. The Additional Mortgage Loans will be selected using generally the
same criteria used to select the Initial Mortgage Loans and the Subsequent
Mortgage Loans, and generally the same representations and warranties will be
made with respect thereto. The statistical characteristics of the entire pool of
Mortgage Loans on the Closing Date may vary from the statistical information
presented in this Prospectus Supplement upon the acquisition of Additional
Mortgage Loans. See "Conveyance of Subsequent Mortgage Loans, the Pre-Funding
Account and the Funding Account" herein.
Initial Mortgage Loans
The Initial Mortgage Loans assigned and transferred to the Issuer and
pledged to the Indenture Trustee as of the Closing Date will be divided into
three groups (each, a "Loan Group"). Loan Group I is expected to have an
aggregate principal balance of approximately $81,922,554.82 as of the
Statistical Calculation Date and will consist of Mortgage Loans (the "Group I
Mortgage Loans") which are (i) fixed-rate, closed-end mortgage loans secured by
first mortgages or deeds of trust on residential properties or (ii) fixed-rate,
closed-end home equity loans secured by first or second mortgages or deeds of
trust on residential properties with Combined Loan-to-Value Ratios generally
less than or equal to 100%. Loan Group II is expected to have an aggregate
principal balance of approximately $42,776,444.15 as of the Statistical
Calculation Date and will consist of Mortgage Loans (the "Group II Mortgage
Loans") which are (i) fixed-rate, closed-end home equity loans secured by first
or second mortgages or deeds of trust on residential properties with Combined
Loan-to-Value Ratios generally equal to or greater than 100% or (ii) fixed-rate
immediate credit loans (the "Immediate Credit HELs") secured by first, second or
more junior mortgages or deeds of trust on residential properties with Combined
Loan-to-Value Ratios generally less than 100% and original principal balances
less than or equal to $20,000. Loan Group III is expected to have an aggregate
principal balance of approximately $42,114,829.63 as of the Statistical
Calculation Date and will consist of Mortgage Loans (the "Group III Mortgage
Loans") which are (i) adjustable-rate home equity lines of credit secured by
first or second mortgages or deeds of trust on residential properties with
Combined Loan-to-Value Ratios generally equal to or greater than 100% or (ii)
adjustable-rate immediate credit home equity lines of credit (the "Immediate
Credit HELOCs" and, together with the Immediate Credit HELs, the "Immediate
Credit Mortgage
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<PAGE>
Loans") secured by first, second or more junior mortgages or deeds of trust on
residential properties with Combined Loan-to-Value Ratios that may exceed 100%
and original principal balances less than or equal to $20,000.
Unless otherwise indicated, all percentages set forth in this
Prospectus Supplement are based upon the aggregate Principal Balances of the
Group I Mortgage Loans, Group II Mortgage Loans and Group III Mortgage Loans as
of the Statistical Calculation Date.
The Mortgage Loans are evidenced by Mortgage Notes (each, a "Mortgage
Note") or, in the case of HELOCs, loan agreements (each, a "Loan Agreement"),
secured by mortgages or deeds of trust (the "Mortgages"), of which approximately
68.58% are second lien Mortgages with respect to the Group I Mortgage Loans, of
which approximately 99.81% are second or more junior lien Mortgages, with
respect to the Group II Mortgage Loans and of which approximately 99.95% are
second or more junior lien Mortgages, with respect to the Group III Mortgage
Loans, on one- to four-family residential properties (the "Mortgaged
Properties") and have the additional characteristics described below.
Each Group I Mortgage Loan for which information is presented in this
Prospectus Supplement has an original term to stated maturity of ten, 15, 20, 25
or (in the case of first Mortgages) 30 years) and was selected for inclusion in
the Trust from among those that met the following additional criteria as of the
Statistical Calculation Date: (i) a current principal balance of no less than
$2,395.69 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 Enhancer. As of the
Statistical Calculation Date, the average principal balance of the Group I
Mortgage Loans was approximately $42,958.86. As of the Statistical Calculation
Date, the weighted average Mortgage Interest Rate of the Group I Mortgage Loans
was approximately 11.576%. The weighted average Combined Loan-to-Value Ratio of
the Group I Mortgage Loans was approximately 91.04%. The weighted average
remaining term to maturity was 228 months and the latest scheduled maturity of
any Group I Mortgage Loan is November 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, 1,885 of the Mortgaged Properties
securing the Group I Mortgage Loans, which secure approximately 98.67% of the
outstanding principal balance of the Group I Mortgage Loans, will be owner
occupied primary residences and 22 of the Mortgaged Properties securing the
Group I Mortgage Loans, which secure approximately 1.33% of the outstanding
principal balance of the Group I Mortgage Loans, will be non-owner occupied or
second homes.
Each Group II Mortgage Loan for which information is presented in this
Prospectus Supplement has an original term to stated maturity of up to 30 years
and was selected for inclusion in the Trust from among those that met the
following criteria of the Statistical Calculation Date: (i) a current principal
balance of no less than $9,839.86 and (ii) 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
Enhancer. As of the Statistical Calculation Date, the average principal balance
of the Group II Mortgage Loans was approximately $32,259.76. As of the
Statistical Calculation Date, the weighted average Mortgage Interest Rate of the
Group II Mortgage Loans was approximately 14.623%. The weighted average Combined
Loan-to-Value Ratio of the Group II Mortgage Loans was approximately 116.08%.
The weighted average remaining term to stated maturity was approximately 183
months and the latest scheduled maturity of any Group II Mortgage Loan is
October 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, all of the Mortgaged Properties securing
the Group II Mortgage Loans will be owner occupied primary residences.
The monthly payment on each Mortgage Loan, with the exception of the
HELOCs and the Immediate Credit HELOCs, (each a "Monthly Payment") includes
interest plus an amount that will amortize the outstanding principal balance of
the Mortgage Loan over its remaining term.
S-21
<PAGE>
The Mortgage Loans assigned to Loan Group III are evidenced by loan
agreements (each, a "Loan Agreement") secured by Mortgages, of which
approximately 99.95% are junior Mortgages on the related Mortgaged Properties,
and have the additional characteristics described below.
As of the Statistical Calculation Date, the average principal balance
of the Initial Mortgage Loans in Loan Group III is approximately $22,975.90, the
weighted average Gross Margin of the Initial Mortgage Loans in Loan Group III is
approximately 6.113%, and the weighted average Mortgage Interest Rate of the
Initial Mortgage Loans in Loan Group III is approximately 14.320%. The weighted
average Combined Loan-to-Value Ratio of the Initial Mortgage Loans in Loan Group
III is approximately 111.97%, and approximately 86.34% of the Initial Mortgage
Loans in Loan Group III have Combined Loan-to-Value Ratios greater than 100%.
The weighted average credit limit utilization rate (computed by dividing the
aggregate principal balance of the Initial Mortgage Loans in Loan Group III as
of the Statistical Calculation Date by the aggregate credit limit thereof) is
approximately 98.34%. The weighted average remaining term to maturity is 234
months and the latest scheduled maturity of any Initial Mortgage Loan in Loan
Group III is November 15, 2019; however, the actual date on which any Initial
Mortgage Loan in Loan Group III is paid in full may be earlier than the stated
maturity date thereof due to unscheduled payments of principal.
Effective with the first payment due on a HELOC after the tenth
anniversary date of the date of origination thereof in the case of substantially
all HELOCs, on each related Interest Adjustment Date, the Monthly Payment will
be adjusted to an amount that will amortize the then-outstanding Principal
Balance of such HELOC over its remaining term plus interest thereon. The
weighted average number of months from the Statistical Calculation Date to the
first adjustment of the Monthly Payment such that the resulting amount will
amortize the outstanding Principal Balance of the Initial HELOCs over their
remaining term is approximately 119 months.
Interest on each HELOC is and will be calculated based on the average
daily Principal Balance thereof outstanding during the related Billing Cycle.
The "Billing Cycle" for any HELOC and "Due Date" is the period from on or about
the 21st day of the calendar month second preceding such Due Date to the 20th
day of the calendar month immediately preceding such Due Date.
The Mortgage Interest Rates on the HELOCs will adjust monthly on each
applicable Interest Adjustment Date to a rate equal to the sum of (i) the
highest prime rate as published in the "Money Rates" section of The Wall Street
Journal on the last Business Day of the month immediately preceding the related
Interest Adjustment Date plus (ii) a fixed percentage (the "Gross Margin"),
which total is generally subject to specified maximum and minimum lifetime
Mortgage Interest Rates ("Lifetime Rate Caps" and "Lifetime Rate Floors",
respectively), as specified in the related Mortgage documents. Due to the
application of the Lifetime Rate Caps and Lifetime Rate Floors, the Mortgage
Interest Rate on any HELOC, as adjusted on any Interest Adjustment Date, may not
equal the sum of the related prime rate and Gross Margin. Each HELOC requires
the related Mortgagor to make current interest payments during the life of such
HELOC.
Each Initial HELOC has a term to maturity from the date of origination
of approximately 20 years.
A Mortgagor may make a draw at any time during the period stated in the
related Loan Agreement (the "Draw Period"). In addition, the Mortgagor will not
be permitted to make any draw during the period stated in the related Loan
Agreement (the "Repayment Period"). The Draw Period and the Repayment Period for
any HELOC may vary based on such HELOC's state of origination.
The maximum amount of each draw with respect to any HELOC is equal to
the excess, if any, of the credit limit thereof over the outstanding Principal
Balance thereof at the time of such draw. Approximately 32.48% of the Initial
Mortgage Loans may be prepaid in whole or in part at any time, after origination
thereof without a corresponding penalty. However, Mortgagors will have the right
during the related Draw Period to make a draw in the amount of any prepayment
theretofore made with respect to such HELOC.
A Mortgagor's right to make draws during the Draw Period may be
suspended, or the credit limit of the related HELOC may be reduced, for cause
under a number of circumstances, including, but not limited to, (i) a material
and adverse change in such Mortgagor's financial circumstances; (ii) a decline
in the value of the related Mortgaged Property significantly below the Appraised
Value thereof at origination of such HELOC; or (iii) a
S-22
<PAGE>
payment default by such Mortgagor. However, such suspension or reduction
generally will not affect the payment terms for previously drawn amounts.
Neither the Master Servicer nor any subservicer will have any obligation to
investigate whether any such circumstances have transpired, and may have no
knowledge thereof. As such, there can be no assurance that any Mortgagor's
ability to make Draws will be suspended or reduced in the event that any of the
foregoing circumstances occur. In the event of a default under a HELOC, such
HELOC may be terminated and declared immediately due and payable in full. For
such purpose, a default includes, but is not limited to, (i) the related
Mortgagor's failure to make any payment as required; (ii) any action or inaction
by such Mortgagor that adversely affects the related Mortgaged Property or the
mortgagee's rights therein; or (iii) fraud or material misrepresentation by such
Mortgagor in connection with such HELOC.
During the Draw Period, the Mortgagor will be obligated to make Monthly
Payments on the related HELOC, which amounts will generally be equal to the
Finance Charge and Additional Charges for such Billing Cycle. During the
Repayment Period, the Mortgagor will be obligated to make Monthly Payments
consisting of principal installments that would substantially amortize the
Principal Balance of the related Mortgage Loan by the maturity date thereof,
plus current Finance Charges and Additional Charges.
With respect to each HELOC, (i) the "Finance Charge" for any Billing
Cycle will be an amount equal to the aggregate of, as calculated for each day in
such Billing Cycle, the then-applicable Mortgage Interest Rate divided by 365,
and multiplied by the average daily Principal Balance of such HELOC and (ii) the
"Account Balance" on any day generally will be the aggregate unpaid Principal
Balance outstanding at the beginning of such day, plus the sum of any unpaid
fees, insurance premiums and other charges, if any (collectively, "Additional
Charges"), and any unpaid Finance Charges due, plus the aggregate of all draws
funded on such day, minus the aggregate of all payments and credits applied to
the repayment of any such draws on such day. Payments made by or on behalf of
the Mortgagor will be applied to any unpaid Finance Charges due thereon, prior
to application to any unpaid Principal Balance outstanding.
The "Mortgage Interest Rate" of each Mortgage Loan is the per annum
interest rate required to be paid by the mortgagor (each a "Mortgagor") under
the terms of the related note and, in the case of the HELOCs, the related Loan
Agreement. The Mortgage Interest Rate borne by each Mortgage Loan is (i) in the
case of a HELOC, adjustable on the date (each such date, an "Interest Adjustment
Date") specified in the related Loan Agreement to a rate equal to the sum of (A)
the highest prime rate as published in the "Money Rates" section of The Wall
Street Journal on the last Business Day of the related calendar month and (B)
the margin specified in the related Loan Agreement and (ii) in the case of a
HEL, fixed as of the date of origination of such HEL.
The "Combined Loan-to-Value Ratio" generally will be, with respect to
each HELOC and Immediate Credit HELOC, the ratio, expressed as a percentage, of
the sum of (i) the credit limit of such HELOC or Immediate Credit HELOC and (ii)
the outstanding Principal Balance at origination of such HELOC or Immediate
Credit HELOC of all other mortgage loans, if any, secured by senior or
subordinate liens on the related Mortgaged Property, to the Appraised Value.
With respect to each HEL and Immediate Credit HEL, the "Combined Loan-to-Value
Ratio" generally will be the ratio, expressed as a percentage, of the sum of (i)
the Principal Balance of such HEL or Immediate Credit HEL as of the related
Cut-Off Date and (ii) any outstanding Principal Balance at origination of such
HEL or Immediate Credit HEL of all other mortgage loans, if any, secured by
senior or subordinate liens on the related Mortgaged Property, to the Appraised
Value. The "Appraised Value" for any Mortgaged Property will be the appraised
value thereof, determined in the appraisal or property valuation (which in the
case of the Immediate Credit Mortgage Loans may be a borrower stated value) used
in the origination of the related Mortgage Loan (which may have been obtained at
an earlier time). See "Description of the Mortgage Loans--Underwriting
Standards" herein.
Approximately 77.13% of the Group I Mortgage Loans, 68.36% of the Group
II Mortgage Loans and 47.96% of the Group III 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.
S-23
<PAGE>
Solicitation Process
Since January 1995, the Originator has processed over 235,000 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.
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.
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
the 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.
S-24
<PAGE>
Statistical Information
Set forth below is a description of certain additional characteristics
of the Mortgage Loans as of the Statistical Calculation Date (except as
otherwise indicated). Dollar amounts and percentages may not add up to totals
due to rounding.
LIEN POSITION OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Mortgage Principal Balance of of Group I
Lien Position Loans Group I Mortgage Loans Mortgage Loans
- ------------- ----------- ------------------------- -----------------
<S> <C> <C> <C>
First Lien....................... 250 31.42% $25,742,644.23
Second Lien...................... 1,657 68.58 56,179,910.59
----- ------ --------------
Total.......... 1,907 100.00% $81,922,554.82
===== ====== ==============
</TABLE>
MORTGAGE INTEREST RATES OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Mortgage Principal Balance of of Group I
Mortgage Interest Rates (%) Loans Group I Mortgage Loans Mortgage Loans
- --------------------------- ----------- -------------------------- ------------------
<S> <C> <C> <C> <C> <C>
7.001 to 7.500......... 5 0.70% $ 576,760.80
7.501 to 8.000......... 16 2.05 1,678,874.69
8.001 to 8.500......... 46 5.52 4,521,516.01
8.501 to 9.000......... 79 9.62 7,883,768.73
9.001 to 9.500......... 91 8.73 7,155,348.13
9.501 to 10.000......... 113 9.06 7,424,405.81
10.001 to 10.500......... 96 6.58 5,394,209.76
10.501 to 11.000......... 107 6.14 5,029,658.22
11.001 to 11.500......... 91 3.96 3,244,141.11
11.501 to 12.000......... 119 5.80 4,752,902.57
12.001 to 12.500......... 114 5.04 4,131,915.77
12.501 to 13.000......... 170 7.12 5,833,325.42
13.001 to 13.500......... 116 4.82 3,945,493.60
13.501 to 14.000......... 167 7.23 5,922,762.69
14.001 to 14.500......... 142 4.76 3,902,053.32
14.501 to 15.000......... 153 5.25 4,304,260.65
15.001 to 15.500......... 81 2.35 1,921,156.27
15.501 to 16.000......... 110 3.02 2,474,913.41
16.001 to 16.500......... 28 0.67 550,661.66
16.501 to 17.000......... 26 0.65 534,929.26
17.001 to 17.500......... 11 0.25 202,149.36
17.501 to 18.000......... 7 0.23 186,693.61
18.001 to 18.500......... 6 0.13 108,960.05
18.501 to 19.000......... 12 0.26 212,378.71
19.001 to 19.500......... 1 0.04 29,315.21
----- ------ ---------------
Total............ 1,907 100.00% $ 81,922,554.82
===== ====== ===============
</TABLE>
The weighted average Mortgage Interest Rate of the Group I Mortgage
Loans is approximately 11.576% per annum.
S-25
<PAGE>
ORIGINAL TERM TO MATURITY OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Original Term to Maturity Mortgage Principal Balance of of Group I
(months) Loans Group I Mortgage Loans Mortgage Loans
- ------------------------- ----------- ------------------------- -------------------
<S> <C> <C> <C> <C> <C>
61 to 120 ..................... 159 4.56% $ 3,734,682.53
121 to 180 ..................... 1,492 62.47 51,175,395.45
181 to 240 ..................... 28 2.20 1,802,505.58
241 to 300 ..................... 43 3.32 2,721,358.59
301 to 360 ..................... 185 27.45 22,488,612.67
----- ------ ----------------
Total....................... 1,907 100.00% $ 81,922,554.82
===== ====== ================
</TABLE>
The weighted average original term to Maturity is approximately 232
months.
REMAINING TERM TO MATURITY OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Remaining Term to Maturity Mortgage Principal Balance of of Group I
(months) Loans Group I Mortgage Loans Mortgage Loans
- ------------------------- ----------- ------------------------- -------------------
<S> <C> <C> <C> <C> <C>
61 to 120....................... 159 4.56% $ 3,734,682.53
121 to 180....................... 1,492 62.47 51,175,395.45
181 to 240....................... 28 2.20 1,802,505.58
241 to 300....................... 43 3.32 2,721,358.59
301 to 360....................... 185 27.45 22,488,612.67
----- ------ ---------------
Total....................... 1,907 100.00% $ 81,922,554.82
===== ====== ===============
</TABLE>
The calculated weighted average remaining term of the Group I Mortgage
Loans is approximately 228 months.
S-26
<PAGE>
YEAR OF ORIGINATION OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Mortgage Principal Balance of of Group I
Year of Origination Loans Group I Mortgage Loans Mortgage Loans
- ------------------- ----------- ------------------------- -------------------
<S> <C> <C> <C>
1998..................................... 7 2.47% $ 2,022,980.31
1999..................................... 1,900 97.53 79,899,574.51
----- ------ ---------------
Total..................... 1,907 100.00% $ 81,922,554.82
===== ====== ===============
</TABLE>
The earliest month and year of origination of any Group I Mortgage Loan
is September 1998 and the latest month and year of origination is October 1999.
MORTGAGED PROPERTIES SECURING GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Mortgage Principal Balance of of Group I
Property Type Loans Group I Mortgage Loans Mortgage Loans
- ------------- ----------- ------------------------- -------------------
<S> <C> <C> <C>
Condominium.............................. 88 4.36% $ 3,571,574.08
Multi-Family............................. 20 0.85 693,382.99
Planned Unit Development................. 79 6.47 5,299,278.36
Single-Family Dwelling................... 1,720 88.33 72,358,319.39
----- ------ --------------
Total.................... 1,907 100.00% $81,922,554.82
===== ====== ==============
</TABLE>
S-27
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Combined Loan-to-Value Mortgage Principal Balance of of Group I
Ratio (%) Loans Group I Mortgage Loans Mortgage Loans
- ---------------------- ----------- ------------------------- -------------------
<S> <C> <C> <C> <C> <C>
10.01 to 15.00.............. 7 0.24% $ 193,761.46
15.01 to 20.00.............. 1 0.03 24,727.60
20.01 to 25.00.............. 3 0.17 137,669.20
25.01 to 30.00.............. 3 0.11 86,455.81
30.01 to 35.00.............. 3 0.11 86,120.57
35.01 to 40.00.............. 8 0.72 593,909.85
40.01 to 45.00.............. 4 0.13 103,826.77
45.01 to 50.00.............. 6 0.30 246,486.21
50.01 to 55.00.............. 7 0.62 507,028.21
55.01 to 60.00.............. 15 0.77 633,732.64
60.01 to 65.00.............. 20 1.19 976,524.54
65.01 to 70.00.............. 34 2.24 1,832,559.47
70.01 to 75.00.............. 37 2.10 1,722,415.57
75.01 to 80.00.............. 107 6.06 4,961,675.75
80.01 to 85.00.............. 149 7.63 6,250,741.91
85.01 to 90.00.............. 268 14.96 12,258,332.06
90.01 to 95.00.............. 336 17.42 14,268,395.26
95.01 to 100.00.............. 899 45.21 37,038,191.94
----- ------ ---------------
Total................... 1,907 100.00% $ 81,922,554.82
===== ====== ===============
</TABLE>
The minimum and maximum Combined Loan-to-Value Ratios of the Group I
Mortgage Loans as of the Statistical Calculation Date are approximately 10.20%
and 100.00%, respectively, and the weighted average Combined Loan-to-Value Ratio
as of the Statistical Calculation Date of the Group I Mortgage Loans is
approximately 91.04%. The "Combined Loan-to-Value Ratio" of a Group I Mortgage
Loan as of the Statistical Calculation 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 Statistical Calculation Date
divided by the Appraised Value of the Mortgaged Property.
S-28
<PAGE>
PRINCIPAL BALANCES OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Mortgage Principal Balance of of Group I
Principal Balance Loans Group I Mortgage Loans Mortgage Loans
- ----------------- ----------- ------------------------- --------------------
<S> <C> <C> <C>
$ 0.01 to $ 25,000.00 709 16.46% $ 13,487,611.52
$ 25,000.01 to $ 50,000.00 768 33.44 27,391,576.88
$ 50,000.01 to $ 75,000.00 215 16.14 13,223,469.90
$ 75,000.01 to $ 100,000.00 110 11.84 9,700,262.25
$100,000.01 to $ 200,000.00 82 13.77 11,278,093.95
$200,000.01 to $ 300,000.00 16 4.95 4,058,956.17
$300,000.01 to $ 400,000.00 3 1.20 983,535.23
$400,000.01 to $ 500,000.00 4 2.20 1,799,048.92
----- ------ --------------
Total....................... 1,907 100.00% $81,922,554.82
===== ====== ==============
</TABLE>
As of the Statistical Calculation Date, the average unpaid principal
balance of the Group I Mortgage Loans is approximately $42,958.86.
S-29
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES SECURING
GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate Unpaid
Number of Percentage of Aggregate Principal Balance
Initial Mortgage Principal Balance of of Group I
State Loans Group I Mortgage Loans Mortgage Loans
- --------- ------------------ ------------------------- -------------------
<S> <C> <C> <C>
Arizona.................................. 72 3.16% $ 2,586,127.77
California............................... 470 30.80 25,233,766.26
Florida.................................. 188 10.40 8,522,610.53
Georgia.................................. 102 4.94 4,044,424.09
Illinois................................. 87 5.36 4,394,984.56
Maryland................................. 50 2.02 1,658,842.37
Massachusetts............................ 60 2.78 2,277,150.34
Michigan................................. 125 5.69 4,662,781.16
Missouri................................. 61 2.13 1,745,857.74
New Jersey............................... 92 6.49 5,313,113.20
Ohio..................................... 97 4.12 3,376,629.28
Oregon................................... 49 2.54 2,079,786.78
Pennsylvania............................. 69 2.42 1,984,230.62
Virginia................................. 103 5.17 4,231,540.01
Washington............................... 104 5.14 4,209,155.89
Other (less than 2%)..................... 178 6.84 5,601,554.22
----- ------ --------------
Total.................... 1,907 100.00% $81,922,554.82
===== ====== ==============
</TABLE>
No more than approximately 0.85% of the Group I Mortgage Loans are
secured by Mortgaged Properties located in any one zip code.
S-30
<PAGE>
DEBT-TO-INCOME RATIOS OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Mortgage Principal Balance of of Group I
Debt-to-Income Ratios (%) Loans Group I Mortgage Loans Mortgage Loans
- ------------------------- ----------- ------------------------- ------------------
<S> <C> <C> <C> <C> <C>
10.01 to 15.00...... 3 0.11% $ 89,865.04
15.01 to 20.00...... 29 1.44 1,183,217.23
20.01 to 25.00...... 84 3.08 2,522,880.42
25.01 to 30.00...... 168 7.30 5,982,846.92
30.01 to 35.00...... 272 12.69 10,393,499.71
35.01 to 40.00...... 336 16.25 13,308,365.40
40.01 to 45.00...... 352 18.91 15,492,291.66
45.01 to 50.00...... 384 21.46 17,577,525.76
50.01 to 55.00...... 276 18.72 15,339,239.41
55.01+................... 3 0.04 32,823.27
----- ------ --------------
Total............. 1,907 100.00% $81,922,554.82
===== ====== ==============
</TABLE>
The weighted average Debt-to-Income Ratio of the Group I Mortgage Loans
is approximately 41.40%
OCCUPANCY TYPE OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Mortgage Principal Balance of Group of Group I
Occupancy Type Loans I Mortgage Loans Mortgage Loans
- -------------- ----------- -------------------------- -----------------
<S> <C> <C> <C>
Owner Occupied............. 1,885 98.67 $80,832,016.97
Non Owner Occupied......... 22 1.33 1,090,537.85
----- ------ --------------
Total.......... 1,907 100.00% $81,922,554.82
===== ====== ==============
</TABLE>
CREDIT QUALITY OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Mortgage Principal Balance of of Group I
Credit Quality Loans Group I Mortgage Loans Mortgage Loans
- -------------- ----------- ------------------------- ------------------
<S> <C> <C> <C>
Excellent................... 1,402 75.19% $61,596,143.70
Superior.................... 338 16.77 13,736,549.73
Good........................ 137 5.59 4,578,926.62
Fair........................ 26 1.84 1,507,140.56
Other....................... 4 0.61 503,794.21
----- ------ --------------
Total........... 1,907 100.00% $81,922,554.82
===== ====== ==============
</TABLE>
Credit grades run from Excellent to Superior to Good to Fair to Other
in descending order.
S-31
<PAGE>
LIEN POSITION OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Mortgage Principal Balance of of Group II
Lien Position Loans Group II Mortgage Loans Mortgage Loans
- ------------- ----------- ----------------------- -------------------
<S> <C> <C> <C>
First Lien.................... 2 0.19% $ 82,063.52
Second or More Junior Lien.... 1,324 99.81% 42,694,380.63
----- -------- --------------
Total.......... 1,326 100.00% $42,776,444.15
===== ====== ==============
</TABLE>
MORTGAGE INTEREST RATES OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Mortgage Principal Balance of of Group II
Mortgage Interest Rates (%) Loans Group II Mortgage Loans Mortgage Loans
- --------------------------- ----------- ------------------------- -------------------
<S> <C> <C> <C> <C> <C>
5.501 to 6.000........... 1 0.11% $ 47,442.03
7.001 to 7.500........... 2 0.28 120,149.22
8.001 to 8.500........... 3 0.29 123,528.93
8.501 to 9.000........... 1 0.19 81,991.36
9.001 to 9.500........... 3 0.27 115,396.54
9.501 to 10.000.......... 10 1.18 505,833.69
10.001 to 10.500.......... 10 1.05 447,392.01
10.501 to 11.000.......... 20 2.12 908,330.09
11.001 to 11.500.......... 31 3.30 1,411,524.17
11.501 to 12.000.......... 57 5.88 2,513,400.54
12.001 to 12.500.......... 59 6.09 2,606,043.69
12.501 to 13.000.......... 62 5.75 2,460,044.85
13.001 to 13.500.......... 50 4.64 1,984,631.96
13.501 to 14.000.......... 109 9.65 4,127,679.17
14.001 to 14.500.......... 77 6.20 2,652,696.38
14.501 to 15.000.......... 177 11.34 4,850,695.49
15.001 to 15.500.......... 74 5.86 2,508,598.56
15.501 to 16.000.......... 138 9.71 4,155,013.02
16.001 to 16.500.......... 80 5.36 2,293,644.37
16.501 to 17.000.......... 99 6.52 2,790,556.72
17.001 to 17.500.......... 78 3.89 1,664,567.43
17.501 to 18.000.......... 86 4.71 2,014,401.50
18.001 to 18.500.......... 35 2.04 871,424.68
18.501 to 19.000.......... 52 2.83 1,209,861.05
19.001 to 19.500.......... 6 0.36 153,582.97
19.501 to 20.000.......... 6 0.37 158,013.73
----- ------ --------------
Total............... 1,326 100.00% $42,776,444.15
===== ====== ==============
</TABLE>
The weighted average Mortgage Interest Rate of the Group II Mortgage
Loans is approximately 14.623% per annum.
S-32
<PAGE>
ORIGINAL TERM TO MATURITY OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Original Term to Maturity Mortgage Principal Balance of of Group II
(months) Loans Group II Mortgage Loans Mortgage Loans
- --------------------------- ----------- ------------------------- -------------------
<S> <C> <C> <C> <C> <C>
61 to 120............... 52 3.24% $ 1,385,277.11
121 to 180............... 1,178 87.46 37,410,311.65
181 to 240............... 54 4.66 1,995,175.28
241 to 300............... 41 4.61 1,970,980.11
301 to 360............... 1 0.03 14,700.00
----- ------ --------------
Total................... 1,326 100.00% $42,776,444.15
===== ====== ==============
</TABLE>
The weighted average original term to Maturity is approximately 186
months.
REMAINING TERM TO MATURITY OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Mortgage Principal Balance of of Group II
Remaining Term to Maturity (months) Loans Group II Mortgage Loans Mortgage Loans
- ----------------------------------- ----------- ------------------------- -------------------
<S> <C> <C> <C> <C> <C>
61 to 120............ 52 3.24% $ 1,385,277.11
121 to 180............ 1,178 87.46 37,410,311.65
181 to 240............ 54 4.66 1,995,175.28
241 to 300............ 41 4.61 1,970,980.11
301 to 360............ 1 0.03 14,700.00
----- -------- --------------
Total.................. 1,326 100.00% $42,776,444.15
===== ====== ==============
</TABLE>
The calculated weighted average remaining term of the Group II Mortgage
Loans is approximately 183 months.
YEAR OF ORIGINATION OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Mortgage Principal Balance of of Group II
Year of Origination Loans Group II Mortgage Loans Mortgage Loans
- ------------------- ---------- ------------------------- -------------------
<S> <C> <C> <C>
1998...................... 125 11.47% $ 4,907,190.99
1999...................... 1,201 88.53 37,869,253.16
----- ------ --------------
Total............ 1,326 100.00% $42,776,444.15
===== ====== ==============
</TABLE>
The earliest month and year of origination of any Group II Mortgage
Loan is May 1998 and the latest month and year of origination is October 1999.
S-33
<PAGE>
MORTGAGED PROPERTIES SECURING GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Mortgage Principal Balance of Group of Group II
Property Type Loans II Mortgage Loans Mortgage Loans
- ------------- ----------- ---------------------------- -------------------
<S> <C> <C> <C>
Condominium........................ 59 4.26% $ 1,823,248.53
Multi-Family....................... 4 0.18 76,509.78
Planned Unit Development........... 63 5.98 2,558,828.34
Single-Family Dwelling............. 1,200 89.58 38,317,857.50
----- ------ --------------
Total................ 1,326 100.00% $42,776,444.15
===== ====== ==============
</TABLE>
COMBINED LOAN-TO-VALUE RATIOS OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Combined Loan-to-Value Mortgage Principal Balance of of Group II
Ratio (%) Loans Group II Mortgage Loans Mortgage Loans
- ---------------------- ----------- -------------------------- -------------------
<S> <C> <C> <C> <C> <C>
10.01 to 15.00........ 1 0.03% $ 11,000.00
45.01 to 50.00........ 3 0.27 115,858.87
50.01 to 55.00........ 1 0.11 47,319.86
55.01 to 60.00........ 3 0.19 79,756.78
60.01 to 65.00........ 1 0.03 10,948.50
65.01 to 70.00........ 4 0.12 52,773.67
70.01 to 75.00........ 3 0.10 42,387.94
75.01 to 80.00........ 5 0.13 54,813.16
80.01 to 85.00........ 7 0.32 135,526.28
85.01 to 90.00........ 4 0.16 67,730.09
90.01 to 95.00........ 8 0.20 87,464.25
95.01 to 100.00....... 7 0.24 102,067.95
100.01 to 105.00....... 121 9.17 3,922,030.04
105.01 to 110.00....... 184 13.31 5,693,756.61
110.01 to 115.00....... 200 14.24 6,089,979.20
115.01 to 120.00....... 228 17.97 7,686,008.95
120.01 to 125.00....... 540 42.96 18,377,230.53
125.01 to 130.00....... 5 0.37 158,643.81
130.01+ 1 0.10 41,187.66
----- ------ --------------
Total............... 1,326 100.00% $42,776,444.15
===== ====== ==============
</TABLE>
The minimum and maximum Combined Loan-to-Value Ratios of the Group II
Mortgage Loans as of the Statistical Calculation Date are approximately 11.04%
and 158.33%, respectively, and the weighted average Combined Loan-to-Value Ratio
as of the Statistical Calculation Date of the Group II Mortgage Loans is
approximately 116.13%. The "Combined Loan-to-Value Ratio" of a Group II Mortgage
Loan as of the Statistical Calculation Date is the ratio, expressed as a
percentage, equal to the sum of any outstanding first and other mortgage
balances, if any, as of the date of origination plus the Principal Balance of
such Group II Mortgage Loan as of the Statistical Calculation Date divided by
the Appraised Value of the Mortgaged Property at origination.
S-34
<PAGE>
PRINCIPAL BALANCES OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Mortgage Principal Balance of of Group II
Principal Balance Loans Group II Mortgage Loans Mortgage Loans
- ----------------- ----------- -------------------------- -------------------
<S> <C> <C> <C> <C> <C>
$0.01 to $25,000.00...... 551 24.47% $10,465,400.32
$25,000.01 to $50,000.00...... 634 53.89 23,053,792.08
$50,000.01 to $75,000.00...... 130 19.50 8,340,524.70
$75,000.01 to $100,000.00..... 11 2.14 916,727.05
----- ------ --------------
Total................... 1,326 100.00% $42,776,444.15
===== ====== ==============
</TABLE>
As of the Statistical Calculation Date, the average unpaid principal
balance of the Group II Mortgage Loans is approximately $32,259.76.
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES SECURING
GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Mortgage Principal Balance of of Group II
State Loans Group II Mortgage Loans Mortgage Loans
- ----- ----------- ------------------------- -------------------
<S> <C> <C> <C>
Arizona........................... 57 4.89% $ 2,092,920.74
California........................ 225 18.44 7,886,704.52
Florida........................... 166 12.93 5,533,096.08
Georgia........................... 70 4.35 1,860,995.47
Illinois.......................... 85 7.24 3,095,469.30
Maryland.......................... 77 5.48 2,344,682.82
Michigan.......................... 66 4.29 1,835,937.38
Missouri.......................... 35 2.05 877,084.32
New Jersey........................ 58 5.03 2,152,314.87
Ohio.............................. 95 6.96 2,975,496.70
Pennsylvania...................... 78 4.60 1,966,014.67
Virginia.......................... 98 7.71 3,296,660.26
Washington........................ 49 4.29 1,833,182.87
Other (less than 2%).............. 167 11.74 5,025,884.15
------ ------- ---------------
Total.............. 1,326 100.00% $ 42,776,444.15
===== ====== ===============
</TABLE>
No more than approximately 0.56% of the Group II Mortgage Loans are
secured by Mortgaged Properties located in any one zip code.
S-35
<PAGE>
deneen
DEBT-TO-INCOME RATIOS OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Mortgage Principal Balance of of Group II Mortgage
Debt-to-Income Ratios (%) Loans Group II Mortgage Loans Loans
- ------------------------- ----------- ------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
10.01 to 15.00......... 2 0.06% $ 24,883.34
15.01 to 20.00......... 8 0.45 193,267.30
20.01 to 25.00......... 51 3.02 1,290,343.37
25.01 to 30.00......... 82 5.97 2,554,124.81
30.01 to 35.00......... 188 13.32 5,696,364.39
35.01 to 40.00......... 264 19.31 8,261,442.61
40.01 to 45.00......... 307 23.85 10,202,178.12
45.01 to 50.00......... 282 22.10 9,451,472.83
50.01 to 55.00......... 127 11.21 4,794,071.79
55.01+ 15 0.72 308,295.59
----- ------ ---------------
Total............... 1,326 100.00% $ 42,776,444.15
===== ====== ===============
</TABLE>
The weighted average Debt-to-Income Ratio of the Group II Mortgage
Loans is approximately 41.08%.
OCCUPANCY TYPE OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Mortgage Principal Balance of of Group II
Occupancy Type Loans Group II Mortgage Loans Mortgage Loans
- -------------- ---------- ----------------------- -----------------
<S> <C> <C> <C>
Owner Occupied................. 1,326 100.00% $42,776,444.15
----- ------ --------------
Total........... 1,326 100.00% $42,776,444.15
===== ====== ==============
</TABLE>
CREDIT QUALITY OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate Unpaid
Number of Percentage of Aggregate Principal Balance
Initial Mortgage Principal Balance of Group of Group II
Credit Quality Loans II Mortgage Loans Mortgage Loans
- -------------- ------------------ ---------------------------- -------------------
<S> <C> <C> <C>
Excellent.......................... 885 74.92% $32,049,925.25
Superior........................... 211 12.77 5,463,794.16
Good............................... 221 11.83 5,061,585.90
Fair............................... 5 0.23 100,335.76
Other.............................. 4 0.24 100,803.08
----- ------ --------------
Total............... 1,326 100.00% $42,776,444.15
===== ====== ==============
</TABLE>
Credit grades run from Excellent to Superior to Good to Fair to Other
in descending order.
S-36
<PAGE>
LIEN POSITION OF GROUP III MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate Unpaid
Number of Percentage of Aggregate Principal Balance
Initial Mortgage Principal Balance of of Group III
Lien Position Loans Group III Mortgage Loans Mortgage Loans
- ------------- ------------------ -------------------------- -------------------
<S> <C> <C> <C>
First Lien.................... 2 0.05% $ 22,000.00
Second or More Junior Lien.... 1,831 99.95 42,092,829.63
----- ------ ---------------
Total.......... 1,833 100.00% $ 42,114,829.63
===== ====== ===============
</TABLE>
MORTGAGE INTEREST RATES OF GROUP III MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Mortgage Principal Balance of of Group III
Mortgage Interest Rates (%) Loans Group III Mortgage Loans Mortgage Loans
- --------------------------- ----------- -------------------------- -------------------
<S> <C> <C> <C> <C>
8.001 to 8.500.......... 6 0.55% $ 232,161.20
8.501 to 9.000.......... 5 0.64 267,877.23
9.001 to 9.500.......... 6 0.68 286,375.41
9.501 to 10.000......... 5 0.54 228,958.96
10.001 to 10.500......... 6 0.62 262,689.76
10.501 to 11.000......... 6 0.77 325,802.51
11.001 to 11.500......... 19 2.12 894,560.85
11.501 to 12.000......... 34 3.59 1,513,933.62
12.001 to 12.500......... 47 5.07 2,134,930.48
12.501 to 13.000......... 58 6.15 2,588,456.83
13.001 to 13.500......... 88 8.09 3,405,574.79
13.501 to 14.000......... 122 10.55 4,441,494.92
14.001 to 14.500......... 110 9.36 3,940,079.58
14.501 to 15.000......... 287 12.51 5,268,920.44
15.001 to 15.500......... 428 14.88 6,265,254.00
15.501 to 16.000......... 250 9.16 3,859,510.51
16.001 to 16.500......... 239 7.54 3,175,689.14
16.501 to 17.000......... 48 3.00 1,264,514.53
17.001 to 17.500......... 32 1.94 819,078.84
17.501 to 18.000......... 17 0.99 417,717.23
18.001 to 18.500......... 14 0.75 316,851.16
18.501 to 19.000......... 1 0.05 21,700.00
19.001 to 19.500......... 4 0.36 153,149.76
24.501 to 25.000......... 1 0.07 29,547.88
----- ------ ---------------
Total.............. 1,833 100.00% $ 42,114,829.63
===== ====== ===============
</TABLE>
The weighted average Mortgage Interest Rate of the Group III Mortgage
Loans is approximately 14.320% per annum.
S-37
<PAGE>
GROSS MARGIN OF GROUP III MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of
Initial Percentage of Aggregate Aggregate Unpaid
Mortgage Principal Balance of Principal Balance of
Gross Margins (%) Loans Group III Mortgage Loans Group III Mortgage Loans
- ----------------- ----------- -------------------------- --------------------------
<S> <C> <C> <C> <C>
0.000 to 0.500............ 5 0.58% $ 243,726.84
0.501 to 1.000............ 8 0.97 407,818.41
1.001 to 1.500............ 4 0.48 203,871.27
1.501 to 2.000............ 3 0.24 99,372.39
2.001 to 2.500............ 8 0.96 403,555.91
2.501 to 3.000............ 12 1.38 582,966.14
3.001 to 3.500............ 25 2.82 1,186,036.13
3.501 to 4.000............ 58 6.13 2,583,573.46
4.001 to 4.500............ 46 4.87 2,050,052.97
4.501 to 5.000............ 72 6.83 2,877,011.10
5.001 to 5.500............ 107 10.26 4,321,436.93
5.501 to 6.000............ 115 8.91 3,752,629.72
6.001 to 6.500............ 111 9.13 3,844,110.30
6.501 to 7.000............ 476 16.71 7,035,373.64
7.001 to 7.500............ 225 9.13 3,846,314.27
7.501 to 8.000............ 375 11.09 4,668,442.23
8.001 to 8.500............ 99 4.12 1,734,913.46
8.501 to 9.000............ 40 2.77 1,168,579.89
9.001 to 9.500............ 18 1.07 448,654.44
9.501 to 10.000........... 16 0.86 361,095.52
10.001+ 10 0.70 295,294.61
----- ------ ---------------
Total................... 1,833 100.00% $ 42,114,829.63
===== ====== ===============
</TABLE>
The weighted average Gross Margin is approximately 6.113% per annum.
