PROSPECTUS
PROSPECTUS SUPPLEMENT
(To Prospectus dated August 5, 1999)
$149,659,000
Mortgage Loan Trust, Series RASC 1999-RS4
Mortgage Asset-Backed Pass-Through Certificates, Series 1999-RS4
Residential Funding Corporation
Seller and Master Servicer
Bear Stearns Asset Backed Securities, Inc.
Depositor
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-10 IN THIS
PROSPECTUS SUPPLEMENT AND PAGE 3 IN THE PROSPECTUS.
The certificates will represent interests only in the trust created for Series
1999-RS4 and will not represent ownership interests in or obligations of Bear
Stearns Asset Backed Securities, Inc., Residential Funding Corporation or any
of their affiliates.
This prospectus supplement may be used to offer and sell the certificates
offered hereby only if accompanied by the prospectus.
CLASS A CERTIFICATES
The Series RASC 1999-RS4 trust will consist primarily of two groups of one- to
four-family first mortgage loans. The trust will issue seven classes of
certificates. Only two of these classes of certificates, the Class A
Certificates, are offered hereby.
CREDIT ENHANCEMENT
To the extent provided in this prospectus supplement, credit enhancement will
be provided to the Class A Certificates by
o the excess cash flow on the mortgage loans;
o overcollateralization represented by the excess of the balance of
the mortgage loans over the balance of the Class A Certificates;
o cross-collateralization; and
o a certificate guaranty insurance policy issued by Ambac Assurance
Corporation.
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UNDERWRITING
The underwriter will offer to the public the Class A Certificates at varying
prices to be determined at the time of sale. The underwriter"s commission will
be the difference between the price it pays to the depositor for the Class A
Certificates and the amount it receives from the sale of the Class A
Certificates to the public. The proceeds to the depositor from the sale of the
Class A Certificates to the underwriter will be approximately 99.68% of the
aggregate principal balance of the Class A Certificates, before deducting
expenses payable by the depositor. See "Method of Distribution" in this
prospectus supplement.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED CERTIFICATES OR
DETERMINED THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
BEAR, STEARNS & CO. INC.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS NOVEMBER 23, 1999
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
We provide information to you about the certificates 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 certificates; and
o this prospectus supplement, which describes the specific terms of
your series of certificates.
If the description of your certificates in this prospectus supplement differs
from the related description in the accompanying prospectus, you should rely
on the information 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) 272-4095.
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TABLE OF CONTENTS
PAGE PAGE
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PROSPECTUS SUPPLEMENT PROSPECTUS
Summary............................ S-3 Important Notice About Information
Risk Factors....................... S-10 in this Prospectus and Each
Introduction....................... S-15 Accompanying Prospectus
Description of the Mortgage Pool... S-15 Supplement....................... 2
Description of the Certificates.... S-31 Risk Factors....................... 3
Year 2000 Considerations........... S-43 Description of the Securities...... 8
The Insurer........................ S-46 The Trust Funds.................... 13
Certain Yield and Prepayment Enhancement........................ 22
Considerations................... S-47 Servicing of Loans................. 25
Pooling and Servicing Agreement.... S-53 The Agreements..................... 32
The Mortgage Loan Purchase Certain Legal Aspects of the
Agreement........................ S-56 Loans............................ 42
Certain Federal Income Tax The Depositor...................... 53
Considerations................... S-58 Use of Proceeds.................... 53
Method of Distribution............. S-60 Certain Federal Income Tax
Experts............................ S-61 Consequences..................... 53
Legal Opinions..................... S-61 State Tax Considerations........... 76
Ratings............................ S-61 FASIT Securities................... 76
Legal Investment................... S-62 ERISA Considerations............... 79
ERISA Considerations............... S-62 Legal Matters...................... 85
Annex I -- Global Clearance, Financial Information.............. 85
Settlement and Tax Document Available Information.............. 85
Procedures....................... I-1 Incorporation of Certain
Annex II -- Form of ERISA Letter... II-1 Information by Reference......... 85
Rating............................. 86
Legal Investment................... 87
Plan of Distribution............... 87
Index of Defined Terms............. 88
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SUMMARY
The following summary is a very general overview of the offered
certificates and does not contain all of the information that you should
consider in making your investment decision. To understand the terms of the
offered certificates, you should read carefully this entire document and the
accompanying prospectus.
Title of securities............... Mortgage Asset-Backed Pass-Through
Certificates, Series 1999-RS4.
Depositor......................... Bear Stearns Asset Backed Securities, Inc.
Seller and master servicer........ Residential Funding Corporation.
Trustee........................... Bank One, National Association.
Certificate insurer............... Ambac Assurance Corporation.
Mortgage pool..................... 1,471 fixed and adjustable-rate mortgage
loans with an aggregate principal balance
of approximately $157,266,970 as of the
cut-off date, secured by first liens on
one- to four-family residential
properties.
Cut-off date...................... November 1, 1999.
Closing date...................... On or about November 29, 1999.
Distribution dates................ The 25th of each month or, if the 25th is
not a business day, on the next business
day, beginning on December 27, 1999.
Scheduled final distribution
date............................ November 25, 2029. The actual final
distribution date could be substantially
earlier.
Form of certificates.............. Book-entry.
SEE "DESCRIPTION OF THE CERTIFICATES --
BOOK-ENTRY REGISTRATION" IN THIS
PROSPECTUS SUPPLEMENT.
Minimum denominations............. $25,000.
Legal investment.................. When issued, the Class A Certificates will
be "mortgage related securities" for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984.
SEE "LEGAL INVESTMENT" IN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS.
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Offered Certificates
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Initial
Certificate
Pass-Through Principal Initial Rating
Class Rate Balance (S&P/Fitch(1)) Designations
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Class A Certificates:
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A-I 7.43%(2) $ 136,984,000 AAA/AAA Senior/Fixed Rate(2)
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A-II Adjustable(3) $ 12,675,000 AAA/AAA Senior/Floating Rate
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Total Class A Certificates $ 149,659,000
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Non-Offered Certificates(4)
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SB-I N/A $ 6,962,911 N/A Subordinate
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SB-II N/A $ 645,059 N/A Subordinate
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R-I N/A N/A N/A Residual
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R-II N/A N/A N/A Residual
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R-III N/A N/A N/A Residual
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Total Class SB and Class R $ 7,607,970
Certificates
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Total offered and non- $ 157,266,970
offered certificates
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(1) See "Ratings" in this prospectus supplement.
(2) Subject to increase to 7.93% per annum on the first distribution date
after the first possible optional termination date.
(3) The least of (i) one-month LIBOR plus 0.40% per annum (or 0.80% per annum
beginning on the first distribution date after the first possible optional
termination date), (ii) 14.00% per annum and (iii) the weighted average of
the net mortgage rates of the Mortgage Loans in loan group II.
(4) The information presented for non-offered certificates is provided solely
to assist your understanding of the offered certificates.
THE TRUST
The depositor will establish a trust with respect to the Series 1999-RS4
Certificates pursuant to a pooling and servicing agreement dated as of the
cut-off date among the depositor, the master servicer and the trustee. On the
closing date, the depositor will purchase the mortgage pool from the seller,
and the depositor will deposit the mortgage pool into the trust.
The trust will also include credit enhancement in the form of a certificate
guaranty insurance policy provided by Ambac Assurance Corporation, which
guarantees certain payments on the Class A Certificates.
The Class A Certificates will represent a partial ownership interest in the
trust. Distributions of interest and/or principal on the Class A Certificates
will be made only from payments received from the assets of the trust as
described in this prospectus supplement.