S-38
<PAGE>
LIFETIME RATE CAPS OF GROUP III MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of
Initial Percentage of Aggregate Aggregate Unpaid Principal
Mortgage Principal Balance of Group Balance of Group III
Lifetime Rate Caps (%) Loans III Mortgage Loans Mortgage Loans
- ---------------------- ----------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C>
15.501 to 16.000........... 7 0.57% $ 240,782.39
16.001 to 16.500........... 5 0.58 245,121.37
16.501 to 17.000........... 3 0.35 145,373.17
17.001 to 17.500........... 8 0.93 391,947.19
17.501 to 18.000........... 411 19.36 8,155,223.05
18.001 to 18.500........... 7 0.90 378,822.35
18.501 to 19.000........... 13 1.31 552,457.22
19.001 to 19.500........... 21 2.43 1,024,489.75
19.501 to 20.000........... 125 10.82 4,555,927.48
20.001 to 20.500........... 39 4.32 1,818,098.53
20.501 to 21.000........... 194 10.44 4,395,582.94
21.001 to 21.500........... 57 5.52 2,324,996.49
21.501 to 22.000........... 75 6.15 2,588,829.61
22.001 to 22.500........... 58 4.54 1,910,340.76
22.501 to 23.000........... 421 14.51 6,111,636.38
23.001 to 23.500........... 44 2.92 1,228,443.95
23.501 to 24.000........... 255 8.34 3,510,272.93
24.001+ 90 6.02 2,536,484.07
----- ------ ---------------
Total.................... 1,833 100.00% $ 42,114,829.63
===== ====== ===============
</TABLE>
The weighted average Lifetime Rate Cap is approximately 21.061% per
annum.
S-39
<PAGE>
LIFETIME RATE FLOORS OF GROUP III MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of
Initial Percentage of Aggregate Aggregate Unpaid Principal
Mortgage Principal Balance of Group Balance of Group III
Lifetime Rate Floors (%) Loans III Mortgage Loans Mortgage Loans
- ------------------------ ----------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C>
0.000 to 6.500............ 9 0.91% $ 384,445.23
6.501 to 7.000............ 3 0.35 145,373.17
7.001 to 7.500............ 9 0.99 415,709.35
7.501 to 8.000............ 4 0.34 143,113.70
8.001 to 8.500............ 9 1.14 480,774.29
8.501 to 9.000............ 15 1.65 695,929.98
9.001 to 9.500............ 25 2.73 1,148,847.52
9.501 to 10.000........... 41 4.14 1,744,014.96
10.001 to 10.500........... 53 5.94 2,500,400.63
10.501 to 11.000........... 73 6.71 2,827,793.59
11.001 to 11.500........... 83 8.13 3,424,843.44
11.501 to 12.000........... 133 11.08 4,667,014.62
12.001 to 12.500........... 92 7.37 3,102,090.43
12.501 to 13.000........... 643 22.39 9,427,928.32
13.001 to 13.500........... 67 4.35 1,831,902.48
13.501 to 14.000........... 439 13.44 5,658,429.69
14.001 to 14.500........... 41 2.46 1,036,609.42
14.501 to 15.000........... 45 2.91 1,225,338.24
15.001 to 15.500........... 16 0.95 398,980.44
15.501 to 16.000........... 21 1.29 542,305.27
16.001 to 16.500........... 7 0.33 138,135.10
16.501 to 17.000........... 2 0.22 91,249.76
17.001 to 17.500........... 3 0.20 83,600.00
----- ------ ---------------
Total................... 1,833 100.00% $ 42,114,829.63
===== ====== ===============
</TABLE>
The weighted average Lifetime Rate Floor is approximately 12.120% per
annum.
S-40
<PAGE>
CREDIT LIMIT UTILIZATION RATES OF GROUP III MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of
Initial Percentage of Aggregate Aggregate Unpaid Principal
Credit Limit Utilization Mortgage Principal Balance of Group Balance of Group III
Rates (%) Loans III Mortgage Loans Mortgage Loans
- -------------------------- ----------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C>
0.000 to 10.000 3 0.01% $ 4,716.17
10.001 to 15.000 1 0.01 4,392.67
20.001 to 25.000 1 0.04 17,041.96
25.501 to 30.000 1 0.02 9,435.10
30.001 to 35.000 1 0.02 8,096.50
35.501 to 40.000 4 0.12 48,723.92
45.501 to 50.000 4 0.09 37,012.40
50.001 to 55.000 4 0.10 42,230.41
55.501 to 60.000 6 0.27 113,460.85
60.001 to 65.000 5 0.25 103,189.70
65.501 to 70.000 9 0.60 251,838.36
70.001 to 75.000 8 0.55 232,889.09
75.501 to 80.000 8 0.52 218,941.42
80.001 to 85.000 7 0.50 212,234.47
85.001 to 90.000 17 1.38 580,888.51
90.501 to 95.000 26 1.72 722,822.55
95.001 to 100.000 1,728 93.81 39,506,915.55
----- ------ --------------
Total................... 1,833 100.00% $42,114,829.63
===== ====== ==============
</TABLE>
The weighted average Credit Limit Utilization Rate is approximately
98.34% per annum.
S-41
<PAGE>
ORIGINAL TERM TO MATURITY OF GROUP III MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Original Term to Maturity Mortgage Principal Balance of of Group III
(months) Loans Group III Mortgage Loans Mortgage Loans
- -------------------------- ----------- -------------------------- -------------------
<S> <C> <C> <C> <C>
121 to 180 1 0.11% $ 45,771.10
181 to 240 1,831 99.81 42,036,358.53
241 to 300 1 0.08 32,700.00
----- ------ ---------------
Total................... 1,833 100.00% $ 42,114,829.63
===== ====== ===============
</TABLE>
The weighted average original term to Maturity is approximately 240
months.
REMAINING TERM TO MATURITY OF GROUP III MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate Unpaid
Number of Percentage of Aggregate Principal Balance
Remaining Term to Maturity Initial Mortgage Principal Balance of of Group III
(months) Loans Group III Mortgage Loans Mortgage Loans
- --------------------------- ------------------ -------------------------- -------------------
<S> <C> <C> <C> <C>
121 to 180............ 1 0.11% $ 45,771.10
181 to 240............ 1,831 99.81 42,036,358.53
241 to 300............ 1 0.08 32,700.00
----- ------ ----------------
Total.................. 1,833 100.00% $ 42,114,829.63
===== ====== ================
</TABLE>
The calculated weighted average remaining term of the Group III
Mortgage Loans is approximately 234 months.
S-42
<PAGE>
YEAR OF ORIGINATION OF GROUP III MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate Unpaid
Number of Percentage of Aggregate Principal Balance
Initial Mortgage Principal Balance of of Group III
Year of Origination Loans Group III Mortgage Loans Mortgage Loans
- ------------------- ------------------ -------------------------- -------------------
<S> <C> <C> <C>
1997........... 6 0.36% $ 152,034.32
1998........... 248 22.08 9,298,638.86
1999.......................... 1,579 77.56 32,664,156.45
----- ------ ----------------
Total.................. 1,833 100.00% $ 42,114,829.63
===== ====== ================
</TABLE>
The earliest month and year of origination of any Group III Mortgage
Loan is June 1997 and the latest month and year of origination is October 1999.
MORTGAGED PROPERTIES SECURING GROUP III MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate Unpaid
Number of Percentage of Aggregate Principal Balance
Initial Mortgage Principal Balance of of Group III
Property Type Loans Group III Mortgage Loans Mortgage Loans
- ------------- ------------------ -------------------------- -------------------
<S> <C> <C> <C>
Condominium........................ 75 4.80% $ 2,023,340.92
Multi-Family....................... 12 0.31 130,942.54
Planned Unit Development........... 57 5.80 2,440,816.54
Single-Family Dwelling............. 1,689 89.09 37,519,729.53
----- ------ ---------------
Total................ 1,833 100.00% $ 42,114,829.63
===== ====== ===============
</TABLE>
S-43
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS OF GROUP III MORTGAGE LOANS*
<TABLE>
<CAPTION>
Aggregate Unpaid
Number of Percentage of Aggregate Principal Balance
Combined Loan-to-Value Ratio Initial Mortgage Principal Balance of of Group III
Ratio (%) Loans Group III Mortgage Loans Mortgage Loans
- ---------------------------- ------------------ -------------------------- -------------------
<S> <C> <C> <C> <C>
10.01 to 15.00 2 0.09% $ 38,350.00
15.01 to 20.00 1 0.03 11,000.00
20.01 to 25.00 1 0.03 11,000.00
35.01 to 40.00 2 0.06 25,999.71
40.01 to 45.00 5 0.15 63,000.00
45.01 to 50.00 3 0.08 33,000.00
50.01 to 55.00 3 0.08 32,885.19
55.01 to 60.00 7 0.18 76,969.32
60.01 to 65.00 13 0.34 142,257.66
65.01 to 70.00 26 0.67 283,610.16
70.01 to 75.00 30 0.78 328,897.56
75.01 to 80.00 56 1.50 630,408.82
80.01 to 85.00 68 1.90 800,665.36
85.01 to 90.00 80 2.10 884,249.39
90.01 to 95.00 88 2.31 971,681.60
95.01 to 100.00 127 3.37 1,417,844.24
100.01 to 105.00 197 8.40 3,539,448.04
105.01 to 100.00 263 13.86 5,837,274.03
110.01 to 115.00 242 14.65 6,167,915.22
115.01 to 120.00 196 14.40 6,066,436.90
120.01 to 125.00 405 34.56 14,553,936.64
125.01 to 150.00 14 0.37 153,999.79
150.01+ 4 0.10 44,000.00
----- ------ ---------------
Total............... 1,833 100.00% $ 42,114,829.63
===== ====== ===============
</TABLE>
The minimum and maximum Combined Loan-to-Value Ratios of the Group III
Mortgage Loans as of the Statistical Calculation Date are approximately 10.63%
and 162.82%, respectively, and the weighted average Combined Loan-to-Value Ratio
as of the Statistical Calculation Date of the Group III Mortgage Loans is
approximately 111.97%. The "Combined Loan-to-Value Ratio" of a Group III
Mortgage Loan as of the Statistical Calculation Date is the ratio, expressed as
a percentage, equal to the sum of any outstanding first and other mortgage
balances, if any, as of the date of origination plus the Principal Balance of
such Group III Mortgage Loan as of the Statistical Calculation Date divided by
the Appraised Value of the Mortgaged Property at origination.
S-44
<PAGE>
PRINCIPAL BALANCES OF GROUP III MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate Unpaid
Number of Percentage of Aggregate Principal Balance
Initial Mortgage Principal Balance of Group of Group III
Principal Balance Loans III Mortgage Loans Mortgage Loans
- ----------------- ------------------ ---------------------------- -------------------
<S> <C> <C> <C> <C>
$0.01 to $10,000.00...... 27 0.46% $ 195,735.86
$10,000.01 to $20,000.00...... 1,045 29.41 12,385,597.17
$20,000.01 to $30,000.00...... 247 14.66 6,172,691.58
$30,000.01 to $40,000.00...... 242 19.81 8,342,230.65
$40,000.01 to $50,000.00...... 149 16.52 6,957,067.14
$50,000.01 to $60,000.00...... 40 5.21 2,195,147.46
$60,000.01 to $70,000.00...... 35 5.43 2,287,458.90
$70,000.01 to $80,000.00...... 48 8.50 3,578,900.87
----- ------ --------------
Total................... 1,833 100.00% $42,114,829.63
===== ====== ==============
</TABLE>
As of the Statistical Calculation Date, the average unpaid principal
balance of the Group III Mortgage Loans is approximately $22,975.90.
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES SECURING
GROUP III MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate Unpaid
Number of Percentage of Aggregate Principal Balance
Initial Mortgage Principal Balance of of Group III
State Loans Group III Mortgage Loans Mortgage Loans
- ----------- ------------------ -------------------------- -------------------
<S> <C> <C> <C>
Arizona........................... 89 4.32 $ 1,817,944.72
California........................ 395 20.80% 8,760,978.50
Florida........................... 281 12.35 5,200,084.61
Georgia........................... 146 5.30 2,233,782.62
Illinois.......................... 42 3.65 1,535,358.60
Maryland.......................... 61 5.04 2,121,022.09
Michigan.......................... 38 3.04 1,280,467.95
New Jersey........................ 96 5.50 2,315,398.77
New York.......................... 38 3.01 1,269,308.43
Ohio.............................. 64 4.67 1,966,371.75
Pennsylvania...................... 122 4.41 1,855,430.98
Virginia.......................... 136 7.27 3,063,076.42
Washington........................ 110 5.18 2,179,528.18
Other (less than 2%).............. 215 15.47 6,516,076.01
----- ------ --------------
Total.............. 1,833 100.00% $42,114,829.63
===== ====== ==============
</TABLE>
No more than approximately 0.41% of the Group III Mortgage Loans are
secured by Mortgaged Properties located in any one zip code.
S-45
<PAGE>
DEBT-TO-INCOME RATIOS OF GROUP III MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Mortgage Principal Balance of Group of Group III
Debt-to-Income Ratios (%) Loans III Mortgage Loans Mortgage Loans
- ------------------------- --------- -------------------------- -----------------
<S> <C> <C> <C>
0.01 to 5.00 2 0.11% $ 44,944.63
5.01 to 10.00 7 0.20 84,041.02
10.01 to 15.00 7 0.19 80,677.12
15.01 to 20.00 15 0.58 243,708.35
20.01 to 25.00 47 2.04 861,242.13
25.01 to 30.00 111 6.40 2,693,535.18
30.01 to 35.00 206 11.38 4,790,812.85
35.01 to 40.00 255 15.66 6,596,930.61
40.01 to 45.00 298 17.57 7,401,056.55
45.01 to 50.00 326 19.90 8,381,491.14
50.01 to 55.00 263 18.00 7,578,899.62
55.01+ 296 7.97 3,357,490.43
----- ------ ----------------
Total............... 1,833 100.00% $ 42,114,829.63
===== ====== ================
</TABLE>
The weighted average Debt-to-Income Ratio of the Group III Mortgage
Loans is approximately 44.13%.
OCCUPANCY TYPE OF GROUP III MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid Principal
Initial Percentage of Aggregate Balance
Mortgage Principal Balance of of Group III
Occupancy Type Loans Group III Mortgage Loans Mortgage Loans
- -------------- --------- ------------------------ --------------------------
<S> <C> <C> <C>
Owner Occupied..................... 1,822 99.66% $41,970,329.63
Non Owner Occupied................. 11 0.34 144,500.00
----- ------ --------------
Total............... 1,833 100.00% $42,114,829.63
===== ====== ==============
</TABLE>
S-46
<PAGE>
CREDIT QUALITY OF GROUP III MORTGAGE LOANS
<TABLE>
Aggregate Unpaid
Number of Percentage of Aggregate Principal Balance
Initial Mortgage Principal Balance of of Group III
Credit Quality Loans Group III Mortgage Loans Mortgage Loans
- -------------- ---------------- ------------------------ -----------------
<S> <C> <C> <C>
Excellent.......................... 1,255 78.63 $33,112,951.29
Superior........................... 295 12.36 5,206,374.07
Good............................... 207 6.96 2,933,209.66
Fair............................... 46 1.19 501,522.72
Other.............................. 30 0.86 360,771.89
----- ------ --------------
Total............... 1,833 100.00% $42,114,829.63
===== ====== ==============
</TABLE>
Credit grades run from Excellent to Superior to Good to Fair to Other
in descending order.
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
Mortgage Loan Sale Agreement and the Purchase and Sale Agreement -- Assignment
of Mortgage Loans" herein.
Conveyance of Subsequent Mortgage Loans, the Pre-Funding Account and the
Funding Account
The Sale and Servicing Agreement permits the Trust to acquire certain
Mortgage Loans (the "Subsequent Mortgage Loans") after the Closing Date and
prior to May 31, 2000. Accordingly, the statistical characteristics of the
Mortgage Loans will vary as of any Cut-Off Date subsequent to the Closing Date
upon the acquisition of Subsequent Mortgage Loans. Each Subsequent Mortgage Loan
will be purchased by the Trust at a purchase price equal to the Principal
Balance thereof as of the related Cut-Off Date. The date of transfer of a
Subsequent Mortgage Loan to the Trust is the "Subsequent Transfer Date."
The obligation of the Trust to purchase Subsequent Mortgage Loans on a
Subsequent Transfer Date is subject to the consent of the Enhancer and to
certain requirements set forth in the Purchase and Sale Agreement, which are
designed to ensure that, following such purchase, the characteristics of the
Mortgage Loans in the aggregate for each Loan Group will not differ materially
from the characteristics of the Initial Mortgage Loans.
The Pre-Funding Account. The Master Servicer will cause an account (the
"Pre-Funding Account") to be established in the name of the Indenture Trustee,
and will deposit the Pre-Funded Amount therein on the Closing Date from the net
proceeds of the sale of the Term Notes. The "Pre-Funded Amount" will be an
amount equal to the excess of the aggregate initial Term Note Balance plus the
initial Overcollateralization Amount, if any, required by the Enhancer, over the
sum of the aggregate Principal Balance of the Initial Mortgage Loans and the
aggregate Principal Balance of the Additional Mortgage Loans acquired by the
Trust on the Closing Date. Monies in the Pre-Funding Account will be applied
during the Pre-Funding Period to purchase Subsequent Mortgage Loans from the
Transferor. The "Pre-Funding Period" will be the period from the Closing Date
until the earliest of (i) the date on which the amount on deposit in the
Pre-Funding Account is less than $100,000, (ii) May 31, 2000 and (iii) the
occurrence, if any, of a servicer default under the Sale and Servicing Agreement
or a Rapid Amortization Event. The Pre-Funding Account will be part of the
Trust, but monies on deposit therein will not be available to cover losses on or
in respect of the Mortgage Loans. Any portion of the Pre-Funded Amount remaining
on deposit in the Pre-Funding Account at the end of the Pre-Funding Period for
the Class A-1 and A-2 Term Notes, that was allocated to purchase Subsequent
Mortgage Loans for Loan Group I and Loan Group II, respectively, will be paid to
the related Class of Noteholders as a payment of principal. Any portion of the
Pre-Funded Amount remaining on deposit in the Pre-Funding Account at the end of
the Pre-Funding Period for the Class A-3 Term Notes, will be
S-47
<PAGE>
applied first to acquire any additional draws under the HELOCs during
the period from the Closing Date to but excluding the beginning of the Rapid
Amortization Period for the Class A-3 Term Notes (the "Additional Balances")
and thereafter will be paid to Noteholders. Monies on deposit in the
Pre-Funding Account may be invested in Permitted Investments as provided in the
Indenture. Net income on investment of funds in the Pre-Funding Account will be
deposited into or credited to an account held by the Indenture Trustee
designated the "capitalized interest account" (the "Capitalized Interest
Account"). There can be no assurance that a sufficient number of Subsequent
Mortgage Loans for any Loan Group will be available for application of the
entire Pre-Funded Amount.
The Funding Account. The Class A-1 Term Notes will be subject to
redemption in part on the Payment Date immediately succeeding the date on which
the Revolving Period ends in the event that any amounts relating to Loan Group I
remain on deposit in the Funding Account, after giving effect to the purchase by
the Trust of all Subsequent Mortgage Loans, including any such purchase on the
date on which the Revolving Period ends. The Class A-3 Term Notes will be
subject to redemption in part on the Payment Date immediately succeeding the
date on which the Managed Amortization Period ends in the event that any amounts
relating to Loan Group III remain on deposit in the Funding Account, after
giving effect to the purchase by the Trust of all Additional Balances, including
any such purchase on the date on which the Managed Amortization Period ends.
IRWIN FUNDING CORP.
Irwin Funding Corp. (the "Transferor"), 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, broker channels 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 September 30, 1999, the Originator had
over $320.8 million in assets, had originated $1,165.3 million in mortgage loans
and was a Freddie Mac approved seller-servicer. The Originator underwrites
first, second and more junior 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 will sell to the Depositor
pursuant to a purchase and sale agreement between the Transferor and the
Depositor (together, the "Mortgage Sale Agreements"). 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 Sale and Servicing Agreement. However, the Originator
will subservice the Mortgage Loans pursuant to a Subservicing
S-48
<PAGE>
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 September 30, 1999, the Originator serviced 19,723 mortgage
loans with an outstanding principal balance of approximately $749.1 million.
At September 30, 1999, the Originator had approximately 309 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.
The Originator's Servicing Portfolio
<TABLE>
<CAPTION>
Year ended Year Ended Year Ended Nine Months Ended
December 31, 1996 December 31, 1997 December 31, 1998 September 30, 1999
----------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Beginning servicing $ 85,787,401 $ 230,449,915 $ 358,165,795 $ 581,243,178
portfolio Add:
Loans originated $ 169,119,113 $ 214,517,880 $ 389,673,129 $ 304,660,744
Deduct: Principal Payments $ (24,456,600) $ (86,802,000) $(166,595,726) $(136,763,981)
(net of subsequent draws)
Sale of servicing 0 0 0 0
rights
Loans sold, 0 0 0 0
servicing released
Ending servicing portfolio $ 230,449,915 $ 358,165,795 $ 581,243,178 $ 749,139,941
Number of loans serviced 7,247 10,800 14,578 19,723
Average loan size $ 31,799 $ 33,163 $ 39,871 $ 37,983
</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-49
<PAGE>
Delinquency Experience
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
----------------------------------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Number Number Number Number Number
of Dollar of Dollar of Dollar of Dollar of Dollar
Accounts Managed Loans Amount Loans Amount Loans Amount Loans Amount Loans Amount
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2,682 $85,787 7,247 $230,450 10,800 $358,166 14,578 $581,243 19,273 $749,140
Principal
Balance of
Mortgage Loans:
------------------
30--59 Days Past
Due (1).......... 10 $ 354 50 $ 1,427 80 $ 2,516 108 $ 3,590 215 $ 6,662
60-89 Days Past
Due (1).......... 2 $ 94 10 $ 287 12 $ 372 13 $ 352 33 $ 981
90+ Days Past
Due (1).......... 0 $ 0 8 $ 176 28 $ 905 31 $ 991 42 $ 1,501
Foreclosures..... 0 $ 0 8 $ 371 38 $ 1,546 62 $ 2,151 121 $ 4,138
REO Properties
(2).............. 0 $ 0 5 $ 322 3 $ 5 8 $ 277 14 $ 405
</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.
Loss Experience
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
----------------------------------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Aggregate Principal
Balance Outstanding. $85,787 $230,450 $358,166 $581,243 $749,140
Net Charge-offs (1). $ 0 $ 37 $ 1,026 $ 2,141 $ 2,202
Total Loans in Foreclosure $ 0 $ 693 $ 1,696 $ 2,428 $ 4,138
----------------------------------------------------------------------------------------------------------------------------
Net Charge-offs as a % %
Percentage of Aggregate
Amount Outstanding at
period-end.......... 0.00% 0.02 0.29 0.37% 0.29%
</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
S-50
<PAGE>
purposes of estimating the future delinquency and loss experience of
mortgage loans similar to the Mortgage Loans being sold to the Trust.
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 Enhancer make any representation as to the accuracy or
completeness of such information.
PREPAYMENT AND YIELD CONSIDERATIONS
General
The yield to maturity and the aggregate amount of payments on the Term
Notes will depend on the price paid by the related Term Noteholder for such Term
Note, the related Note 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 and, in the case of the HELOCs, the rate and timing of draws and the
allocations thereof. Approximately 77.13% of the Group I Mortgage Loans,
approximately 68.36% of the Group II Mortgage Loans and approximately 47.96% of
the Group III 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 among Group I Mortgage Loans, Group II Mortgage Loans
and Group III Mortgage Loans, as between HELOCs and HELs, and as between HELOCs
with Additional Balances and those without Additional Balances. 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 Term Note is purchased at a premium over its face
amount and payments of principal of such Term Note occur at a rate faster than
that assumed at the time of purchase, the purchaser's actual yield to maturity
will be lower than that anticipated at the time of purchase. Conversely, if a
Term Note is purchased at a discount from its face amount and payments of
principal of such Term Note occur at a rate that is slower than that assumed at
the time of purchase, the purchaser's actual yield to maturity will be lower
than originally anticipated.
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 Term Notes.
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
Term Noteholders 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 Term Notes
will be influenced by, among other factors, the rate of principal payments (and,
with respect to the HELOCs, the rate of draws) on the Mortgage Loans in the
related Loan Group.
S-51
<PAGE>
The primary source of information available to investors concerning the
Term Notes will be the monthly statements discussed herein under "Description of
the Trust Agreement and Indenture-- Reports to Term Noteholders" and in the
Prospectus under "Description of the Securities-Reports to Holders", which will
include information as to the outstanding Term Note Balance. There can be no
assurance that any additional information regarding the Term Notes will be
available through any other source. In addition, the Depositor is not aware of
any source through which price information about the Term Notes will be
generally available on an ongoing basis. The limited nature of such information
regarding the Term Notes may adversely affect the liquidity of the Term Notes,
even if a secondary market for the Term Notes becomes available.
HELOCs. There can be no assurance as to the rate of principal payments
or the rate of draws on the HELOCs. The rate of principal payments and/or draws
may fluctuate substantially from time to time. Generally, revolving credit loans
such as the HELOCs are not viewed by mortgagors as permanent financing. Due to
the unpredictable nature of both principal payments and draws, the rates of
principal payments net of draws may be much more volatile than that for typical
first lien mortgage loans. In addition, the repayment of any HELOC may be
dependent on the ability of the related Mortgagor to make larger interest
payments following the adjustment of the Mortgage Interest Rate during the life
of such HELOC. The rate of such losses and delinquencies is likely to be higher
than that of traditional first lien mortgage loans, particularly in the case of
HELOCs with high Combined Loan-to-Value Ratios. 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 Securityholders will bear the risk of losses
resulting from default by Mortgagors. See "Risk Factors" herein and in the
Prospectus.
Funding Account. Amounts on deposit in the Funding Account may be used
during the Revolving Period for the Class A-1 Term Notes and during the Managed
Amortization Period for the Class A-3 Term Notes, to acquire, in the case of
Loan Group I, Subsequent Mortgage Loans for Loan Group I, and in the case of
Loan Group III, Additional Balances for Loan Group III. In the event that, at
the end of the Revolving Period, any amounts on deposit in the Funding Account
have not been used to acquire Subsequent Mortgage Loans for Loan Group I, then
the Class A-1 Term Notes will be prepaid in part on the following Payment Date.
Tables
The tables set forth below are based on the constant prepayment rate
("CPR", which is the assumed rate of prepayment each month as an annualized
percentage of the then outstanding principal balance of a pool of mortgage
loans), constant draw rate (in the case of the HELOCs and Immediate Credit
HELOCs, and which, for purposes of the assumptions, is the amount of Additional
Balances drawn each month as an annualized percentage of the principal balance
of the Mortgage Loans in Loan Group III outstanding at the beginning of such
month) and optional termination assumptions as indicated in the tables below.
The Mortgage Loans are assumed to consist of sub-pools of Mortgage
Loans with the characteristics set forth below in the table captioned "Assumed
Mortgage Loan Characteristics".
In addition, it was assumed that (i) payments are made in accordance
with the description set forth under "Description of the Securities -- Priority
of Distributions", (ii) no extension past the scheduled maturity date of a
Mortgage Loan is made, (iii) no delinquencies or defaults occur, (iv) in the
case of the HELOCs and the Immediate Credit HELOCs, monthly draws are calculated
under each of the assumptions as set forth in the tables below before giving
effect to prepayments, (v) the Mortgage Loans pay on the basis of a 30-day month
and a 360-day year, (vi) there is no restriction on the Maximum Variable Funding
Balance, (vii) no Rapid Amortization Event or Managed Amortization Event occurs,
(viii) the scheduled due date for each Mortgage Loan is the first day of each
calendar month, (ix) the Closing Date is December 15, 1999, (x) for the initial
Payment Date LIBOR is equal to 6.47625% per annum and for each Payment Date
thereafter LIBOR is equal to 5.60000% per annum, (xi) the initial Term Note
Balances are as set forth on the cover page hereof and (xii) unless otherwise
noted, the Master Servicer has not exercised the optional termination as set
forth in "Description of the Securities - Maturity and Optional Redemption".
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 and
S-52
<PAGE>
(in the case of the HELOCs and the Immediate Credit HELOCs) draw scenarios. For
example, it is very unlikely that the Mortgage Loans in the related Loan Group
will prepay and/or experience draws at a constant rate until maturity or that
all Mortgage Loans in the related Loan Group will prepay and/or experience
draws 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 Security Balances
outstanding over time and the weighted average life of the Term Notes. Neither
the CPR model nor any other prepayment model or assumption purports to be an
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans. Variations in the actual prepayment experience and the
Principal Balances of the Mortgage Loans that prepay may increase or decrease
each weighted average life shown in the following tables. Such variations may
occur even if the average prepayment experience of all Mortgage Loans equals
the indicated CPR.
Assumed Mortgage Loan Characteristics
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Remaining Term
Initial Gross Original Term to to Stated
Outstanding Mortgage Stated Maturity Maturity
Loan Group Principal Balance Interest Rate Servicing (months) (months)
---------- ----------------- ------------- --------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
I $131,313,131.31 11.850% 0.500% 230 226
II $71,794,871.82 14.623% 0.765% 187 183
III $52,631,578.95 14.320% 1.051% 240 234
-------------------------------------
Total $255,739,582.08
===============
</TABLE>
Subject to the foregoing discussion and assumptions, the following
tables sets forth the percentage of the initial Term Note Balance of the Term
Notes that would be outstanding after each of the Payment Dates shown at various
percentages of CPR, and indicate the weighted average life of each class of Term
Notes.
S-53
<PAGE>
Percentage of Term Note Balance (1)(3)
Class A-1
<TABLE>
<CAPTION>
Payment Date Percentage of Balance
- ---------------------------------------------------------------------------------------------------------------------
CPR 0% 10% 14% 19% 24% 29%
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Initial............................. 100 100 100 100 100 100
December 2000............................. 96 90 87 83 80 76
December 2001............................. 94 78 72 65 58 51
December 2002............................. 92 69 60 50 42 35
December 2003............................. 90 60 50 40 31 24
December 2004............................. 88 52 41 31 23 17
December 2005............................. 85 45 34 25 17 12
December 2006............................. 82 39 29 19 13 8
December 2007............................. 78 33 24 15 9 5
December 2008............................. 74 29 19 11 7 4
December 2009............................. 70 24 16 9 5 2
December 2010............................. 64 20 13 7 3 1
December 2011............................. 59 17 10 5 2 1
December 2012............................. 52 14 8 3 1 *
December 2013............................. 45 11 6 2 1 0
December 2014............................. 38 8 4 1 * 0
December 2015............................. 29 6 3 1 0 0
December 2016............................. 20 3 1 * 0 0
December 2017............................. 10 1 * 0 0 0
December 2018............................. 0 0 0 0 0 0
Weighted Average Life to 10% call
(years) (2) .............................. 12.20 6.37 5.10 4.01 3.27 2.74
Weighted Average Life to maturity
(years) (3)............................... 12.24 6.54 5.33 4.25 3.50 2.94
</TABLE>
(1) All percentages are rounded to the nearest 1%.
(2) Assumes that an optional termination is exercised on the first Payment
Date on which the aggregate outstanding Principal Balance of the
Mortgage Loans in Loan Group I is less than 10% of the sum of (x) the
aggregate Principal Balance of the Mortgage Loans in Loan Group I as of
the related Cut-Off Date and (y) the amount on deposit in the
Pre-Funding Account on the Closing Date that is available to purchase
Mortgage Loans for Loan Group I.
(3) Assumes the Class A-1 Term Notes pay to maturity.
* indicates a number less than 0.5% but greater than 0%.
S-54
<PAGE>
Percentage of Term Note Balance (1)(3)
Class A-2
<TABLE>
<CAPTION>
Payment Date Percentage of Balance
- ---------------------------------------------------------------------------------------------------------------------
CPR 0% 9% 13% 17% 21% 26%
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Initial.................................. 100 100 100 100 100 100
December 2000............................ 92 83 79 75 71 66
December 2001............................ 88 71 64 57 51 44
December 2002............................ 85 62 53 44 38 31
December 2003............................ 82 53 43 35 29 22
December 2004............................ 79 45 36 28 22 16
December 2005............................ 75 39 30 22 17 11
December 2006............................ 70 33 24 17 12 8
December 2007............................ 65 28 20 14 9 5
December 2008............................ 58 24 16 10 7 4
December 2009............................ 51 19 12 8 5 2
December 2010............................ 43 15 9 5 3 1
December 2011............................ 35 11 7 4 2 1
December 2012............................ 26 8 4 2 1 *
December 2013............................ 15 4 2 1 * 0
December 2014............................ 3 * 0 0 0 0
December 2015............................ 0 0 0 0 0 0
Weighted Average Life to 10% call
(years) (2).............................. 9.21 5.41 4.39 3.61 3.01 2.47
Weighted Average Life to maturity
(years) (3).............................. 9.24 5.51 4.53 3.78 3.20 2.65
</TABLE>
(1) All percentages are rounded to the nearest 1%.
(2) Assumes that an optional termination is exercised on the first Payment
Date on which the aggregate outstanding Principal Balance of the
Mortgage Loans in Loan Group II is less than 10% of the sum of (x) the
aggregate Principal Balance of the Mortgage Loans in Loan Group II as
of the related Cut-Off Date and (y) the amount on deposit in the
Pre-Funding Account on the Closing Date that is available to purchase
Mortgage Loans for Loan Group II.
(3) Assumes the Class A-2 Term Notes pay to maturity.
* indicates a number less than 0.5% but greater than 0%.
S-55
<PAGE>
Percentage of Term Note Balance (1)(3)(4)
Class A-3
<TABLE>
<CAPTION>
Payment Date Percentage of Balance
- ---------------------------------------------------------------------------------------------------------------------
CPR 2% 10% 14% 19% 24% 29%
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Initial................................. 100 100 100 100 100 100
December 2000........................... 92 84 80 75 70 64
December 2001........................... 92 76 68 59 50 42
December 2002........................... 92 69 58 47 37 30
December 2003........................... 92 62 50 37 29 22
December 2004........................... 90 55 41 30 22 15
December 2005........................... 88 48 34 24 16 11
December 2006........................... 86 42 29 19 12 8
December 2007........................... 84 36 25 16 9 5
December 2008........................... 82 32 21 13 7 4
December 2009........................... 80 29 18 10 5 3
December 2010........................... 79 26 16 8 4 2
December 2011........................... 77 23 13 7 3 1
December 2012........................... 75 21 11 5 2 1
December 2013........................... 73 19 10 4 2 *
December 2014........................... 72 17 8 3 1 *
December 2015........................... 70 15 7 3 1 *
December 2016........................... 68 13 6 2 1 0
December 2017........................... 67 12 5 2 * 0
December 2018........................... 65 11 4 1 * 0
December 2019........................... 0 0 0 0 0 0
Weighted Average Life to 10% call
(years) (2) ............................ 15.82 7.44 5.54 3.96 3.04 2.44
Weighted Average Life to maturity
(years) (3)............................. 15.82 7.44 5.63 4.20 3.27 2.63
</TABLE>
(1) All percentages are rounded to the nearest 1%.
(2) Assumes that an optional termination is exercised on the first Payment
Date on which the aggregate outstanding Principal Balance of the
Mortgage Loans in Loan Group III is less than 10% of the sum of (x) the
aggregate Principal Balance of the Mortgage Loans in Loan Group III as
of the related Cut-Off Date and (y) the amount on deposit in the
Pre-Funding Account on the Closing Date that is available to purchase
Mortgage Loans for Loan Group III.
(3) Assumes the Class A-3 Term Notes pay to maturity.
(4) Assumes a constant draw rate of 2% per annum.
* indicates a number less than 0.5% but greater than 0%.
S-56
<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 Enhancer, the Trust, the Indenture Trustee, the Owner
Trustee, the Depositor or the Master Servicer will be liable to any Term
Noteholder for any loss or damage incurred by such Term Noteholder as a result
of a reduced rate of return experienced by such Term Noteholder relative to the
Note Rate, upon reinvestment of the funds received in connection with any
premature repayment of principal on the Term Notes, including, without
limitation, any such repayment resulting from prepayments, liquidations, or
repurchases of, or substitutions for, any Mortgage Loan.
THE MASTER SERVICER
Servicing Provisions
The Master Servicer will be responsible for servicing the Mortgage
Loans directly or through one or more subservicers in accordance with the terms
of the Sale and Servicing Agreement. Initially, the Originator will be the sole
subservicer with respect to the Mortgage Loans, and will perform all of the
duties of the Master Servicer under the Sale and Servicing Agreement. As such,
all discussion herein of the Master Servicer's obligations initially apply to
the Originator, as subservicer of the Mortgage Loans on behalf of the Master
Servicer. See "Servicing of Loans" in the Prospectus and "Servicing of the
Mortgage Loans" and "Description of the Sale and Servicing Agreement" herein.
Billing statements will be mailed to Mortgagors monthly by the Master
Servicer. Such statements will detail the monthly activity on the related
Mortgage Loan and specify the monthly payment due thereon.
For information regarding foreclosure procedures, see "Servicing of
Loans--Realization Upon Defaulted Loans" in the Prospectus and "Servicing of the
Mortgage Loans" herein. The Master Servicer's servicing and charge-off policies
and collection practices may change over time in accordance with the Master
Servicer's business judgment, changes in applicable laws and regulations and
other considerations.
Servicing Compensation
The Servicing Fee will be payable out of Interest Collections on the
Mortgage Loans. The Servicing Fee will be, with respect to any Collection
Period, the sum for all outstanding Mortgage Loans of the product of (i) the
applicable Servicing Fee Rate multiplied by a fraction, the numerator of which
is the actual number of days in the related Interest Period and the denominator
of which is 360 and (ii) the Principal Balance of the related Mortgage Loan as
of the first day of such Collection Period. The Servicing Fee Rate shall equal
(i) in the case of Immediate Credit Mortgage Loans, 2.00%, (ii) in the case of
all other Mortgage Loans assigned to Loan Group II and Loan Group III, 0.75%,
and (iii) in the case of all Mortgage Loans assigned to Loan Group I, 0.50%;
provided that in each case and so long as IUB is the Master Servicer, such
Servicing Fee Rate shall be reduced by 0.10% for any Collection Period that ends
prior to December 31, 2000. The Servicing Fee will serve as compensation to the
Master Servicer (or any applicable subservicer) in respect of its servicing
activities. In addition to the Servicing Fee, the Master Servicer will be
entitled under the Sale and Servicing Agreement to retain additional servicing
compensation in the form of assumption and other administrative fees, release
fees, bad check charges and certain other servicing-related fees. The Master
Servicer will be obligated to pay certain ongoing expenses incurred by it in
connection with its servicing activities and other responsibilities under the
Sale and Servicing Agreement.
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<PAGE>
SERVICING OF THE MORTGAGE LOANS
Collection and Other Servicing Procedures
The Master Servicer will be obligated under the Sale and Servicing
Agreement to service and administer the Mortgage Loans on behalf of the Trust,
and will have full power and authority, subject to the provisions of the Sale
and Servicing Agreement, to do any and all things in connection with such
servicing and administration that it may deem necessary. The Master Servicer may
perform any of its obligations under the Sale and Servicing Agreement through
one or more subservicers. Initially, the Originator will be the sole subservicer
of the Mortgage Loans. Notwithstanding any such subservicing arrangement, the
Master Servicer will remain liable for its servicing duties and obligations
under the Sale and Servicing Agreement as if it alone were servicing the
Mortgage Loans. The Master Servicer will be obligated under the Sale and
Servicing Agreement to make reasonable efforts to collect all payments due under
the terms and provisions of the related mortgage documents and will be
obligated, subject to the terms of the Sale and Servicing Agreement, to follow
such collection procedures as it would normally follow with respect to mortgage
loans serviced by it for its own account, and that generally conform to the
mortgage servicing practices of prudent mortgage lending institutions that
service mortgage loans of the same type as the Mortgage Loans for their own
accounts in the jurisdictions in which the related Mortgaged Properties are
located. Consistent with the foregoing, the Master Servicer will be permitted,
in its discretion, to, among other things, (i) waive any late payment charge,
prepayment penalty or other charge in connection with any Mortgage Loan, (ii)
arrange a schedule, running for no more than 180 days after the due date of any
payment due under the related mortgage documents, for the liquidation of
delinquent items and (iii) subject to certain restrictions, modify the Mortgage
Interest Rate of a Mortgage Loan.
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 thereon. 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 will not be required to expend its own funds in connection with any
foreclosure or to restore any damaged property relating to any Mortgage Loan
unless it shall determine that such foreclosure and/or restoration will increase
Liquidation Proceeds.
The Master Servicer will be permitted to foreclose against the
Mortgaged Property securing a defaulted Mortgage Loan either by foreclosure,
sale or strict foreclosure, and in the event a deficiency judgment is available
against the related 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 Owner Trustee, or to the Master Servicer on
behalf of the Owner Trustee. Notwithstanding any such acquisition of title and
cancellation of the related Mortgage Loan, such Mortgage Loan will be required
to be considered to be a Mortgage Loan held by the Trust until such time as the
related Mortgaged Property is sold and such Mortgage Loan becomes a Liquidated
Mortgage Loan.
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. 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 related Mortgagor.