THE MORTGAGE POOL
The mortgage loans to be deposited in the trust will be divided into two loan
groups. Loan group I consists of fixed rate mortgage loans, and loan group II
consists of adjustable rate mortgage loans. The mortgage loans have the
following characteristics as of the cut-off date:
Loan Group I
Range of principal $38,753 to $353,038
balances
Average principal $103,933
balance
Range of mortgage 8.95% to 14.96%
rates
Weighted average 11.5539%
mortgage rate
Range of remaining 43 months to 355
terms to stated months
maturity
Weighted average 231 months
remaining term to
stated maturity
Weighted average 103.39%
loan-to-value ratio
Loan Group II
Range of principal $69,799 to $370,975
balances
Average principal $154,884
balance
Range of mortgage 6.50% to 11.88%
rates
Weighted average 8.7840%
mortgage rate
Range of remaining 342 months to 360
terms to stated months
maturity
Weighted average 357 months
remaining term to
stated maturity
Weighted average 98.04%
loan-to-value ratio
The interest rate on each mortgage loan in loan group II will adjust on each
adjustment date to equal the sum of the related index and the related note
margin on the mortgage, subject to a maximum and minimum interest rate, as
described in this prospectus supplement.
All of the mortgage loans were acquired under the seller"s portfolio
transaction program. Substantially all of these mortgage loans have one or
more of the following characteristics:
o they do not comply with the seller"s standard programs, in
particular, almost all of them have loan-to-value ratios over 100%;
o they have borrowers with high debt-to-income ratios;
o they were not originated in accordance with any standard secondary
market underwriting guidelines; and/or
o the related mortgagors have delinquency histories or low credit
scores.
SEE "RISK FACTORS -- RISK OF LOSS" IN THIS PROSPECTUS SUPPLEMENT.
FOR ADDITIONAL INFORMATION REGARDING THE MORTGAGE POOL, SEE "DESCRIPTION OF
THE MORTGAGE POOL" IN THIS PROSPECTUS SUPPLEMENT.
DISTRIBUTIONS ON THE CLASS A CERTIFICATES
PRIORITY OF PAYMENT. Subservicers will collect payments of principal and
interest on the mortgage loans. Each month, the subservicers will retain their
subservicing fee and forward the remainder of the payments, together with any
advance that they make for delinquent mortgage payments, to the master
servicer. After retaining its master servicing fee and amounts that reimburse
the subservicer or master servicer for reimbursable expenses and advances, the
master servicer will forward all collections on the mortgage loans, together
with any advances that it makes for delinquent mortgage payments and certain
other amounts described in this prospectus supplement, to the trustee.
The aggregate amount of the monthly payments, advances and other amounts, less
the premium paid to the certificate insurer, is the available distribution
amount for any distribution date. SEE "DESCRIPTION OF THE CERTIFICATES -- THE
AVAILABLE DISTRIBUTION AMOUNT" IN THIS PROSPECTUS SUPPLEMENT.
Distributions to certificateholders will be made from the available
distribution amount generally as follows:
Step 1
Interest to the Class A Certificates
Step 2
Principal to the Class A Certificates
Step 3
Principal to the Class A Certificates in respect of certain realized losses
on the mortgage loans
Step 4
Reimbursement to the certificate insurer for payments made by the
certificate insurer to the Class A Certificates
Step 5
Principal payments of excess cash flow to the Class A Certificates as
required to create overcollateralization, until the amount of
overcollateralization reaches the required level
Step 6
Payments in respect of prepayment interest shortfalls on the Class A
Certificates
Step 7
Payments in respect of basis risk interest shortfalls on the Class A-II
Certificates
Step 8
Distribution of any remaining funds to the Class SB Certificates
INTEREST DISTRIBUTIONS. The amount of interest owed to the Class A
Certificates on each distribution date will generally equal, to the extent of
the available distribution amount:
o the pass-through rate on the Class A Certificates for the related
distribution date
MULTIPLIED BY
o the certificate principal balance of the Class A Certificates immediately
prior to the related distribution date
MULTIPLIED BY
o in the case of the Class A-I Certificates, 1/12, and in the case of the
Class A-II Certificates, the actual number of days in the related
interest accrual period divided by 360
MINUS
o interest shortfalls allocated to that class.
SEE "DESCRIPTION OF THE CERTIFICATES -- INTEREST DISTRIBUTIONS" IN THIS
PROSPECTUS SUPPLEMENT.
PRINCIPAL DISTRIBUTIONS. Principal distributions on the Class A Certificates
will include the following:
o the principal portion of scheduled monthly payments on the mortgage
loans;
o principal prepayments on the mortgage loans; and
o the principal portion of repurchases or other recoveries on the mortgage
loans.
In addition, the Class A Certificates will receive a distribution in respect
of principal, to the extent of any excess cash flow available to cover certain
realized losses and then to increase the amount of overcollateralization until
the overcollateralization target is reached. In addition, the Class A
Certificates will receive a distribution in respect of principal from the
policy to cover realized losses on the mortgage loans not otherwise covered.
SEE "DESCRIPTION OF THE CERTIFICATES -- PRINCIPAL DISTRIBUTIONS ON THE CLASS A
CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT.
CREDIT ENHANCEMENT
COVERAGE OF LOSSES. Realized losses on the mortgage loans will be covered by
excess cash flow, overcollateralization, cross-collateralization and the
certificate guaranty insurance policy as follows:
o FIRST, realized losses will be covered by a distribution from any excess
cash flow,
o SECOND, realized losses will result in a decrease in the level of
overcollateralization, until reduced to zero, and
o THIRD, realized losses will be allocated to the Class A Certificates, in
reduction of the certificate principal balance thereof, provided that any
loss allocated to the Class A Certificates will be covered by the
certificate guaranty insurance policy.
Not all realized losses will be allocated in the priority set forth above.
Realized losses due to natural disasters such as floods, earthquakes, or
certain other extraordinary events and losses due to fraud by or bankruptcy of
a mortgagor will be allocated as described above only up to specified amounts.
Losses of these types in excess of the specified amount and losses due to
certain other extraordinary events will, in general, be allocated to the Class
A Certificates, provided that any loss on the Class A Certificates will be
covered by the certificate guaranty insurance policy.
Neither the Class A Certificates nor the mortgage loans are insured or
guaranteed by the depositor, the master servicer, the trustee, GMAC Mortgage
Group, Inc. or any affiliate thereof.
SEE "DESCRIPTION OF THE CERTIFICATES -- ALLOCATION OF LOSSES; SUBORDINATION"
IN THIS PROSPECTUS SUPPLEMENT.
THE CERTIFICATE GUARANTY INSURANCE POLICY. Ambac Assurance Corporation will
issue a certificate guaranty insurance policy as a means of providing
additional credit enhancement to the Class A Certificates. Under the policy,
the insurer will pay to the trustee, for the benefit of the holders of the
Class A Certificates, as further described in this prospectus supplement, an
amount that will cover any shortfalls in amounts available to pay the interest
distribution amount for the Class A Certificates on any distribution date, the
principal portion of any realized losses allocated to the Class A Certificates
and the certificate principal balance of the Class A Certificates to the
extent unpaid on the final distribution date. The policy will not provide
coverage for certain interest shortfalls.
SEE "DESCRIPTION OF THE CERTIFICATES -- CERTIFICATE GUARANTY INSURANCE POLICY"
AND "THE INSURER" IN THIS PROSPECTUS SUPPLEMENT.
ADVANCES
For any month, if the master servicer receives a payment on a mortgage loan
that is less than the full scheduled payment (or if no payment is received at
all), the master servicer will advance its own funds to cover that shortfall.
However, the master servicer will make an advance only if it determines that
the advance will be recoverable from future payments or collections on that
mortgage loan.
SEE "DESCRIPTION OF THE CERTIFICATES -- ADVANCES" IN THIS PROSPECTUS
SUPPLEMENT.