Notwithstanding the foregoing, prior to the institution of foreclosure
proceedings or the acceptance of a deed-in-lieu of foreclosure with respect to
any Mortgaged Property, the Master Servicer will make, or cause to be made,
inspection of such Mortgaged Property in accordance with accepted servicing
procedures. The Master Servicer will be entitled to rely upon the results of any
such inspection made by others. In cases where such inspection reveals that such
Mortgaged Property is potentially contaminated with or affected by hazardous
wastes or
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<PAGE>
hazardous substances, the Master Servicer will promptly give written notice
of such fact to the Owner Trustee. The Master Servicer will not begin
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 Owner Trustee.
Enforcement of Due-on-Sale Clauses
When a Mortgaged Property has been or is about to be conveyed by the
related Mortgagor, the Master Servicer will, to the extent that it has knowledge
of such conveyance or prospective conveyance, exercise its right to accelerate
the maturity of the related Mortgage Loan under any due-on-sale clause contained
in the related mortgage documents. The Master Servicer may not, however,
exercise any such right if such due-on-sale clause, in the reasonable judgment
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 which such property has been or is about to be conveyed, pursuant
to which such person will become liable under the related mortgage documents
and, unless prohibited by applicable law or such mortgage documents, the related
Mortgagor will remain liable thereon. The Master Servicer is also authorized to
enter into a substitution of liability agreement with such person, pursuant to
which the original Mortgagor will be released from liability and such person
will be substituted as Mortgagor and become liable under the related mortgage
documents.
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, Term Noteholders
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 Term Noteholders,
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 Sale 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 Sale 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 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.
S-59
<PAGE>
Master Servicer Reports
The Master Servicer is required to deliver to the Issuer, the Indenture
Trustee, the Enhancer and each Rating Agency, not later than May 31 of each
year, beginning with 2001, an officer's certificate stating as to each signer
thereof that (i) a review of the activities of the Master Servicer during the
preceding calendar year and of its performance under the Sale and Servicing
Agreement has been made under such officer's supervision and (ii) to the best of
such officer's knowledge, based on such review, the Master Servicer has
fulfilled all of its obligations under the Sale and Servicing Agreement
throughout such year, or if there has been a default in the fulfillment of any
such obligation, specifying each such default known to such officer and the
nature and status thereof.
Not later than May 31 of each year, beginning with 2001, the Master
Servicer, at its expense, will cause a firm of nationally recognized independent
public accountants to furnish a statement to the Issuer, the Indenture Trustee,
the Enhancer and each Rating Agency to the effect that, on the basis of an
examination of certain documents and records relating to the servicing of
mortgage loans then being serviced by the Master Servicer under servicing
agreements similar to the Sale and Servicing Agreement, which agreements will be
described in a schedule to such statement, such firm is of the opinion that such
servicing has been conducted in compliance with the Uniform Single Attestation
Program for Mortgage Bankers and that such examination has disclosed no
exceptions or errors relating to the servicing activities of the Master
Servicer, including the servicing of the Mortgage Loans, that in the opinion of
such firm are material, except for such exceptions as shall be set forth in such
statement.
Removal of the Master Servicer
The Enhancer, the Issuer or the Indenture Trustee, by notice given in
writing to the Master Servicer, may terminate all rights and obligations of the
Master Servicer under the Sale and Servicing Agreement, other than the Master
Servicer's right to receive servicing compensation and reimbursement of expenses
thereunder during any period prior to the date of such termination, upon the
occurrence and continuation beyond the applicable cure period of an event
described below (each, a "Servicer Default"):
(a) any failure by the Master Servicer to deposit into the Collection
Account or the Trustee Collection Account any deposit required to be made under
the terms of the Sale and Servicing Agreement that continues unremedied for a
period of five Business Days after the date upon which written notice of such
failure shall have been given to the Master Servicer by the Issuer, the
Enhancer or the Indenture Trustee;
(b) any failure on the part of the Master Servicer to duly observe or
perform in any material respect any other covenants or agreements of the Master
Servicer set forth in the Sale and Servicing Agreement, which failure
materially and adversely affects the interests of the Enhancer or any
Securityholder, and which failure continues unremedied for a period of 45 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 Issuer, the
Enhancer or the Indenture Trustee;
(c) the entry against the Master Servicer of a decree or order by a
court, agency or supervisory authority having jurisdiction in the premises for
the appointment of a trustee, conservator, receiver or liquidator in any
insolvency, conservatorship, receivership, readjustment of debt, marshalling of
assets and liabilities or similar proceedings, or for the winding up or
liquidation of its affairs; and the continuance of any such decree or order
unstayed and in effect for a period of 60 consecutive days; or
(d) the Master Servicer shall voluntarily go into liquidation or
consent to the appointment of a conservator, receiver, liquidator or similar
person in any insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceeding of or relating to the Master Servicer or all
or substantially all of its property, or a decree or order of a court, agency
or supervisory authority having jurisdiction in the premises for the
appointment of a conservator, receiver, liquidator or similar person in any
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceeding, or for the winding-up or liquidation of the Master
Servicer's affairs, shall have been entered against the Master Servicer, and
such decree or order shall have remained in force undischarged,
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<PAGE>
unbonded and unstayed for a period of 60 days, or the Master Servicer shall
admit in writing its inability to pay its debts generally as they become due,
file a petition to take advantage of any applicable insolvency or
reorganization statute, make an assignment for the benefit of its creditors or
voluntarily suspend payment of its obligations; or
(e) the delinquency or loss experience of the Mortgage Loans exceeds
certain levels specified in the Insurance and Indemnity Agreement, to be dated
as of the Closing Date, among the Enhancer, the Transferor, the Depositor, the
Master Servicer, the Originator, the Trust and the Indenture Trustee.
The Master Servicer may not assign the Sale and Servicing Agreement nor
resign from the obligations and duties imposed on it thereby except by mutual
written consent of the parties thereto and the Enhancer or upon the Master
Servicer's determination that its duties thereunder are no longer permissible
under applicable law and that such incapacity cannot be cured without the
incurrence of unreasonable expense. Any such determination that the Master
Servicer's duties under the Sale and Servicing Agreement are no longer
permissible under applicable law will be evidenced by a written Opinion of
Counsel, who may be counsel for the Master Servicer, to such effect delivered to
the Issuer, the Indenture Trustee and the Enhancer. No such resignation will
become effective until the Indenture Trustee or a successor appointed in
accordance with the terms of the Sale and Servicing Agreement has assumed the
Master Servicer's responsibilities and obligations in accordance with the Sale
and Servicing Agreement. The Master Servicer will provide the Issuer, the
Indenture Trustee, the Enhancer and each Rating Agency with 30 days prior
written notice of its intention to resign.
Unless the Enhancer selects another eligible servicer to act as
successor Master Servicer within 90 days of such termination, the Indenture
Trustee, as pledgee of the Mortgage Loans, will be the successor in all respects
to the Master Servicer in its capacity as Master Servicer under the Sale and
Servicing Agreement and with respect to the transactions set forth therein, and
shall be subject to all responsibilities, duties and liabilities relating
thereto placed on the Master Servicer by the terms thereof. As compensation
therefor, the Indenture Trustee will be entitled to such compensation as the
Master Servicer would have been entitled to under the Sale and Servicing
Agreement if there had been no such termination. If the Indenture Trustee is
unwilling to act as successor Master Servicer or is legally unable so to act,
then it will be required to appoint or petition a court of competent
jurisdiction to appoint any established mortgage loan servicing institution
having a net worth of not less than $10,000,000 as the successor to the Master
Servicer under the Sale and Servicing Agreement with respect to all or any part
of the Master Servicer's responsibilities, duties or liabilities thereunder;
provided, that the Enhancer shall have consented thereto and that no Rating
Agency, after prior notice thereto, shall have notified the Indenture Trustee in
writing that such appointment would result in a qualification, reduction or
withdrawal of its then-current rating of the Term Notes, determined without
regard to the Policy. See "The Master Servicer--Servicing Compensation" herein.
Any successor Master Servicer, including the Indenture Trustee, (i)
will be bound by the terms of the Insurance Agreement and (ii) will not be
deemed to be in default or to have breached its duties under the Sale and
Servicing Agreement if the predecessor Master Servicer fails to make any
required deposit into the Collection Account or the Trustee Collection Account
or otherwise cooperate with any required servicing transfer or succession
thereunder.
THE ISSUER
The Issuer is a business trust formed under the laws of the State of
Delaware pursuant to the Trust Agreement for the purposes described in this
Prospectus Supplement. The Trust Agreement constitutes the "governing
instrument" under the laws of the State of Delaware relating to business trusts.
After its formation, the Issuer will not engage in any activity other than (i)
acquiring and holding the Mortgage Loans and the other assets of the Issuer (the
"Trust Estate") and proceeds therefrom, (ii) issuing the Term Notes and the
Certificates, (iii) making payments on the Term Notes and the Certificates and
(iv) engaging in other activities that are necessary, suitable or convenient to
accomplish the foregoing or are incidental thereto or connected therewith.
The Issuer's principal offices are in Wilmington, Delaware, in care of
Wilmington Trust Company, as Owner Trustee, at Rodney Square North, 1100 North
Market Street, Wilmington, Delaware 19890-0001.
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THE OWNER TRUSTEE
Wilmington Trust Company is the Owner Trustee under the Trust
Agreement. The Owner Trustee is a Delaware banking corporation and its principal
offices are located at Rodney Square North, 1100 North Market Street, in
Wilmington, Delaware 19890-0001.
Neither the Owner Trustee nor any director, officer or employee of the
Owner Trustee will be under any liability to the Issuer or the Securityholders
for any action taken or for refraining from the taking of any action in good
faith pursuant to the Trust Agreement or for errors in judgment; provided,
however, that none of the Owner Trustee and any director, officer or employee
thereof will be protected against any liability which would otherwise be imposed
by reason of willful malfeasance, bad faith or negligence in the performance of
duties or by reason of reckless disregard of obligations and duties under the
Trust Agreement. All persons into which the Owner Trustee may be merged or with
which it may be consolidated or any person resulting from such merger or
consolidation shall be the successor of the Owner Trustee under the Trust
Agreement.
THE INDENTURE TRUSTEE
Norwest Bank Minnesota, National Association, a national banking
association, is the Indenture Trustee under the Indenture. The principal offices
of the Indenture Trustee are located Norwest Center, Sixth and Marquette,
Minneapolis, Minnesota 55479.
DESCRIPTION OF THE SECURITIES
General
The Notes will be issued pursuant to the Indenture. The Certificates
will be issued pursuant to the Trust Agreement. The following summaries describe
certain provisions of the Securities, the Indenture and the Trust Agreement. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the applicable agreement. Only
the Term Notes are being offered hereby.
The Notes will be secured by the assets of the Trust pledged by the
Issuer to the Indenture Trustee pursuant to the Indenture which will consist of:
(i) the Mortgage Loans (including all Additional Balances and any Subsequent
Mortgage Loans); (ii) all funds on deposit from time to time in the Note Payment
Account, the Certificate Distribution Account, the Pre-Funding Account, the
Funding Account, the Collection Account, the Trustee Collection Account and the
Capitalized Interest Account (each as defined herein) and all proceeds thereof;
(iii) the Policy; and (iv) all proceeds of the foregoing.
The Variable Funding Notes will be issued to Irwin Union Bank and Trust
Company. The Variable Funding Balance will be increased from time to time until
the commencement of the Rapid Amortization Period for the Class A-3 Term Notes
in consideration for Additional Balances sold to the Issuer, if Principal
Collections in respect of the related Collection Period are insufficient or
unavailable to cover the full consideration therefor. The consideration for any
such sale will be, after the application of amounts, if any, on deposit in the
Funding Account, an increase in the Variable Funding Balance. Notwithstanding
any of the foregoing, the Variable Funding Balance may not exceed $50,000,000
(the "Maximum Variable Funding Balance"). Initially, the Variable Funding
Balance will be zero. Except for any amounts paid from the Reserve Account, the
Variable Funding Notes only will be entitled to receive a portion of the
collections on the Mortgage Loans in Loan Group III.
Book-Entry Notes
The Term Notes will initially be issued as Book-Entry Notes. Persons
acquiring beneficial ownership interests in the Term Notes ("Term Note Owners")
may elect to hold their Term Notes through DTC in the United States, or Cedel or
Euroclear, in Europe if they are Participants of such systems, or indirectly
through organizations which are Participants in such systems. The Book-Entry
Notes will be issued in one or more securities which equal the aggregate
principal balance of the Term Notes and will initially be registered in the name
of Cede & Co., the
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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 (in such
capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries") which in turn will hold such positions in customers"
securities accounts in the depositaries" names on the books of DTC. Investors
may hold such beneficial interests in the Book-Entry Notes in minimum
denominations of $1,000 and in integral multiples of $1 in excess thereof.
Except as described below, no Beneficial Owner will be entitled to receive a
physical certificate representing such security (a "Definitive Note"). Unless
and until Definitive Notes are issued, it is anticipated that the only "Holder"
of the Term Notes will be Cede & Co., as nominee of DTC. Term Note Owners will
not be Holders as that term is used in the Indenture.
DTC has advised the Depositor that management of DTC is aware that some
computer applications, systems and the like for processing data ("Systems") that
are dependent upon calendar dates, including dates before, on and after January
1, 2000, may encounter "Year 2000" problems. DTC has informed its Participants
and other members of the financial community (the "Industry") that it has
developed and is implementing a program so that its Systems, as they relate to
the timely payment of distributions (including principal and income payments) to
securityholders, book-entry deliveries and settlement of trades with DTC ("DTC
Services") continue to function appropriately. This program includes a technical
assessment and a remediation plan, each of which is complete. Additionally,
DTC's plan includes a testing phase, which, DTC has advised the Industry, is
expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also
dependent upon other parties, including but not limited to issuers and their
agents, as well as DTC's Participants and third party vendors from whom DTC
licenses software and hardware, and third party vendors on whom DTC relies for
information or the provision of services, including telecommunication and
electrical utility service providers, among others. DTC has informed the
Industry that it is contacting (and will continue to contact) third party
vendors from whom DTC acquires services to (i) impress upon them the importance
of such services being Year 2000 compliant; and (ii) determine the extent of
their efforts for Year 2000 remediation (and, as appropriate, testing) of their
services. In addition, DTC is in the process of developing such contingency
plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has
been provided to the Industry for informational purposes only and is not
intended to serve as a representation, warranty or contract modification of any
kind.
A Beneficial Owner's ownership of a Book-Entry Note will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the Beneficial
Owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Notes 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).
Term Note Owners will receive all payments of principal and interest on
the Term Notes from the Indenture Trustee through DTC and DTC Participants.
While the Term Notes are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Term Notes and is
required to receive and transmit payments of principal and interest on the Term
Notes.
Participants and Indirect Participants with whom Term Note Owners have
accounts with respect to Term Notes are similarly required to make book-entry
transfers and receive and transmit such payments on behalf of their respective
Term Note Owners. Accordingly, although Term Note Owners will not possess
physical certificates, the Rules provide a mechanism by which Term Note Owners
will receive payments and will be able to transfer their interest.
Term Note Owners will not receive or be entitled to receive Definitive
Notes representing their respective interests in the Term Notes, except under
the limited circumstances described below. Unless and until Definitive Notes are
issued, Term Note Owners who are not Participants may transfer ownership of Term
Notes only through
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Participants and Indirect Participants by instructing such Participants and
Indirect Participants to transfer the Term Notes, by book-entry transfer,
through DTC for the account of the purchasers of such Term Notes, which account
is maintained with their respective Participants. Under the Rules and in
accordance with DTC's normal procedures, transfers of ownership of Term Notes
will be executed through DTC and the accounts of the respective Participants at
DTC will be debited and credited. Similarly, the Participants and Indirect
Participants will make debits or credits, as the case may be, on their records
on behalf of the selling and purchasing Term Note Owners.
Under a book-entry format, Beneficial Owners of the Book-Entry Notes
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Indenture Trustee to Cede & Co. Payments with respect to
Term Notes held through Cedel or Euroclear will be credited to the cash accounts
of Cedel Participants or Euroclear Participants in accordance with the relevant
system's rules and procedures, to the extent received by the Relevant
Depositary. Such payments will be subject to tax reporting in accordance with
relevant United States tax laws and regulations. Because DTC can only act on
behalf of Financial Intermediaries, the ability of a Beneficial Owner to pledge
Book-Entry Notes to persons or entities that do not participate in the
Depositary system, or otherwise take actions in respect of such Book-Entry
Notes, may be limited due to the lack of physical certificates for such
Book-Entry Notes. In addition, issuance of the Book-Entry Notes in book-entry
form may reduce the liquidity of such Term Notes in the secondary market since
certain potential investors may be unwilling to purchase securities for which
they cannot obtain physical certificates.
DTC has advised the Indenture Trustee that, unless and until Definitive
Notes are issued, DTC will take any action permitted to be taken by the holders
of the Book-Entry Notes under the Indenture only at the direction of one or more
Financial Intermediaries to whose DTC accounts the Book-Entry Notes are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Notes. Cedel or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by Term Noteholders under the Indenture on behalf of a Cedel
Participant or Euroclear Participant only in accordance with its relevant rules
and procedures and subject to the ability of the Relevant Depositary to effect
such actions on its behalf through DTC. DTC may take actions, at the direction
of the related Participants, with respect to some Term Notes which conflict with
actions taken with respect to other Term Notes.
Definitive Notes will be issued to Beneficial Owners of the Book-Entry
Notes, or their nominees, rather than to DTC, if (a) the Indenture Trustee
determines that DTC is no longer willing, qualified or able to discharge
properly its responsibilities as nominee and depository with respect to the
Book-Entry Notes and the Indenture Trustee is unable to locate a qualified
successor, (b) the Indenture Trustee elects to terminate a book-entry system
through DTC or (c) after the occurrence of an Event of Default, pursuant to the
Indenture, Beneficial Owners having Percentage Interests aggregating at least a
majority of the Term Note Balance of the Term Notes advise DTC through the
Financial Intermediaries and the DTC Participants in writing that the
continuation of a book-entry system through DTC (or a successor thereto) is no
longer in the best interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Indenture Trustee will be required to notify all
Beneficial Owners of the occurrence of such event and the availability through
DTC of Definitive Notes. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Notes and instructions for
re-registration, the Indenture Trustee will issue and authenticate Definitive
Notes, and thereafter the Indenture Trustee will recognize the holders of such
Definitive Term Notes as Holders under the Indenture.
Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Term Notes among Participants of
DTC, Cedel and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time. See
"Risk Factors--Book-Entry Registration", "Description of the
Securities--Book-Entry Securities" and "The Agreements--Book-Entry Securities"
in the Prospectus and Annex I hereto.
None of the Depositor, the Master Servicer or the Indenture Trustee
will have any liability for any actions taken by DTC or its nominee, including,
without limitation, actions for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Term Notes
held by Cede, as nominee for DTC, or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
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Payments
Payments on the Notes will be made by the Indenture Trustee or the
Paying Agent on the 25th day of each month or, if such day is not a Business
Day, then the next succeeding Business Day, commencing in January 2000 (each, a
"Payment Date"). Payments on the Notes will be made to the persons in whose
names such Notes are registered at the close of business on the day prior to
each Payment Date (or, in the case of the Term Notes, if the Term Notes are no
longer Book-Entry Notes, at the related Record Date). See "The
Agreements--Book-Entry Securities" in the Prospectus. Payments will be made by
check or money order mailed (or upon the request of a Holder owning Notes having
denominations aggregating at least $1,000,000, by wire transfer or otherwise) to
the address of the person entitled thereto (which, in the case of Book-Entry
Notes, will be DTC or its nominee) as it appears on the Note Register in amounts
calculated as described herein on the Determination Date. However, the final
payment in respect of the Notes will be made only upon presentation and
surrender thereof at the office or the agency of the Indenture Trustee specified
in the notice to Holders of such final payment. A "Business Day" is any day
other than (i) a Saturday or Sunday or (ii) a day on which banking institutions
in the State of California, Minnesota, Maryland, New York, Indiana or Delaware
are required or authorized by law to be closed.
Interest Payments on the Notes
The "Note Rate" for the Class A-1 Term Notes and Class A-2 Term Notes
will be 7.520% and 7.690% per annum, respectively; provided, however, that the
Note Rate on the Class A-1 Term Notes and the Class A-2 Term Notes will increase
to 8.020% and 8.190% per annum, respectively, commencing on the first Payment
Date on which the aggregate outstanding Principal Balance of the Mortgage Loans
in Loan Group I and Loan Group II, as applicable, is less than 10% of the sum of
(x) the aggregate Principal Balance of the Mortgage Loans in such Loan Groups as
of the related Cut-Off Date and (y) the amount on deposit in the Pre-Funding
Account on the Closing Date that is available to be used to purchase Mortgage
Loans for the related Loan Group. See "Maturity and Optional Redemption" below.
Interest payments will accrue on each class of Notes on each Payment Date at the
related Note Rate, subject to the limitations set forth below, which may result
in Interest Carry-Forward Amounts. The "Note Rate" for the Class A-3 Term Notes
will equal the least of (i) LIBOR plus 0.370% per annum, (ii) the weighted
average net Mortgage Interest Rate of the Mortgage Loans in Loan Group III, and
(iii) 14.50% per annum; provided, however, that the Note Rate on the Class A-3
Term Notes will equal the least of (i) LIBOR plus 0.740 % per annum, (ii) the
weighted average net Mortgage Interest Rate of the Mortgage Loans in Loan Group
III, and (iii) 14.50% per annum, commencing on the first Payment Date on which
the aggregate outstanding Principal Balance of the Mortgage Loans in Loan Group
III is less than 10% of the sum of (x) the aggregate Principal Balance of the
Mortgage Loans in Loan Group III as of the related Cut-Off Date and (y) the
amount on deposit in the Pre-Funding Account on the Closing Date that is
available to be used to purchase Mortgage Loans for Loan Group III.
However, on any Payment Date for which the Note Rate for the Class A-3
Term Notes has been determined pursuant to clause (ii) of the related definition
above, the excess of (a) the amount of interest that would have accrued on the
Class A-3 Term Notes during the related Interest Period had such amount been
determined pursuant to clause (i) above over (b) the interest actually accrued
on the Class A-3 Term Notes during such Interest Period (such excess, an
"Interest Carry-Forward Amount") will accrue interest at the related Note Rate
(as adjusted from time to time) and will be paid on subsequent Payment Dates to
the extent funds are available therefor. Interest Carry-Forward Amounts will not
be covered by the Policy and may remain unpaid on the Final Payment Date.
Interest on each class of Term Notes in respect of any Payment Date
will accrue for the related Interest Period on the related Note Balance (as
defined herein). The "Interest Period" with respect to any Payment Date and the
Class A-1 Term Notes and Class A-2 Term Notes will be the calendar month
preceding the month in which the related Payment Date occurs. Interest for the
Class A-3 Term Notes will be calculated on the basis of the actual number of
days in the related Interest Period and a 360-day year. The "Interest Period"
with respect to the Class A-3 Term Notes shall be (i) with respect to the
Payment Date in January 2000, the period commencing on the Closing Date and
ending on the day preceding the Payment Date in January 2000, and (ii) with
respect to any Payment Date after the Payment Date in January 2000, the period
commencing on the Payment Date in the month immediately preceding the month in
which such Payment Date occurs and ending on the day preceding such Payment
Date. Interest for the Class A-1 Term Notes and Class A-2 Term Notes will be
based on a 30-day month and a 360-day year. Interest payments on the Notes will
be funded from payments on the Mortgage Loans and, if necessary, from draws on
the Policy as described herein.
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Determination of LIBOR
On each Payment Date, LIBOR will be established by the Indenture
Trustee. As to any Interest Period, LIBOR will equal, for any Interest Period
other than the first Interest Period, the rate for United States dollar deposits
for one month that appears on the Telerate Screen Page 3750 as of 11:00 a.m.,
London, England time, on the second LIBOR Business Day prior to the first day of
such Interest Period. With respect to the first Interest Period, LIBOR will
equal the rate for United States dollar deposits for one month that appears on
the Telerate Screen Page 3750 as of 11:00 a.m., London, England time, two LIBOR
Business Days prior to the Closing Date. If such rate does not appear on such
page (or such other page as may replace such page on such service, or if such
service is no longer offered, such other service for displaying LIBOR or
comparable rates as may be reasonably selected by the Indenture Trustee after
consultation with the 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 Payment Date.
"Telerate Screen Page 3750" means the display page so designated on the
Bridge Information Systems 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).
The "Reference Bank Rate" will be, with respect to any Interest Period,
as follows: the arithmetic mean (rounded upwards, if necessary, to the nearest
one sixteenth of one percent) of the offered rates for United States dollar
deposits for one month which are offered by the Reference Banks as of 11:00
a.m., London, England time, on the second LIBOR Business Day prior to the first
day of such Interest Period to prime banks in the London interbank market for a
period of one month in amounts approximately equal to the sum of the outstanding
Term Note Balance of the Class A-3 Term Notes; provided, that at least two such
Reference Banks provide such rate. If fewer than two offered rates appear, the
Reference Bank Rate will be the arithmetic mean of the rates quoted by one or
more major banks in New York City, selected by the Indenture Trustee after
consultation with the 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 Term Note Balance of the
Class A-3 Term Notes. If no such quotations can be obtained, the Reference Bank
Rate will be the Reference Bank Rate applicable to the preceding Interest
Period.
"LIBOR Business Day" means any day other than (i) a Saturday or a
Sunday or (ii) a day on which banking institutions in the city of London,
England are required or authorized by law to be closed.
The establishment of LIBOR as to each Interest Period by the Indenture
Trustee and the Indenture Trustee's calculation of the rate of interest
applicable to the Term Notes for the related Interest Period will, in the
absence of manifest error, be final and binding.
Capitalized Interest Account
On the Closing Date, if required by the Enhancer, a cash deposit will
be made by the Transferor into an account in the name of the Indenture Trustee
on behalf of the Trust (the "Capitalized Interest Account") from the proceeds of
the sale of the Term Notes. In lieu of such deposit, a letter of credit in form
and substance, and from a provider, acceptable to the Enhancer evidencing the
availability of such amount may be delivered to the Owner Trustee on the Closing
Date. On each Payment Date during the Pre-Funding Period, the Indenture Trustee
will transfer from the Capitalized Interest Account (or make a drawing under
such letter of credit and transfer) to the Trustee Collection Account an amount
equal to the Capitalized Interest Requirement, if any, for such Payment Date.
The "Capitalized Interest Requirement" will be, with respect to each
Payment Date during the Pre-Funding Period, the excess, if any of (i) the sum of
(A) the amount of interest accrued at the weighted average Note Rate on the
amount on deposit in the Pre-Funding Account as of the preceding Payment Date
(or as of the Closing Date, in the case of the first Payment Date) and (B) the
amount of fees paid to the Enhancer, the Owner Trustee and the Indenture
Trustee, over (ii) the amount of reinvestment earnings on funds on deposit in
the Pre-Funding Account.
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On the Payment Date following the end of the Pre-Funding Period, the
Indenture Trustee will distribute to the Transferor any amounts remaining in the
Capitalized Interest Account after taking into account withdrawals therefrom on
such Payment Date. The Capitalized Interest Account will be closed following
such payment.
Principal Payments on the Notes
No principal will be payable on the Class A-1 Term Notes during the
Revolving Period. On each Payment Date during the Managed Amortization Period,
principal will be payable on the Class A-3 Term Notes in an amount equal to Net
Principal Collections for Loan Group III for the related Collection Period. On
each Payment Date during the Rapid Amortization Period for each class of Notes,
principal will be payable on the related Class or Classes of Notes in an amount
equal to Principal Collections for the related Loan Group for the related
Collection Period. In addition, on each Payment Date during the Amortization
Periods for each class of Notes, to the extent of funds available therefor,
holders of the related class of Term Notes and the Variable Funding Notes will
be entitled to receive certain additional amounts to be applied in reduction of
the related Note Balances or Variable Funding Balance, as applicable, equal to
Liquidation Loss Amounts, as described herein.
As to the Class A-1 Term Notes, the "Revolving Period" will be the
period beginning on the Closing Date and ending on the earlier of (i) April 30,
2000 and (ii) the occurrence of a "Rapid Amortization Event". As to the Class
A-1 Term Notes, the "Rapid Amortization Period" will be the period beginning on
the earlier of (i) the first Payment Date following the end of the Revolving
Period and (ii) the occurrence of a Rapid Amortization Event, and ending upon
the termination of the Issuer. As to the Class A-2 Term Notes, the Rapid
Amortization Period will be the period beginning on the Closing Date and ending
upon the termination of the Issuer. The Class A-1 and Class A-2 Term Notes will
not have a Managed Amortization Period.
As to the Class A-3 Term Notes, the "Managed Amortization Period" will
be the period beginning on the Closing Date and ending on the earlier of (i)
December 31, 2003 and (ii) the occurrence of a Rapid Amortization Event. As to
the Class A-3 Term Notes, the Rapid Amortization Period will be the period
beginning on the earlier of (i) the First Payment Date following the end of the
Managed Amortization Period and (ii) the occurrence of a Rapid Amortization
Event, and ending upon the termination of the Issuer. The Managed Amortization
Period and the Rapid Amortization Period are referred to as the "Amortization
Periods."
All principal payments due and payable on the Class A-3 Term Notes and
the Variable Funding Notes will be allocated to such classes of Notes pro rata
based on the outstanding principal balances thereof until paid in full. In no
event will principal payments on each class of Notes on any Payment Date exceed
the related Note Balance or Variable Funding Balance, as applicable, on such
Payment Date. On the Final Payment Date, principal will be due and payable on
the Notes in an amount equal to the related Note Balance remaining outstanding
on such Payment Date.
Priority of Distributions
On each Payment Date, from amounts on deposit in the Trustee Collection
Account (including any draw on the Policy deposited therein for such Payment
Date), the Indenture Trustee will make the following payments in the following
order of priority:
(i) any prepayment penalties collected during the immediately
preceding Collection Period to the Certificateholders;
(ii) to the Enhancer, the amount of the premium for the
Policy, with interest thereon as provided in the Insurance Agreement,
and to the Indenture Trustee, the Indenture Trustee Fee payable thereto
in respect of such Collection Period;
(iii) from Interest Collections and Principal Collections for
each Loan Group, interest for the related Interest Period at the
related Note Rate on the related Note Balances of the Notes immediately
prior to such Payment Date, pro rata, to the Holders of the related
Class of Term Notes and, in the case of Loan Group III, to the Variable
Funding Notes;
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(iv) the Principal Distribution Amount for Loan Groups I and
II, to the Holders of the Class A-1 and Class A-2 Term Notes,
respectively, until the respective Note Balance thereof has been
reduced to zero; and the Principal Distribution Amount for Loan Group
III, during the Managed Amortization Period, to the Holders of the
Class A-3 Term Notes and, during the Rapid Amortization Period, to the
Holders of the Class A-3 Term Notes and Variable Funding Notes, pro
rata, until the respective Note Balance thereof has been reduced to
zero;
(v) to the Enhancer, to reimburse it for prior draws made on
the Policy, with interest thereon as provided in the Insurance
Agreement (such payment shall be allocated first to Interest
Collections and Principal Collections from Mortgage Loans assigned to
Loan Group I if the draw in question was made for the benefit of the
Class A-1 Term Notes; first to Interest Collections and Principal
Collections from Mortgage Loans assigned to Loan Group II if the draw
in question was made for the benefit of the Class A-2 Term Notes; or
first to Interest Collections and Principal Collections from Mortgage
Loans assigned to Loan Group III if the draw in question was made for
the benefit of the Class A-3 Term Notes or the Variable Funding Notes);
(vi) during the Revolving Period for the Class A-1 Term Notes,
to the Funding Account, the amount (but not in excess of the Group I
Excess Spread) necessary to be applied on such Payment Date so that the
Overcollateralization Amount for the related Loan Group is not less
than the Overcollateralization Target Amount for such Loan Group;
(vii) during the Amortization Periods for each class of Term
Notes, to the Note Payment Account, the amount (but not in excess of
the related Excess Spread for the related Loan Group) necessary to be
applied on such Payment Date so that the Overcollateralization Amount
for such Loan Group is not less than the Overcollateralization Target
Amount for such Loan Group;
(viii) if the aggregate Overcollateralization Amount for all
Loan Groups is less than the aggregate Overcollateralization Target
Amount for all Loan Groups, the remaining Excess Spread for each Loan
Group shall be deposited in the Reserve Account to be applied pursuant
to clause (ix) below or, at such time, if any, that the aggregate
Overcollateralization Amount for all Loan Groups equals or exceeds the
aggregate Overcollateralization Target Amount for all Loan Groups, the
remaining Excess Spread for each Loan Group, together with any funds on
deposit in the Reserve Account, shall be applied pursuant to clauses
(x) through (xiii) below;
(ix) from any funds on deposit in the Reserve Account, the
amount (but not in excess of the amount on deposit in the Reserve
Account) of (A) any shortfalls in current interest ("Interest
Shortfalls") for any Class of Term Notes and, as applicable, Variable
Funding Notes that have not been paid to the related Holders pursuant
to clause (iii) above on such Payment Date or prior Payment Dates
(other than any Interest Shortfalls) and (B) any Liquidation Loss
Amounts for each Loan Group not otherwise covered by payments pursuant
to clauses (iv), (vi) or (vii) above, for payment to the Holders of the
related Class of Term Notes and, if applicable, Variable Funding Notes,
pro rata, based on the amount of the unpaid Liquidation Loss Amounts;
(x) to the Enhancer, any other amounts owed to the Enhancer
pursuant to the Insurance Agreement;
(xi) to the Indenture Trustee, any amounts owing to the
Indenture Trustee to the extent remaining unpaid; provided, that to the
extent the amount available pursuant to this clause is insufficient to
cover the entire amount payable to the Indenture Trustee in respect of
such Collection Period, the remaining amount shall be paid as agreed on
the Closing Date between the Master Servicer and the Indenture Trustee;
(xii) from (and only to the extent of) any remaining Group III
Excess Spread, to the Holders of the Class A-3 Term Notes, any Interest
Carry-Forward Amounts not previously paid, together with interest
thereon at the related Note Rate (as adjusted from time to time), based
on the amount remaining unpaid with respect thereto; and
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(xiii) any remaining amount, to the Certificateholders;
Notwithstanding the foregoing, (x) on the Final Insured Payment Date
the aggregate of amounts to be paid pursuant to clauses (iv), (vi) and (vii)
above shall be equal to the aggregate of the Note Balances immediately prior to
such Payment Date, and (y) any draw on the Policy included in the amount on
deposit in the Trustee Collection Account shall be applied only to the payment
of clauses (iii), (iv), (vii) and (ix) above.
For purposes of the foregoing, to the extent that Subordination
Deficits are not otherwise covered by Excess Spread or a draw on the Policy on a
Payment Date, payments of principal to Holders of the Notes on such Payment Date
will be reduced by the pro rata portion allocable to the related Class or
Classes of Notes of all Subordination Deficits for such Payment Date.
"Aggregate Balance Differential" means, with respect to any Payment
Date and any Variable Funding Note, the sum of the Balance Differentials that
have been added to the Variable Funding Balance of such Variable Funding Note
prior to such Payment Date. "Balance Differential" means, with respect to any
Payment Date, the amount, if any, by which the sum of the aggregate Principal
Balance of all Additional Balances transferred to the Trust Estate and included
in Loan Group III during the related Collection Period exceeds the Principal
Collections for Loan Group III for the previous Collection Period.
"Excess Spread" means, with respect to Loan Group I, the Group I Excess
Spread, with respect to Loan Group II, the Group II Excess Spread and, with
respect to Loan Group III, the Group III Excess Spread.
"Group I Excess Spread" means with respect to any Payment Date and
without taking into account any draw on the Policy for such Payment Date, the
excess, if any, of Interest Collections and Principal Collections for Mortgage
Loans assigned to Loan Group I over the sum of (i) prepayment penalties
collected on Mortgage Loans assigned to Loan Group I, (ii) the portion of the
premium for the Policy and the Indenture Trustee Fee allocable to Loan Group I,
(iii) interest accrued on the outstanding Class A-1 Term Note Balance at the
applicable Note Rate for the related Interest Period, (iv) the Principal
Distribution Amount for Loan Group I, and (v) the portion of any reimbursement
amount, together with any interest thereon, payable to the Enhancer that is
allocable to Loan Group I.
"Group II Excess Spread" means with respect to any Payment Date and
without taking into account any draw on the Policy for such Payment Date, the
excess, if any, of Interest Collections and Principal Collections for Mortgage
Loans assigned to Group II over the sum of (i) prepayment penalties collected on
Mortgage Loans assigned to Loan Group II, (ii) the portion of the premium for
the Policy and the Indenture Trustee Fee allocable to Loan Group II, (iii)
interest accrued on the outstanding Class A-2 Term Note Balance at the
applicable Note Rate for the related Interest Period, (iv) the Principal
Distribution Amount for Loan Group II, and (v) the portion of any reimbursement
amount, together with any interest thereon, payable to the Enhancer that is
allocable to Loan Group II.
"Group III Excess Spread" means with respect to any Payment Date and
without taking into account any draw on the Policy for such Payment Date, the
excess, if any, of Interest Collections and Principal Collections for Mortgage
Loans assigned to Group III over the sum of (i) prepayment penalties collected
on Mortgage Loans assigned to Loan Group III, (ii) the portion of the premium
for the Policy and the Indenture Trustee Fee allocable to Loan Group III, (iii)
interest accrued on the outstanding Class A-3 Term Note Balance and aggregate
Variable Funding Balance at the applicable Note Rate for the related Interest
Period, (iv) the Principal Distribution Amount for Loan Group III, and (v) the
portion of any reimbursement amount, together with any interest thereon, payable
to the Enhancer that is allocable to Loan Group III.
"Interest Collections" means, with respect to any Payment Date and Loan
Group, the sum of all payments by or on behalf of Mortgagors and any other
amounts constituting interest (including such portion of Insurance Proceeds,
Liquidation Proceeds and Repurchase Prices as is allocable to interest on the
applicable Mortgage Loan as are paid by the Transferor or the Master Servicer in
respect of Mortgage Loans in the applicable Loan Group or is collected by the
Master Servicer under the Mortgage Loans in such Loan Group, reduced by the
Servicing Fee for the related Collection Period and by any fees (including
annual fees), prepayment penalties or late charges or similar administrative
fees paid by Mortgagors with respect to Mortgage Loans in such Loan Group during
such Collection
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Period). The terms of the related mortgage documents shall determine the portion
of each payment in respect of such Mortgage Loan that constitutes principal and
interest, respectively.
"Liquidated Mortgage Loan" means 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).
"Liquidation Loss Amount" means, with respect to any Payment Date and
any Liquidated Mortgage Loan in a Loan Group, the unrecovered Principal Balance
thereof at the end of the related Collection Period in which such Mortgage Loan
became a Liquidated Mortgage Loan, after giving effect to the Liquidation
Proceeds in connection therewith.
"Net Principal Collections" means, with respect to any Payment Date
during the Managed Amortization Period, the Principal Collections for Loan Group
III for the related Collection Period less the amount of Additional Balances
sold to the Trust during such Collection Period (but not less than zero).
"Note Balance" means the Term Note Balance and/or the Variable Funding
Balance, as the context requires.
"Overcollateralization Amount" shall mean, with respect to any Payment
Date and Loan Group, the excess, if any, of (i) the aggregate Principal Balance
of all Mortgage Loans assigned to such Loan Group as of the close of business on
the last day of the related Collection Period, together with the related portion
of the property of the Issuer allocable to such Loan Group (including the
allocable portion of the amounts on deposit in the Pre-Funding Account, the
Funding Account and the Reserve Account) over (ii) the aggregate of the Term
Note Balances of the Class A-1 Term Notes, in the case of Loan Group I, or the
aggregate of the Term Note Balances of the Class A-2 Term Notes, in the case of
Loan Group II, or the aggregate of the Term Note Balances of the Class A-3 Term
Notes and the Variable Funding Balance, in the case of Loan Group III, in each
case after taking into account the payment of Net Principal Collections or
Principal Collections, as applicable, for such Payment Date.
"Overcollateralization Target Amount" with respect to each Loan Group,
shall have the meaning assigned thereto in the Insurance Agreement.
"Principal Collections" means, with respect to any Payment Date and
Loan Group, the aggregate of the following amounts:
(i) the total amount of payments made by or on behalf of the related
Mortgagors, received and applied as payments of principal on such
Mortgage Loans in the related Loan Group during the related Collection
Period, as reported by the Master Servicer or the related Subservicer;
(ii) any Liquidation Proceeds allocable as a recovery of principal
received in connection with such Mortgage Loans in the related Loan
Group during the related Collection Period;
(iii) if such Mortgage Loan (or Mortgage Loans) in the related Loan
Group was purchased by the Transferor pursuant to the Mortgage Loan
Sale Agreement during the related Collection Period, 100% of the
Principal Balance thereof as of the date of such purchase; and
(iv) other amounts received as payments on or proceeds of such Mortgage
Loans in the related Loan Group during the Collection Period, to the
extent applied in reduction of the Principal Balance thereof.
"Principal Distribution Amount" means, for any Payment Date and Loan
Group (i) during the Revolving Period (as applicable), zero, (ii) during the
Managed Amortization Period (as applicable), Net Principal Collections for the
Mortgage Loans in Loan Group III, and (iii) during the Rapid Amortization
Period, Principal Collections for the Mortgage Loans in such Loan Group;
provided, that on any Payment Date, the Principal Distribution Amount
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shall also include an amount equal to the Liquidation Loss Amounts for the
Mortgage Loans in such Loan Group; provided, further, that on any Payment Date
as to which the aggregate Overcollateralization Amount for all Loan Groups that
would result without regard to this proviso equals or exceeds the aggregate
Overcollateralization Target Amount for all Loan Groups (the "Aggregate
Overcollateralization Target Amount"), the related Principal Distribution Amount
for each Loan Group will be reduced as set forth in the Indenture. To the extent
the Aggregate Overcollateralization Target Amount decreases on any Payment Date,
the amount of the aggregate Principal Distribution Amount for the Loan Groups
will be reduced on that Payment Date and on each subsequent Payment Date so that
the aggregate Overcollateralization Amount for all Loan Groups equals the
reduced Aggregate Overcollateralization Target Amount.