OPTIONAL TERMINATION
On any distribution date on which the aggregate outstanding principal balance
of the mortgage loans as of the related determination date is less than 10% of
their aggregate principal balance as of the cut-off date, the master servicer
may, but will not be required to:
o purchase from the trust all remaining mortgage loans and thereby cause an
early retirement of the certificates;
or
o purchase all the certificates.
An optional repurchase of the certificates will cause the outstanding
principal balance of the certificates to be paid in full with accrued
interest. However, there will be no reimbursement of principal reductions or
related interest that resulted from losses allocated to the certificates that
were not covered by the policy. In addition, an optional termination of the
remaining mortgage loans may cause the holders of the Class A Certificates to
receive less than the outstanding principal balance of their certificates plus
accrued interest and any unpaid interest shortfalls. However, no purchase of
the mortgage loans or certificates will be permitted if it would result in a
draw under the policy unless the certificate insurer consents to the
termination.
SEE "POOLING AND SERVICING AGREEMENT -- TERMINATION" IN THIS PROSPECTUS
SUPPLEMENT AND "THE AGREEMENTS -- TERMINATION" IN THE PROSPECTUS.
RATINGS
When issued, the Class A Certificates will receive the ratings shown on page
S-4 of this prospectus supplement. The ratings on the Class A Certificates
address the likelihood that holders of the Class A Certificates will receive
all distributions on the underlying mortgage loans to which they are entitled.
A security rating is not a recommendation to buy, sell or hold a security and
is subject to change or withdrawal at any time by the assigning rating agency.
In addition, the ratings do not address the rate of principal prepayments on
the mortgage loans or the likelihood of reimbursement for certain interest
shortfalls.
SEE "RATINGS" IN THIS PROSPECTUS SUPPLEMENT.
LEGAL INVESTMENT
When issued, the Class A Certificates will 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 Class A Certificates constitute legal investments for you.
SEE "LEGAL INVESTMENT" IN THIS PROSPECTUS SUPPLEMENT FOR IMPORTANT INFORMATION
CONCERNING POSSIBLE RESTRICTIONS ON OWNERSHIP OF THE CLASS A CERTIFICATES BY
REGULATED INSTITUTIONS.
TAX STATUS
For federal income tax purposes, the depositor will elect to treat certain
portions of the trust as Real Estate Mortgage Investment Conduits. The Class A
Certificates will each represent ownership of a regular interest in a REMIC,
together with, in the case of the Class A-II Certificates, the contractual
right to receive payments from the reserve fund to cover some shortfalls that
may result from limiting their pass-through rate to the weighted average of
the net mortgage rates on the mortgage loans in loan group II. The Class A
Certificates generally will be treated as debt instruments for federal income
tax purposes. Certificateholders will be required to include in income all
interest and original issue discount, if any, on their certificates in
accordance with the accrual method of accounting regardless of the
certificateholder"s usual method of accounting. For federal income tax
purposes, the Residual Certificates will represent the sole residual interest
in each REMIC.
FOR FURTHER INFORMATION REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF
INVESTING IN THE CLASS A CERTIFICATES, SEE "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND IN THE ACCOMPANYING
PROSPECTUS.
ERISA CONSIDERATIONS
Sales of the Class A Certificates to persons investing assets of employee
benefit plans or individual retirement accounts are prohibited. Any investor
in a Class A Certificate will be deemed to represent that it complies with
this restriction.
SEE "ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND IN THE
ACCOMPANYING PROSPECTUS.
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RISK FACTORS
The Class A Certificates are not suitable investments for all investors.
In particular, you should not purchase any class of Class A Certificates
unless you understand the prepayment, credit, liquidity and market risks
associated with that class.
The Class A Certificates are complex securities. You should possess,
either alone or together with an investment advisor, the expertise necessary
to evaluate the information contained in this prospectus supplement and the
accompanying prospectus in the context of your financial situation and
tolerance for risk.