A "Rapid Amortization Event" will be deemed to occur upon the
occurrence of any one of the following events:
(a) the failure on the part of Irwin Union Bank and Trust Company (i)
to make any payment or deposit required to be made under the Purchase Agreement
within five (5) Business Days after the date such payment or deposit is required
to be made; or (ii) to observe or perform in any material respect any other
covenants or agreements of Irwin Union Bank and Trust Company set forth in the
Purchase Agreement, which failure continues unremedied for a period of sixty
(60) days after written notice thereof to Irwin Union Bank and Trust Company,
and such failure materially and adversely affects the interests of the Enhancer
or the Securityholders; provided, that a Rapid Amortization Event will not be
deemed to occur if Irwin Union Bank and Trust Company has repurchased or caused
to be repurchased or substituted for the related Mortgage Loans or all Mortgage
Loans, as applicable, during such period in accordance with the provisions of
the Indenture;
(b) any representation or warranty made by Irwin Union Bank and Trust
Company in the Purchase Agreement shall prove to have been incorrect in any
material respect when made and shall continue to be incorrect in any material
respect for the related cure period specified in the Servicing Agreement after
written notice and as a result of which the interests of the Enhancer or the
Securityholders are materially and adversely affected; provided, that a Rapid
Amortization Event will not be deemed to occur if Irwin Union Bank and Trust
Company has repurchased or caused to be repurchased or substituted for the
related Mortgage Loans or all Mortgage Loans, as applicable, during such period
in accordance with the provisions of the Indenture;
(c) the entry against Irwin Union Bank and Trust Company or the Issuer
of a decree or order by a court or agency or supervisory authority having
jurisdiction in the premises for the appointment of a trustee, conservator,
receiver or liquidator in any insolvency, conservatorship, receivership,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings, or for the winding up or liquidation of its affairs, and the
continuance of any such decree or order unstayed and in effect for a period of
sixty (60) consecutive days;
(d) Irwin Union Bank and Trust Company or the Issuer shall voluntarily
go into liquidation, consent to the appointment of a conservator, receiver,
liquidator or similar person in any insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings of or relating to
Irwin Union Bank and Trust Company or the Issuer or of or relating to all or
substantially all of its property, or a decree or order of a court, agency or
supervisory authority having jurisdiction in the premises for the appointment of
a conservator, receiver, liquidator or similar person in any insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings, or for the winding-up or liquidation of its affairs, shall have
been entered against Irwin Union Bank and Trust Company or the Issuer and such
decree or order shall remain in force undischarged, unbonded or unstayed for a
period of sixty (60) days or Irwin Union Bank and Trust Company or the Issuer
shall admit in writing its inability to pay its debts generally as they become
due, file a petition to take advantage of any applicable insolvency or
reorganization statute, make an assignment for the benefit of its creditors or
voluntarily suspend payment of its obligations;
(e) the Issuer becomes subject to regulation by the Commission as an
investment company within the meaning of the Investment Company Act of 1940, as
amended;
(f) a Servicing Default occurs and is unremedied under the Servicing
Agreement and a qualified successor Servicer has not been appointed;
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(g) the aggregate of all draws under the Policy exceeds 1% of the
initial aggregate Note Balance;
(h) the Issuer is determined to be an association (or a publicly traded
partnership) taxable as a corporation for federal income tax purposes; or
(i) an event of default under the Insurance Agreement (except for a
default by the Enhancer, unless such Enhancer cannot be replaced without
additional expense).
In the case of any event described in (a), (b), (f), (g) or (i), a
Rapid Amortization Event will be deemed to have occurred only if, after any
applicable grace period described in such clauses, either the Indenture Trustee,
the Enhancer or Securityholders evidencing not less than 51% of the aggregate
Securities Balance, by written notice to the Depositor, the Servicer and the
Owner Trustee (and to the Indenture Trustee, if given by the Securityholders),
declare that a Rapid Amortization Event has occurred as of the date of such
notice. In the case of any event described in clauses (c), (d), (e), or (h), a
Rapid Amortization Event will be deemed to have occurred without any notice or
other action on the part of the Indenture Trustee, the Enhancer or the
Securityholders immediately upon the occurrence of such event; provided, that
any Rapid Amortization Event may be waived and deemed of no effect with the
written consent of the Enhancer and each Rating Agency, subject to the
satisfaction of any conditions to such waiver.
"Subordination Deficit" shall mean, with respect to any Payment Date
and Loan Group, the excess, if any, of (i) the aggregate of the Class A-1 Term
Note Balance, in the case of Loan Group I, the aggregate of the Class A-2 Term
Note Balance, in the case of Loan Group II or the aggregate of the Class A-3
Term Note Balance and the Variable Funding Balance, in the case of Loan Group
III on such Payment Date, after taking into account the payment of the Principal
Distribution Amount on such Payment Date (without taking into account any
amounts payable under the Policy on such Payment Date) over (ii) the aggregate
Principal Balance of all Mortgage Loans assigned to such Loan Group as of the
close of business on the last day of the related Collection Period, together
with the related portion of the property of the Issuer allocable to such
Loan.Group (including the allocable portion of the amounts on deposit in the
Pre-Funding Account, the Funding Account and the Reserve Account).
"Term Note Balance" means as of any date of determination and with
respect to each Class of Term Notes, the principal balance of such Class of Term
Notes on the Closing Date less any amounts actually distributed as principal
thereon on all prior Payment Dates.
"Variable Funding Balance" means, with respect to any Payment Date and
any Variable Funding Note, the initial Variable Funding Balance thereof (i)
increased by the Aggregate Balance Differential for such Variable Funding Note
immediately prior to such Payment Date and (ii) reduced by all distributions of
principal thereon prior to such Payment Date.
Reserve Account
On or after the Closing Date the Indenture Trustee will establish an
account in its name designated the "reserve account" (the "Reserve Account"). On
each Payment Date, the Indenture Trustee will transfer from the Reserve Account
to the Note Payment Account the amount (but not in excess of the amount then on
deposit in the Reserve Account) of any Interest Shortfalls and Liquidation Loss
Amounts for each Loan Group not otherwise covered by Interest Collections and
Principal Collections for such Loan Group on such Payment Date. The Reserve
Account will be funded only from amounts representing the Excess Spread, if any,
for each Loan Group remaining after such Excess Spread is applied towards the
creation and/or maintenance of overcollateralization with respect to such Loan
Group. Moneys on deposit in the Reserve Account may be invested in Permitted
Investments as provided in the Servicing Agreement. Net income on the investment
of funds in the Reserve Account will be retained therein.
Overcollateralization
The cashflow mechanics of the Trust Estate are intended to create
overcollateralization by depositing the Excess Spread in the Funding Account
during the Revolving Period with respect to the Class A-1 Term Notes and
applying it to acquire Subsequent Mortgage Loans and by using a portion or all
of the Excess Spread to make
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principal payments on the Notes during the Amortization Periods. Such
application of Excess Spread will continue until the Overcollateralization
Amount for a Loan Group equals the Overcollateralization Target Amount for such
Loan Group at which point such application will cease unless necessary on a
later Payment Date to increase the amount of overcollateralization to the target
level. In addition, the Overcollateralization Target Amount may be permitted to
step down in the future in which case a portion of the Excess Spread will not be
used to acquire Additional Balances and/or Subsequent Mortgage Loans or paid to
the holders of the Notes but will instead be distributed to the holders of the
Certificates. As a result of these mechanics, the weighted average lives of the
Notes will be different than they would have been in the absence of such
mechanics.
The cashflow mechanics of the Trust Estate are intended to provide
limited cross-collateralization by depositing any remaining Excess Spread in the
Reserve Account during the Amortization Periods and applying it to cover any
remaining Interest Shortfalls and liquidation losses that are not otherwise
covered by Principal Collections and Interest Collections with respect to the
related Loan Group. Such application of any remaining Excess Spread will
continue until the aggregate Overcollateralization Amount for all Loan Groups
equals or exceeds the aggregate Overcollateralization Target Amount for all Loan
Groups at which point any funds on deposit in the Reserve Account will be
applied in accordance with the normal priority of distributions. The trapping of
any remaining Excess Spread in the Reserve Account may resume on a later Payment
Date if the aggregate Overcollateralization Amount for all Loan Groups falls
below the aggregate Overcollateralization Target Amount for all Loan Groups.
To the extent that the protection provided by the application of Excess
Spread and the availability of overcollateralization are exhausted and if
payments are not made under the Policy as required, Noteholders may incur a loss
on their investments.
The Paying Agent
The Paying Agent shall initially be the Indenture Trustee, together
with any successor thereto. The Paying Agent shall have the revocable power to
withdraw funds from the Note Payment Account for the purpose of making payments
to the Noteholders.
Maturity and Optional Redemption
Each class of Notes will be payable in full on June 25, 2031 (the
"Final Insured Payment Date"), in each case to the extent of any accrued and
unpaid interest and the outstanding related Note Balance on such date, if any.
In addition, with respect to each Loan Group and the related Notes, the
Master Servicer may, at its option and at its sole expense, repurchase all but
not less than all of the Mortgage Loans in a Loan Group, and thereby cause a
full redemption of the aggregate outstanding Note Balance of the related Class
or Classes of Notes, on any Payment Date on which the aggregate Principal
Balance of the Mortgage Loans in such Loan Group (after applying payments
received in the related Collection Period) is reduced to an amount less than or
equal to 10% of the sum of (x) the aggregate Principal Balance of the Mortgage
Loans in such Loan Group as of the related Cut-Off Date and (y) the amount on
deposit in the Pre-Funding Account and the Funding Account on the Closing Date
that is available to be used to purchase Mortgage Loans for such Loan Group. In
the event that all of the Mortgage Loans in a Loan Group are purchased by the
Master Servicer, the purchase price will be equal to the sum of the aggregate
Principal Balances of the Mortgage Loans so repurchased and accrued and unpaid
interest thereon at the weighted average of the related Mortgage Interest Rates
on such Mortgage Loans through the day preceding the Payment Date on which such
purchase occurs, together with all amounts due and owing to the Enhancer. No
such optional repurchase will be permitted without the prior written consent of
the Enhancer if it would result in a draw on the Policy.
DESCRIPTION OF THE MORTGAGE LOAN SALE AGREEMENT AND
THE PURCHASE AND SALE AGREEMENT
Assignment of Mortgage Loans
Pursuant to the Mortgage Loan Sale Agreement between Irwin Union Bank
and Trust Company, as seller (in such capacity, "IUB") and the Transferor, as
purchaser, IUB will sell, transfer, assign, set over and otherwise
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convey the Initial Mortgage Loans and Additional Mortgage Loans without recourse
to the Transferor on the Closing Date, and thereafter, until the commencement of
the Rapid Amortization Period with respect to the Class A-3 Term Notes, all
Additional Balances relating thereto created on or after the initial Cut-Off
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 Initial Mortgage Loans and Additional Mortgage Loans without recourse
to the Depositor on the Closing Date, and thereafter, until the commencement of
the Rapid Amortization Period, all Additional Balances relating thereto created
on or after the initial Cut-Off Date. Pursuant to the Sale 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
Securityholders and the Enhancer all right, title and interest in and to each
Initial Mortgage Loan and Additional Mortgage Loan on the Closing Date, and
thereafter, until the commencement of the Rapid Amortization Period, all
Additional Balances relating thereto created on or after the initial Cut-Off
Date. Pursuant to the terms of one or more Subsequent Transfer Agreements among
IUB, the Transferor, the Issuer and the Indenture Trustee, IUB will sell,
transfer, assign, set over and otherwise convey the Subsequent Mortgage Loans to
the Trust on the related Subsequent Transfer Date, and thereafter, until the
commencement of the Rapid Amortization Period, all Additional Balances relating
thereto created on or after such Subsequent Transfer Date. 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 related
Cut-Off Date; provided, however, that IUB will not convey, and IUB 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 or Additional Balance on or prior to the
related Cut-Off Date.
In connection with such transfer and assignment, the Depositor will
cause to be delivered to the Indenture Trustee on the Closing Date or Subsequent
Transfer Date, as applicable, the following documents (collectively, with
respect to each Mortgage Loan, the "Trustee's Mortgage File") with respect to
each Mortgage Loan:
(a) The original Loan Agreement endorsed without recourse in blank;
In the case of the HELs, 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 Indenture Trustee within 60 days of the Closing
Date or the Subsequent Transfer Date, as applicable); 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 Indenture Trustee, each of the Rating Agencies and the Enhancer shall
have received an opinion of counsel satisfactory to the Indenture Trustee, each
of the Rating Agencies and the Enhancer 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 Indenture Trustee in the Mortgage Loan;
provided, further, that any assignment not submitted for recordation within 60
days of the Closing Date shall be recorded upon the earlier to occur of (i)
receipt by the Indenture Trustee of the Enhancer's written direction to record
such assignment, (ii) the occurrence of any Event of Default, as such term is
defined in the Sale 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 Closing Date);
(d) Any intervening assignments of the Mortgage with evidence of
recording thereon; and
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(e) Any assumption, modification, consolidation or extension
agreements.
Pursuant to the Sale and Servicing Agreement, the Indenture Trustee
agrees to execute and deliver on or prior to the Closing Date an acknowledgment
of receipt of the Policy and, for each Mortgage Loan, the original Mortgage
Note, item (b) above, with respect to the Mortgage Loans (with any exceptions
noted). The Indenture Trustee agrees, for the benefit of the Securityholders and
the Enhancer, to review (or cause to be reviewed) each Trustee's Mortgage File
within 90 days after the Closing Date (or, with respect to any Qualified
Substitute Mortgage Loan, within 90 days after the receipt by the Indenture
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 Indenture Trustee or the Enhancer 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 Indenture Trustee or the Enhancer, as applicable,
shall promptly so notify the Indenture Trustee, the Master Servicer, the
Transferor and the Enhancer. 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 Indenture Trustee. If,
however, within 120 days after the Indenture 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 Enhancer, 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 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 "Description of the Notes--Priority of Distributions"
above).
A "Qualified Substitute Mortgage Loan" is defined in the Indenture 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, and (v)
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 Closing Date, the following:
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(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 Sale and Servicing
Agreement.
Pursuant to the Sale and Servicing Agreement, upon the discovery by any
of the Securityholders, the Master Servicer, the Transferor, the Enhancer or the
Indenture 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 Closing Date, with the result that
the interests of the Securityholders in the related Mortgage Loan or the
interests of the Enhancer 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 as part of the amounts
remitted by the Master Servicer on such Payment 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
Collection Account for future distribution to the extent such amounts have not
yet been applied to principal or interest on such Mortgage Loan. 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 Securityholders, the Indenture Trustee and the
Enhancer.
DESCRIPTION OF THE SALE AND SERVICING AGREEMENT
The following summary describes certain terms of the sale and servicing
agreement dated as of November 30, 1999 (the "Sale and Servicing Agreement"),
among the Trust, the Depositor, the Transferor, the Indenture Trustee and the
Master Servicer. Such summary does not purport to be complete and is subject to,
and qualified in its entirety by reference to, the provisions of the Sale and
Servicing Agreement. See "Servicing of the Mortgage Loans" herein and "Servicing
of Loans" and "The Agreements" in the Prospectus.
The Master Servicer
Irwin Union Bank and Trust Company, an affiliate of the Originator,
will be Master Servicer of the Mortgage Loans; provided, that the Mortgage Loans
may be serviced by one or more subservicers designated by the Master Servicer
pursuant to subservicing agreements between the Master Servicer and such
subservicers. Initially, the Originator will act as sole subservicer of the
Mortgage Loans on behalf of the Master Servicer. For a general description of
the Master Servicer and its activities, see "The Master Servicer" and "Servicing
of the Mortgage Loans" herein.
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Collections
The Master Servicer will establish an account (the "Collection
Account") into which the Master Servicer will deposit or cause to be deposited
any amounts representing payments on and any collections received on or in
respect of the Mortgage Loans received by it subsequent to the initial Cut-Off
Date. On the 20th day of each month or, if such day is not a Business Day, the
immediately succeeding Business Day (each, a "Determination Date"), the Master
Servicer will notify the Paying Agent and the Indenture Trustee of the amounts
required to be withdrawn from the Collection Account and deposited into an
Eligible Account established with and maintained by the Indenture Trustee (the
"Trustee Collection Account") prior to the close of business on the last
Business Day that is at least three days prior to the related Payment Date. On
each Payment Date, the Indenture Trustee will deposit such amounts into the Note
Payment Account (the "Note Payment Account") or the Certificate Distribution
Account (the "Certificate Distribution Account"), as applicable, for payment to
the related Securityholders in accordance with the priorities set forth in the
Indenture.
All Collections will generally be allocated in accordance with the
related mortgage documents between amounts collected in respect of interest and
principal, respectively.
"Collection Period" means, with respect to any Mortgage Loan and
Payment Date, the calendar month preceding any such Payment Date.
"Excluded Amount" will mean the portion of the Principal Balance of any
HELOC attributable to draws made following the commencement of the Rapid
Amortization Period. Excluded Amounts will not be transferred to the Trust, and
the portion of the collections of principal and interest on the related HELOC
for each Collection Period during the Rapid Amortization Period will be
allocated, pro rata, between the Excluded Amount and the Principal Balance of
such HELOC in the Trust in proportion to the respective amounts outstanding as
of the end of the calendar month preceding such Collection Period.
"Liquidation Proceeds" means the proceeds, including Insurance
Proceeds, but not including amounts drawn under the Policy, if any, received in
connection with the liquidation of any Mortgage Loan or any related Mortgaged
Property or REO Property, whether through trustee's sale, foreclosure sale or
otherwise, net of related liquidation expenses (but not including the portion,
if any, of such amount that exceeds the Principal Balance of the related
Mortgage Loan at the end of the Collection Period immediately preceding the
Collection Period in which such Mortgage Loan became a Liquidated Mortgage
Loan).
"Principal Balance" means, with respect to any Mortgage Loan (other
than a Liquidated Mortgage Loan) and as of any day, the related Cut-Off Date
principal balance, plus, in the case of a HELOC, any Additional Balances thereof
conveyed to the Trust, minus, in the case of all Mortgage Loans, all collections
credited as principal in respect of any such Mortgage Loan in accordance with
the related mortgage documents (except for any such collections allocable to any
Excluded Amount) and applied in reduction of the Principal Balance thereof. A
Liquidated Mortgage Loan will be deemed to have a Principal Balance equal to the
Principal Balance of the related Mortgage Loan immediately prior to the final
recovery of substantially all related Liquidation Proceeds, and a Principal
Balance of zero thereafter.
DESCRIPTION OF THE TRUST AGREEMENT AND INDENTURE
The following summary describes certain terms of the Trust Agreement
and the Indenture. Such summary does not purport to be complete and is subject
to, and qualified in its entirety by reference to, the respective provisions of
the Trust Agreement and the Indenture. See "The Agreements" in the Prospectus.
The Trust Estate. Simultaneously with the issuance of the Notes, the
Issuer will pledge the Trust Estate to the Indenture Trustee as collateral for
the Notes. As pledgee of the Mortgage Loans, the Indenture Trustee will be
entitled to direct the Issuer in the exercise of all rights and remedies of the
Trust against the Transferor under the Purchase and Sale Agreement and against
the Master Servicer under the Sale and Servicing Agreement.
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Reports To Noteholders. The Indenture Trustee will, to the extent such
information is provided to it by the Master Servicer pursuant to the terms of
the Sale and Servicing Agreement, make available to each Noteholder, at its
address listed on the Note Register maintained with the Indenture Trustee, and
each Rating Agency, the Enhancer and the Depositor, a report setting forth
certain amounts relating to the Notes for each Payment Date, including, without
limitation, the amount of the payment on such Payment Date, the amount of such
distribution allocable to principal and allocable to interest, the aggregate
outstanding principal amount of each Note as of such Payment Date, the amount of
any Insured Payment included in such distributions on such Payment Date and such
other information as required by the Sale and Servicing Agreement.
The Indenture Trustee will make such report (and, at its option, any
addition files containing the same information in an alternative format)
available each month to the Noteholders, via the Indenture Trustee's internet
website and its fax-on-demand service. The Indenture Trustee's fax-on-demand
service may be accessed by calling (301) 815-6610. The Indenture Trustee's
internet website shall initially be located at www.ctslink.com. Assistance in
using the website or the fax-on-demand service can be obtained by calling the
Indenture Trustee's customer service desk at (301) 815-6610. Parties that are
unable to use the above distribution options are entitled to have a paper copy
mailed to them via first class mail by calling the customer service desk and
indicating such. The Indenture Trustee shall have the right to change the way
such reports are distributed in order to make such distribution more convenient
and/or more accessible to the above parties and the Indenture Trustee shall
provide timely and adequate notification to all above parties regarding any such
changes.
Certain Covenants. The Indenture will provide that the Issuer may not
consolidate or merge with or into any other Person, unless:
(a) the Person (if other than the Issuer) formed by or surviving such
consolidation or merger will be a Person organized and existing under the laws
of the United States of America or any state, and will expressly assume, by an
indenture supplemental hereto, executed and delivered to the Indenture Trustee,
in form reasonably satisfactory to the Indenture Trustee, the due and punctual
payment of the principal of and interest on all Notes, and to the Certificate
Paying Agent, on behalf of the Noteholders, and the performance or observance of
every agreement and covenant of the Indenture on the part of the Issuer to be
performed or observed;
(b) immediately after giving effect to such transaction, no event of
default under the Indenture or the Trust Agreement (each, an "Event of Default")
shall have occurred and be continuing;
(c) no Rating Agency, after prior notice thereto, shall have notified
the Issuer that such transaction would cause such Rating Agency's then-current
rating of the Term Notes to be qualified, reduced or withdrawn, or to be
considered by either Rating Agency to be below investment grade, determined
without regard to the Policy;
(d) the Issuer shall have received an Opinion of Counsel (and will have
delivered a copy thereof to the Indenture Trustee) to the effect that such
transaction will not have any material adverse tax consequence to the Issuer or
any Noteholder;
(e) any action necessary to maintain the lien and security interest
created by the Indenture shall have been taken; and
(f) the Issuer shall have delivered to the Indenture Trustee an
officer's certificate and an opinion of counsel each stating that such
consolidation or merger and such supplemental indenture comply with certain
provisions of the Indenture and that all conditions precedent therein provided
for relating to such transaction have been complied with (including any filing
required by the Securities Exchange Act of 1934, as amended).
Modification of Indenture. The Indenture provides that, without the
consent of the Holders of any Notes, but with prior notice to the Enhancer, the
Issuer and the Indenture Trustee, when authorized by a request of the Issuer
pursuant to the Indenture, at any time and from time to time, may enter into one
or more supplemental indentures (which will conform to the provisions of the
Trust Indenture Act of 1939, as amended (the "TIA"), as in
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force at the date of the execution thereof), in form satisfactory to the
Indenture Trustee, for any of the following purposes:
(1) to correct or amplify the description of any property at any time
subject to the lien of the Indenture, or better to assure, convey and confirm
unto the Indenture Trustee any property subject or required to be subjected to
the lien of the Indenture, or to subject to the lien of the Indenture additional
property;
(2) to evidence the succession, in compliance with the applicable
provisions of the Indenture, of another entity to the Issuer, and the assumption
by any such successor of the covenants of the Issuer contained in the Notes or
the Indenture;
(3) to add to the covenants of the Issuer for the benefit of the
Holders of the Notes, or to surrender any right or power conferred upon the
Issuer in the Indenture;
(4) to convey, transfer, assign, mortgage or pledge any property to or
with the Indenture Trustee;
(5) to cure any ambiguity, to correct or supplement any provision in
the Indenture or in any supplemental indenture that may be inconsistent with any
other provision in the Indenture or in any supplemental indenture;
(6) to make any other provisions with respect to matters or questions
arising under the Indenture or in any supplemental indenture; provided, that
such action will not materially and adversely affect the interests of the
Noteholders or the Enhancer;
(7) to evidence and provide for the acceptance of the appointment under
the Indenture by a successor trustee with respect to the Notes and to add to or
change any of the provisions of the Indenture as will be necessary to facilitate
the administration of the trusts thereunder by more than one trustee, pursuant
to the requirements of the Indenture; or
(8) to modify, eliminate or add to the provisions of the Indenture to
such extent as will be necessary to effect the qualification of the Indenture
under the TIA or under any similar federal statute enacted after the date of the
Indenture and to add to the Indenture such other provisions as may be expressly
required by the TIA;
provided, however, that no such supplemental indentures will be entered
into unless the Indenture Trustee and the Enhancer shall have received an
Opinion of Counsel to the effect that entering into such supplemental indenture
will not have any material adverse tax consequences to the Noteholders.
The Indenture also provides that the Issuer and the Indenture Trustee,
when authorized by an Issuer Request, also may, with prior notice to the
Enhancer and each Rating Agency and with the consent of the Enhancer and the
Holders of Notes affected thereby representing not less than a majority of the
aggregate Note Balance thereof, enter into a supplemental indenture for the
purpose of adding any provisions to, or changing in any manner or eliminating
any of the provisions of, the Indenture or of modifying in any manner the rights
of the Noteholders thereunder; provided, that no such supplemental indenture
may, without the consent of the Holder of each Note affected thereby:
(i) change the date of payment of any installment of principal of or
interest on any Note, or reduce the principal amount thereof or the interest
rate thereon, change the provisions of the Indenture relating to the application
of collections on, or the proceeds of the sale of, the Trust Estate to payment
of principal of or interest on the Notes, or change any place of payment where,
or the coin or currency in which, any Note or the interest thereon is payable,
or impair the right to institute suit for the enforcement of the provisions of
the Indenture requiring the application of funds available therefor to the
payment of any such amount due on the Notes on or after the respective dates
such amounts become due;
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(ii) reduce the percentage of the Note Balances of the Notes, the
consent of the Holders of which is required for any such supplemental indenture,
or the consent of the Holders of which is required for any waiver of compliance
with certain provisions of the Indenture or certain defaults thereunder and
their consequences provided for in the Indenture;
(iii) modify or alter the provisions of the proviso to the definition
of the term "Outstanding" in the Indenture or modify or alter the exception in
the definition of the term "Holder" therein;
(iv) reduce the percentage of the Note Balances of the Notes required
to direct the Indenture Trustee to direct the Issuer to sell or liquidate the
Trust Estate pursuant to the Indenture;
(v) modify any provision of the amendment provisions of the Indenture
except to increase any percentage specified in the Indenture or to provide that
certain additional provisions of the Indenture cannot be modified or waived
without the consent of the Holder of each Note affected thereby;
(vi) modify any of the provisions of the Indenture in such manner as to
affect the calculation of the amount of any payment of interest or principal due
on any Note on any Payment Date (including the calculation of any of the
individual components of such calculation); or
(vii) permit the creation of any lien ranking prior to or on a parity
with the lien of the Indenture with respect to any part of the Trust Estate or,
except as otherwise permitted or contemplated in the Indenture, terminate the
lien of the Indenture on any property at any time subject thereto or deprive the
Holder of any Note of the security provided by the lien of the Indenture; and
provided, further, that such action will not, as evidenced by an opinion of
counsel, cause the Issuer to be subject to an entity level tax.
Certain Matters Regarding the Indenture Trustee and the Issuer. Neither
the Indenture Trustee nor any director, officer or employee of the Indenture
Trustee will be under any liability to the Issuer or the Noteholders for taking
any action or for refraining from the taking of any action in good faith
pursuant to the Indenture, or for errors in judgment; provided, that none of the
Indenture Trustee or any director, officer or employee thereof will be protected
against any liability that would otherwise be imposed on it by reason of its
willful malfeasance, bad faith or negligence in the performance of its duties or
by reason of its reckless disregard of its obligations and duties under the
Indenture. Subject to certain limitations set forth in the Indenture, the
Indenture Trustee and any director, officer, employee or agent thereof will be
indemnified by the Issuer and held harmless against any loss, liability or
expense incurred in connection with investigating, preparing to defend or
defending any legal action, commenced or threatened, relating to the Indenture,
other than any loss, liability or expense incurred by reason of its willful
malfeasance, bad faith or negligence in the performance of its duties under the
Indenture, or by reason of its reckless disregard of its obligations and duties
under the Indenture. All persons into which the Indenture Trustee may be merged
or with which it may be consolidated, or any person resulting from such merger
or consolidation, will be the successor to the Indenture Trustee under the
Indenture.
DESCRIPTION OF THE POLICY
The following summary of the terms of the Policy does not purport to be
complete and is qualified in its entirety by reference to the Policy. The
information in this section regarding the Policy has been supplied by the
Enhancer for inclusion herein. Only the Notes will be entitled to the benefit of
the Policy to be issued by the Enhancer.
On the date of issuance of the Notes the Enhancer will issue the Policy
in favor of the Indenture Trustee. The Policy will unconditionally and
irrevocably guarantee Insured Payments on the Notes.
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The Enhancer's obligation under the Policy will be discharged to the
extent that funds are received by the Indenture Trustee for distribution to the
Holders, whether or not such funds are properly distributed by the Indenture
Trustee.
For purposes of the Policy, "Holder" as to a particular Note 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
Payment Date (other than the Final Insured Payment Date), the excess, if any, of
(i) the sum of (a) the amount of interest accrued on the Note Balances, if any,
of the related Class or Classes of Notes, at the applicable Note Rates during
the related Interest Period (excluding any Interest Carry-Forward Amounts and
Relief Act Shortfalls), and (b) the related Subordination Deficit minus an
amount equal to the Overcollateralization Amount, if any, for the other Loan
Groups (to the extent not in excess of such Subordination Deficit) over (ii) the
related Total Available Funds for such Loan Group for such Payment Date, and (y)
on the Final Insured Payment Date, the outstanding Note Balance, if any, of all
Classes of Notes then outstanding, to the extent not otherwise paid on such
date, together with the amount of interest accrued on the Note Balances, if any,
of such Notes, at the applicable Note Rates during the related Interest Period
(excluding any Interest Carry-Forward Amounts and Relief Act Shortfalls). The
Policy expires and terminates without any action on the part of the Enhancer or
any other person on the date that is one year and one day following the date on
which the Notes have been paid in full.
"Total Available Funds" with respect to each Loan Group and for any
Payment Date is the sum of (i) the Interest Collections and Principal
Collections (excluding prepayment penalties, the premium for the Policy and the
Indenture Trustee Fee) for the related Classes of Notes and (ii) any Excess
Spread available from the other Loan Groups (including amounts on deposit in the
Reserve Account).
"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 the Loans--Soldiers' and Sailors" Civil Relief Act
of 1940" in the Prospectus.
The 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 POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY
FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
THE ENHANCER
The following information has been supplied by Ambac Assurance
Corporation (the "Enhancer") for inclusion in this Prospectus Supplement. No
representation is made by the Depositor, the Master Servicer, the Underwriters
or any of their affiliates as to the accuracy or completeness of such
information.
The Enhancer is a Wisconsin-domiciled stock insurance corporation
regulated by the Office of the Commissioner of Insurance of the State of
Wisconsin and licensed to do business in 50 states, the District of Columbia,
the Commonwealth of Puerto Rico and the Territory of Guam. The Enhancer
primarily insures newly issued municipal and structured finance obligations. The
Enhancer is a wholly-owned subsidiary of Ambac Financial Group, Inc., a 100%
publicly-held company. Moody's, Standard & Poor's and Fitch IBCA, Inc., have
each assigned a triple-A financial strength rating to the Enhancer.
The consolidated financial statements of the Enhancer and subsidiaries
as of December 31, 1998 and December 31, 1997, and for each of the years in the
three-year period ended December 31, 1998, 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
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Commission on March 30, 1999; Commission File Number 1-10777) and the unaudited
consolidated financial statements of the Enhancer and subsidiaries as of
September 30, 1999 and for the periods ending September 30, 1999 and September
30, 1998 included in the Quarterly Report on Form 10-Q of Ambac Financial Group,
Inc. for the period ended September 30, 1999 (which was filed with the
Commission on November 12, 1999), 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 modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus
Supplement.
All financial statements of the Enhancer and subsidiaries included in
documents filed by Ambac Financial Group, Inc. with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Term Notes shall be deemed to be incorporated
by reference into this Prospectus Supplement and to be a part hereof from the
respective dates of filing such documents.
The following table sets forth the Enhancer's capitalization as of
December 31, 1996, December 31, 1997, December 31, 1998 and September 30, 1999,
respectively, in conformity with generally accepted accounting principles.
<TABLE>
Ambac Assurance Corporation
Consolidated Capitalization Table
(Dollars in Millions)
<CAPTION>
December 31, December 31, December 31, September 30,
1996 1997 1998 1999
------------ ------------ ------------ -------------
(unaudited)
-------------
<S> <C> <C> <C> <C>
Unearned premiums.............................. $ 995 $1,184 $1,303 $1,376
Other liabilities.............................. 259 562 548 465
----------- ---------- ----------- -----------
Total liabilities.............................. $1,254 $1,746 $1,851 $1,841
----------- ---------- ----------- -----------
Stockholder's equity:(1)
Common Stock................................ $ 82 $ 82 $ 82 $ 82
Additional paid-in capital.................. 515 521 541 643
Accumulated other comprehensive income 66 118 138 (23)
(loss)......................................
Retained earnings........................... 992 1,180 1,405 1,600
----------- ---------- ----------- -----------
Total stockholder's equity..................... $1,655 $1,901 $2,166 $2,302
----------- ---------- ----------- -----------
Total liabilities and Stockholder's equity..... $2,909 $3,647 $4,017 $4,143
=========== ========== =========== ===========
</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 Enhancer effective January 1,
1998. As this new standard only requires additional information on the financial
statements, it does not affect the Enhancer's financial position or results of
operations.
For additional financial information concerning the Enhancer, see the
audited and unaudited financial statements of the Enhancer incorporated by
reference herein. Copies of the financial statements of the Enhancer
incorporated herein by reference and copies of the Enhancer's annual statement
for the year ended December 31, 1998 prepared in accordance with statutory
accounting standards are available, without charge, from the Enhancer. The
address of the Enhancer's administrative offices and its telephone number are
One State Street Plaza, 19th Floor, New York, New York 10004 and (212) 668-0340.
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The Enhancer makes no representation regarding the Term Notes or the
advisability of investing in the Term Notes and makes no representation
regarding, nor has it participated in the preparation of, this Prospectus
Supplement other than the information supplied by the Enhancer and presented
under the headings "The Enhancer" and "Description of the Policy" and in the
financial statements incorporated herein by reference.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Brown & Wood LLP, counsel to the Depositor, for
federal income tax purposes, the Term Notes will be characterized as
indebtedness and neither the Issuer nor any portion of the Issuer, as created
pursuant to the terms and conditions of the Trust Agreement, will be
characterized as an association (or publicly traded partnership within the
meaning of section 7704 of the Code) taxable as a corporation or as a taxable
mortgage pool within the meaning of section 7701(i) of the Code.
For federal income tax purposes, the Term Notes will not be treated as
having been issued with "original issue discount" (as defined in the
Prospectus). See "Certain Federal Income Tax Considerations" in the Prospectus.
The Term Notes will not be treated as assets described in Section
7701(a)(19)(C) of the Code and will not be treated as "real estate assets" under
Section 856(c)(4)(A) of the Code. In addition, interest on the Term Notes will
not be treated as "interest on obligations secured by mortgages on real
property" under Section 856(c)(3)(B) of the Code. The Term Notes also will not
be treated as "qualified mortgages" under Section 860G(a)(3)(C) of the Code.
Prospective investors in the Term Notes should see "Certain Federal
Income Tax Considerations" and "State Tax Considerations" in the Prospectus for
a discussion of the application of certain federal income and state and local
tax laws to the Issuer and purchasers of the Term Notes.
ERISA CONSIDERATIONS
Any fiduciary or other investor of Plan assets that proposes to acquire
or hold the Term Notes on behalf of or with Plan assets of any Plan should
consult with its counsel with respect to the application of the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and the Code to the proposed investment. See "ERISA Considerations" in the
Prospectus.
Each purchaser of a Term Note, by its acceptance of such Term Note,
shall be deemed to have represented that a class or individual exemption under
section 406 of ERISA or section 4975 of the Code is applicable to the
acquisition of the Term Note by such purchaser or the acquisition of the Term
Note by such purchaser does not constitute or give rise to a prohibited
transaction under section 406 of ERISA or section 4975 of the Code, for which no
statutory, regulatory or administrative exemption is available. See "ERISA
Considerations" in the Prospectus.
Insurance companies contemplating the investment of general account
assets in the Term Notes should consult with their legal advisors with respect
to the applicability of section 401(c) of ERISA, as described under "ERISA
Considerations" in the Prospectus. The DOL issued proposed regulations under
section 401(c) on December 22, 1997, but the required final regulations have not
been issued as of the date hereof.
The Term Notes may not be purchased with the assets of a Plan if the
Underwriters, Depositor, the Master Servicer, the Indenture Trustee, the Owner
Trustee, the Enhancer 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 or understanding that
such advice (i) will serve as a primary basis for investment decisions with
respect to such Plan assets and (ii) will be based on the particular investment
needs for such Plan; or (c) is an employer maintaining or contributing to such
Plan.
The sale of any of the Term Notes to a Plan is in no respect a
representation by the Issuer or the Underwriters that such an investment meets
all relevant legal requirements with respect to investments by Plans generally
or any particular Plan, or that such an investment is appropriate for Plans
generally or any particular Plan.
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LEGAL INVESTMENT
The Term Notes will not constitute "mortgage related securities" for
purposes of SMMEA. Accordingly, many institutions with legal authority to invest
in mortgage related securities may not be legally authorized to invest in the
Term Notes. No representation is made herein as to whether the Term Notes
constitute legal investments for any entity under any applicable statute, law,
rule, regulation or order. Prospective purchasers are urged to consult with
their counsel concerning the status of the Term Notes as legal investments for
such purchasers prior to investing in Term Notes.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting
Agreement, dated December 6, 1999 (the "Underwriting Agreement"), between Bear,
Stearns & Co. Inc., as representative (in such capacity, the "Representative")
of the underwriters named below (the "Underwriters"), and the Depositor, the
Underwriters have agreed to purchase and the Depositor has agreed to sell,
severally but not jointly, the following principal amounts of Term Notes set
forth opposite their names below.
<TABLE>
<CAPTION>
Class A-1 Class A-2 Class A-3
Underwriters Term Notes Term Notes Term Notes
------------ ---------- ---------- ----------
<S> <C> <C> <C>
Bear, Stearns & Co. Inc........................ $110,500,000 $59,500,000 $42,500,000
Prudential Securities Incorporated ............ $ 19,500,000 $10,500,000 $ 7,500,000
------------ ----------- -----------
Total ....................... $130,000,000 $70,000,000 $50,000,000
============ =========== ===========
</TABLE>
The Transferor has been advised by the Underwriters that they propose
initially to offer the Term Notes to the public at the prices set forth herein,
and to certain dealers at such prices less the initial concession set forth
below for each Class. The Underwriters may allow, and such dealers may reallow,
a concession not in excess of that set forth below for each Class. After the
initial public offering of the Term Notes, the public offering price and such
concessions and reallowances may be changed.
<TABLE>
<CAPTION>
Class A-1 Class A-2 Class A-3
--------- --------- ---------
<S> <C> <C> <C>
Concession...................... 0.120% 0.120% 0.120%
Reallowances..................... 0.100% 0.100% 0.100%
</TABLE>
Until the distribution of the Term Notes is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Term Notes. As an
exception to these rules, the Underwriters are permitted to engage in certain
transactions that stabilize the price of the Term Notes. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Term Notes.
If the Underwriters create a short position in the Term Notes in
connection with the offering, i.e., if it sells more Term Notes than are set
forth on the cover page of this Prospectus Supplement, the Underwriters may
reduce that short position by purchasing Term Notes in the open market.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases.
Neither the Transferor nor the Underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Term Notes. In addition, neither
the Transferor nor any of the Underwriters makes any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
S-84
<PAGE>
It is expected that delivery of the Term Notes will be made only in
book-entry form through DTC, Cedel and Euroclear as discussed herein, on or
about December 15, 1999, against payment therefor in immediately available
funds.
The Underwriting Agreement provides that the obligation of the
Underwriters to pay for and accept delivery of the Term Notes is subject to,
among other things, the receipt of certain legal opinions and to the conditions,
among others, that no stop order suspending the effectiveness of the Depositor's
Registration Statement shall be in effect, and that no proceedings for such
purpose shall be pending before or threatened by the Securities and Exchange
Commission.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriters, and that under limited circumstances the Underwriters will
indemnify the Depositor, against certain civil liabilities under the Securities
Act of 1933, as amended, or contribute to payments required to be made in
respect thereof.
There can be no assurance that a secondary market for the Term Notes
will develop or, if it does develop, that it will continue. The primary source
of information available to investors concerning the Term Notes will be the
monthly statements discussed herein under "Description of the Trust Agreement
and Indenture--Reports to Term Noteholders" and in the Prospectus under
"Reports to Holders," which will include information as to the outstanding
principal balance of the Term Notes. There can be no assurance that any
additional information regarding the Term Notes will be available through any
other source. In addition, the Depositor is not aware of any source through
which price information about the Term Notes will be generally available on an
ongoing basis. The limited nature of such information regarding the Term Notes
may adversely affect the liquidity of the Term Notes, even if a secondary market
for the Term Notes becomes available.
EXPERTS
The consolidated financial statements of Ambac Assurance Corporation
and subsidiaries, as of December 31, 1998 and 1997 and for each of the years in
the three-year period ended December 31, 1998 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 that firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters with respect to the Term Notes 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 Underwriters
by Brown & Wood LLP, New York, New York.
RATINGS
It is a condition to issuance that the Term Notes be rated "Aaa" by
Moody's and "AAA" by Standard & Poor's. The Depositor has not requested a rating
on the Term Notes by any rating agency other than Moody's and Standard & Poor's.
However, there can be no assurance as to whether any other rating agency will
rate the Term Notes, or, if it does, what rating would be assigned by any such
other rating agency. A rating on the Term Notes by another rating agency, if
assigned at all, may be lower than the ratings assigned to the Term Notes by
Moody's and Standard & Poor's. A securities rating addresses the likelihood of
the receipt by holders of Term Notes of distributions on the Mortgage Loans. The
rating takes into consideration the structural and legal aspects associated with
the Term Notes. The ratings on the Term Notes do not, however, constitute
statements regarding the possibility that Holders might realize a lower than
anticipated yield. The ratings also do not address the likelihood of the payment
of any Interest Carry-Forward Amounts. A securities rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the assigning rating organization. Each securities
rating should be evaluated independently of similar ratings on different
securities.
S-85
<PAGE>
INDEX OF DEFINED TERMS
Account Balance.........................................................S-23
Additional Balances.....................................................S-48
Additional Charges......................................................S-23
Additional Mortgage Loans...............................................S-20
Aggregate Balance Differential..........................................S-69
Aggregate Overcollateralization Target Amount...........................S-71
Amortization Periods....................................................S-67
Appraised Value.........................................................S-23
Balance Differential....................................................S-69
Billing Cycle...........................................................S-22
Business Day............................................................S-65
Capitalized Interest Account............................................S-66
Capitalized Interest Requirement........................................S-66
Certificate Distribution Account........................................S-77
Certificates............................................................S-20
Closing Date.............................................................S-4
Collection Account......................................................S-77
Collection Period.......................................................S-77
Combined Loan-to-Value Ratio............................................S-21
Cut-Off Date.............................................................S-4
Definitive Note.........................................................S-63
Depositor..........................................................S-3, S-20
Determination Date......................................................S-77
Draw Period.............................................................S-22
DTC Services............................................................S-63
Due Date................................................................S-22
Enhancer...........................................................S-3, S-81
European Depositaries...................................................S-63
Event of Default........................................................S-78
Excess Spread...........................................................S-69
Excluded Amount.........................................................S-77
Final Insured Payment Date..............................................S-73
Finance Charge..........................................................S-23
Financial Intermediary..................................................S-63
Global Securities......................................................A-I-1
governing instrument....................................................S-61
Gross Margin............................................................S-22
Group I Excess Spread...................................................S-69
Group I Mortgage Loans..................................................S-20
Group II Excess Spread..................................................S-69
Group II Mortgage Loans.................................................S-20
Group III Excess Spread.................................................S-69
Group III Mortgage Loans................................................S-20
HELOCs..................................................................S-20
HELs....................................................................S-20
IFC.....................................................................S-48
Immediate Credit HELOCs.................................................S-20
Immediate Credit HELs...................................................S-20
Immediate Credit Mortgage Loans.........................................S-21
Indenture...............................................................S-20
Indenture Trustee........................................................S-3
Industry................................................................S-63
Initial HELOCs..........................................................S-20
S-86
<PAGE>
Initial HELs............................................................S-20
Initial Immediate Credit HELOCs.........................................S-20
Initial Immediate Credit HELs...........................................S-20
Initial Mortgage Loans..................................................S-20
Insured Payment.........................................................S-81
Interest Carry-Forward Amount...........................................S-65
Interest Collections....................................................S-69
Interest Period.........................................................S-65
Interest Shortfalls.....................................................S-68
Issuer.............................................................S-3, S-20
IUB.....................................................................S-74
LIBOR Business Day......................................................S-66
Lifetime Rate Caps......................................................S-22
Lifetime Rate Floors....................................................S-22
Liquidated Mortgage Loan................................................S-70
Liquidation Loss Amount.................................................S-70
Liquidation Proceeds....................................................S-77
Loan Agreement....................................................S-21, S-22
Loan Group..............................................................S-20
Managed Amortization Period.............................................S-67
Master Servicer..........................................................S-3
Maximum Variable Funding Balance........................................S-62
Monthly Payment.........................................................S-21
Mortgage Interest Rate..................................................S-23
Mortgage Loan............................................................S-3
Mortgage Loans..........................................................S-20
Mortgage Note...........................................................S-21
mortgage related securities.............................................S-14
Mortgage Sale Agreements................................................S-48
Mortgaged Properties....................................................S-21
Mortgages...............................................................S-21
Mortgagor...............................................................S-23
Net Principal Collections...............................................S-70
New Withholding Regulations............................................A-I-4
Non-U.S. Person........................................................A-I-3
Note Balance............................................................S-70
Note Payment Account....................................................S-77
Note Rate...............................................................S-65
Notes...................................................................S-20
Originator.........................................................S-3, S-48
Overcollateralization Amount............................................S-70
Overcollateralization Target Amount.....................................S-70
Owner Trustee............................................................S-3
Payment Date.......................................................S-4, S-65
Pre-Funded Amount.......................................................S-47
Pre-Funding Account.....................................................S-47
Pre-Funding Period......................................................S-47
Principal Balance.......................................................S-77
Principal Collections...................................................S-70
Principal Distribution Amount...........................................S-70
Qualified Substitute Mortgage Loan......................................S-75
Rapid Amortization Event..........................................S-67, S-71
Rapid Amortization Period...............................................S-67
Real estate owned.......................................................S-50
Reference Bank Rate.....................................................S-66
Relevant Depositary.....................................................S-63
S-87
<PAGE>
Relief Act Shortfalls...................................................S-81
Repayment Period........................................................S-22
Representative..........................................................S-84
Reserve Account.........................................................S-72
Revolving Period........................................................S-67
Rules...................................................................S-63
Sale and Servicing Agreement............................................S-76
Securities..............................................................S-20
Servicer Default........................................................S-60
Statistical Calculation Date.............................................S-3
Step-Up Date.............................................................S-5
Subordination Deficit...................................................S-72
Subsequent Mortgage Loans...............................................S-47
Subsequent Transfer Date................................................S-47
Substitution Adjustment.................................................S-75
Systems.................................................................S-63
Telerate Screen Page 3750...............................................S-66
Term Note Balance.......................................................S-72
Term Note Owners........................................................S-62
Term Notes..............................................................S-20
TIA.....................................................................S-79
Total Available Funds...................................................S-81
Transferor.........................................................S-3, S-48
Trust...................................................................S-20
Trust Agreement.........................................................S-20
Trust Estate............................................................S-61
Trustee Collection Account..............................................S-77
Trustee's Mortgage File.................................................S-74
U.S. Person............................................................A-I-3
Underwriter.............................................................S-84
Underwriting Agreement..................................................S-84
Variable Funding Balance................................................S-72
Variable Funding Notes..................................................S-20
Weighted average life...................................................S-51
S-88
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Bear
Stearns Asset Backed Securities, Inc., Home Equity Loan-Backed Term Notes,
Series 1999-3 (the "Global Securities") will be available only in book-entry
form. Investors in the Global Securities may hold such Global Securities through
any of DTC, Cedel or Euroclear. The Global Securities will be tradable as home
market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors through Cedel and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of Cedel and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Term Notes will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors" interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Cedel and
Euroclear will hold positions on behalf of their participants through their
Relevant Depositary which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset-backed term notes issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
A-I-1
<PAGE>
Trading between DTC, Transferor and Cedel or Euroclear Participants.
When Global Securities are to be transferred from the account of a DTC
Participant to the account of a Cedel Participant or a Euroclear Participant,
the purchaser will send instructions to Cedel or Euroclear through a Cedel
Participant or Euroclear Participant at least one business day prior to
settlement. Cedel or Euroclear will instruct the Relevant Depositary, as the
case may be, to receive the Global Securities against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment date to and excluding the settlement date, on the basis of the
actual number of days in such accrual period and a year assumed to consist of
360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
Payment will then be made by the Relevant Depositary to the DTC Participant's
account against delivery of the Global Securities. After settlement has been
completed, the Global Securities will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the Cedel Participant's or Euroclear Participant's account. The securities
credit will appear the next day (European time) and the cash debt will be
back-valued to, and the interest on the Global Securities will accrue from, the
value date (which would be the preceding day when settlement occurred in New
York). If settlement is not completed on the intended value date (i.e., the
trade fails), the Cedel or Euroclear cash debt will be valued instead as of the
actual settlement date.
Cedel Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedel or Euroclear. Under this
approach, they may take on credit exposure to Cedel or Euroclear until the
Global Securities are credited to their account one day later. As an
alternative, if Cedel or Euroclear has extended a line of credit to them, Cedel
Participants or Euroclear Participants can elect not to preposition funds and
allow that credit line to be drawn upon to finance settlement. Under this
procedure, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although the result will depend on each Cedel Participant's or
Euroclear Participant's particular cost of funds. Since the settlement is taking
place during New York business hours, DTC Participants can employ their usual
procedures for crediting Global Securities to the respective European Depositary
for the benefit of Cedel Participants or Euroclear Participants. The sale
proceeds will be available to the DTC seller on the settlement date. Thus, to
the DTC Participants a cross-market transaction will settle no differently than
a trade between two DTC Participants.
Trading between Cedel or Euroclear Transferor and DTC Purchaser. Due to
time zone differences in their favor, Cedel Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. In these cases Cedel
or Euroclear will instruct the respective Depositary, as appropriate, to credit
the Global Securities to the DTC Participant's account against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment to and excluding the settlement date on the basis of the
actual number of days in such accrual period and a year assumed to consist to
360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
The payment will then be reflected in the account of Cedel Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
Cedel Participant's or Euroclear Participant's account would be back-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedel Participants or
Euroclear Participants should term note that these trades would automatically
fail on the sale side unless affirmative action is taken. At least three
techniques should be readily available to eliminate this potential problem:
A-I-2
<PAGE>
(a) borrowing through Cedel or Euroclear for one day (until the purchase
side of the trade is reflected in their Cedel or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear account
in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the Cedel Participant or Euroclear
Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Cedel or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (i) each clearing system, bank
or other financial institution that holds customers" securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate: Exemption for
Non-U.S. Persons (Form W-8). Beneficial Holders of Global Securities that are
Non-U.S. Persons (as defined below) can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
Exemption or reduced rate for Non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Holdership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by Term Note Holders or their agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Holder of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds the
security (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year. The term "U.S.
Person" means (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity (treated as a corporation or a
partnership for federal income tax purposes) organized in or under the laws of
the United States, any state thereof or the District of Columbia (unless, in the
case of a partnership, future Treasury regulations provide otherwise), (iii) an
estate that is subject to U.S. federal income tax regardless of the source of
its income, or (iv) a trust if a court within the United States is able to
exercise primary supervision of the administration of the trust and one or more
United States persons have the authority to control all substantial decisions of
the trust. Certain trusts not described in clause (iv) above in existence on
August 20, 1996 that elect to be treated as a United States Person will also be
a U.S. Person. The term "Non-U.S. Person" means any person who is not a U.S.
Person. This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global Securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Securities.
A-I-3
<PAGE>
Final regulations dealing with withholding tax on income paid to
foreign persons, backup withholding and related matters (the "New Withholding
Regulations") were issued by the Treasury Department on October 6, 1997. The New
Withholding Regulations generally attempt to unify certification requirements
and modify reliance standards. The New Withholding Regulations generally will be
effective for payments made after December 31, 2000, subject to certain
transition rules.
Prospective investors are strongly urged to consult their own tax
advisors with respect to the New Withholding Regulations.
A-I-4
<PAGE>
PROSPECTUS
Asset-Backed Securities
(Issuable in Series)
BEAR STEARNS ASSET BACKED SECURITIES, INC.
Depositor
- --------------------------------------------------------------------------------
Consider carefully the risk factors beginning on page 3 of this prospectus.
The securities represent obligations of the trust only and do not represent an
interest in or obligation of the depositor, the seller, the master servicer or
any of their affiliates.
This prospectus may be used to offer and sell the securities only if accompanied
by a prospectus supplement.
- --------------------------------------------------------------------------------
The Securities
Bear Stearns Asset Backed Securities, Inc., as depositor, will sell the
securities, which may be in the form of asset-backed certificates or
asset-backed notes. Each issue of securities will have its own series
designation and will evidence either:
o ownership interests in certain assets in a trust fund or
o debt obligations secured by certain assets in a trust fund.
Each series of securities will consist of one or more classes. Each
class of securities will represent the entitlement to a specified portion of
future interest payments and a specified portion of future principal payments on
the assets in the related trust fund. In each case, the specified portion may
equal from 0% to 100%. A series may include one or more classes of securities
that are senior in right of payment to one or more other classes. One or more
classes of securities may be entitled to receive distributions of principal,
interest or both prior to one or more other classes, or before or after certain
specified events have occurred. The related prospectus supplement will specify
each of these features.
The Trust Fund and Its Assets
As specified in the related prospectus supplement, each trust fund will
consist primarily of assets from one of the following categories:
o closed-end and/or revolving home equity loans secured by
senior or subordinate liens on one- to four-family residential
or mixed-use properties;
o home improvement installment sales contracts and installment
loan agreements that are either unsecured or secured by senior
or subordinate liens on one- to four-family residential or
mixed-use properties or by purchase money security interests
in the related home improvements; and
o private asset backed securities.
Each trust fund may be subject to early termination in certain
circumstances.
Market for the Securities
No market will exist for the securities of any series before they are
issued. In addition, even after the securities of a series have been issued and
sold, there can be no assurance that a resale market will develop.
Offers of the Securities
Offers of the securities are made through Bear, Stearns & Co. Inc. and
the other underwriters listed in the related prospectus supplement.
Neither the Securities and Exchange Commission nor any state securities
commission has approved these securities or determined that this prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
Bear, Stearns & Co. Inc.
August 5, 1999
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS
AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT
Information about each series of securities is contained in the
following documents:
o this prospectus, which provides general information, some of
which may not apply to a particular series; and
o the accompanying prospectus supplement for a particular
series, which describes the specific terms of the securities
of that series. If the prospectus supplement contains
information about a particular series that differs from the
information contained in this prospectus, you should rely on
the information in the prospectus supplement.
You should rely only on the information contained in this prospectus
and the accompanying prospectus supplement. We have not authorized anyone to
provide you with information that is different from that contained in this
prospectus and the accompanying prospectus supplement. The information in this
prospectus is accurate only as of the date of this prospectus.
Each prospectus supplement generally will include the following
information with respect to the related series of securities:
o the principal amount, interest rate and authorized
denominations of each class of securities;
o information concerning the home equity loans, home improvement
contracts and/or private securities in the related trust fund;
o information concerning the seller or sellers of the home
equity loans, home improvement contracts and/or private
securities and information concerning any servicer;
o the terms of any credit enhancement with respect to particular
classes of the securities;
o information concerning other trust fund assets, including any
reserve fund;
o the final scheduled distribution date for each class of
securities;
o the method for calculating the amount of principal to be paid
to each class of securities, and the timing and order of
priority of principal payments;
o information about any REMIC or FASIT tax elections for some or
all of the trust fund assets; and
o particulars of the plan of distribution for the securities.
If you require additional information, the mailing address of our
principal executive offices is Bear Stearns Asset Backed Asset Securities, Inc.,
245 Park Avenue, New York, New York 10167 and our telephone number is (212)
272-4095. For other means of acquiring additional information about us or a
series of securities, see "The Trust Funds -- Incorporation of Certain
Information by Reference" beginning on page 85 of this prospectus.
2
<PAGE>
RISK FACTORS
You should consider the following information carefully, since it
identifies certain significant sources of risk associated with an investment in
the securities.
Limited Liquidity
No market will exist for the securities of any series before they are
issued. In addition, we cannot give you any assurance that a resale market will
develop following the issuance and sale of any series of the securities. Even if
a resale market does develop, it might not provide you with liquidity of
investment or continue for the life of the securities.
Limited Assets for Making Payments
The securities of each series will be payable solely from the assets of
the related trust fund, including any credit enhancement that may be applicable
to certain classes. In the case of securities that are in the form of notes, the
related indenture will require that noteholders proceed only against the assets
of the related trust fund. We cannot give you any assurance that the market
value of the assets in any trust fund will be equal to or greater than the total
principal amount of the related series of securities then outstanding, plus
accrued interest. Moreover, if the assets of a trust fund are ever sold, the
sale proceeds will be applied first to reimburse any related trustee, servicer
and credit enhancement provider for their unpaid fees and expenses before any
remaining amounts are distributed to securityholders.
In addition, at the times specified in the related prospectus
supplement, certain assets of the trust fund and the related security accounts
may be released to the depositor, the servicer, the credit enhancement provider
or other persons, if
o all payments then due on the related securities have been
made, and
o any other payments specified in the related prospectus
supplement have been made.
Once released, such assets will no longer be available to make payments
to securityholders.
You will have no recourse against the depositor or any other person if
any required distribution on the securities is not made or for any other
default. The only obligations of the depositor with respect to the related trust
fund or the securities would result from a breach of the representations and
warranties that the depositor may make concerning the trust assets. However,
because of the depositor's very limited assets, even if the depositor should be
required to repurchase a loan from a particular trust fund because of the breach
of a representation or warranty, its sole source of funds for the repurchase
would be:
o funds obtained from enforcing any similar obligation of the
originator of the loan, or
o monies from any reserve fund established to pay for loan
repurchases.
Limited Protection Against Losses
Credit enhancement is intended to reduce the effect of delinquent
payments or loan losses on those classes of securities that have the benefit of
the credit enhancement. Nevertheless, the amount of any credit enhancement is
subject to the limits described in the related prospectus supplement. Moreover,
the amount of credit enhancement may decline or be depleted under certain
circumstances before the related securities are paid in full. As a result,
securityholders may suffer losses.
Your Yields on the Securities May Vary
The timing of principal payments on the securities of a series will be
affected by a number of factors, including the following:
o the extent of prepayments on the underlying loans in the trust
fund or, if the trust fund contains underlying
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securities, on the loans backing the underlying securities;
o the method by which payments of principal are allocated among
the classes of securities of that series as specified in the
related prospectus supplement;
o if any party has an option to terminate the related trust
early, the effect of the exercise of the option;
o the rate and timing of defaults and losses on the assets in
the related trust fund;
o repurchases of assets in the related trust fund as a result of
material breaches of representations and warranties made by
the depositor or a seller; and
o in the case of a trust fund that contains revolving credit
line loans, any provisions for non-amortization, early
amortization or scheduled amortization periods described in
the related prospectus supplement.
All the above factors may affect the yield to maturity of the
securities.
Interest payable on the securities on any given distribution date will
include all interest accrued during the related interest accrual period. Each
prospectus supplement will specify the interest accrual period for the
securities of the related series. If interest accrues during the calendar month
before the related distribution date, your effective yield will be less than it
would be if the interest accrual period ended the day before the distribution
date. As a result, your effective yield at par may be less than the indicated
coupon rate.
Some Loans Require Balloon Payments
Certain of the underlying loans may not be fully amortizing over their
terms to maturity and may require a substantial principal payment (i.e., a
"balloon" payment) at their stated maturity. Loans of this type involve a
greater degree of risk than fully amortizing loans since the related borrower
generally must be able to refinance the loan or sell the related property prior
to the loan's maturity date. The borrower's ability to do so will depend on such
factors as the level of available mortgage rates at the time of sale or
refinancing, the relative strength of the local housing market, the borrower's
equity in the property, the borrower's general financial condition and tax laws.
Adjustable Rate Loans May Be Underwritten Differently
A trust fund may include adjustable rate loans that were underwritten
on the assumption that the borrowers would be able to make higher monthly
payments in a relatively short period of time. In fact, however, the borrowers'
income may not be sufficient to meet their loan payments as payment amounts
increase, thus increasing the risk of default.
Property Values May Be Insufficient
If the home equity loans in a trust fund are primarily in a junior lien
position, any proceeds from liquidations, insurance recoveries or condemnations
must be used first to satisfy the claims of the related senior lien loans (and
related foreclosure expenses) before being available to satisfy the junior lien
loans. In addition, a junior mortgage lender may only foreclose subject to the
related senior mortgage. As a result, the junior mortgage lender must either pay
the related senior mortgage lender in full, at or before the foreclosure sale,
or agree to make the regular payments on the senior mortgage. The trust will not
have a source of funds to satisfy any senior mortgages or to continue making
payments on them. As a result, the trust's ability, as a practical matter, to
foreclose on any junior mortgage loan will be quite limited. The following
factors, among others, could adversely affect property values in such a way that
the outstanding balance of the related loans, together with any senior financing
on the same properties, would equal or exceed those values:
o an overall decline in the residential real estate markets
where the properties are located;
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o failure of borrowers to maintain their properties adequately;
and
o natural disasters that may not be covered by hazard insurance,
such as earthquakes and floods.
If property values decline, actual rates of delinquencies, foreclosures
and losses on the underlying loans could be higher than those currently
experienced by the mortgage lending industry in general.
Home Improvement Contracts and Other Loans May Not Have Sufficient Security
A trust fund may include home improvement contracts that are not
secured by an interest in real estate or otherwise. It may also include home
equity loans with original loan-to-value ratios (or combined loan-to-value
ratios in the case of junior loans) greater than 100%. In these cases, the trust
fund could be treated as a general unsecured creditor for the unsecured portion
of these loans.
If a loan of this type goes into default, the trust fund will have
recourse only against the borrower's assets generally for the unsecured portion
of the loan, along with the borrower's other general unsecured creditors. In a
bankruptcy proceeding, the unsecured portion of the loan may be discharged, even
if the value of the borrower's assets available to the trust fund would be
insufficient to pay the remaining amounts owing on the loan.
Home Improvement Contracts Will Not Be Stamped
The depositor will ensure that a UCC-1 financing statement is filed
that identifies as collateral the home improvement contracts included in a trust
fund. However, unless the related prospectus supplement provides otherwise, the
home improvement contracts themselves will not be stamped or marked to reflect
their assignment to the trust fund. Thus, if as a result of negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
contracts without notice of the assignment to the trust fund, the interests of
the related securityholders in those contracts could be defeated.
Pre-Funding May Adversely Affect Your Investment
The related prospectus supplement may provide that the depositor or
seller will deposit a specified amount in a pre-funding account on the date the
securities are issued. In this case, the deposited funds may be used only to
acquire additional assets for the trust during a specified period after the
initial issuance of the securities. Any amounts remaining in the account at the
end of that period will be distributed as a prepayment of principal to the
holders of the related securities. As a result, the yield to maturity on your
investment may be adversely affected.
Bankruptcy Laws May Adversely Affect Trust Fund Assets
The federal bankruptcy code and state debtor relief laws may adversely
affect the ability of the trust fund, as a secured lender, to realize upon its
security. For example, in a federal bankruptcy proceeding, a lender may not
foreclose on mortgaged property without the bankruptcy court's permission.
Similarly, the debtor may propose a rehabilitation plan, in the case of
mortgaged property that is not his principal residence, that would reduce the
amount of the lender's secured indebtedness to the value of the property as of
the commencement of the bankruptcy. As a result, the lender would be treated as
a general unsecured creditor for the reduced amount, the amount of the monthly
payments due on the loan could be reduced, and the interest rate and loan
payment schedule could be changed.
Any such actions could result in delays in receiving payments on the
loans underlying the securities and result in the reduction of total payments.
Environmental Risks May Adversely Affect Trust Fund Assets
Federal, state and local laws and regulations impose a wide range of
requirements on activities
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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 that secure the loans. Failure to comply
with these laws and regulations can result in fines and penalties that could be
assessed against the trust fund as owner of the related property.
In some states, a lien on the property due to contamination has
priority over the lien of an existing mortgage. Further, a mortgage lender may
be held liable as an "owner" or "operator" for costs associated with the release
of petroleum from an underground storage tank under certain circumstances. If
the trust fund is considered the owner or operator of a property, it will suffer
losses as a result of any liability imposed for environmental hazards on the
property.
Consumer Protection Laws May Adversely Affect Trust Fund Assets
The loans and contracts in each trust fund also may be subject to
federal laws relating to loan origination and underwriting. These laws
o require certain disclosures to the borrowers regarding the
terms of the loans;
o 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;
o regulate the use and reporting of information related to the
borrower's credit experience; and
o require additional application disclosures, limit changes that
may be made to the loan documents without the borrower's
consent and restrict a lender's ability to declare a default
or to suspend or reduce a borrower's credit limit to certain
enumerated events.
Certain loans are also subject to federal laws that impose additional
disclosure requirements on creditors with respect to non-purchase money mortgage
loans with high interest rates or high up-front fees and charges. These laws can
impose specific liabilities upon creditors that fail to comply and may affect
the enforceability of the related loans. In addition, the trust fund, as
assignee of the creditor, would generally be subject to all claims and defenses
that the borrower could assert against the creditor, including the right to
rescind the loan.
Certain home improvement contracts are subject to federal laws that
protect the borrower from defective or incomplete work by a contractor. These
laws permit the borrower to withhold payment if the work does not meet the
quality and durability standards agreed to between the borrower and the
contractor. These laws have the effect of subjecting the trust fund, as assignee
of the creditor, to all claims and defenses which the borrower in a sale
transaction could assert against the seller of defective goods.
If certain provisions of these federal laws are violated, the servicer
may be unable to collect all or part of the principal or interest on the loans.
The trust fund also could be subject to damages and administrative enforcement.
Subordinate Securities Are Subject to Additional Risk
If you invest in any class of subordinate securities, your rights as an
investor to receive payments otherwise due you will be subordinate to the rights
of the servicer and the holders of the related senior securities. As a result,
before investing in any subordinate securities, you must be prepared to bear the
risk that payments on your securities may be delayed and that you might not
recover all of your initial investment.
Financial Instruments May Not Perform As Expected
As described under "Enhancement--Financial Instruments," a trust fund
may include
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financial instruments to protect against certain risks or to provide certain
cash flow characteristics for particular classes of the securities of a series.
If you invest in such a class and the issuer of the financial instruments fails
to perform its obligations, the yield to maturity, market price and liquidity of
your securities could be materially adversely affected. In addition, if the
issuer of the related financial instruments experiences a credit rating
downgrade, the market price and liquidity of your securities could be reduced.
Finally, if the financial instruments are intended to provide an approximate or
partial hedge for certain risks or cashflow characteristics, the yield to
maturity, market price and liquidity of your securities could be adversely
affected to the extent that the financial instrument does not provide a perfect
hedge.
REMIC Residual Securities Are Subject to Additional Risk
If you invest in any class of securities that represent the "residual
interest" in a real estate mortgage investment conduit (REMIC), you will be
required to report as ordinary income your pro rata share of the REMIC's taxable
income, whether or not you actually received any cash. Thus, as the holder of a
REMIC residual interest security, you could have taxable income and tax
liabilities in a year that are in excess of your ability to deduct servicing
fees and any other REMIC expenses. In addition, because of their special tax
treatment, your after-tax yield on a REMIC residual interest security may be
significantly less than that of a corporate bond with similar cash-flow
characteristics and pre-tax yield. Transfers of REMIC residual interest
securities are also restricted.
FASIT Ownership Securities Are Subject to Additional Risk
If you are a fully taxable domestic corporation that invests in any
class of securities representing the "ownership interest" in a financial asset
securitization investment trust (FASIT), you will be required to report as
ordinary income your pro rata share of the FASIT's taxable income, whether or
not you actually received any cash. Thus, as the holder of a FASIT ownership
interest security, you could have taxable income and tax liabilities in a year
that are in excess of your ability to deduct servicing fees and any other FASIT
expenses. In addition, because of their special tax treatment, your after-tax
yield on a FASIT ownership interest security may be significantly less than that
of a corporate bond with similar cash-flow characteristics and pre-tax yield.
Transfers of FASIT ownership interest securities are also restricted.
Book Entry Registration
Limit on Liquidity of Securities. Securities issued in book-entry form
may have only limited liquidity in the resale market, since investors may be
unwilling to purchase securities for which they cannot obtain physical
instruments.
Limit on Ability to Transfer or Pledge. Transactions in book-entry
securities can be effected only through The Depository Trust Company (DTC), its
participating organizations, its indirect participants and certain banks. As a
result, your ability to transfer or pledge securities issued in book-entry form
may be limited.
Delays in Distributions. You may experience some delay in the receipt
of distributions on book-entry securities since the distributions will be
forwarded by the trustee to DTC for credit to the accounts of its participants.
In turn, these participants will credit the distributions to your account either
directly or indirectly through indirect participants.
Security Ratings Are Not Recommendations
Any class of securities issued under this prospectus and the
accompanying prospectus supplement will be rated in one of the four highest
rating categories of a nationally recognized rating agency. A rating is based on
the adequacy of the value of the trust fund assets and any credit enhancement
for that class and reflects the rating agency's assessment of the likelihood
that holders of the class of securities will receive the payments to which they
are entitled. A rating is not an assessment of the likelihood that principal
prepayments on the
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underlying loans will be made, the degree to which the rate of prepayments might
differ from that originally anticipated or the likelihood of an early
termination of the securities. You should not view a rating as a recommendation
to purchase, hold or sell securities because it does not address the market
price or suitability of the securities for any particular investor.
There is no assurance that any rating will remain in effect for any
given period or that the rating agency will not lower or withdraw the rating in
the future. The rating agency could lower or withdraw its rating due to:
o any decrease in the adequacy of the value of the trust fund
assets or any related credit enhancement, or
o an adverse change in the financial or other condition of a
credit enhancement provider.
DESCRIPTION OF THE SECURITIES
General
Bear Stearns Asset Backed Securities, Inc. (the "Depositor") will
establish a trust fund (each, a "Trust Fund") for each series (a "Series") of
its Asset-Backed Notes (the "Notes") and of its Asset-Backed Certificates (the
"Certificates").
Each Series of Notes will be issued pursuant to an indenture (each, an
"Indenture") between the Trust Fund and the entity named in the related
Prospectus Supplement as trustee (the "Trustee") with respect to that Series. A
form of Indenture has been filed as an exhibit to the Registration Statement of
which this prospectus forms a part. If the Trust Fund includes Loans, the Trust
Fund and the related servicer (the "Servicer") will also enter into a Servicing
Agreement (each, a "Servicing Agreement") with respect to the Loans.
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 related Servicer (if the Trust Fund includes Loans) and
the related 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. We refer to both Notes and
Certificates in this prospectus as "Securities."
The seller or sellers named in the related Prospectus Supplement
(collectively, the "Seller"), from which the Depositor will have purchased
certain of the assets included in the Trust Fund, may agree to reimburse the
Depositor for certain fees and expenses that the Depositor incurs in connection
with the offering of the related Securities.
The following summaries describe certain provisions in the Pooling and
Servicing Agreement or Trust Agreement, in the case of a Series of Certificates,
and the Indenture and the Servicing Agreement, in the case of a Series of Notes
(collectively, 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 in this prospectus
by reference as part of such summaries.
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Each Series of Securities will consist of one or more classes (each, a
"Class"), one or more of which may be compound interest Securities, variable
interest Securities, planned balance (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 any conditions, applicable to a
particular Class as described in the related Prospectus Supplement, the transfer
of the Securities may be registered and the Securities may be exchanged at the
office of the Trustee without the payment of any service charge, other than any
tax or governmental charge payable in connection with the 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 (each, a
"Distribution Date") by check mailed to holders of that Series, registered as
such at the close of business on the record date (specified in the Prospectus
Supplement) that is applicable to that Distribution Date at their addresses
appearing on the security register (each, a "Holder"). However, payments may be
made by wire transfer (at the expense of the Holder requesting payment by wire
transfer) in certain circumstances described in the Prospectus Supplement. In
addition final payments of principal in retirement of each Security will be made
only upon presentation and surrender of the Security at the office of the
related Trustee. Notice of the final payment on a Security will be mailed to the
Holder of that Security before the Distribution Date on which the final
principal payment is expected to be made.
Payments of principal of and interest on the Securities will be made by
the Trustee, or a paying agent on behalf of the Trustee, as specified in the
related Prospectus Supplement. Unless otherwise provided in the related
Prospectus Supplement, the following amounts will be deposited directly into an
account (each, a "Collection Account") established for a particular Series with
the Trustee (or with the Servicer in the name of the Trustee):
o all payments with respect to the Primary Assets (as defined
below) for a Series, together with reinvestment income
thereon;
o amounts withdrawn from any cash, letters of credit, short-term
investments or other instruments acceptable to the rating
agencies identified in the Prospectus Supplement as rating
that Series (each, a "Rating Agency") deposited in one or more
reserve funds established in the name of the Trustee (each, a
"Reserve Fund'); and
o amounts available pursuant to any other credit enhancement.
If provided in the related Prospectus Supplement, the deposits may be
net of certain amounts payable to the Servicer and any other person specified in
the Prospectus Supplement. Those amounts thereafter will be deposited into the
separate distribution account (each, a "Distribution Account") established for
that Series and will be available to make payments on the Securities of that
Series on the next Distribution Date. See "The Trust Funds--Collection and
Distribution Accounts" in this prospectus.
The Primary Assets and Their Valuation
The "Primary Assets" of each Trust Fund may include one or more pools
of the following:
o closed-end and/or revolving home equity loans (the "Mortgage
Loans"), secured by senior or subordinate liens on one- to
four-family residential or mixed-use properties;
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o 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 related home
improvements (the "Home Improvements"); and
o securities (the "Private Securities") backed or secured by
Mortgage Loans, Contracts and/or Home Improvement Contracts
(the "Underlying Loans").
The Mortgage Loans and the Home Improvement Contracts are collectively
referred to in this prospectus as the "Loans". The residential or mixed-use
properties that secure the Mortgage Loans are collectively referred to in this
prospectus as the "Mortgaged Properties".
If specified in the related Prospectus Supplement for a Series of
Notes, each Primary Asset included in the related Trust Fund 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
o the product of the Asset Value Percentage as set forth in the
Indenture and
o 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 that 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.
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 or reinvestment agreement or other
arrangement satisfactory to the Rating Agencies. If the Assumed Reinvestment
Rate is insured in this way, the related Prospectus Supplement will set forth
the terms of the arrangement.
Payments of Interest
The Securities of each Class that by their terms are entitled to
receive interest will bear interest (calculated, unless otherwise specified in
the related Prospectus Supplement, on the basis of a 360-day year of twelve
30-day months) from the date and at the rate specified, or will be entitled to
receive interest payment amounts calculated in the method described, in the
related Prospectus Supplement. Interest on the interest-bearing 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 interest rates of the Loans
(or Underlying Loans) included in the related Trust Fund and/or as prepayments
occur with respect to the Loans (or Underlying Loans). Principal only Securities
may not be entitled to receive any interest distributions or may be entitled to
receive only nominal interest distributions. Any interest on zero coupon
Securities that is not paid on the related Distribution Date will accrue and be
added to principal on such Distribution Date.
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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 that Distribution Date.
Payments of Principal
On each Distribution Date for a Series, principal payments will be made
to the Holders of the related Securities on which principal is then payable, to
the extent set forth in the related Prospectus Supplement. The payments will be
made in a total amount determined as specified in the related Prospectus
Supplement and will be allocated among the respective Classes of the 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 total principal balance of
that Class will be fully paid, and with respect to each Class of a Series of
Certificates is the date on which the principal balance of that Class is
expected to be reduced to zero, in each case calculated on the basis of the
assumptions applicable to that 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 that reduce the outstanding
principal amount of the Securities, it is likely that the actual final
Distribution Date of any 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, the actual final Distribution Date of any Certificate may
occur later than its Final Scheduled Distribution Date as a result of
delinquencies, defaults and liquidations of the Primary Assets in the Trust
Fund. No assurance can be given as to the actual prepayment experience with
respect to a Series. See "-Weighted Average Lives 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 that 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 related Loans (or
Underlying Loans) or low yields then available for reinvestment, the entity
specified in the Prospectus Supplement determines, based on assumptions set
forth in the applicable Agreement, that the amount available for the payment of
interest that will have accrued on those 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 those Securities to that date. In this event and as further described in the
Prospectus Supplement, the Trustee will redeem a principal amount of outstanding
Securities of that Series sufficient to cause the Available Interest Amount to
equal the amount of interest that will have accrued through the designated
interest accrual date for that Series of Securities outstanding immediately
after the redemption.
Optional Redemption, Purchase or Termination
The Depositor or the Servicer or any other entity that may be
designated in the related Prospectus Supplement will have the option to redeem,
in whole or in part, one or more Classes of Notes or purchase
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one or more Classes of Certificates of any Series on any Distribution Date under
the circumstances, if any, specified in the related Prospectus Supplement.
Alternatively, if the Prospectus Supplement for a Series of Certificates so
provides, the Depositor, the Servicer or another entity designated in the
related Prospectus Supplement will have the option to cause an early termination
of the Trust Fund by repurchasing all of the Primary Assets from the Trust Fund
on or after a date specified in the Prospectus Supplement, or on or after such
time as the total outstanding principal amount of the Certificates or Primary
Assets (as specified in the Prospectus Supplement) is equal to or less than the
amount or percentage specified in the 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 Prospectus Supplement. If specified in the 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 Internal Revenue Code of 1986, as amended (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 Lives 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
the 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, whether 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, that is used
and may contain tables setting forth the projected weighted average life of each
Class of Securities of the Series and the percentage of the original principal
amount of each Class of Securities of the Series that would be outstanding on
specified Distribution Dates 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 the 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 others. The
deductibility of mortgage interest payments, servicing decisions and other
factors also can affect the rate of principal prepayments. As a result, there
can be no assurance as to the rate or timing of principal prepayments of the
Loans (or Underlying Loans) either from time to time or over the lives of the
Loans (or Underlying Loans).
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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) for a Series, those loans are likely to prepay at
rates higher than if prevailing interest rates remain at or above the interest
rates borne by those loans. In this regard, it should be noted that the Loans
(or Underlying Loans) for a Series may have different interest rates. In
addition, the weighted average life of a Class of the Securities may be affected
by the varying maturities of the Loans (or Underlying Loans). If any Loans (or
Underlying Loans) for a Series have actual terms to stated maturity that are
less than those that were 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 by the Depositor from the Seller composed of:
o the Primary Assets;
o amounts available from the reinvestment of payments on the
Primary Assets at the Assumed Reinvestment Rate, if any,
specified in the related Prospectus Supplement;
o any credit enhancement ("Enhancement") in the form of an
irrevocable letter of credit, surety bond, insurance policy or
other form of credit support;
o any Mortgaged Property or Home Improvement that secured a Loan
but which is acquired by foreclosure or deed in lieu of
foreclosure or repossession "REO Property"); and
o 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 the Prospectus Supplement
indicates otherwise, will serve as collateral only for that Series of
Securities. Holders of a Series of Notes may only proceed against the collateral
securing that Series of Notes in the case of a default with respect to that
Series of Notes and may not proceed against any assets of the Depositor or the
related Trust Fund not pledged to secure those 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) that is
specified in the related Prospectus Supplement. The Servicer will service the
Loans pursuant to a Pooling and Servicing Agreement, with respect to a Series of
Certificates or a Servicing Agreement between the Trust Fund and Servicer, with
respect to a Series of Notes.
If the Prospectus Supplement so provides, a Trust Fund relating to a
Series of Securities may be a business trust formed under the laws of the state
specified in the Prospectus Supplement pursuant to a trust agreement (each, a
"Trust Agreement") between the Depositor and the Trustee.
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Each Trust Fund, prior to the initial offering of the related Series of
Securities, will have no assets or liabilities. No Trust Fund is expected to
engage in any activities other than:
o to acquire, manage and hold the related Primary Assets and
other assets contemplated in this prospectus and in the
related Prospectus Supplement, and the proceeds thereof;
o to issue the Securities;
o to make payments and distributions on the Securities; and
o to perform 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, as and to the extent the
related Prospectus Supplement specifies.
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 forming a part of the revolving
loans (the "Revolving Credit Line Loans" and, together with the Closed-End
Loans, the "Mortgage Loans") secured by mortgages, primarily on one- to
four-family residential or mixed-use 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 date designated in
the Prospectus Supplement as the cut-off date (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 that 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 under which only the amount of interest that
accrues on the loan during the billing cycle must be paid. 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 to be lower than, or
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similar to, those of traditional fully-amortizing first mortgage loans. The
prepayment experience of the related Trust Fund may be affected by a wide
variety of factors, including general economic conditions, prevailing interest
rate levels, the availability of alternative financing and homeowner mobility
and the frequency and amount of any future draws on any Revolving Credit Line
Loans. Other factors that might be expected to affect the prepayment rate of a
pool of home equity mortgage loans or home improvement contracts include the
amounts of, and interest rates on, the underlying first mortgage loans, and the
use of first mortgage loans as long-term financing for home purchase and
subordinate mortgage loans as shorter-term financing for a variety of purposes,
including home improvement, education expenses and purchases of consumer
durables such as automobiles. Accordingly, the Mortgage Loans may experience a
higher rate of prepayment than traditional fixed-rate first 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 Mortgage Loans. Moreover, the
enforcement of a "due-on-sale" provision (as described below) will have the same
effect as a prepayment of the related Mortgage Loan. See "Certain Legal Aspects
of the Loans--Due-on-Sale Clauses in Mortgage Loans."
Collections on Revolving Credit Line Loans may vary for a number of
reasons, including those listed below.
o A borrower may make a payment during a month in an amount that
is as little as the minimum monthly payment for that 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, fees and charges for that
month.
o A borrower may make a payment that is as much as the entire
Principal Balance plus accrued interest and related fees and
charges during a month.
o A borrower may fail to make the required periodic payment.
o Collections on the Mortgage Loans may vary due to seasonal
purchasing and the payment habits of borrowers.
The Mortgage Loans will be secured by "Single Family Properties" (i.e.,
one- to four-family residential housing, including condominium units and
cooperative dwelling units) and mixed-use properties. 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 Single Family 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 dwelling units consist of a lien on the shares issued
by the cooperative dwelling corporation and the proprietary lease or occupancy
agreement relating to the cooperative dwelling.
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The aggregate Principal Balance of Loans secured by Single Family
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
o a representation by the borrower at origination of the
Mortgage Loan either that the underlying Mortgaged Property
will be used by the borrower for a period of at least six
months every year or that the borrower intends to use the
Mortgaged Property as a primary residence, or
o a finding that the address of the underlying Mortgaged
Property is the borrower's mailing address as reflected in the
Servicer's records.
To the extent specified in the related Prospectus Supplement, Single
Family Properties may include non-owner occupied investment properties and
vacation and second homes.
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 senior or junior Mortgages primarily on Single Family
Properties, or by purchase money security interests in the related Home
Improvements. 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. As used in this prospectus, the term "Property"
includes the Mortgaged Properties and the Home Improvements.