You should carefully consider, among other things, the following factors
in connection with the purchase of the Class A Certificates:
RISK OF LOSS
Many of the mortgage loans The mortgage loans were evaluated pursuant
have documentation defects, to a variety of programs as described in
underwriting exceptions and this prospectus supplement. SEE
other attributes that may "DESCRIPTION OF THE MORTGAGE POOL --
increase risk of loss on the PRODUCT TYPES." The mortgage loans are
mortgage loans. ineligible for inclusion in a
securitization conducted by the seller (or
any one of its affiliates) using the
standard selection criteria for the
securitizations. These mortgage loans
include loans that:
o have loan-to-value ratios in excess of
100%, and do not have a primary mortgage
insurance policy;
o have borrowers with high debt-to-income
ratios;
o have delinquency histories that do not
comply with the standard requirements
for securitizations conducted by the
seller (or any one of its affiliates);
o are currently delinquent (not greater
than 59 days);
o were originated to be held in portfolio
by various originators and not pursuant
to any particular secondary mortgage
market program; as a result many of the
mortgage loans have exceptions such as
high loan-to-value ratios or no primary
mortgage insurance policy;
o have borrowers with low credit scores as
described in this prospectus supplement;
or
o have other factors and characteristics
that cause the loan to be ineligible for
inclusion in another securitization
conducted by the seller (or any one of
its affiliates), other than on an
exception basis.
The foregoing characteristics of the
mortgage loans may adversely affect the
performance of the mortgage pool and the
value of the Class A Certificates as
compared to other mortgage pools and other
series of mortgage pass-through
certificates issued by the seller and its
affiliates.
Investors should note that 24.9% and 33.8%
of the mortgage loans in loan group I and
loan group II, respectively, were made to
borrowers that had credit scores of less
than 600. The mortgage loans with higher
loan-to-value ratios may also present a
greater risk of loss. 99.9% and 93.0% of
the mortgage loans in loan group I and loan
group II, respectively, are mortgage loans
with loan-to-value ratios at origination in
excess of 80% and are not insured by a
primary mortgage insurance policy.
The mortgage loans were The mortgage loans included in the trust
originally underwritten in were originally underwritten in accordance
accordance with a variety of with a variety of underwriting standards
underwriting standards and under several different programs. SEE
programs, which may increase "DESCRIPTION OF THE MORTGAGE POOL --
the risk of loss on the PRODUCT TYPES." The standards under which
mortgage loans. the mortgage loans were underwritten are
less stringent than the underwriting
standards applied by other first mortgage
loan purchase programs such as those run by
Fannie Mae or by Freddie Mac. In addition,
certain of the mortgage loans were
originated by various originators for their
own portfolio of mortgage loans and not
pursuant to any of the seller"s programs or
any other secondary market program.
As a result of the varying underwriting
standards, the mortgage loans are likely to
experience rates of delinquency,
foreclosure and bankruptcy that are higher,
and that may be substantially higher, than
those experienced by mortgage loans
underwritten in a more traditional manner.
The delinquencies on the Some of the mortgage loans included in the
mortgage loans are high, which trust are either currently delinquent or
may increase the risk of loss have been delinquent in the past. As of the
on the mortgage loans. cut-off date, 2.4% of the mortgage loans in
loan group I are 30 to 59 days delinquent
in payment of principal and interest.
Mortgage loans with a history of
delinquencies are more likely to experience
delinquencies in the future, even if these
mortgage loans are current as of the
cut-off date. SEE "DESCRIPTION OF THE
MORTGAGE POOL -- MORTGAGE POOL
CHARACTERISTICS" AND " -- PRODUCT TYPES" IN
THIS PROSPECTUS SUPPLEMENT.
The simple interest mortgage 98.1% of the mortgage loans in loan group I
loans may have substantial are simple interest mortgage loans. If the
balloon payments at maturity. mortgagor with respect to such mortgage
loans consistently makes scheduled payments
after the scheduled due date the mortgage
loan will amortize more slowly than
scheduled. Any remaining unpaid principal
is payable on the final maturity date of
the mortgage loan and may be substantially
higher than the scheduled monthly payment.
These mortgage loans involve a greater
degree of risk because the mortgagor may
not be able to make such payment. SEE
"DESCRIPTION OF THE MORTGAGE POOL -- SIMPLE
INTEREST LOANS" IN THIS PROSPECTUS
SUPPLEMENT.
Credit enhancement is limited. The only credit enhancement for the Class A
Certificates will be provided by (i) the
excess cash flow on the mortgage loans,
(ii) overcollateralization represented by
the excess of the balance of the mortgage
loans over the balance of the Class A
Certificates, (iii) cross-
collateralization and (iv) a certificate
guaranty insurance policy issued by Ambac
Assurance Corporation, in each case to the
extent described in this prospectus
supplement.
LIMITED OBLIGATIONS
Payments from the assets of The Class A Certificates will not represent
the trust are the only source an interest in or obligation of the
of payments on the Class A depositor, the master servicer, GMAC
Certificates. Mortgage Group, Inc. or any of their
affiliates. The only obligations of the
foregoing entities with respect to the
Class A Certificates or any mortgage loan
will be the obligations (if any) of the
seller and the master servicer pursuant to
certain limited representations and
warranties made with respect to the
mortgage loans and the master servicer"s
servicing obligations under the pooling and
servicing agreement (including the master
servicer"s limited obligation to make
certain advances). Neither the certificates
nor the underlying mortgage loans will be
guaranteed or insured by the depositor, the
master servicer, the trustee, GMAC Mortgage
Group, Inc. or any of their affiliates.
Proceeds of the assets included in the
trust (including the mortgage loans and the
policy) will be the sole source of payments
on the certificates, and there will be no
recourse to the depositor, the master
servicer, the trustee, GMAC Mortgage Group,
Inc. or any other entity in the event that
the proceeds are insufficient or otherwise
unavailable to make all payments provided
for under the Class A Certificates.
LIQUIDITY RISKS
An investor may have to hold A secondary market for the Class A
its Class A Certificates to Certificates may not develop. Even if a
their maturity because of secondary market does develop, it may not
difficulty in reselling the continue. Accordingly, the Class A
Class A Certificates. Certificates may experience illiquidity.
Illiquidity means an investor may not be
able to find a buyer to buy its securities
readily or at prices that will enable the
investor to realize a desired yield.
Illiquidity can have a severe adverse
effect on the market value of the Class A
Certificates.
SPECIAL YIELD AND PREPAYMENT CONSIDERATIONS
An investor"s yield to The yield to maturity on the Class A
maturity will depend on Certificates will depend on a variety of
various factors. factors, including:
o the rate and timing of principal
payments on the mortgage loans
(including prepayments, defaults and
liquidations, and repurchases due to
breaches of representations or
warranties);
o the pass-through rate for the related
Class A Certificates;
o interest shortfalls due to mortgagor
prepayments, to the extent not otherwise
covered as described in this prospectus
supplement; and
o the purchase price for the Class A
Certificates. In general, if a class of
Class A Certificates is purchased at a
price higher than its outstanding
principal balance, and principal
distributions on the class occur faster
than assumed at the time of purchase,
the yield will be lower than
anticipated. Conversely, if a class of
Class A Certificates is purchased at a
price lower than its outstanding
principal balance, and principal
distributions on that class occur more
slowly than assumed at the time of
purchase, the yield will be lower than
anticipated.
The rate of prepayments on Since mortgagors can generally prepay their
the mortgage loans will be mortgage loans at any time, the rate and
affected by various factors. timing of principal distributions on the
Class A Certificates are highly uncertain.