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 under various FHA
programs as authorized under the United States Housing Act of 1937, as amended..
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.
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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 borrower'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
borrower. Such plans may involve the reduction or suspension of regular mortgage
payments for a specified period, with such payments to be made upon or before
the maturity date of the mortgage, or the recasting of payments due under the
mortgage up to or beyond the maturity date. In addition, when a default caused
by such circumstances is accompanied by certain other criteria, HUD may provide
relief by making payments to the Servicer in partial or full satisfaction of
amounts due under the Loan (which payments are to be repaid by the mortgagor to
HUD) or by accepting assignment of the loan from the Servicer. With certain
exceptions, at least three full monthly installments must be due and unpaid
under the Loan and HUD must have rejected any request for relief from the
borrower 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 a Loan upon default for
an amount equal to the principal amount of the 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 the date of foreclosure 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 borrower'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 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
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guaranty exceed the amount of the original guaranty. The VA may, at its option
and without regard to its 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
guaranteed amount is submitted to the VA after liquidation of the Mortgaged
Property.
The amount payable under a VA guaranty will be the percentage of the
VA- insured loan originally guaranteed by the VA applied to the indebtedness
outstanding as of the applicable date of computation specified in the VA
regulations. Payments under the guaranty will be equal to the unpaid principal
amount of the loan, interest accrued on the unpaid balance of the loan to the
appropriate date of computation and limited expenses of the mortgagee, but in
each case only to the extent that such amounts have not been recovered through
liquidation of the mortgaged property. The amount payable under the guaranty may
in no event exceed the amount of the original guaranty.
The related Prospectus Supplement for each Series will provide
information with respect to the Loans that are Primary Assets as of the Cut-off
Date, including, among other things, and to the extent relevant:
o the aggregate unpaid Principal Balance of the Loans;
o the range and weighted average interest rates on the Loans,
and, in the case of adjustable rate Loans, the range and
weighted average of the current interest rates and the
lifetime interest rate caps, if any;
o the range and average Principal Balance of the Loans;
o the weighted average original and remaining terms to stated
maturity of the Loans and the range of original and remaining
terms to stated maturity, if applicable;
o the range and weighted average of combined loan-to-value
ratios or loan-to-value ratios for the Loans, as applicable;
o the percentage (by Principal Balance as of the Cut-off Date)
of Loans that accrue interest at adjustable or fixed interest
rates;
o any special hazard insurance policy or bankruptcy bond or
other enhancement relating to the Loans;
o 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;
o the geographic distribution of any Mortgaged Properties
securing the Loans;
o for Loans that are secured by Single Family Properties, the
percentage (by Principal Balance as of the Cut-off Date)
secured by shares relating to cooperative dwelling units,
condominium units, investment property and vacation or second
homes;
o the lien priority of the Loans;
o the delinquency status and year of origination of the Loans;
o whether such Loans are Closed-End Loans and/or Revolving
Credit Line Loans; and
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o in the case of Revolving Credit Line Loans, the general
payments and credit line terms of those Loans and other
pertinent features.
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,
more general or approximate 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 the Securities.
Private Securities
General. Primary Assets for a Series may consist, in whole or in part,
of Private Securities that include:
o pass-through certificates representing beneficial interests in
loans of the type that would otherwise be eligible to be Loans
(the "Underlying Loans") or
o collateralized obligations secured by Underlying Loans.
The pass-through certificates or collateralized obligations will have previously
been
o offered and distributed to the public pursuant to an effective
registration statement, or
o purchased in a transaction not involving any public offering
from a person that is not an affiliate of the issuer of the
Private Securities at the time of sale (nor its affiliate at
any time during the three preceding months) and a period of
two years has elapsed since the date the Private Securities
were acquired from the issuer or from its affiliate, whichever
is later.
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 insured or guaranteed.
Private Securities will have been issued pursuant to a pooling and
servicing agreement, a trust agreement or similar agreement (each, a "PS
Agreement"). The seller/servicer of the Underlying Loans will have entered into
the PS Agreement with the trustee under such PS Agreement (the "PS Trustee").
The PS Trustee or its agent, or a custodian, will possess the Underlying Loans.
Underlying Loans will be serviced by a servicer (the "PS Servicer") directly or
by one or more sub-servicers who may be subject to the supervision of the PS
Servicer.
The sponsor of the Private Securities (the "PS Sponsor") will be
o a financial institution or other entity engaged generally in
the business of lending;
o a public agency or instrumentality of a state, local or
federal government; or
o 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 generally will be
limited to certain representations and warranties that
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it makes 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.
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. The 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, 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:
o the total approximate principal amount and type of the Private
Securities to be included in the Trust Fund for that Series;
o certain characteristics of the Underlying Loans, including
(a) the payment features of the 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 the Underlying Loans insured or guaranteed
by a governmental entity;
(c) the servicing fee or range of servicing fees for the
Underlying Loans;
(d) the minimum and maximum stated maturities of the
Underlying Loans at origination;
(e) the lien priority of the Underlying Loans; and
(f) the delinquency status and year of origination of
such Underlying Loans;
o the maximum original term to stated maturity of the Private
Securities;
o the weighted average term to stated maturity of the Private
Securities;
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o the pass-through or certificate rate or range of rates for the
Private Securities;
o the PS Sponsor, the PS Servicer (if other than the PS Sponsor)
and the PS Trustee for the Private Securities;
o certain characteristics of any credit support such as reserve
funds, security policies or guarantees relating to the
Underlying Loans or to the Private Securities themselves;
o 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
o the terms on which Underlying Loans may be substituted for
those originally underlying the Private Securities.
The above disclosure may be on an approximate basis and will be as of
the date specified in the related Prospectus Supplement. If information of the
nature described above for the Private Securities is not known to the Depositor
at the time the Securities are initially offered, more general or approximate
information of a similar nature 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 SEC 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 any cash 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 that may be 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 the Series, a portion of the proceeds of the
sale of the related Securities (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
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Pre-Funded Amount exceed 50% of the total principal amount of the related
Securities, and in no case will the Pre-Funding Period exceed one year. The
Primary Assets to be 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 to them. If any
Pre-Funded Amount remains on deposit in the Pre-Funding Account at the end of
the Pre-Funding Period, such amount will be applied in the manner specified in
the related Prospectus Supplement to prepay the Notes and/or the Certificates of
the applicable Series.
If a Pre-Funding Account is established, one or more segregated trust
accounts (each, a "Capitalized Interest Account") may be established and
maintained with the Trustee for the related Series. On the Closing Date for the
Series, a portion of the proceeds of the sale of the Securities of the Series
will be deposited into the Capitalized Interest Account and used to fund the
excess, if any, of
o the sum of
(i) the amount of interest accrued on the Securities of
the Series and
(ii) if specified in the related Prospectus Supplement,
certain fees or expenses during the Pre-Funding
Period,
over
o the amount of interest available 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 so provided 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 the 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
the Prospectus Supplement. Enhancement for a Series may include one or more of
the forms described below, or such other form as may be specified in the related
Prospectus Supplement. If so specified in the related Prospectus Supplement, any
Enhancement may be structured so as to protect against losses relating to more
than one Trust Fund, in the manner described in that Prospectus Supplement.
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 Holders of subordinated Securities to receive distributions on any
Distribution Date will be subordinate in right and priority to the rights of
Holders of senior Securities of the same Series, but only to the extent
described in the related Prospectus Supplement.
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Insurance
If specified in the related Prospectus Supplement, Enhancement for a
Series may consist of pool insurance policies, 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 related Prospectus
Supplement, 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 the Property,
or in connection with partial loss resulting from the application of the
coinsurance clause in a standard hazard insurance policy, the special hazard
insurer will pay the lesser of
(i) the cost of repair or replacement of the Property, or
(ii) upon transfer of the Property to the special hazard insurer,
the unpaid Principal Balance of the Loan at the time of
acquisition of the 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 the 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 that amount less
any net proceeds from the sale of the Property. Any amount paid as the cost of
repair of the Property will reduce coverage by that 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 clause
(i) in the second previous paragraph is expected to satisfy the condition under
any Pool Insurance Policy that the Property be restored before a claim under the
Pool Insurance Policy may be validly presented with respect to the defaulted
Loan secured by the Property. The payment described under clause (ii) in the
second previous paragraph will render unnecessary presentation of a claim in
respect of the Loan under any Pool Insurance Policy. Therefore, so long as a
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 the Loan.
The amount of the secured debt could be reduced to that value, and the holder of
the Loan thus would become an unsecured creditor to the extent the Principal
Balance of the Loan exceeds
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the value 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" in this prospectus. If the
related Prospectus Supplement so provides, the Depositor or other entity
specified in the Prospectus Supplement will obtain a bankruptcy bond or similar
insurance contract covering losses resulting from proceedings with respect to
borrowers under the Federal 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 the court of
the principal amount of a Loan and will cover certain unpaid interest on the
amount of any 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 Prospectus Supplement for all Loans in the Trust Fund for the
related Series. Such amount will be reduced by payments made under the
bankruptcy bond in respect of the Loans, unless otherwise specified in the
related Prospectus Supplement, and will not be restored.
Reserve Funds
If the Prospectus Supplement relating to a Series of Securities so
specifies, the Depositor will deposit into one or more funds to be established
with the Trustee as part of the Trust Fund for that Series or for the benefit of
any provider of Enhancement with respect to that 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 in
the amount specified in such Prospectus Supplement. In the alternative or in
addition to such an initial deposit, a Reserve Fund for a Series may be funded
over time through application of all or a portion of the excess cash flow from
the Primary Assets for the 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 the related Series, to
pay expenses, to reimburse any provider of Enhancement for the Series 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 provided 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 the
entity will provide certain payments on the Securities of the Series in the
event that aggregate scheduled principal payments and/or prepayments on the
Primary Assets for the Series are not sufficient to make certain payments on the
Securities of the 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 the related 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
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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.
Financial Instruments
If provided in the related Prospectus Supplement, the Trust Fund may
include one or more financial instruments that are intended to meet the
following goals:
o to convert the payments on some or all of the Loans and
Private Securities from fixed to floating payments, or from
floating to fixed, or from floating based on a particular
index to floating based on another index;
o to provide payments if any index rises above or falls below
specified levels; or
o to provide protection against interest rate changes, certain
types of losses or other payment shortfalls to one or more
Classes of the related Series.
If a Trust Fund includes financial instruments of this type, the
instruments may be structured to be exempt from the registration requirements of
the Securities Act of 1933, as amended.
The related Prospectus Supplement will include, or incorporate by
reference, material financial and other information about the provider of the
financial instruments.
SERVICING OF LOANS
General
Customary servicing functions with respect to Loans comprising the
Primary Assets in a 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 a borrower a schedule for the liquidation of delinquencies by extending the
Due Dates for Scheduled Payments on a Loan.
If the related Prospectus Supplement so provides, the Servicer, to the
extent permitted by law, will establish and maintain escrow or impound accounts
(each, an "Escrow Account") with respect to Loans in which payments by borrowers
to pay taxes, assessments, mortgage and hazard insurance policy premiums, and
other comparable items will be deposited. In the case of Loans that do not
require such payments under the related loan documents, the Servicer will not be
required to establish any Escrow Account for those Loans. The Servicer will make
withdrawals from the Escrow Accounts to effect timely payment of taxes,
assessments and mortgage and hazard insurance, to refund to borrowers amounts
determined to be overages, to pay interest to borrowers on balances in the
Escrow Account to the extent required by law, to repair or otherwise protect the
related Property and to clear and terminate such Escrow
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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 the related Prospectus Supplement specifies otherwise, the
Trustee or the Servicer will establish a separate account (the "Collection
Account") in the name of the Trustee. Unless the related Prospectus Supplement
provides otherwise, the Collection Account will be an account maintained
o at a depository institution, the long-term unsecured debt
obligations of which at the time of any deposit are rated by
each Rating Agency that rates the related the Securities of
that Series at levels satisfactory to each Rating Agency; or
o 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, all scheduled payments of principal and interest on the Primary
Assets ("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 the Cut-off Date):
(i) All payments in respect of principal, including prepayments,
on the Primary Assets;
(ii) All payments in respect of interest on the 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 fee payable to the
Servicer (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 the related Property, whether
through foreclosure sale, repossession or otherwise, including
payments in connection with the Primary Assets received from
the borrower, other than amounts required to be paid or
refunded to the borrower pursuant to the terms of the
applicable loan documents or otherwise pursuant to law, net of
related liquidation expenses (such net amount, the
"Liquidation Proceeds"), exclusive of, in the discretion of
the Servicer (but only to the extent of the amount permitted
to be withdrawn from the Collection Account in accordance with
the related Agreement), the Servicing Fee, if any, in respect
of the related Primary Asset;
(iv) All proceeds under any title insurance, hazard insurance
policy or other insurance policy covering any such Primary
Asset, other than proceeds to be applied to the restoration or
repair of the related Property or released to the borrower in
accordance with the related Agreement;
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(v) All amounts required to be deposited therein from any Reserve
Fund for the Series pursuant to the related Agreement;
(vi) All advances of cash made by the Servicer in respect of
delinquent Scheduled Payments on a Loan and for any other
purpose as required pursuant to the related Agreement
("Advances"); and
(vii) All repurchase prices of any 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 made by it in connection with
that Series 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 proceeds of insurance
policies covering the related Loans and Mortgaged Properties
("Insurance Proceeds")) that represent late recoveries of
Scheduled Payments with respect to which the Advance was made;
(ii) to the extent provided in the related Agreement, to reimburse
itself for any Advances that it made in connection with the
Series which the Servicer determines in good faith to be
nonrecoverable from amounts representing late recoveries of
Scheduled Payments respecting which the 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 the Loan next succeeding the date
of its receipt of the Liquidation Proceeds, to pay to itself
out of the 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 the 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
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 related REO Property 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 Trustee of the Series for deposit into
the related Distribution Account, if any, or for remittance to
the Holders of the 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, the Servicer may, at any
time, withdraw the amount from the Collection Account.
Advances and Limitations on Advances
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. Its obligation to make Advances 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 Scheduled Payments, Insurance Proceeds or
Liquidation Proceeds respecting which any 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 borrower under each Loan to maintain) a standard
hazard insurance policy providing the standard form of fire insurance coverage
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, the 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 the Property, to the extent available.
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The standard hazard insurance policies covering Properties typically
will contain a "coinsurance" clause, which in effect will require that the
insured at all times carry hazard insurance of a specified percentage (generally
80% to 90%) of the full replacement value of the Property, including any
improvements on the Property, in order to recover the full amount of any partial
loss. If the insured's coverage falls below this specified percentage, the
coinsurance 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 (i.e.,
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 the Property and
improvements. Since the amount of hazard insurance to be maintained on the
improvements securing the Loans declines as their Principal Balances 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 a standard hazard insurance policy in an amount that is
at least equal to the maximum insurable value of the REO Property. No earthquake
or other additional insurance will be required of any borrower or will be
maintained on REO Property other than pursuant to such applicable laws and
regulations as shall at any time be in force and shall require the additional
insurance.
Any amounts collected by the Servicer under any those insurance
policies (other than amounts to be applied to the restoration or repair of the
Property, released to the borrower 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 the related 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 the policy absent the deductible clause, to deposit into the Collection
Account the amount not otherwise payable under the blanket policy because of the
application of the 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 that come into and continue in default and as to
which no satisfactory arrangements can be made for collection of delinquent
payments. In this connection, 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 that it services. 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 of
the related Loan available to the Holders after reimbursement to itself for its
expenses and (ii) its expenses will be recoverable 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 REO Property by the end of the third
calendar year after the Trust Fund acquires beneficial ownership of the REO
Property. While the holder of an REO Property can often maximize its recovery
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by providing financing to a new purchaser, the Trust Fund, if applicable, will
have no ability to do so and neither the Servicer nor the Depositor will be
required to do so.
The Servicer may arrange with the borrower on a defaulted Loan a change
in the terms of such Loan to the extent provided in the related Prospectus
Supplement. This type of modification may only be entered into if it meets the
underwriting policies and procedures employed by the Servicer in servicing
receivables for its own account and meets 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 the prospective conveyance and prior to
the time of the consummation of the conveyance, exercise its rights to
accelerate the maturity of the related Loan under any applicable "due-on-sale"
clause, unless it reasonably believes that the clause is not enforceable under
applicable law or if the enforcement of the clause would result in loss of
coverage under any primary mortgage insurance policy. In that event, the
Servicer is authorized to accept from or enter into an assumption agreement with
the person to whom the Property has been or is about to be conveyed. Under the
assumption, the transferee of the Property becomes liable under the Loan and the
original borrower is released from liability and the transferee is substituted
as the borrower 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 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 additional 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 a borrower makes a principal prepayment in full between due dates
on the related Loan, the borrower generally will 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
Securities 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 total 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 that it incurs
in connection with the liquidation of defaulted Loans.
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The related Holders will suffer no loss by reason of the Servicer's expenses to
the extent the 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 its
expenses in connection with the restoration of REO Property This right of
reimbursement is prior to the rights of the Holders to receive any related
Insurance Proceeds, Liquidation Proceeds or amounts derived from other
Enhancement. The Servicer generally is 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 Securities of the Series.
Evidence as to Compliance
If so specified in the related Prospectus Supplement, the applicable
Agreement will provide that, each year, a firm of independent public accountants
will furnish a statement to the Trustee to the effect that the firm has examined
certain documents and records relating to the servicing of the Loans by the
Servicer and that, on the basis of the examination, the firm is of the opinion
that the servicing has been conducted in compliance with the Agreement, except
for (i) such exceptions as the firm believes to be immaterial and (ii) any other
exceptions set forth in the statement.
If so specified in the related Prospectus Supplement, the applicable
Agreement will also provide for delivery to the Trustee of an annual statement
signed by an officer of the Servicer to the effect that the Servicer has
fulfilled its obligations under the 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 (defined below) 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, the Events of Default and the rights of a Trustee upon a
default under the Agreement for the related Series will be substantially similar
to those described under "The Agreements--Events of Default; Rights upon Event
of Default--Pooling and Servicing Agreement; Servicing Agreement" in this
prospectus.
Unless otherwise specified in the Prospectus Supplement, the Servicer
does not have the right to assign its rights and delegate its duties and
obligations under the related Agreement unless the successor Servicer accepting
such assignment or delegation
o services similar loans in the ordinary course of its business;
o is reasonably satisfactory to the Trustee;
o has a net worth of not less than the amount specified in the
Prospectus Supplement;
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o would not cause any Rating Agency's rating of the related
Securities in effect immediately prior to the assignment, sale
or transfer to be qualified, downgraded or withdrawn as a
result of the assignment, sale or transfer; and
o executes and delivers to the Trustee an agreement, in form and
substance reasonably satisfactory to the Trustee, that
contains an assumption by the successor Servicer of the due
and punctual performance and observance of each covenant and
condition required to be performed or observed by the Servicer
under the Agreement from and after the date of the agreement.
No 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, the 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 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 Agreement provided that the 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.
However, neither the Servicer nor any such person will be protected against any
breach of warranty or representations made under the Agreement, or the failure
to perform its obligations in compliance with any standard of care set forth in
the 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 under the
Agreement. 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 under the Agreement or by reason of reckless disregard
of those obligations and duties. In addition, the 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 the
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 Agreement and the rights and duties
of the parties thereto and the interests of the Holders thereunder. In that
event, the legal expenses and costs of the action and any resulting liability
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, the
provisions or terms are as specified in the related Agreements.
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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 related Trust Fund all right,
title and interest of the Depositor in the Primary Assets and other property to
be transferred to the Trust Fund. Such assignment will include all principal and
interest due on or with respect to the Primary Assets after the Cut-off Date
(except for any retained interests). The Trustee will, concurrently with the
assignment, execute and deliver the Securities.
Assignment of Mortgage Loans. Unless otherwise specified in the related
Prospectus Supplement, the Depositor will deliver or cause to be delivered to
the Trustee (or, if specified in the Prospectus Supplement, a custodian on
behalf of the Trustee (the "Custodian")), as to each Mortgage Loan, the related
note endorsed without recourse to the order of the Trustee or in blank, the
original mortgage, deed of trust or other security instrument (each, a
"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 those documents in trust for the
benefit of the Holders.
If so specified in the related Prospectus Supplement, at the time of
issuance of the Securities, the Depositor will cause assignments to the Trustee
of the Mortgages relating to the Loans 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, recording is not required to protect the
Trustee's interest in the related Loans. If specified in the Prospectus
Supplement, the Depositor will cause the assignments to be recorded within the
time after issuance of the Securities as is specified in the related Prospectus
Supplement. In this event, the Prospectus Supplement will specify whether the
Agreement requires the Depositor to repurchase from the Trustee any Loan the
related Mortgage of which is not recorded within that time, at the price
described below with respect to repurchases by reason of defective
documentation. Unless otherwise provided in the 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.
Assignment of Home Improvement Contracts. Unless otherwise specified in
the related Prospectus Supplement, the Depositor will deliver or cause to be
delivered to the Trustee (or the Custodian), as to each Home Improvement
Contract, the original Home Improvement Contract and copies of related documents
and instruments and, other than in the case of unsecured Home Improvement
Contracts, the security interest in the related Home Improvements. 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" in this prospectus.
Loan Schedule. Each Loan will be identified in a schedule appearing as
an exhibit to the related and will specify with respect to each Loan:
o the original principal amount,
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o its unpaid Principal Balance as of the Cut-off Date,
o the current interest rate,
o the current Scheduled Payment of principal and interest,
o the maturity date, if any, of the related note, and
o 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" in this prospectus. Each Private Security
will be identified in a schedule appearing as an exhibit to the related
Agreement, which will specify the original principal amount, Principal Balance
as of the Cut-off Date, annual pass-through rate or interest rate and maturity
date for each Private Security conveyed to the Trust Fund. In the Agreement, the
Depositor will represent and warrant to the PS Trustee regarding the Private
Securities that:
o the information contained in the Private Securities schedule
is true and correct in all material respects;
o immediately prior to the conveyance of the Private Securities,
the Depositor had good title, and was their sole owner
(subject to any retained interest);
o there has been no other sale by the Private Securities; and
o there is no existing lien, charge, security interest or other
encumbrance (other than any retained interest) on the 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 any other period specified in the related Prospectus
Supplement), the Depositor or Seller will, not later than 90 days (or within
such any 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. Unless otherwise specified in the related Prospectus
Supplement, the repurchase shall be effected at a price equal to the:
(a) the lesser of
(i) the Principal Balance of the Primary Asset, and
(ii) the Trust Fund's federal income tax basis in the
Primary Asset;
plus
(b) accrued and unpaid interest to the date of the next Scheduled
Payment on the Primary Asset at the rate set forth in the
related Agreement;
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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 the repurchased 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 the non-conforming 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, the 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, on the date of substitution,
o have 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),
o have an interest rate not less than (and not more than 2%
greater than) the interest rate of the Deleted Primary Asset,
o have a remaining term-to-stated maturity not greater than (and
not more than two years less than) that of the Deleted Primary
Asset; and
o 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 the
other entity cannot cure a breach of any such representations and warranties in
all material respects within the time period specified in the related Prospectus
Supplement after notification by the Trustee of such breach, and if the breach
is of a nature that materially and adversely affects the value of such Primary
Asset, the Depositor or the other entity will be obligated to repurchase the
affected Primary Asset or, if provided in the Prospectus Supplement, provide a
Qualifying Substitute Primary Asset, 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 the non-conforming Primary
Assets. See "Risk Factors--Limited Assets for Making Payments" in this
prospectus.
No Holder of Securities of a Series, solely by virtue of the Holder's
status as a Holder, will have any right under the applicable Agreement to
institute any proceeding with respect to Agreement, unless Holder previously has
given to the Trustee for the Series written notice of default and unless the
Holders of Securities evidencing not less than 51% of the aggregate voting
rights of the Securities of the Series
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have made written request upon the Trustee to institute the proceeding in its
own name as Trustee thereunder and have offered to the Trustee reasonable
indemnity, and the Trustee for 60 days has neglected or refused to institute any
such proceeding.
Reports to Holders
The 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 the
Securities following the distribution;
(ii) the amount of interest distributed to Holders of the related
Securities and the current interest on the Securities;
(iii) the amount of
(a) any overdue accrued interest included in such
distribution,
(b) any remaining overdue accrued interest with respect
to the 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 the distribution,
(b) any remaining overdue principal amounts with respect
to the 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 the Securities;
(v) the amount received under any related Enhancement, and the
remaining amount available under the Enhancement;
(vi) the amount of any delinquencies with respect to payments on
the related Primary Assets;
(vii) the book value of any REO Property acquired by the related
Trust Fund; and
(viii) such other information as specified in the related Agreement.
In addition, within a reasonable period of time after the end of each
calendar year, the applicable Trustee, unless otherwise specified in the related
Prospectus Supplement, will furnish to each Holder of record at any time during
the calendar year:
o the total of the amounts reported pursuant to clauses (i),
(ii) and (iv)(d) above for the calendar year, and
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o the information specified in the related Agreement to enable
Holders to prepare their tax returns including, without
limitation, the amount of any original issue discount accrued
on the Securities.
Information in the Distribution Date Statements and annual statements
provided to the Holders will not have been examined and reported upon by an
independent public accountant. However, the Servicer will provide to the Trustee
a report by independent public accountants with respect to its servicing of the
Loans. See "Servicing of Loans--Evidence as to Compliance" in this prospectus.
If so specified in the Prospectus Supplement, the related Series of
Securities (or one or more Classes of the Series) will be issued in book-entry
form. In that event, owners of beneficial interests in those Securities will not
be considered Holders and will not receive such reports directly from the
Trustee. The Trustee will forward such reports only to the entity or its nominee
that is the registered holder of the global certificate that evidences such
book-entry securities. Beneficial owners will receive 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
o any failure by the Servicer to deposit amounts in the
Collection Account and Distribution Account(s) to enable the
Trustee to distribute to Holders of Securities of the Series
any required payment, provided that this failure continues
unremedied for the number of days specified in the related
Prospectus Supplement after the giving of written notice to
the Servicer by the Trustee, or to the Servicer and the
Trustee by Holders having not less than 25% of the total
voting rights of the Series;
o any failure by the Servicer duly to observe or perform in any
material respect any other of its covenants or agreements in
the Agreement provided that this failure continues unremedied
for the number of days specified in the related Prospectus
Supplement after the giving of written to the Servicer by the
Trustee, or to the Servicer and the Trustee by the Holders
having not less than 25% of the total voting rights of the of
the Series; and
o 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 or Holders
of Securities of the Series having not less than 51% of the total voting rights
of the 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 the 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 the 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 the 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
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specified in the related Prospectus Supplement to act as successor Servicer
under the provisions of the 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 the Agreement.
During the continuance of any Event of Default of a Servicer under an
Agreement for a Series of Securities, the Trustee 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 Securities of the Series, and, unless otherwise
specified in the related Prospectus Supplement, Holders of Securities having not
less than 51% of the total voting rights of the Series may direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee or exercising any trust or power conferred upon the Trustee. However,
the Trustee will not be under any obligation to pursue any such remedy or to
exercise any of such trusts or powers unless the Holders have offered the
Trustee reasonable security or indemnity against the cost, expenses and
liabilities that may be incurred by the Trustee as a result. The Trustee may
decline to follow any such direction if it 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:
o a default for thirty (30) days or more in the payment of any
principal of or interest on any Note of the Series;
o failure to perform any other covenant of the Depositor or the
Trust Fund in the Indenture, provided that the failure
continues for a period of sixty (60) days after notice is
given in accordance with the procedures described in the
related Prospectus Supplement;
o any representation or warranty made by the Depositor or the
Trust Fund in the Indenture or in any certificate or other
writing delivered pursuant to it or in connection with it with
respect to or affecting such Series having been incorrect in a
material respect as of the time made, provided that the breach
is not cured within sixty (60) days after notice is given in
accordance with the procedures described in the related
Prospectus Supplement;
o certain events of bankruptcy, insolvency, receivership or
liquidation of the Depositor or the Trust Fund; and
o any other Event of Default specified with respect to Notes of
that Series.
If an Event of Default with respect to the then-outstanding Notes of
any Series occurs and is continuing, either the Indenture Trustee or the Holders
of a majority of the total amount of those Notes may declare the principal
amount of all the Notes of the Series (or, if the Notes of that Series are Zero
Coupon Securities, such portion of the principal amount as may be specified in
the related Prospectus Supplement) to be due and payable immediately. Under
certain circumstances of this type the declaration may be rescinded and annulled
by the Holders of a majority of the total amount of those Notes.
If, following an Event of Default with respect to any Series of Notes,
the related Notes have been declared to be due and payable, the Indenture
Trustee may, in its discretion, and notwithstanding such acceleration, elect to
maintain possession of the collateral securing the Notes and to continue to
apply distributions on the collateral as if there had been no declaration of
acceleration, provided that the collateral continues to provide sufficient funds
for the payment of principal of and interest on the Notes as they would have
become due if there had not been 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
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(other than a default in the payment of any principal of or interest on any Note
of the Series for thirty (30) days or more), unless:
(a) the Holders of 100% of the total amount of the
then-outstanding Notes of the Series consent to such sale;
(b) the proceeds of the sale or liquidation are sufficient to pay
in full the principal of and accrued interest due and unpaid
on the outstanding Notes of the Series at the date of sale; or
(c) the Indenture Trustee determines that the collateral would not
be sufficient on an ongoing basis to make all payments on the
Notes as such payments would have become due if the Notes had
not been declared due and payable, and the Indenture Trustee
obtains the consent of the Holders of 66 2/3% of the total
amount of the then-outstanding Notes of the 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 liquidation for its unpaid fees and expenses. As a result, upon
the occurrence of an Event of Default of this type, 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 that the principal of the Notes of a Series is declared due and payable as
described above, Holders of the Notes issued at a discount from par may be
entitled to receive no more than an amount equal to the unpaid principal amount
of those Notes less the amount of the discount that remains 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 its rights or powers under the Indenture at the
request or direction of any of the Holders of Notes of the Series, unless the
Holders offer security or indemnity satisfactory to the Indenture Trustee
against the costs, expenses and liabilities it might incur in complying with
their request or direction. Subject to the provisions for indemnification and
certain limitations contained in the Indenture, the Holders of a majority of
amount of the then-outstanding Notes of the 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 those Notes, and the Holders of a majority
of the amount of the amount of the then-outstanding Notes of the Series may, in
certain cases, waive any default with respect to the Notes, 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 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 an
appointment, all rights, powers, duties and obligations conferred or imposed
upon the Trustee
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by the related Agreement will be conferred or imposed upon that Trustee and each
separate trustee or co-trustee jointly, or, in any jurisdiction in which the
Trustee shall be incompetent or unqualified to perform certain acts, singly upon
the separate trustee or co-trustee who will exercise and perform such rights,
powers, duties and obligations solely at the direction of the Trustee. The
Trustee may also appoint agents to perform any of its responsibilities, which
agents will have any or all of the rights, powers, duties and obligations of the
Trustee conferred on them by their appointment; provided, however, that the
Trustee will continue to be responsible for its duties and obligations under the
Agreement.
Duties of Trustees
No Trustee will make any representations as to the validity or
sufficiency of the related Agreement, the Securities or of any Primary Asset or
related documents. If no Event of Default (as defined in the related Agreement)
has occurred, the applicable Trustee will be required to perform only those
duties specifically required of it under the Agreement. Upon receipt of the
various certificates, statements, reports or other instruments required to be
furnished to it, the Trustee will be required to examine them to determine
whether they are in the form required by the related Agreement. However, the
Trustee will not be responsible for the accuracy or content of any such
documents furnished to it by the Holders or the Servicer under the Agreement.
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 that Trustee ceases to be eligible to continue as
such under the related Agreement, (ii) if that Trustee becomes insolvent or
(iii) by the Holders of Securities having more than over 50% of the total voting
rights of the Securities in the Trust Fund upon written notice to the Trustee
and to the Depositor. Any resignation or removal of a Trustee and appointment of
a successor Trustee will not become effective until the successor Trustee
accepts its appointment.
Amendment of Agreement
Unless otherwise specified in the Prospectus Supplement, the Agreement
for each Series of Securities may be amended by the Depositor, the Servicer
(with respect to a Series relating to Loans), and the Trustee, 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,
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(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, however, that any such amendment (other than pursuant to clause (vi)
above) will not adversely affect in any material respect the interests of any
Holders of the Series, as evidenced by an opinion of counsel delivered to the
Trustee. Unless otherwise specified in the Prospectus Supplement, any such
amendment shall be deemed not to adversely affect in any material respect the
interests of any Holder if the Trustee receives written confirmation from each
applicable Rating Agency rating that the amendment will not cause the Rating
Agency to reduce its then-current rating.
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 the consent of the Holders possessing not
less than 66 2/3% of the total outstanding principal amount of the Securities
of the Series (or, if only certain Classes are affected by the amendment,
66 2/3% of the total outstanding principal amount of each affected Class), for
the purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of the Agreement, or modifying in any manner the rights of
Holders of the Series. In no event, however, shall any such amendment
(a) reduce the amount or delay the timing of payments on any
Security without the consent of the Holder of the Security; or
(b) reduce the aforesaid percentage of the total 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 total outstanding
principal amount of each affected Class.
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 Trustee will afford them access during
business hours to the most recent list of Holders of that Series held by the
Trustee.
No Agreement will provide for the holding of any annual or other
meeting of Holders.
Book-Entry Securities
If specified in the related Prospectus Supplement for a Series of
Securities, the Securities (or one or more Classes of the Securities) may be
issued in book-entry form. In that event, beneficial owners of those 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.
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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 the Agreement under the circumstances described in the related
Prospectus Supplement. See "Description of the Securities--Optional Redemption,
Purchase or Termination" in this prospectus.
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 that 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 the Series.
In addition to such discharge with certain limitations, if so specified
with respect to the Notes of any Series, the Indenture will provide that the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of that Series (except for certain obligations relating to temporary
Notes and exchange of Notes, registration of the transfer or exchange of those
Notes, replacing stolen, lost or mutilated Notes, to, maintaining paying
agencies and holding 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 accordance with their terms, will provide money in
an amount sufficient to pay the principal of and each installment of interest on
those Notes on the Final Scheduled Distribution Date for the Notes and any
installment of interest on the Notes in accordance with the terms of the
Indenture and the Notes. In the event of any such defeasance and discharge of
Notes of a Series, Holders of Notes of that 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 legal aspects are governed by applicable state law (which laws may
differ substantially), the summaries do not purport to be complete or reflect
the laws of any particular state, or 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 that 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
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liens pursuant to the laws of the jurisdiction in which the mortgaged property
is located. Priority with respect to the instruments depends on their terms, the
knowledge of the parties to the mortgage and generally on the order of recording
with the applicable state, county or municipal office. There are two parties to
a mortgage: the mortgagor, who is the borrower/property owner or the land
trustee (as described below), and the mortgagee, who is the lender. Under the
mortgage instrument, the mortgagor delivers to the mortgagee a note or bond and
the mortgage. In the case of a land trust, there are three parties because title
to the property is held by a land trustee under a land trust agreement of which
the borrower/property owner is the beneficiary; at origination of a mortgage
loan, the borrower executes a separate undertaking to make payments on the
mortgage note. A deed of trust transaction normally has three parties: the
trustor, who is the borrower/property owner; the beneficiary, who is the lender;
and the trustee, a third-party grantee. Under a deed of trust, the trustor
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale, to the trustee to secure payment of the obligation. The
mortgagee's authority under a mortgage and the trustee's authority under a deed
of trust are governed by the law of the state in which the real property is
located, the express provisions of the mortgage or deed of trust, and, in some
cases, in deed of trust transactions, the directions of the beneficiary.
Foreclosure on Mortgages
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming and expensive. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a receiver
or other officer to conduct the sale of the property. In some states, mortgages
may also be foreclosed by advertisement, pursuant to a power of sale provided in
the mortgage. Foreclosure of a mortgage by advertisement is essentially similar
to foreclosure of a deed of trust by nonjudicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a
nonjudicial trustee's sale under a specific provision in the deed of trust that
authorizes the trustee to sell the property upon any default by the borrower
under the terms of the note or deed of trust. In certain states, 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 its rights in a
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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 the sale occurred while the mortgagor was insolvent and within
one year (or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law) of the
filing of bankruptcy. Similarly, a suit against the debtor on the related
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is a
public sale. However, because of the difficulty potential third party purchasers
at the sale have in determining the exact status of title and because the
physical condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for an amount that may be equal to the unpaid
principal amount of the mortgage note secured by the mortgage or deed of trust
plus accrued and unpaid interest and the expenses of foreclosure, in which event
the mortgagor's debt will be extinguished or the lender may purchase for a
lesser amount in order to preserve its right against a borrower to seek a
deficiency judgment in states where such a judgment is available. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burdens of ownership,
including obtaining hazard insurance, paying taxes and making such repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Any loss may be reduced by the
receipt of any mortgage guaranty Insurance Proceeds.
Environmental Risks
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and safety.
These include laws and regulations governing air pollutant emissions, hazardous
and toxic substances, impacts to wetlands, leaks from underground storage tanks
and the management, removal and disposal of lead- and asbestos-containing
materials. In certain circumstances, these laws and regulations impose
obligations on the owners or operators of residential properties such as those
subject to the Loans. The failure to comply with such laws and regulations may
result in fines and penalties.
Moreover, under various federal, state and local laws and regulations,
an owner or operator of real estate may be liable for the costs of addressing
hazardous substances on, in or beneath such property and related costs. Such
liability may be imposed without regard to whether the owner or operator knew
of, or was responsible for, the presence of such substances, and could exceed
the value of the property and the aggregate assets of the owner or operator. In
addition, persons who transport or dispose of
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hazardous substances, or arrange for the transportation, disposal or treatment
of hazardous substances, at off-site locations may also be held liable if there
are releases or threatened releases of hazardous substances at such off-site
locations.
In addition, under the laws of some states and under the Federal
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
contamination of property may give rise to a lien on the property to assure the
payment of the costs of clean-up. In several states, such a lien has priority
over the lien of an existing mortgage against such property. Under CERCLA, such
a lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, there is a possibility
that a lender may be held liable as an "owner or operator" for costs of
addressing releases or threatened releases of hazardous substances at a
property, regardless of whether or not the environmental damage or threat was
caused by a current or prior owner or operator. CERCLA and some state laws
provide an exemption from the definition of "owner or operator" for a secured
creditor who, without "participating in the management" of a facility, holds
indicia of ownership primarily to protect its security interest in the facility.
The Solid Waste Disposal Act (the "SWDA") provides similar protection to secured
creditors in connection with liability for releases of petroleum from certain
underground storage tanks. However, if a lender "participates in the management"
of the facility in question or is found not to have held its interest primarily
to protect a security interest, the lender may forfeit its secured creditor
exemption status.
A regulation promulgated by the U.S. Environmental Protection Agency
(the "EPA") in April 1992 attempted to clarify the activities in which lenders
could engage both prior to and subsequent to foreclosure of a security interest
without forfeiting the secured creditor exemption under CERCLA. The rule was
struck down in 1994 by the United States Court of Appeals for the District of
Columbia Circuit in Kelley ex rel State of Michigan v. Environmental Protection
Agency, 15 F.3d 1100 (D.C Cir. 1994), reh'g denied, 25 F.3d 1088, cert. denied
sub nom. Am. Bankers Ass'n v. Kelley, 115 S.Ct. 900 (1995). Another EPA
regulation promulgated in 1995 clarifies the activities in which lenders may
engage without forfeiting the secured creditor exemption under the underground
storage tank provisions of the SWDA. That regulation has not been struck down.
On September 30, 1996, Congress enacted the Asset Conservation, Limited
Liability and Deposit Insurance Protection Act (ACA) which 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 ACA
specifies 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 ACA states 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 ACA also specifies 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.
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The ACA also specifies 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 ACA specifically addresses the potential liability of lenders who
hold mortgages or similar conventional security interests in real property, such
as the Trust Fund does in connection with the Mortgage Loans and the Home
Improvement Contracts.
If a lender is or becomes liable under CERCLA, it may be authorized to
bring a statutory action for contribution against any other "responsible
parties," including a previous owner or operator. However, such persons or
entities may be bankrupt or otherwise judgment proof, and the costs associated
with environmental cleanup and related actions may be substantial. Moreover,
some state laws imposing liability for addressing hazardous substances do not
contain exemptions from liability for lenders. Whether the costs of addressing a
release or threatened release at a property pledged as collateral for one of the
Loans would be imposed on the Trust Fund, and thus occasion a loss to the
Holders, therefore depends on the specific factual and legal circumstances at
issue.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the trustor or mortgagor and foreclosed junior lienors are given
a statutory period in which to redeem the property from the foreclosure sale.
The right of redemption should be distinguished from the equity of redemption,
which is a non-statutory right that must be exercised prior to the foreclosure
sale. In some states, redemption may occur only upon payment of the entire
principal balance of the loan, accrued interest and expenses of foreclosure. In
other states, redemption may be authorized if the former borrower pays only a
portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The exercise
of a right of redemption would defeat the title of any purchaser at a
foreclosure sale, or of any purchaser from the lender subsequent to foreclosure
or sale under a deed of trust. Consequently, the practical effect of a right of
redemption is to force the lender to retain the property and pay the expenses of
ownership until the redemption period has run. In some states, there is no right
to redeem property after a trustee's sale under a deed of trust.
Junior Mortgages; Rights of Senior Mortgages
The Mortgage Loans comprising or underlying the Primary Assets included
in the Trust Fund for a Series will be secured by mortgages or deeds of trust,
which may be second or more junior mortgages to other mortgages held by other
lenders or institutional investors. The rights of the Trust Fund (and therefore
of 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 the 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.
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The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed
of trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property that appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the mortgagor. All sums so expended by
the mortgagee become part of the indebtedness secured by the mortgage.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory prohibitions that limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In some states, statutes limit the right of the beneficiary or mortgagee to
obtain a deficiency judgment against the borrower following foreclosure or sale
under a deed of trust. A deficiency judgment is a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security.
However, in some of these states, the lender, following judgment on the 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 of 1940 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 rehabilitation plan under chapter 13 of the federal bankruptcy code to
cure a monetary default with respect to a loan on his residence by paying
arrearages within a reasonable time period and reinstating the
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original loan payment schedule even though the lender accelerated the loan and
the lender has taken all steps to realize upon its security (provided no sale of
the property has yet occurred) prior to the filing of the debtor's chapter 13
petition. Some courts with federal bankruptcy jurisdiction have approved plans,
based on the particular facts of the reorganization case, that effected the
curing of a loan default by permitting the obligor to pay arrearages over a
number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan may be modified if the borrower has filed a
petition under chapter 13. These courts have suggested that such modifications
may include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Federal bankruptcy law and limited case law
indicate that the foregoing modifications could not be applied to the terms of a
loan secured by property that is the principal residence of the debtor. In all
cases, the secured creditor is entitled to the value of its security plus
post-petition interest, attorney's fees and costs to the extent the value of the
security exceeds the debt.
In a chapter 11 case under the federal 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
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loans. Also, the Garn-St. Germain Act does "encourage" lenders to permit
assumption of loans at the original rate of interest or at some other rate less
than the average of the original rate and the market rate.
In addition, under federal bankruptcy law, due-on-sale clauses may not
be enforceable in bankruptcy proceedings and may, under certain circumstances,
be eliminated in any modified mortgage resulting from such bankruptcy
proceeding.
Enforceability of Prepayment and Late Payment Fees
Forms of notes, mortgages and deeds of trust used by lenders may
contain provisions obligating the borrower to pay a late charge if payments are
not timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations, upon the late charges a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid. Late charges and prepayment fees are typically retained by servicers as
additional servicing compensation.
Equitable Limitations on Remedies
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his defaults
under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon his
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in cases involving the
sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full
or in part without penalty. The regulations of the Office of Thrift Supervision
(the "OTS") prohibit the imposition of a prepayment penalty or equivalent fee
for or in connection with the acceleration of a loan by exercise of a
due-on-sale clause. A mortgagee to whom a prepayment in full has been tendered
may be compelled to give either a release of the mortgage or an instrument
assigning the existing mortgage. The absence of a restraint on prepayment,
particularly with respect to mortgage loans having higher mortgage rates, may
increase the likelihood of refinancing or other early retirements of such
mortgage loans.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. Similar federal
statutes were in effect with respect to mortgage loans made during the first
three months of 1980. The OTS, as successor
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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, generally
are "chattel paper" or constitute "purchase money security interests," each as
defined in the Uniform Commercial Code (the "UCC") in effect in the applicable
jurisdiction. 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 Home
Improvement Contracts to the Trustee or 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 Home Improvement 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 Home
Improvement Contracts without notice of such assignment, the Trustee's interest
in the contracts could be defeated.
Security Interests in Home Improvements
The Home Improvement 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. Purchase money security interests of
this type 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 the 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 Home
Improvement Contract by voluntary surrender, by "self-help" repossession that is
"peaceful" (i.e., without breach of the peace) or, in the absence of
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voluntary surrender and the ability to repossess without breach of the peace, by
judicial process. The holder of a Home Improvement 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 the resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgement from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgements, and in many cases
the defaulting borrower would have no assets with which to pay a judgement.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgement.
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade
Commission is intended to defeat the ability of the transferor of a consumer
credit contract that is the seller of goods that gave rise to the transaction
(and certain related lenders and assignees) to transfer the contract free of
notice of claims by the debtor thereunder. The effect of this rule is to subject
the assignee of the 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 Home Improvement 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
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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 right to occupy the property, the entire indebtedness is accelerated,
and the buyer's equitable interest in the property is forfeited. The lender in
such a situation does not have to foreclose in order to obtain title to the
property, although in some cases a quiet title action is in order if the
borrower has filed the Installment Sales Contract in local land records and an
ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
Installment Sales Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Sales Contracts from the harsh consequences of
forfeiture. Under those 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
related loss may reduce the amounts available to be paid to the Holders of the
related Securities. Unless otherwise specified in the related Prospectus
Supplement, any shortfalls in interest collections on Loans (or Underlying
Loans), 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 the 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 the interest shortfall not occurred.
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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"). The
Depositor Securities must be collateralized or otherwise secured or backed by,
or otherwise represent an interest in, among other things, receivables or
pass-through certificates, (or participations or certificates of participation
or beneficial ownership in one or more pools of receivables), and the proceeds
of the foregoing, that arise in connection with loans secured by certain first
or junior mortgages on real estate or manufactured housing and any and all other
commercial transactions and commercial, sovereign, student or consumer loans or
indebtedness, In connection therewith or otherwise, the depositor may purchase,
acquire, own, hold, transfer, convey, service, sell, pledge, assign, finance and
otherwise deal 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
those 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:
o to purchase the related Primary Assets,
o to repay indebtedness incurred to obtain funds to acquire such
Primary Assets,
o to establish any Reserve Funds described in the related
Prospectus Supplement and
o to pay costs of structuring and issuing the Securities,
including the costs of obtaining any Enhancement.
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.
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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
Code; (iii) the Securities represent an ownership interest in some or all of the
assets included in the Trust Fund for a Series; or (iv) an election is made to
treat the Trust Fund relating to a particular Series of Certificates as a
partnership; or (v) an election is made to treat the Trust Fund relating to a
particular Series of Securities as a Financial Asset Securitization Investment
Trust ("FASIT") under the Code. The Prospectus Supplement for each Series of
Securities will specify how the Securities will be treated for federal income
tax purposes and will discuss whether a REMIC election, if any, will be made
with respect to such Series.
As used herein, the term "U.S. Person" means a citizen or resident of
the United States, a corporation, partnership or other entity created or
organized in or under the laws of the United States, 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 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."
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Tax Counsel is of the opinion that Debt Securities that are Compound
Interest Securities will, and certain of the other Debt Securities issued at a
discount may, be issued with "original issue discount" ("OID"). The following
discussion is based in part on the rules governing OID, which are set forth in
Sections 1271-1275 of the Code and the Treasury regulations issued thereunder on
February 2, 1994 and amended on June 11, 1996 (the "OID Regulations"). A Holder
should be aware, however, that the OID Regulations do not adequately address
certain issues relevant to prepayable securities, such as the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. In the
opinion of Tax Counsel, a Holder of a Debt Security must include such OID in
gross income as ordinary interest income as it accrues under a method taking
into account an economic accrual of the discount. In general, OID must be
included in income in advance of the receipt of the cash representing that
income. The amount of OID on a Debt Security will be considered to be zero if it
is less than a de minimis amount determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that Class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular Class of Debt Securities is sold for cash on
or prior to the Closing Date, the issue price for such Class will be treated as
the fair market value of such Class on the Closing Date. The issue price of a
Debt Security also includes the amount paid by an initial Debt Security Holder
for accrued interest that relates to a period prior to the issue date of the
Debt Security. The stated redemption price at maturity of a Debt Security
includes the original principal amount of the Debt Security, but generally will
not include distributions of interest if such distributions constitute
"qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as described
below); provided, that such interest payments are unconditionally payable at
intervals of one year or less during the entire term of the Debt Security. The
OID Regulations state that interest payments are unconditionally payable only if
a late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Certain Debt Securities may provide for default
remedies in the event of late payment or nonpayment of interest. In the opinion
of Tax Counsel, the interest on such Debt Securities will be unconditionally
payable and constitute qualified stated interest, not OID. However, absent
clarification of the OID Regulations, where Debt Securities do not provide for
default remedies, the interest payments will be included in the Debt Security's
stated redemption price at maturity and taxed as OID. Interest is payable at a
single fixed rate only if the rate appropriately takes into account the length
of the interval between payments. Distributions of interest on Debt Securities
with respect to which deferred interest will accrue, will not constitute
qualified stated interest payments, in which case the stated redemption price at
maturity of such Debt Securities includes all distributions of interest as well
as principal thereon. Where the interval between the issue date and the first
Distribution Date on a Debt Security is either longer or shorter than the
interval between subsequent Distribution Dates, all or part of the interest
foregone, in the case of the longer interval, and all of the additional
interest, in the case of the shorter interval, will be included in the stated
redemption price at maturity and tested under the de minimis rule described
below. In the case of a Debt Security with a long first period that has non-de
minimis OID, all stated interest in excess of interest payable at the effective
interest rate for the long first period will be included in the stated
redemption price at maturity and the Debt Security will generally have OID.
Holders of Debt Securities should consult their own tax advisors to determine
the issue price and stated redemption price at maturity of a Debt Security.
Under the de minimis rule, OID on a Debt Security will be considered to
be zero if such OID is less than 0.25% of the stated redemption price at
maturity of the Debt Security multiplied by the weighted
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average maturity of the Debt Security. For this purpose, the weighted average
maturity of the Debt Security is computed as the sum of the amounts determined
by multiplying the number of full years (i.e., rounding down partial years) from
the issue date until each distribution in reduction of stated redemption price
at maturity is scheduled to be made by a fraction, the numerator of which is the
amount of each distribution included in the stated redemption price at maturity
of the Debt Security and the denominator of which is the stated redemption price
at maturity of the Debt Security. Holders generally must report de minimis OID
pro rata as principal payments are received, and such income will be capital
gain if the Debt Security is held as a capital asset. However, accrual method
Holders may elect to accrue all de minimis OID as well as market discount under
a constant interest method.
Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a qualified
variable rate and not as contingent interest if, generally, (i) such interest is
unconditionally payable at least annually, (ii) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and (iii)
interest is based on a "qualified floating rate," an "objective rate," or a
combination of "qualified floating rates" that do not operate in a manner that
significantly accelerates or defers interest payments on such Debt Security. In
the case of Compound Interest Securities, certain Interest Weighted Securities,
and certain of the other Debt Securities, none of the payments under the
instrument will be considered qualified stated interest, and thus the aggregate
amount of all payments will be included in the stated redemption price.
The Internal Revenue Service (the "IRS") recently issued final
regulations (the "Contingent Payment Regulations") governing the calculation of
OID on instruments having contingent interest payments. The Contingent Payment
Regulations, represent the only guidance regarding the views of the IRS with
respect to contingent interest instruments and specifically do not apply for
purposes of calculating OID on debt instruments subject to Code Section
1272(a)(6), such as the Debt Security. Additionally, the OID Regulations do not
contain provisions specifically interpreting Code Section 1272(a)(6). Until the
Treasury issues guidance to the contrary, the applicable Trustee intends to base
its computation on Code Section 1272(a)(6) and the OID Regulations as described
in this Prospectus. However, because no regulatory guidance currently exists
under Code Section 1272(a)(6), there can be no assurance that such methodology
represents the correct manner of calculating OID.
The Holder of a Debt Security issued with OID must include in gross
income, for all days during its taxable year on which it holds such Debt
Security, the sum of the "daily portions" of such original issue discount. The
amount of OID includible in income by a Holder will be computed by allocating to
each day during a taxable year a pro rata portion of the original issue discount
that accrued during the relevant accrual period. In the case of a Debt Security
that is not a Regular Interest Security and the principal payments on which are
not subject to acceleration resulting from prepayments on the Loans, the amount
of OID includible in income of a Holder for an accrual period (generally the
period over which interest accrues on the debt instrument) will equal the
product of the yield to maturity of the Debt Security and the adjusted issue
price of the Debt Security, reduced by any payments of qualified stated
interest. The adjusted issue price is the sum of its issue price plus prior
accruals or OID, reduced by the total payments made with respect to such Debt
Security in all prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a Holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a "Pay-Through Security"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the
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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 (or other regular interests in a REMIC) in a manner that it believes to
be appropriate, to take account of realized losses on the Loans, although the
OID Regulations do not provide for such adjustments. If the IRS were to require
that OID be accrued without such adjustments, the rate of accrual of OID for a
Class of Regular Interest Securities could increase.
Certain Classes of Regular Interest Securities may represent more than
one Class of REMIC regular interests. Unless otherwise provided in the related
Prospectus Supplement, the applicable Trustee intends, based on the OID
Regulations, to calculate OID on such Securities as if, solely for the purposes
of computing OID, the separate regular interests were a single debt instrument.
A subsequent Holder of a Debt Security will also be required to include
OID in gross income, but such a Holder who purchases such Debt Security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial Holder who pays more than a Debt Security's issue price) to offset such
OID by comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. In the opinion of Tax Counsel,
Holders will be required to report income with respect to the related Securities
under an accrual method without giving effect to delays and reductions in
distributions attributable to a default or delinquency on the Loans, except
possibly to the extent that it can be established that such amounts are
uncollectible. As a result, the amount of income (including OID) reported by a
Holder of such a Security in any period could significantly exceed the amount of
cash distributed to such Holder in that period. The Holder will eventually be
allowed a loss (or will be allowed to report a lesser amount of income) to the
extent that the aggregate amount of distributions on the Securities is reduced
as a result of a Loan default. However, the timing and character of such losses
or reductions in income are uncertain and, accordingly, Holders of Securities
should consult their own tax advisors on this point.
Interest Weighted Securities. It is not clear how income should be
accrued with respect to Regular Interest Securities or Stripped Securities (as
defined under "--Tax Status as a Grantor Trust; General" herein) the payments on
which consist solely or primarily of a specified portion of the interest
payments on qualified mortgages held by the REMIC or on Loans underlying
Pass-Through Securities ("Interest Weighted Securities"). The Trustee intends to
take the position that all of the income derived from an Interest Weighted
Security should be treated as OID and that the amount and rate of accrual of
such OID should be calculated by treating the Interest Weighted Security as a
Compound Interest Security. However, in the case of Interest Weighted Securities
that are entitled to some payments of principal and that are Regular Interest
Securities the Internal Revenue Service could assert that income derived from an
Interest Weighted Security should be calculated as if the Security were a
security
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purchased at a premium equal to the excess of the price paid by such Holder for
such Security over its stated principal amount, if any. Under this approach, a
Holder would be entitled to amortize such premium only if it has in effect an
election under Section 171 of the Code with respect to all taxable debt
instruments held by such Holder, as described below. Alternatively, the IRS
could assert that an Interest Weighted Security should be taxable under the
rules governing bonds issued with contingent payments. Such treatment may be
more likely in the case of Interest Weighted Securities that are Stripped
Securities as described below. See "--Tax Status as a Grantor Trust--Discount or
Premium on Pass-Through Securities."
Variable Rate Debt Securities. In the opinion of Tax Counsel, in the
case of Debt Securities bearing interest at a rate that varies directly,
according to a fixed formula, with an objective index, it appears that (i) the
yield to maturity of such Debt Securities and (ii) in the case of Pay-Through
Securities, the present value of all payments remaining to be made on such Debt
Securities, should be calculated as if the interest index remained at its value
as of the issue date of such Securities. Because the proper method of adjusting
accruals of OID on a variable rate Debt Security is uncertain, Holders of
variable rate Debt Securities should consult their own tax advisers regarding
the appropriate treatment of such Securities for federal income tax purposes.
Market Discount. In the opinion of Tax Counsel, a purchaser of a
Security may be subject to the market discount rules of Sections 1276-1278 of
the Code. A Holder that acquires a Debt Security with more than a prescribed de
minimis amount of "market discount" (generally, the excess of the principal
amount of the Debt Security over the purchaser's purchase price) will be
required to include accrued market discount in income as ordinary income in each
month, but limited to an amount not exceeding the principal payments on the Debt
Security received in that month and, if the Securities are sold, the gain
realized. Such market discount would accrue in a manner to be provided in
Treasury regulations but, until such regulations are issued, such market
discount would in general accrue either (i) on the basis of a constant yield (in
the case of a Pay-Through Security, taking into account a prepayment assumption)
or (ii) in the ratio of (a) in the case of Securities (or in the case of a
Pass-Through Security, as set forth below, the Loans underlying such Security)
not originally issued with original issue discount, stated interest payable in
the relevant period to total stated interest remaining to be paid at the
beginning of the period or (b) in the case of Securities (or, in the case of a
Pass-Through Security, as described below, the Loans underlying such Security)
originally issued at a discount, OID in the relevant period to total OID
remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination
date of the Debt Security (or, in the case of a Pass-Through Security, the
Loans), the excess of interest paid or accrued to purchase or carry a Security
(or, in the case of a Pass-Through Security, as described below, the underlying
Loans) with market discount over interest received on such Security is allowed
as a current deduction only to the extent such excess is greater than the market
discount that accrued during the taxable year in which such interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon the
sale, disposition, or repayment of the Security (or in the case of a
Pass-Through Security, an underlying Loan). A Holder may elect to include market
discount in income currently as it accrues, on all market discount obligations
acquired by such Holder during the taxable year such election is made and
thereafter, in which case the interest deferral rule will not apply.
Premium. In the opinion of Tax Counsel, a Holder who purchases a Debt
Security (other than an Interest Weighted Security to the extent described
above) at a cost greater than its stated redemption price at maturity, generally
will be considered to have purchased the Security at a premium, which it may
elect to amortize as an offset to interest income on such Security (and not as a
separate deduction item) on a constant yield method. Although no regulations
addressing the computation of premium accrual on
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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.
On December 30, 1997, the IRS issued final regulations (the
"Amortizable Bond Premium Regulations") dealing with amortizable bond premium.
The regulations specifically do not apply to prepayable debt instruments subject
to Code Section 1272(a)(6). Absent further guidance from the IRS, the Trustee
intends to account for amortizable bond premium in the manner described above.
Prospective Purchasers of the Debt Securities should consult their tax advisors
regarding the possible application of the Amortizable Bond Premium Regulations.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a Holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method for Debt Securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a Debt Security with market discount, the Holder of the Debt Security
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount that
such Holder of the Debt Security acquires during the year of the election or
thereafter. Similarly, a Holder of a Debt Security that makes this election for
a Debt Security that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Holder owns or acquires. The election to
accrue interest, discount and premium on a constant yield method with respect to
a Debt Security is irrevocable.
Taxation of the REMIC and its Holders
General. In the opinion of Tax Counsel, if a REMIC election is made
with respect to a Series of Securities, then the arrangement by which the
Securities of that Series are issued will be treated as a REMIC as long as all
of the provisions of the applicable Agreement are complied with and the
statutory and regulatory requirements are satisfied. Securities will be
designated as "Regular Interests" or "Residual Interests" in a REMIC, as
specified in the related Prospectus Supplement.
Except to the extent specified otherwise in a Prospectus Supplement, if
a REMIC election is made with respect to a Series of Securities, in the opinion
of Tax Counsel (i) Securities held by a domestic building and loan association
will constitute "a regular or a residual interest in a REMIC" within the meaning
of Code Section 7701(a)(19)(C)(xi) (assuming that at least 95% of the REMIC's
assets consist of cash, government securities, "loans secured by an interest in
real property," and other types of assets described in Code Section
7701(a)(19)(C)); and (ii) Securities held by a real estate investment trust will
constitute "real estate assets" within the meaning of Code Section 856(c)(4)(A),
and income with respect to the Securities will be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Code Section 856(c)(3)(B) (assuming, for both
purposes, that at least 95% of the REMIC's assets are qualifying assets). If
less than 95% of the REMIC's assets consist of assets described in (i) or (ii)
above, then a Security will qualify for the tax treatment described in (i) or
(ii) in the proportion that such REMIC assets are qualifying assets.
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REMIC Expenses; Single Class REMICs
As a general rule, in the opinion of Tax Counsel, all of the expenses
of a REMIC will be taken into account by Holders of the Residual Interest
Securities. In the case of a "single class REMIC," however, the expenses will be
allocated, under Treasury regulations, among the Holders of the Regular Interest
Securities and the Holders of the Residual Interest Securities on a daily basis
in proportion to the relative amounts of income accruing to each Holder on that
day. In the case of a Holder of a Regular Interest Security who is an individual
or a "pass-through interest holder" (including certain pass-through entities but
not including real estate investment trusts), such expenses will be deductible
only to the extent that such expenses, plus other "miscellaneous itemized
deductions" of the Holder, exceed 2% of such Holder's adjusted gross income. In
addition, for taxable years beginning after December 31, 1990, the amount of
itemized deductions otherwise allowable for the taxable year for an individual
whose adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation for taxable years beginning after 1990) will be reduced
by the lesser of (i) 3% of the excess of adjusted gross income over the
applicable amount, or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. The reduction or disallowance of this deduction
may have a significant impact on the yield of the Regular Interest Security to
such a Holder. In general terms, a single class REMIC is one that either (i)
would qualify, under existing Treasury regulations, as a grantor trust if it
were not a REMIC (treating all interests as ownership interests, even if they
would be classified as debt for federal income tax purposes) or (ii) is similar
to such a trust and that is structured with the principal purpose of avoiding
the single class REMIC rules. Unless otherwise specified in the related
Prospectus Supplement, the expenses of the REMIC will be allocated to Holders of
the related residual interest securities.
Taxation of the REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, in the opinion of Tax Counsel, a REMIC is not generally subject to
entity-level tax. Rather, the taxable income or net loss of a REMIC is taken
into account by the Holders of residual interests. As described above, the
regular interests are generally taxable as debt of the REMIC. Qualification as a
REMIC requires ongoing compliance with certain conditions. Although a REMIC is
not generally subject to federal income tax, failure to comply with one or more
of the ongoing requirements of the Code for REMIC status during any taxable
year, including the implementation of restrictions on the purchase and transfer
of the residual interests in a REMIC as described below under "Taxation of
Owners of Residual Interest Securities", the Code provides that the Trust will
not be treated as a REMIC for such year and thereafter. In that event, such
entity may be taxable as a separate corporation and the related certificates may
not be accorded the status or given the tax treatment described below.
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.
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For purposes of computing its taxable income or net loss, the REMIC
should have an initial aggregate tax basis in its assets equal to the aggregate
fair market value of the regular interests and the residual interests on the
Startup Day (generally, the day that the interests are issued). That aggregate
basis will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated
on or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which Holders of Pay-Through Securities
accrue original issue discount (i.e., under the constant yield method taking
into account the Prepayment Assumption). The REMIC will deduct OID on the
Regular Interest Securities in the same manner that the Holders of the Regular
Interest Securities include such discount in income, but without regard to the
de minimis rules. See "Taxation of Debt Securities" above. However, a REMIC that
acquires loans at a market discount must include such market discount in income
currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before such date, it is possible that
such premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be
subject to a 100% tax on any net income derived from a "prohibited transaction."
For this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include: (i) subject to limited exceptions, the sale or other
disposition of any qualified mortgage transferred to the REMIC; (ii) subject to
a limited exception, the sale or other disposition of a cash flow investment;
(iii) the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or (iv) the receipt of any fees or other
compensation for services rendered by the REMIC. It is anticipated that a REMIC
will not engage in any prohibited transactions in which it would recognize a
material amount of net income. In addition, subject to a number of exceptions, a
tax is imposed at the rate of 100% on amounts contributed to a REMIC after the
close of the three-month period beginning on the Startup Day. The Holders of
Residual Interest Securities will generally be responsible for the payment of
any such taxes imposed on the REMIC. To the extent not paid by such Holders or
otherwise, however, such taxes will be paid out of the Trust Fund and will be
allocated pro rata to all outstanding Classes of Securities of such REMIC.
Taxation of Holders of Residual Interest Securities
In the opinion of Tax Counsel, the Holder of a Certificate representing
a residual interest (a "Residual Interest Security") will take into account the
"daily portion" of the taxable income or net loss of the REMIC for each day
during the taxable year on which such Holder held the Residual Interest
Security. The daily portion is determined by allocating to each day in any
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC for such quarter, and by allocating that amount among the Holders (on such
day) of the Residual Interest Securities in proportion to their respective
holdings on such day.
In the opinion of Tax Counsel, the Holder of a Residual Interest
Security must report its proportionate share of the taxable income of the REMIC
whether or not it receives cash distributions from the REMIC attributable to
such income or loss. The reporting of taxable income without corresponding
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distributions could occur, for example, in certain REMIC issues in which the
loans held by the REMIC were issued or acquired at a discount, since mortgage
prepayments cause recognition of discount income, while the corresponding
portion of the prepayment could be used in whole or in part to make principal
payments on REMIC Regular Interests issued without any discount or at an
insubstantial discount (if this occurs, it is likely that cash distributions
will exceed taxable income in later years). Taxable income may also be greater
in earlier years of certain REMIC issues as a result of the fact that interest
expense deductions, as a percentage of outstanding principal on REMIC Regular
Interest Securities, will typically increase over time as lower yielding
Securities are paid, whereas interest income with respect to loans will
generally remain constant over time as a percentage of loan principal.
In any event, because the Holder of a residual interest is taxed on the
net income of the REMIC the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
Limitation on Losses. In the opinion of Tax Counsel, the amount of the
REMIC's net loss that a Holder may take into account currently is limited to the
Holder's adjusted basis at the end of the calendar quarter in which such loss
arises. A Holder's basis in a Residual Interest Security will initially equal
such Holder's purchase price, and will subsequently be increased by the amount
of the REMIC's taxable income allocated to the Holder, and decreased (but not
below zero) by the amount of distributions made and the amount of the REMIC's
net loss allocated to the Holder. Any disallowed loss may be carried forward
indefinitely, but may be used only to offset income of the REMIC generated by
the same REMIC. The ability of Holders of Residual Interest Securities to deduct
net losses may be subject to additional limitations under the Code, as to which
such Holders should consult their tax advisers.
Distributions. In the opinion of Tax Counsel distributions on a
Residual Interest Security (whether at their scheduled times or as a result of
prepayments) will generally not result in any additional taxable income or loss
to a Holder of a Residual Interest Security. If the amount of such payment
exceeds a Holder's adjusted basis in the Residual Interest Security, however,
the Holder will recognize gain (treated as gain from the sale of the Residual
Interest Security) to the extent of such excess.
Sale or Exchange. In the opinion of Tax Counsel a Holder of a Residual
Interest Security will recognize gain or loss on the sale or exchange of a
Residual Interest Security equal to the difference, if any, between the amount
realized and such Holder's adjusted basis in the Residual Interest Security at
the time of such sale or exchange. A Holder's adjusted basis in a Residual
Certificate generally equals the cost of such Residual Certificate increased by
the taxable income of the REMIC that was included in the income of such Residual
Certificate Holder and decreased by distributions received thereon by such
Residual Certificateholder. 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. In that event, the loss will be used to increase such Residual
Interest Security Holders adjusted basis in the newly acquired asset.
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
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were to own a Residual Interest Security, a portion of dividends (or other
distributions) paid by the real estate investment trust (or other entity) would
be treated as excess inclusion income. If a Residual Security is owned by a
foreign person, excess inclusion income is subject to tax at a rate of 30%,
which may not be reduced by treaty, is not eligible for treatment as "portfolio
interest" and is subject to certain additional limitations. See "Tax Treatment
of Foreign Investors." The Small Business Job Protection Act of 1996 has
eliminated the special rule permitting Section 593 institutions ("thrift
institutions") to use net operating losses and other allowable deductions to
offset their excess inclusion income from Residual Interest Securities that have
"significant value" within the meaning of the REMIC Regulations, effective for
taxable years beginning after December 31, 1995, except with respect to Residual
Interest Securities continuously held by a thrift institution since November 1,
1995.
In addition, the Small Business Job Protection Act of 1996 provides
three rules for determining the effect on excess inclusions on the alternative
minimum taxable income of a residual Holder. First, alternative minimum taxable
income for such residual Holder is determined without regard to the special rule
that taxable income cannot be less than excess inclusions. Second, a residual
Holder's alternative minimum taxable income for a tax year cannot be less than
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December 31,
1986, unless a residual Holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to
the excess, if any, of REMIC taxable income for the quarterly period allocable
to a Residual Interest Security, over the daily accruals for such quarterly
period of (i) 120% of the long term applicable federal rate on the Startup Day
multiplied by (ii) the adjusted issue price of such Residual Interest Security
at the beginning of such quarterly period. The adjusted issue price of a
Residual Interest at the beginning of each calendar quarter will equal its issue
price (calculated in a manner analogous to the determination of the issue price
of a Regular Interest), increased by the aggregate of the daily accruals for
prior calendar quarters, and decreased (but not below zero) by the amount of
loss allocated to a Holder and the amount of distributions made on the Residual
Interest Security before the beginning of the quarter. The long-term federal
rate, which is announced monthly by the Treasury Department, is an interest rate
that is based on the average market yield of outstanding marketable obligations
of the United States government having remaining maturities in excess of nine
years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Securities may be disregarded. See "--Restrictions on Ownership and
Transfer of Residual Interest Securities" and "--Tax Treatment of Foreign
Investors" below.
Restrictions on Ownership and Transfer of Residual Interest Securities.
As a condition to qualification as a REMIC, reasonable arrangements must be made
to prevent the ownership of a REMIC residual interest by any "Disqualified
Organization." Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in Section 1381(a)(2)(C) of the
Code, or any entity exempt from the tax imposed by Sections 1-1399 of the Code,
if such entity is not subject to tax on its unrelated business income.
Accordingly, the applicable Pooling and Servicing Agreement will prohibit
Disqualified Organizations from owning a Residual Interest Security. In
addition, no transfer of a Residual Interest Security will be permitted unless
the proposed transferee shall have furnished to the Trustee an affidavit
representing and warranting that it is neither a Disqualified Organization nor
an agent or nominee acting on behalf of a Disqualified Organization.
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If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
Interest Security at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
Residual Interest Security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all federal
tax purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. A Residual Interest Security is a "noneconomic
residual interest" unless, at the time of the transfer (i) the present value of
the expected future distributions on the Residual Interest Security at least
equals the product of the present value of the anticipated excess inclusions and
the highest rate of tax for the year in which the transfer occurs and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes. If a
transfer of a Residual Interest is disregarded, the transferor would be liable
for any federal income tax imposed upon taxable income derived by the transferee
from the REMIC. The REMIC Regulations provide no guidance as to how to determine
if a significant purpose of a transfer is to impede the assessment or collection
of tax. A similar type of limitation exists with respect to certain transfers of
residual interests by foreign persons to United States persons. See "--Tax
Treatment of Foreign Investors."
Mark to Market Rules. Prospective purchasers of a REMIC Residual
Interest Security should be aware that the IRS recently finalized regulations
(the "Final Mark-to-Market Regulations"), which provide that a REMIC Residual
Interest Security acquired after January 3, 1995 cannot be marked-to-market.
Prospective purchasers of a REMIC Residual Interest Security should consult
their tax advisors regarding the possible application of the Mark to Market
Regulations.
Administrative Matters
The REMIC's books must be maintained on a calendar year basis and the
REMIC must file an annual federal income tax return. The REMIC will also be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit, by the IRS in a
unified administrative proceeding.
Tax Status as a Grantor Trust
General. As further specified in the related Prospectus Supplement, if
a REMIC election is not made and the Trust Fund is not structured as a
partnership, then, in the opinion of Tax Counsel, the Trust Fund relating to a
Series of Securities will be classified for federal income tax purposes as a
grantor trust under Subpart E, Part 1 of Subchapter J of the Code and not as an
association taxable as a corporation (the Securities of such Series,
"Pass-Through Securities"). In some Series there will be no separation of the
principal and interest payments on the Loans. In such circumstances, a Holder
will be considered to have purchased a pro rata undivided interest in each of
the Loans. In other cases ("Stripped Securities"), sale of the Securities will
produce a separation in the ownership of all or a portion of the principal
payments from all or a portion of the interest payments on the Loans.
In the opinion of Tax Counsel, each Holder must report on its federal
income tax return its share of the gross income derived from the Loans (not
reduced by the amount payable as fees to the applicable
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Trustee and the Servicer and similar fees (collectively, the "Servicing Fee")),
at the same time and in the same manner as such items would have been reported
under the Holder's tax accounting method had it held its interest in the Loans
directly, received directly its share of the amounts received with respect to
the Loans, and paid directly its share of the Servicing Fees. In the case of
Pass-Through Securities other than Stripped Securities, such income will consist
of a pro rata share of all of the income derived from all of the Loans and, in
the case of Stripped Securities, such income will consist of a pro rata share of
the income derived from each stripped bond or stripped coupon in which the
Holder owns an interest. The Holder of a Security will generally be entitled to
deduct such Servicing Fees under Section 162 or Section 212 of the Code to the
extent that such Servicing Fees represent "reasonable" compensation for the
services rendered by the applicable Trustee and the Servicer (or third parties
that are compensated for the performance of services). In the case of a
noncorporate Holder, however, Servicing Fees (to the extent not otherwise
disallowed, e.g., because they exceed reasonable compensation) will be
deductible in computing such Holder's regular tax liability only to the extent
that such fees, when added to other miscellaneous itemized deductions, exceed 2%
of adjusted gross income and may not be deductible to any extent in computing
such Holder's alternative minimum tax liability. In addition, for taxable years
beginning after December 31, 1990, the amount of itemized deductions otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds the applicable amount (which amount will be adjusted for inflation in
taxable years beginning after 1990) will be reduced by the lesser of (i) 3% of
the excess of adjusted gross income over the applicable amount or (ii) 80% of
the amount of itemized deductions otherwise allowable for such taxable year.
Discount or Premium on Pass-Through Securities. In the opinion of Tax
Counsel, the Holder's purchase price of a Pass-Through Security is to be
allocated among the Loans in proportion to their fair market values, determined
as of the time of purchase of the Securities. In the typical case, the Trustee
(to the extent necessary to fulfill its reporting obligations) will treat each
Loan as having a fair market value proportional to the share of the aggregate
Principal Balances of all of the Loans that it represents, since the Securities,
unless otherwise specified in the related Prospectus Supplement, will have a
relatively uniform interest rate and other common characteristics. To the extent
that the portion of the purchase price of a Pass-Through Security allocated to a
Loan (other than to a right to receive any accrued interest thereon and any
undistributed principal payments) is less than or greater than the portion of
the Principal Balance of the Loan allocable to the Security, the interest in the
Loan allocable to the Pass-Through Security will be deemed to have been acquired
at a discount or premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Loan with OID in excess of a
prescribed de minimis amount or a Stripped Security, a Holder of a Security will
be required to report as interest income in each taxable year its share of the
amount of OID that accrues during that year in the manner described above. OID
with respect to a Loan could arise, for example, by virtue of the financing of
points by the originator of the Loan, or by virtue of the charging of points by
the originator of the Loan in an amount greater than a statutory de minimis
exception, in circumstances under which the points are not currently deductible
pursuant to applicable Code provisions. Any market discount or premium on a Loan
will be includible in income, generally in the manner described above, except
that in the case of Pass-Through Securities, market discount is calculated with
respect to the Loans underlying the Certificate, rather than with respect to the
Security. A Holder that acquires an interest in a Loan originated after July 18,
1984 with more than a de minimis amount of market discount (generally, the
excess of the principal amount of the Loan over the purchaser's allocable
purchase price) will be required to include accrued market discount in income in
the manner set forth above. See "--Taxation of Debt Securities Market Discount"
and "--Premium" above.
In the case of market discount on a Pass-Through Security attributable
to Loans originated on or before July 18, 1984, the Holder generally will be
required to allocate the portion of such discount that is allocable to a loan
among the principal payments on the Loan and to include the discount allocable
to
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each principal payment in ordinary income at the time such principal payment is
made. Such treatment would generally result in discount being included in income
at a slower rate than discount would be required to be included in income using
the method described in the preceding paragraph.
Stripped Securities. A Stripped Security may represent a right to
receive only a portion of the interest payments on the Loans, a right to receive
only principal payments on the Loans, or a right to receive certain payments of
both interest and principal. Certain Stripped Securities ("Ratio Strip
Securities") may represent a right to receive differing percentages of both the
interest and principal on each Loan. Pursuant to Section 1286 of the Code, the
separation of ownership of the right to receive some or all of the interest
payments on an obligation from ownership of the right to receive some or all of
the principal payments results in the creation of "stripped bonds" with respect
to principal payments and "stripped coupons" with respect to interest payments.
Section 1286 of the Code applies the OID rules to stripped bonds and stripped
coupons. For purposes of computing original issue discount, a stripped bond or a
stripped coupon is treated as a debt instrument issued on the date that such
stripped interest is purchased with an issue price equal to its purchase price
or, if more than one stripped interest is purchased, the ratable share of the
purchase price allocable to such stripped interest.
Servicing fees in excess of reasonable servicing fees (the "excess
servicing fee") will be treated under the stripped bond rules. If the excess
servicing fee is less than 100 basis points (i.e., 1% interest on the Loan's
Principal Balance) or the Securities are initially sold with a de minimis
discount (assuming no prepayment assumption is required), any non-de minimis
discount arising from a subsequent transfer of the Securities should be treated
as market discount. The IRS appears to require that reasonable servicing fees be
calculated on a Loan by Loan basis, which could result in some Loans being
treated as having more than 100 basis points of interest stripped off.
The Code, OID Regulations and judicial decisions provide no direct
guidance as to how the interest and original issue discount rules are to apply
to Stripped Securities and other Pass-Through Securities. Under the method
described above for Pay-Through Securities (the "Cash Flow Bond Method"), a
prepayment assumption is used and periodic recalculations are made that take
into account with respect to each accrual period the effect of prepayments
during such period. However, the 1986 Act does not, absent Treasury regulations,
appear specifically to cover instruments such as the Stripped Securities, which
technically represent ownership interests in the underlying Loans, rather than
being debt instruments "secured by" those loans. Nevertheless, it is believed
that the Cash Flow Bond Method is a reasonable method of reporting income for
such Securities, and it is expected that OID will be reported on that basis
unless otherwise specified in the related Prospectus Supplement. In applying the
calculation to Pass-Through Securities, the Trustee will treat all payments to
be received by a Holder with respect to the underlying Loans as payments on a
single installment obligation. The IRS could, however, assert that original
issue discount must be calculated separately for each Loan underlying a
Security.
Under certain circumstances, if the Loans prepay at a rate faster than
the Prepayment Assumption, the use of the Cash Flow Bond Method may accelerate a
Holder's recognition of income. If, however, the Loans prepay at a rate slower
than the Prepayment Assumption, in some circumstances the use of this method may
decelerate a Holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted
Security, the applicable Trustee intends, absent contrary authority, to report
income to Holders as OID, in the manner described above for Interest Weighted
Securities.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the Internal Revenue
Service could contend that (i) in certain Series, each non-Interest
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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.
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
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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,
2000, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
Tax Treatment of Foreign Investors
Subject to the discussion below with respect to Trust Funds as to which
a partnership election is made, under the Code, unless interest (including OID)
paid on a Security (other than a Residual Interest Security is considered to be
"effectively connected" with a trade or business conducted in the United States
by a nonresident alien individual, foreign partnership or foreign corporation
("Nonresidents"), in the opinion of Tax Counsel, such interest will normally
qualify as portfolio interest (except where (i) the recipient is a holder,
directly or by attribution, of 10% or more of the capital or profits interest in
the issuer, or (ii) the recipient is a controlled foreign corporation to which
the issuer is a related person) and will be exempt from federal income tax. Upon
receipt of appropriate ownership statements, the issuer normally will be
relieved of obligations to withhold tax from such interest payments. These
provisions supersede the generally applicable provisions of United States law
that would otherwise require the issuer to withhold at a 30% rate (unless such
rate were reduced or eliminated by an applicable tax treaty) on, among other
things, interest and other fixed or determinable, annual or periodic income paid
to Nonresidents. Holders of Pass-Through Securities and Stripped Securities,
including Ratio Strip Securities, however, may be subject to withholding to the
extent that the Loans were originated on or before July 18, 1984.
Interest and OID of Holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the Holder. They will, however, generally be subject to the regular
United States income tax.
Payments to Holders of Residual Interest Securities who are foreign
persons will generally be treated as interest for purposes of the 30% (or lower
treaty rate) United States withholding tax. Holders should assume that such
income does not qualify for exemption from United States withholding tax as
"portfolio interest." It is clear that, to the extent that a payment represents
a portion of REMIC taxable
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income that constitutes excess inclusion income, a Holder of a Residual Interest
Security will not be entitled to an exemption from or reduction of the 30% (or
lower treaty rate) withholding tax rule. If the payments are subject to United
States withholding tax, they generally will be taken into account for
withholding tax purposes only when paid or distributed (or when the Residual
Interest Security is disposed of). The Treasury has statutory authority,
however, to promulgate regulations that would require such amounts to be taken
into account at an earlier time in order to prevent the avoidance of tax. Such
regulations could, for example, require withholding prior to the distribution of
cash in the case of Residual Interest Securities that do not have significant
value. Under the REMIC Regulations, if a Residual Interest Security has tax
avoidance potential, a transfer of a Residual Interest Security to a Nonresident
will be disregarded for all federal tax purposes. A Residual Interest Security
has tax avoidance potential unless, at the time of the transfer the transferor
reasonably expects that the REMIC will distribute to the transferee residual
interest Holder amounts that will equal at least 30% of each excess inclusion,
and that such amounts will be distributed at or after the time at which the
excess inclusions accrue and not later than the calendar year following the
calendar year of accrual. If a Nonresident transfers a Residual Interest
Security to a United States person, and if the transfer has the effect of
allowing the transferor to avoid tax on accrued excess inclusions, then the
transfer is disregarded and the transferor continues to be treated as the owner
of the Residual Interest Security for purposes of the withholding tax provisions
of the Code. See "--Excess Inclusions."
Tax Characterization of the Trust Fund as a Partnership
Tax Counsel is of the opinion that a Trust Fund structured as a
partnership will not be an association (or publicly traded partnership) taxable
as a corporation for federal income tax purposes. This opinion is based on the
assumption that the terms of the Trust Agreement and related documents will be
complied with, and on counsel's conclusions that the nature of the income of the
Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the Certificates has
been structured as a private placement under an IRS safe harbor, so that the
Trust Fund will not be characterized as a publicly traded partnership taxable as
a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, in the opinion of Tax Counsel, the Trust Fund would be subject to
corporate income tax on its taxable income. The Trust Fund's taxable income
would include all its income, possibly reduced by its interest expense on the
Notes. Any such corporate income tax could materially reduce cash available to
make payments on the Notes and distributions on the Certificates, and
Certificateholders could be liable for any such tax that is unpaid by the Trust
Fund.
Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and
the Noteholders will agree by their purchase of Notes, to treat the Notes as
debt for federal income tax purposes. In such a circumstance, Tax Counsel is,
except as otherwise provided in the related Prospectus Supplement, of the
opinion that the Notes will be classified as debt for federal income tax
purposes. The discussion below assumes this characterization of the Notes is
correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities or Strip Notes. Moreover, the discussion assumes that the
interest formula for the Notes meets the requirements for "qualified stated
interest" under the OID Regulations, and that any OID on the Notes (i.e., any
excess of the principal amount of the Notes over their issue price) does not
exceed a de minimis amount (i.e., 0.25% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID regulations. If these conditions are not satisfied with respect to any given
Series of Notes,
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additional tax considerations with respect to such Notes will be disclosed in
the applicable Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, in the opinion of Tax Counsel, the Notes
will not be considered issued with OID. The stated interest thereon will be
taxable to a Noteholder as ordinary interest income when received or accrued in
accordance with such Noteholder's method of tax accounting. Under the OID
Regulations, a Holder of a Note issued with a de minimis amount of OID must
include such OID in income, on a pro rata basis, as principal payments are made
on the Note. It is believed that any prepayment premium paid as a result of a
mandatory redemption will be taxable as contingent interest when it becomes
fixed and unconditionally payable. A purchaser who buys a Note for more or less
than its principal amount will generally be subject, respectively, to the
premium amortization or market discount rules of the Code.
A Holder of a Note that has a fixed maturity date of not more than one
year from the issue date of such Note (a "Short-Term Note") may be subject to
special rules. An accrual basis Holder of a Short-Term Note (and certain cash
method Holders, including regulated investment companies, as set forth in
Section 1281 of the Code) generally would be required to report interest income
as interest accrues on a straight-line basis over the term of each interest
period. Other cash basis Holders of a Short-Term Note would, in general, be
required to report interest income as interest is paid (or, if earlier, upon the
taxable disposition of the Short-Term Note). However, a cash basis Holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
Sale or Other Disposition. In the opinion of Tax Counsel, if a
Noteholder sells a Note, the Holder will recognize gain or loss in an amount
equal to the difference between the amount realized on the sale and the Holder's
adjusted tax basis in the Note. The adjusted tax basis of a Note to a particular
Noteholder will equal the Holder's cost for the Note, increased by any market
discount, acquisition discount, OID and gain previously included by such
Noteholder in income with respect to the Note and decreased by the amount of
bond premium (if any) previously amortized and by the amount of principal
payments previously received by such Noteholder with respect to such Note. Any
such gain or loss will be capital gain or loss if the Note was held as a capital
asset, except for gain representing accrued interest and accrued market discount
not previously included in income. Capital losses generally may be used only to
offset capital gains.
Foreign Holders. In the opinion of Tax Counsel, interest payments made
(or accrued) to a Noteholder who is a nonresident alien, foreign corporation or
other non-United States person (a "foreign person") generally will be considered
"portfolio interest," and generally will not be subject to United States federal
income tax and withholding tax, if the interest is not effectively connected
with the conduct of a trade or business within the United States by the foreign
person and the foreign person (i) is not actually or constructively a "10
percent shareholder" of the Trust Fund or the Seller (including a Holder of 10%
of the outstanding Certificates) or a "controlled foreign corporation" with
respect to which the Trust Fund or the Seller is a "related person" within the
meaning of the Code and (ii) provides the Trustee or other person who is
otherwise required to withhold U.S. tax with respect to the Notes with an
appropriate statement (on Form W-8 or a similar form), signed under penalties of
perjury, certifying that the beneficial owner of the Note is a foreign person
and providing the foreign person's name and address. If a Note is held through a
securities clearing organization or certain other financial institutions, the
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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.
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.
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A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series of
Securities includes a single Class of Certificates. If these conditions are not
satisfied with respect to any given Series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
Partnership Taxation. If the Trust Fund is a partnership, in the
opinion of Tax Counsel, the Trust Fund will not be subject to federal income
tax. Rather, in the opinion of Tax Counsel, each Certificateholder will be
required to separately take into account such Holder's allocated share of
income, gains, losses, deductions and credits of the Trust Fund. The Trust
Fund's income will consist primarily of interest and finance charges earned on
the Loans (including appropriate adjustments for market discount, OID and bond
premium) and any gain upon collection or disposition of Loans. The Trust Fund's
deductions will consist primarily of interest accruing with respect to the
Notes, servicing and other fees, and losses or deductions upon collection or
disposition of Loans.
In the opinion of Tax Counsel, the tax items of a partnership are
allocable to the partners in accordance with the Code, Treasury regulations and
the partnership agreement (here, the Trust Agreement and related documents). The
Trust Agreement will provide, in general, that the Certificateholders will be
allocated taxable income of the Trust Fund for each month equal to the sum of
(i) the interest that accrues on the Certificates in accordance with their terms
for such month, including interest accruing at the Pass-Through Rate for such
month and interest on amounts previously due on the Certificates but not yet
distributed; (ii) any Trust Fund income attributable to discount on the Loans
that corresponds to any excess of the principal amount of the Certificates over
their initial issue price (iii) prepayment premium payable to the
Certificateholders for such month; and (iv) any other amounts of income payable
to the Certificateholders for such month. Such allocation will be reduced by any
amortization by the Trust Fund of premium on Loans that corresponds to any
excess of the issue price of Certificates over their principal amount. All
remaining taxable income of the Trust Fund will be allocated to the Depositor.
Based on the economic arrangement of the parties, in the opinion of Tax Counsel,
this approach for allocating Trust Fund income should be permissible under
applicable Treasury regulations, although no assurance can be given that the IRS
would not require a greater amount of income to be allocated to
Certificateholders. Moreover, in the opinion of Tax Counsel, even under the
foregoing method of allocation, Certificateholders may be allocated income equal
to the entire Pass-Through Rate plus the other items described above even though
the Trust Fund might not have sufficient cash to make current cash distributions
of such amount. Thus, cash basis Holders will in effect be required to report
income from the Certificates on the accrual basis and Certificateholders may
become liable for taxes on Trust Fund income even if they have not received cash
from the Trust Fund to pay such taxes. In addition, because tax allocations and
tax reporting will be done on a uniform basis for all Certificateholders but
Certificateholders may be purchasing Certificates at different times and at
different prices, Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to them
by the Trust Fund.
In the opinion of Tax Counsel, all of the taxable income allocated to a
Certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
Holder under the Code.
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In the opinion of Tax Counsel, an individual taxpayer's share of
expenses of the Trust Fund (including fees to the Servicer but not interest
expense) would be miscellaneous itemized deductions. Such deductions might be
disallowed to the individual in whole or in part and might result in such Holder
being taxed on an amount of income that exceeds the amount of cash actually
distributed to such Holder over the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income
and allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Loan, the Trust Fund
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Loans were not issued
with OID, and, therefore, the Trust Fund should not have OID income. However,
the purchase price paid by the Trust Fund for the Loans may be greater or less
than the remaining Principal Balance of the Loans at the time of purchase. If
so, in the opinion of Tax Counsel, the Loan will have been acquired at a premium
or discount, as the case may be. (As indicated above, the Trust Fund will make
this calculation on an aggregate basis, but might be required to recompute it on
a Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium,
the Trust Fund will elect to include any such discount in income currently as it
accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
Section 708 Termination. In the opinion of Tax Counsel, under Section
708 of the Code, the Trust Fund will be deemed to terminate for federal income
tax purposes if 50% or more of the capital and profits interests in the Trust
Fund are sold or exchanged within a 12-month period. Pursuant to final Treasury
regulations issued May 9, 1997 under Section 708 of the Code, if such a
termination occurs, the Trust Fund (the "old partnership") would be deemed to
contribute its assets to a new partnership (the "new partnership") in exchange
for interests in the new partnership. Such interests would be deemed distributed
to the partners of the old partnership in liquidation thereof, which would not
constitute a sale or exchange.
Disposition of Certificates. Generally, in the opinion of Tax Counsel,
capital gain or loss will be recognized on a sale of Certificates in an amount
equal to the difference between the amount realized and the seller's tax basis
in the Certificates sold. A Certificateholder's tax basis in a Certificate will
generally equal the Holder's cost increased by the Holder's share of Trust Fund
income (includible in income) and decreased by any distributions received with
respect to such Certificate. In addition, both the tax basis in the Certificates
and the amount realized on a sale of a Certificate would include the Holder's
share of the Notes and other liabilities of the Trust Fund. A Holder acquiring
Certificates at different prices may be required to maintain a single aggregate
adjusted tax basis in such Certificates, and, upon sale or other disposition of
some of the Certificates, allocate a portion of such aggregate tax basis to the
Certificates sold (rather than maintaining a separate tax basis in each
Certificate for purposes of computing gain or loss on a sale of that
Certificate).
Any gain on the sale of a Certificate attributable to the Holder's
share of unrecognized accrued market discount on the Loans would generally be
treated as ordinary income to the Holder and would give rise to special tax
reporting requirements. The Trust Fund does not expect to have any other assets
that would give rise to such special reporting requirements. Thus, to avoid
those special reporting requirements, the Trust Fund will elect to include
market discount in income as it accrues.
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If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a Holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust Fund were to file an election under
Section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the Trust Fund will not make such
election. As a result, Certificateholders might be allocated a greater or lesser
amount of Trust Fund income than would be appropriate based on their own
purchase price for Certificates.
Administrative Matters. The Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust Fund will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust Fund and will report each Certificateholder's allocable share of items of
Trust Fund income and expense to Holders and the IRS on Schedule K-1. The Trust
Fund will provide the Schedule K-l information to nominees that fail to provide
the Trust Fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
Certificates. Generally, Holders must file tax returns that are consistent with
the information return filed by the Trust Fund or be subject to penalties unless
the Holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (a) the name, address and identification number of such person,
(b) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization or any wholly owned agency or
instrumentality of either of the foregoing, and (c) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund information
as to themselves and their ownership of Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Trust Fund. The information referred to above
for any calendar year must be furnished to
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the Trust Fund on or before the following January 31. Nominees, brokers and
financial institutions that fail to provide the Trust Fund with the information
described above may be subject to penalties.
The Depositor will be designated as the tax matters partner in the
related Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the Certificateholders, and,
under certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the Trust Fund. An
adjustment could also result in an audit of a Certificateholder's returns and
adjustments of items not related to the income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a failure
to withhold. The Trust Fund expects to withhold on the portion of its taxable
income that is allocable to foreign Certificateholders pursuant to Section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign Holders that are taxable as corporations
and 39.6% for all other foreign Holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the Trust Fund to change its withholding procedures. In determining a Holder's
withholding status, the Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the
Holder's certification of nonforeign status signed under penalties of perjury.
Each foreign Holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Trust Fund's income. Each foreign Holder must
obtain a taxpayer identification number from the IRS and submit that number to
the Trust Fund on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign Holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the Trust Fund taking the
position that no taxes were due because the Trust Fund was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a
Certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Trust Fund. If these interest payments are properly
characterized as guaranteed payments, then the interest will not be considered
"portfolio interest." As a result, Certificateholders will be subject to United
States federal income tax and withholding tax at a rate of 30 percent, unless
reduced or eliminated pursuant to an applicable treaty. In such case, a foreign
Holder would only be entitled to claim a refund for that portion of the taxes in
excess of the taxes that should be withheld with respect to the guaranteed
payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the Holder is an exempt recipient under
applicable provisions of the Code. The New Regulations described herein make
certain modifications to the backup withholding and information reporting rules.
The New Regulations will generally be effective for payments made after December
31, 1999, subject to certain transition rules. Prospective investors are urged
to consult their own tax advisors regarding the New Regulations.
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STATE TAX CONSIDERATIONS
In addition to the federal income tax considerations described in
"Certain Federal Income Tax Considerations," potential investors should consider
the state and local income tax consequences of the acquisition, ownership, and
disposition of the Securities. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in the
Securities.
FASIT SECURITIES
General. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory vehicle
for the issuance of mortgage-backed and asset-backed securities ("FASIT
Securities"). Although the FASIT provisions of the Code became effective on
September 1, 1997, no Treasury regulations or other administrative guidance has
been issued with respect to those provisions. Accordingly, definitive guidance
cannot be provided with respect to many aspects of the tax treatment of Holders
of FASIT Securities. Investors also should note that the FASIT discussions
contained herein constitutes only a summary of the federal income tax
consequences to Holders of FASIT Securities. With respect to each Series of
FASIT Securities, the related Prospectus Supplement will provide a detailed
discussion regarding the federal income tax consequences associated with the
particular transaction.
FASIT Securities will be classified as either FASIT Regular Securities,
which generally will be treated as debt for federal income tax purposes, or
FASIT Ownership Securities, which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect to
the taxable income or loss of the related Series. The Prospectus Supplement for
each Series of Securities will indicate whether one or more FASIT elections will
be made for such Series, and which Securities of such Series will be designated
as Regular Securities, and which, if any, will be designated as Ownership
Securities.
Qualification as a FASIT. The Trust Fund underlying a Series (or one or
more designated pools of assets held in the Trust Fund) will qualify under the
Code as a FASIT in which the FASIT Regular Securities and the FASIT Ownership
Securities will constitute the "regular interests" and the "ownership
interests," respectively, if (i) a FASIT election is in effect, (ii) certain
tests concerning (a) the composition of the FASIT's assets and (b) the nature of
the Holders' interest in the FASIT are met on a continuing basis and (iii) the
Trust Fund is not a regulated company as defined in Section 851(a) of the Code.
Asset Composition. In order for a Trust Fund (on one or more designated
pools of assets held by a Trust Fund) to be eligible for FASIT status,
substantially all of the assets of the Trust Fund (or the designated pool) must
consist of "permitted assets" as of the close of the third month beginning after
the Closing Date and at all times thereafter (the "FASIT Qualification Test").
Permitted assets include (i) cash or cash equivalents, (ii) debt instruments
with fixed terms that would qualify as REMIC regular interests if issued by a
REMIC (generally, instruments that provide for interest at a fixed rate, a
qualifying variable rate, or a qualifying interest-only 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.
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Interests in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT also must meet certain requirements. All
of the interests in a FASIT must belong to either of the following: (i) one or
more Classes of regular interests or (ii) a single Class of ownership interest
that is held by a fully taxable domestic corporation. In the case of Series that
include FASIT Ownership Securities, the ownership interest will be represented
by the FASIT Ownership Securities.
A FASIT interest generally qualifies as a regular interest if (i) it is
designated as a regular interest, (ii) it has a stated maturity no greater than
thirty years, (iii) it entitles its Holder to a specified principal amount, (iv)
the issue price of the interest does not exceed 125% of its stated principal
amount, (v) the yield to maturity of the interest is less than the applicable
Treasury rate published by the IRS plus 5% and (vi) if it pays interest, such
interest is payable at either (a) a fixed rate with respect to the principal
amount of the regular interest or (b) a permissible variable rate with respect
to such principal amount. Permissible variable rates for FASIT regular interests
are the same as those for REMIC regular interest (i.e., certain qualified
floating rates and weighted average rates). See "Certain Federal Income Tax
Considerations--Taxation of Debt Securities--Variable Rate Debt Securities."
If a FASIT Security fails to meet one or more of the requirements set
out in clauses (iii), (iv) or (v) above, but otherwise meets the above
requirements, it may still qualify as a type of regular interest known as a
"High-Yield Interest." In addition, if a FASIT Security fails to meet the
requirements of clause (vi), but the interest payable on the Security consists
of a specified portion of the interest payments on permitted assets and that
portion does not vary over the life of the Security, the Security also will
qualify as a High-Yield Interest. A High-Yield Interest may be held only by
domestic corporations that are fully subject to corporate income tax ("Eligible
Corporations"), other FASITs and dealers in securities who acquire such
interests as inventory, rather than for investment. In addition, Holders of
High-Yield Interests are subject to limitations on offset of income derived from
such interest. See "Certain Federal Income Tax Considerations--FASIT
Securities--Tax Treatment of FASIT Regular Securities--Treatment of High-Yield
Interests."
Consequences of Disqualification. If a Series of FASIT Securities fails
to comply with one or more of the Code's ongoing requirements for FASIT status
during any taxable year, the Code provides that its FASIT status may be lost for
that year and thereafter. If FASIT status is lost, the treatment of the former
FASIT and the interests therein for federal income tax purposes is uncertain.
The former FASIT might be treated as a grantor trust, as a separate association
taxed as a corporation, or as a partnership. The FASIT Regular Securities could
be treated as debt instruments for federal income tax purposes or as equity
interests. Although the Code authorizes the Treasury to issue regulations that
address situations where a failure to meet the requirements for FASIT status
occurs inadvertently and in good faith, such regulations have not yet been
issued. It is possible that disqualification relief might be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of the
FASIT's income for a period of time in which the requirements for FASIT status
are not satisfied.
Tax Treatment of FASIT Regular Securities. Payments received by Holders
of FASIT Regular Securities generally should be accorded the same tax treatment
under the Code as payments received on other taxable corporate debt instruments
and on REMIC Regular Securities. As in the case of Holders of REMIC Regular
Securities, Holders of FASIT Regular Securities must report income from such
Securities under an accrual method of accounting, even if they otherwise would
have used the case receipts and disbursements method. Except in the case of
FASIT Regular Securities issued with original issue discount or acquired with
market discount or premium, interest paid or accrued on a FASIT Regular Security
generally will be treated as ordinary income to the Holder and a principal
payment on such Security will be treated as a return of capital to the extent
that the Holder's basis is allocable to that payment. FASIT Regular Securities
issued with original issue discount or acquired with market discount or premium
generally will treat interest and principal payments on such Securities in the
same manner
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described for REMIC Regular Securities. See "Certain Federal Income Tax
Considerations--Taxation of Debt Securities,""--Market Discount," and
"--Premium" above. High-Yield Securities may be held only by fully taxable
domestic corporations, other FASITs, and certain securities dealers. Holders of
High-Yield Securities are subject to limitations on their ability to use current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from those Securities.
If a FASIT Regular Security is sold or exchanged, the Holder generally
will recognize gain or loss upon the sale in the manner described above for
REMIC Regular Securities. See "Certain Federal Income Tax Considerations--Sale
or Exchange." In addition, if a FASIT Regular Security becomes wholly or
partially worthless as a result of Default and Delinquencies of the underlying
assets, the Holder of such Security should be allowed to deduct the loss
sustained (or alternatively be able to report a lesser amount of income). See
"Certain Federal Income Tax Considerations--Taxation of Debt
Instruments--Effects of Default and Delinquencies."
FASIT Regular Securities held by a REIT will qualify as "real estate
assets" within the meaning of section 856(c) (4)(A) of the Code, and interest on
such Securities will be considered Qualifying REIT Interest to the same extent
that REMIC Securities would be so considered. FASIT Regular Securities held by a
Thrift Institution taxed as a "domestic building and loan association" will
represent qualifying assets for purposes of the qualification requirements set
forth in Code Section 7701(a)(19) to the same extent that REMIC Securities would
be so considered. See "Certain Federal Income Tax Considerations--Taxation of
Debt Securities--Status as Real Property Loans." In addition, FASIT Regular
Securities held by a financial institution to which Section 585 of the Code
applies will be treated as evidences of indebtedness for purposes of Section
582(c)(1) of the Code. FASIT Securities will not qualify as "Government
Securities" for either REIT or RIC qualification purposes.
Treatment of High-Yield Interests. High-Yield Interests are subject to
special rules regarding the eligibility of Holders of such interests, and the
ability of such Holders to offset income derived from their FASIT Security with
losses. High-Yield Interests may be held only by Eligible Corporations other
FASITs, and dealers in securities who acquire such interests as inventory. If a
securities dealer (other than an Eligible Corporation) initially acquires a
High-Yield Interest as inventory, but later begins to hold it for investment,
the dealer will be subject to an excise tax equal to the income from the
High-Yield Interest multiplied by the highest corporate income tax rate. In
addition, transfers of High-Yield Interests to disqualified Holders will be
disregarded for federal income tax purposes, and the transferor still will be
treated as the Holder of the High-Yield Interest.
The Holder of a High-Yield Interest may not use non-FASIT current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from the High-Yield Interest, for either regular federal income tax
purposes or for alternative minimum tax purposes. In addition, the FASIT
provisions contain an anti-abuse rule that imposes corporate income tax on
income derived from a FASIT Regular Security that is held by a pass-through
entity (other than another FASIT) that issues debt or equity securities backed
by the FASIT Regular Security and that have the same features as High-Yield
Interests.
Tax Treatment of FASIT Ownership Securities. A FASIT Ownership Security
represents the residual equity interest in a FASIT. As such, the Holder of a
FASIT Ownership Security determines its taxable income by taking into account
all assets, liabilities and items of income, gain, deduction, loss and credit of
a FASIT. In general, the character of the income to the Holder of a FASIT
Ownership Interest will be the same as the character of such income of the
FASIT, except that any tax-exempt interest income taken into account by the
Holder of a FASIT Ownership Interest is treated as ordinary income. In
determining that taxable income, the Holder of a FASIT Ownership Security must
determine the amount of interest, original issue discount, market discount and
premium recognized with respect to the FASIT's assets and the FASIT Regular
Securities issued by the FASIT according to a constant yield methodology
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and under an accrual method of accounting. In addition, Holders of FASIT
Ownership Securities are subject to the same limitations on their ability to use
losses to offset income from their FASIT Security as are the Holders of
High-Yield Interests. See "Certain Federal Income Tax Considerations--Treatment
of High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Securities. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where,
within six months before or after the disposition, the seller of such Security
acquires any other FASIT Ownership Security or, in the case of a FASIT holding
mortgage assets, any interest in a Taxable Mortgage Pool that is economically
comparable to a FASIT Ownership Security. In addition, if any security that is
sold or contributed to a FASIT by the Holder of the related FASIT Ownership
Security was required to be marked-to-market under Code section 475 by such
Holder, then section 475 will continue to apply to such securities, except that
the amount realized under the mark-to-market rules will be a greater of the
securities' value under present law or the securities' value after applying
special valuation rules contained in the FASIT provisions. Those special
valuation rules generally require that the value of debt instruments that are
not traded on an established securities market be determined by calculating the
present value of the reasonably expected payments under the instrument using a
discount rate of 120% of the applicable federal rate, compounded semiannually.
The Holder of a FASIT Ownership Security will be subject to a tax equal
to 100% of the net income derived by the FASIT from any "prohibited
transactions." Prohibited transactions include (i) the receipt of income derived
from assets that are not permitted assets, (ii) certain dispositions of
permitted assets, (iii) the receipt of any income derived from any loan
originated by a FASIT and (iv) in certain cases, the receipt of income
representing a servicing fee or other compensation. Any Series for which a FASIT
election is made generally will be structured in order to avoid application of
the prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration. Holders of FASIT
Securities will be subject to backup withholding to the same extent Holders of
REMIC Securities would be subject. See "Certain Federal Income Tax
Considerations--Miscellaneous Tax Aspects--Backup Withholding." For purposes of
reporting and tax administration, Holders of record of FASIT Securities
generally will be treated in the same manner as Holders of REMIC Securities.
Due to the complexity of the federal income tax rules applicable to
Holders and the considerable uncertainty that exists with respect to many
aspects of those rules, potential investors should consult their own tax
advisors regarding the tax treatment of the acquisition, ownership, and
disposition of the securities.
ERISA CONSIDERATIONS
The following describes certain considerations under the Employment
Retirement Security Act of 1974, as amended ("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
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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 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
impose 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, unless certain exceptions apply.
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, the Underwriter 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 Backup Servicer, the Indenture Trustee, the Owner Trustee, the
Underwriter, the Depositor or any of their affiliates (a) has investment or
administrative discretion with respect to such Plan assets; (b) has authority or
responsibility to give, or regularly gives, investment advice with respect to
such Plan assets for a fee and pursuant to an agreement of understanding that
such advice (i) will serve as a primary basis for investment decisions with
respect to such Plan assets and (ii) will be based on the particular investment
needs for such Plan; or (c) is an employer maintaining or contributing to such
Plan.
In addition, the Trust Fund, any underwriter, trustee, servicer,
administrator or producer of credit support or their affiliates might be
considered or might become Parties in Interest with respect to a Plan. Also, any
holder of Notes, because of its activities or the activities of its respective
affiliates, may be deemed to be a Party in Interest with respect to certain
Plans, including but not limited to Plans sponsored by such holder. In either
case, the acquisition or holding of Notes by or on behalf of such a Plan could
be
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considered to give rise to a 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, of if equity participation by
benefit plan investors is not significant. 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. Equity participation in an
entity by benefit plan investors is not significant if, after the most recent
acquisition of an equity interest in the entity, less than 25% of the value of
each class of equity interest in the entity is held by "benefit plan investors,"
which include benefit plans described in ERISA or under section 4975 of the
Code, whether or not they are subject to ERISA, as well as entities whose
underlying assets include plan assets by reason of a plan's investment in the
entity.
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"), the DOL
exempted from ERISA's prohibited transaction rules certain transactions relating
to the operation of residential mortgage pool investment trusts and the
purchase, sale and holding of "mortgage pool pass-through certificates" in the
initial issuance of such certificates. PTCE 83-1 permits, subject to certain
conditions, transactions that might otherwise be prohibited between Plans and
Parties in Interest with respect to those Plans related to the origination,
maintenance and termination of mortgage pools consisting of mortgage loans
secured by first or second mortgages or deeds of trust on single-family
residential property, and the acquisition and holding of certain mortgage pool
pass-through certificates representing an interest in such mortgage pools by
Plans. If the general conditions (discussed below) of PTCE 83-1 are satisfied,
investments by a Plan in Securities that represent interests in a Pool
consisting of Loans conforming to these requirements ("Single Family
Securities") will be exempt from the prohibitions of ERISA Sections 406(a) and
407 (relating generally to transactions with Parties in Interest who are not
fiduciaries) if the Plan purchases the Single Family Securities at no more than
fair market value and will be exempt from the prohibitions of ERISA Sections
406(b)(1) and (2) (relating generally to transactions with fiduciaries) if, in
addition, the purchase is approved by an independent fiduciary, no sales
commission is paid to the pool sponsor, the Plan does not purchase more than 25%
of all Single Family Securities, and at least 50% of all Single
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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, in either case, the Securities,
evidence the beneficial ownership of both a specified percentage of future
interest payments (greater than 0%) and a specified percentage (greater than 0%)
of future principal payments on the Loans. It is not clear whether a Class of
Securities that evidences the beneficial ownership in a Trust Fund divided into
Loan groups, beneficial ownership of a specified percentage of interest payments
only or principal payments only, or a notional amount of either principal or
interest payments, or a Class of Securities entitled to receive payments of
interest and principal on the Loans only after payments to other Classes or
after the occurrence of certain specified events would be a "mortgage
pass-through certificate" for purposes of PTCE 83-1.
PTCE 83-1 sets forth three general conditions that must be satisfied
for any transaction to be eligible for exemption: (i) the maintenance of a
system of insurance or other protection for the pooled mortgage loans and
property securing such loans, and for indemnifying Holders against reductions in
pass-through payments due to property damage or defaults in loan payments in an
amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan; (ii) the existence of a pool trustee who
is not an affiliate of the pool sponsor; and (iii) a limitation on the amount of
the payment retained by the pool sponsor, together with other funds inuring to
its benefit, to not more than adequate consideration for selling the mortgage
loans plus reasonable compensation for services provided by the pool sponsor to
the Pool. The Depositor believes that the first general condition referred to
above will be satisfied with respect to the Securities in a Series issued
without a subordination feature, or the unsubordinated Securities only in a
Series issued with a subordination feature; provided, that the subordination and
Reserve Account, subordination by shifting of interests, the pool insurance or
other form of credit enhancement described herein (such subordination, pool
insurance or other form of credit enhancement being the system of insurance or
other protection referred to above) with respect to a Series of Securities is
maintained in an amount not less than the greater of one percent of the
aggregate Principal Balance of the Loans or the Principal Balance of the largest
Loan. See "Description of the Securities" herein. In the absence of a ruling
that the system of insurance or other protection with respect to a Series of
Securities satisfies the first general condition referred to above, there can be
no assurance that these features will be so viewed by the DOL. The Trustee will
not be affiliated with the Depositor.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold Single Family
Securities must make its own determination as to whether the first and third
general conditions, and the specific conditions described briefly in the
preceding paragraph, of PTCE 83-1 have been satisfied, or as to the availability
of any other prohibited transaction exemptions. Each Plan fiduciary should also
determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the Securities is appropriate for the
Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
The DOL issued to Bear, Stearns & Co. Inc., an individual exemption
(Prohibited Transaction Exemption 90-30; Exemption Application No. D-8207, 55
Fed. Reg. 21461 (1990)) (the "Underwriter Exemption"), which applies to certain
sales and servicing of "certificates" that are obligations of a "trust"
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with respect to which Bear, Stearns & Co. Inc. is the underwriter, or the
manager or co-manager of an underwriting syndicate. The Underwriter Exemption
provides relief generally similar to that provided by PTCE 83-1, but is broader
in several respects.
The Underwriter Exemption contains several requirements, some of which
differ from those in PTCE 83-l. The Underwriter Exemption contains an expanded
definition of "certificate," which includes an interest that entitles the Holder
to pass-through payments of principal, interest and/or other payments. The
Underwriter Exemption contains an expanded definition of "trust," which permits
the trust corpus to consist of secured consumer receivables. The definition of
"trust," however, does not include any investment pool unless, inter alia, (i)
the investment pool consists only of assets of the type that have been included
in other investment pools, (ii) certificates evidencing interests in such other
investment pools have been purchased by investors other than Plans for at least
one year prior to the Plan's acquisition of certificates pursuant to the
Underwriter Exemption and (iii) certificates in such other investment pools have
been rated in one of the three highest generic rating categories of the four
credit rating agencies noted below. Generally, the Underwriter Exemption holds
that the acquisition of the certificates by a Plan must be on terms (including
the price for the certificates) that are at least as favorable to the Plan as
they would be in an arm's length transaction with an unrelated party. The
Underwriter Exemption requires that the rights and interests evidenced by the
certificates not be "subordinated" to the rights and interests evidenced by
other certificates of the same trust. The Underwriter Exemption requires that
certificates acquired by a Plan have received a rating at the time of their
acquisition that is in one of the three highest generic rating categories of
Standard & Poor's, a division of The McGraw-Hill Companies, Inc., Moody's
Investors Service, Inc., Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc. The
Underwriter Exemption specifies that the pool trustee must not be an affiliate
of the pool sponsor, nor an affiliate of the Underwriter, the pool servicer, any
obligor with respect to mortgage loans included in the trust constituting more
than five percent of the aggregate unamortized principal balance of the assets
in the trust, or any affiliate of such entities. Finally, the Underwriter
Exemption stipulates that any Plan investing in the certificates must be an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of the
Commission under the Securities Act.
On July 21, 1997, the DOL published in the Federal Register an
amendment to the Underwriter Exemption, which extends exemptive relief to
certain mortgage-backed and asset-backed securities transactions using
pre-funding accounts for trusts issuing pass-through certificates. The amendment
generally allows mortgage loans or other secured receivables (the "Obligations")
supporting payments to certificateholders, and having a value equal to no more
than twenty-five percent (25%) of the total principal amount of the certificates
being offered by the trust, to be transferred to the trust within a 90-day or
three-month period following the closing date (the "Specified Funding Period"),
instead of requiring that all such Obligations be either identified or
transferred on or before the Closing Date. The relief is available when the
following conditions are met:
(1) The ratio of the amount allocated to the pre-funding
account to the total principal amount of the certificates
being offered (the "Specified Funding Limit") must not
exceed twenty-five percent (25%).
(2) All Obligations transferred after the Closing Date (the
"Additional Obligations") must meet the same terms and
conditions for eligibility as the original Obligations
used to create the trust, which terms and conditions have
been approved by an Exemption Rating Agency.
(3) The transfer of such Additional Obligations to the trust
during the Specified Funding Period must not result in the
certificates to be covered by the Exemption receiving a
lower credit rating from an Exemption Rating Agency upon
termination of the
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Specified Funding Period than the rating that was obtained
at the time of the initial issuance of the certificates by
the trust.
(4) Solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate for all of the
Obligations in the trust at the end of the Specified
Funding Period must not be more than 100 basis points
lower than the average interest rate for the Obligations
transferred to the trust on the Closing Date.
(5) In order to insure that the characteristics of the
Additional Obligations are substantially similar to the
original Obligations which were transferred to the Trust
Fund:
(i) the characteristics of the Additional
Obligations must be monitored by an insurer or
other credit support provider that is
independent of the depositor; or
(ii) an independent accountant retained by the
depositor must provide the depositor with a
letter (with copies provided to each Exemption
Rating Agency rating the certificates, the
related underwriter and the related trustee)
stating whether or not the characteristics of
the Additional Obligations conform to the
characteristics described in the related
prospectus or Prospectus Supplement and/or
pooling and servicing agreement. In preparing
such letter, the independent accountant must
use the same type of procedures as were
applicable to the Obligations transferred to
the trust as of the Closing Date.
(6) The period of pre-funding must end no later than three
months or 90 days after the Closing Date or earlier in
certain circumstances if the pre-funding account falls
below the minimum level specified in the pooling and
servicing agreement or an Event of Default occurs.
(7) Amounts transferred to any pre-funding account and/or
capitalized interest account used in connection with the
pre-funding may be invested only in certain permitted
investments ("Permitted Investments").
(8) The related prospectus or Prospectus Supplement must
describe:
(i) any pre-funding account and/or capitalized
interest account used in connection with a
pre-funding account;
(ii) the duration of the period of pre-funding;
(iii) the percentage and/or dollar amount of the
Specified Funding Limit for the trust; and
(iv) that the amounts remaining in the pre-funding
account at the end of the Specified Funding
Period will be remitted to certificateholders
as repayments of principal.
(9) The related pooling and servicing agreement must describe
the Permitted Investments for the pre-funding account
and/or capitalized interest account and, if not disclosed
in
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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 counsel concerning the impact of ERISA and the Code, the
applicability of PTCE 83-1, the Underwriter Exemption, or any other 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 for each Series of Securities. 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.
AVAILABLE INFORMATION
The Depositor has filed with the SEC a Registration Statement under the
Securities Act of 1933, as amended, with respect to the Securities. This
Prospectus, which forms a part of the Registration Statement, and the Prospectus
Supplement relating to each Series of Securities contain summaries of the
material terms of the documents referred to herein and therein, but do not
contain all of the information set forth in the Registration Statement pursuant
to the Rules and Regulations of the SEC. 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 SEC at its Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional
Offices located as follows: Midwest Regional Office, 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. In addition, the SEC
maintains a Web site at http://www.sec.gov containing reports, proxy and
information statements and other information regarding registrants, including
the Depositor, that file electronically with the Commission.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
This Prospectus incorporates by reference all documents and reports
filed on behalf of the Depositor with respect to a Trust Fund pursuant to
Section 13(a), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
prior to the termination of the offering the related Securities. Upon request by
any person to whom this prospectus is delivered in connection with the offering
of one or more Classes Securities, the Depositor will provide or cause to be
provided without charge a copy of any of the
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documents and/or reports incorporated herein by reference, in each case to the
extent the documents or reports relate to such Classes of Securities, other than
the exhibits to such documents (unless those exhibits are specifically
incorporated by reference in such documents). Requests to the Depositor should
be directed in writing to: Bear Stearns Asset Backed Securities Inc., 245 Park
Avenue, New York, New York 10167, Telephone number (212) 272-4095 . The
Depositor has determined that its financial statements are not material to the
offering of any Certificates.
Investors may read and copy the documents and/or reports incorporated
herein by reference at the Public Reference Room of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Investors may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding issuers, including each Trust Fund, that file
electronically with the SEC.
RATING
It is a condition to the issuance of the Securities of each Series
offered hereby and by the Prospectus Supplement that they shall have been rated
in one of the four highest rating categories by the nationally recognized
statistical rating agency or agencies (each, a "Rating Agency") specified in the
related Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of
the value of the Trust Fund assets and any credit enhancement with respect to
the related Class and will reflect such Rating Agency's assessment solely of the
likelihood that the related Holders will receive payments to which such Holders
are entitled under the related Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments on the related Loans
will be made, the degree to which the rate of such prepayments might differ from
that originally anticipated or the likelihood of early optional termination of
the Series of Securities. Such rating should not be deemed a recommendation to
purchase, hold or sell Securities, inasmuch as it does not address market price
or suitability for a particular investor. Such rating will not address the
possibility that prepayment at higher or lower rates than anticipated by an
investor may cause such investor to experience a lower than anticipated yield or
that an investor purchasing a Security at a significant premium might fail to
recoup its initial investment under certain prepayment scenarios.
There is also no assurance that any such rating will remain in effect
for any given period of time or that it may not be lowered or withdrawn entirely
by the Rating Agencies in the future if in their judgment circumstances so
warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Trust Fund assets or any credit enhancement with
respect to a Series, such rating might also be lowered or withdrawn because of,
among other reasons, an adverse change in the financial or other condition of a
credit enhancement provider or a change in the rating of such credit enhancement
provider's long term debt.
The amount, type and nature of credit enhancement, if any, established
with respect to a Series of Securities will be determined on the basis of
criteria established by each Rating Agency rating Classes of such Series. Such
criteria are sometimes based upon an actuarial analysis of the behavior of
mortgage loans in a larger group. Such analysis is often the basis upon which
each Rating Agency determines the amount of credit enhancement required with
respect to each such Class. There can be no assurance that the historical data
supporting any such actuarial analysis will accurately reflect future experience
nor any assurance that the data derived from a large pool of mortgage loans
accurately predicts the delinquency, foreclosure or loss experience of any
particular pool of Loans. No assurance can be given that values of any
Properties have remained or will remain at their levels on the respective dates
of origination of the
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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 the Secondary Market Mortgage Enhancement Act. 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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Index of Defined Terms
Additional Obligations:............................83
Advances...........................................27
Agreements..........................................8
Amortizable Bond Premium Regulations...............59
Asset Value........................................10
Assumed Reinvestment Rate..........................10
Available Interest Amount..........................11
Capitalized Interest Account.......................22
Cash Flow Bond Method..............................66
CERCLA.............................................45
Certificates........................................8
Class...............................................9
Closed-End Loans...................................14
Code...............................................12
Collection Account..............................9, 26
Contingent Payment Regulations.....................56
Custodian..........................................33
Cut-off Date.......................................14
Debt Securities....................................54
Deleted Primary Asset..............................35
Depositor...........................................8
Depositor Securities...............................53
Disqualified Organization..........................63
Distribution Account................................9
Distribution Date...................................9
DOL................................................80
Eligible Investments...............................21
Enhancement....................................13, 22
EPA................................................45
ERISA..............................................79
Escrow Account.....................................25
Events of Default..............................37, 38
FASIT..............................................54
FASIT Qualification Test...........................76
FASIT Securities...................................76
FHA................................................16
Final Mark-to-Market Regulations...................64
Final Scheduled Distribution Date..................11
Garn-St. Germain Act...............................48
High-Yield Interest................................77
Holder..............................................9
Holders............................................41
Home Improvement Contracts.....................10, 16
Home Improvements..............................10, 16
HUD................................................17
Indenture...........................................8
Installment Sales Contract.........................51
Insurance Proceeds.................................27
Interest Weighted Securities.......................57
IRS................................................56
Liquidation Proceeds...............................26
Loans..............................................10
Mortgage...........................................33
Mortgage Loans......................................9
New Regulations....................................68
Nonresidents.......................................68
Notes...............................................8
Obligations:.......................................83
OID................................................55
OID Regulations....................................55
OTS................................................49
Parties in Interest................................80
Pass-Through Securities............................64
Pay-Through Security...............................56
Permitted Investments..............................84
Plan Asset Regulation..............................80
Plans..............................................79
Pool Insurance Policy..............................23
Pooling and Servicing Agreement.....................8
Pre-Funded Amount..................................21
Pre-Funding Account................................21
Pre-Funding Period.................................21
Prepayment Assumption..............................56
Primary Assets......................................9
Private Securities.................................10
Property...........................................16
PS Agreement.......................................19
PS Servicer........................................19
PS Sponsor.........................................19
PS Trustee.........................................19
PTCE...............................................81
PTCE 83-1..........................................81
Qualifying Substitute Primary Asset................35
Rating Agency...................................9, 86
Ratio Strip Securities.............................66
Regular Interest Securities........................54
Regular Interests..................................59
REMIC..........................................12, 54
REO Property.......................................13
Reserve Fund....................................9, 24
Residual Interest Security.........................61
Residual Interests.................................59
Revolving Credit Line Loans........................14
Revolving Mortgage Loans...........................14
Scheduled Payments.................................26
Securities..........................................8
Seller..............................................8
Servicing Fee..................................26, 65
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Short-Term Note....................................70
Single Family Property.............................15
Single Family Securities...........................81
Special Redemption Date............................11
Specified Funding Limit............................83
Specified Funding Period...........................83
Stripped Securities................................64
Tax Counsel........................................53
TIN................................................68
Title V............................................49
Trust Agreement.................................8, 13
Trust Fund..........................................8
Trustee.............................................8
U.S. Person........................................54
UCC................................................50
Underlying Loans...............................10, 19
Underwriter Exemption..............................82
VA.................................................16
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$250,000,000
HOME EQUITY LOAN-BACKED TERM NOTES,
SERIES 1999-3
IRWIN HOME EQUITY LOAN TRUST 1999-3
Issuer
IRWIN HOME EQUITY CORPORATION
Originator
IRWIN UNION BANK AND TRUST COMPANY
Master Servicer
BEAR STEARNS ASSET BACKED SECURITIES, INC.
Depositor
$130,000,000 Class A-1 Term Notes
$ 70,000,000 Class A-2 Term Notes
$ 50,000,000 Class A-3 Term Notes
----------------
PROSPECTUS SUPPLEMENT
----------------
Bear, Stearns & Co. Inc. Prudential Securities
December 6, 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
notes offered hereby, nor an offer of the notes 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.