Generally, when market interest rates
increase, borrowers are less likely to
prepay their mortgage loans. Any reduced
prepayments could result in a slower return
of principal to holders of the Class A
Certificates at a time when they may be
able to reinvest the funds at a higher rate
of interest than the then-applicable
pass-through rate on the Class A
Certificates. Conversely, when market
interest rates decrease, borrowers are
generally more likely to prepay their
mortgage loans. Any increased prepayments
could result in a faster return of
principal to holders of the Class A
Certificates at a time when they may not be
able to reinvest the funds at an interest
rate as high as the then-applicable
pass-through rate on the Class A
Certificates.
Refinancing programs, which may involve
soliciting all or some of the mortgagors to
refinance their mortgage loans, may
increase the rate of prepayments on the
mortgage loans.
SEE "CERTAIN YIELD AND PREPAYMENT
CONSIDERATIONS" IN THIS PROSPECTUS
SUPPLEMENT.
RISK OF CERTAIN SHORTFALLS
The Class A-II Certificates The Class A-II Certificates may not always
may not always receive receive interest at a rate equal to
interest based on One-Month One-Month LIBOR plus the applicable margin.
LIBOR plus the related margin If the weighted average net mortgage rate
on the mortgage loans in loan group II is
less than the lesser of One-Month LIBOR
plus the related margin and 14%, the
interest rate on the Class A-II
Certificates will be reduced to this
weighted average net rate. Thus, the yield
to investors in the Class A-II Certificates
will be sensitive to fluctuations in the
level of One-Month LIBOR and may be
adversely affected by the application of
the weighted average net mortgage rate on
the mortgage loans in loan group II. The
prepayment of the mortgage loans in loan
group II with higher net mortgage rates may
result in a lower weighted average net
mortgage rate. If on any distribution date
the application of the weighted average net
mortgage rate results in an interest
payment lower than One-Month LIBOR plus the
related margin on the Class A-II
Certificates during the related interest
accrual period, the value of the Class A-II
Certificates may be temporarily or
permanently reduced.
Investors in the Class A-II Certificates
should be aware that the mortgage rates on
the adjustable rate mortgage loans in loan
group II are adjustable annually based on
the related index. Consequently, the
interest that becomes due on such mortgage
loans during the related due period may be
less than interest that would accrue on the
Class A-II Certificates at the rate of
One-Month LIBOR plus the related margin. In
a rising interest rate environment, the
Class A-II Certificates may receive
interest at the weighted average net
mortgage rate or at 14% for a protracted
period of time. In addition, in this
situation, there would be little or no
excess cash flow to cover losses and to
create additional overcollateralization.
To the extent the weighted average net
mortgage rate is paid on a class of Class
A-II Certificates, the difference between
the related weighted average net mortgage
rate and the lesser of One-Month LIBOR plus
the related margin and 14% will create a
shortfall that will carry forward with
interest thereon. Such shortfall will not
be payable by the policy. Such shortfalls
may remain unpaid on the final distribution
date, including the optional termination
date.
<PAGE>
INTRODUCTION
The Depositor will establish a Trust (the "TRUST") with respect to Series
1999-RS4 on November 29, 1999 (the "CLOSING DATE"), pursuant to a pooling and
servicing agreement (the "POOLING AND SERVICING AGREEMENT") among Bear Stearns
Asset Backed Securities, Inc. (the "DEPOSITOR"), Residential Funding
Corporation ("RESIDENTIAL FUNDING" or the "MASTER SERVICER") and Bank One,
National Association, a national banking association (the "TRUSTEE"), dated as
of November 1, 1999 (the "CUT-OFF DATE"). On the Closing Date, the Depositor
will deposit into the Trust a pool of mortgage loans (the "MORTGAGE POOL")
secured by one- to four-family residential properties with terms to maturity
of generally not more than 30 years.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of Mortgage Loans with an aggregate
principal balance outstanding as of the Cut-off Date (after deducting payments
of principal due in the month of November) of $157,266,970. The Mortgage Loans
are secured by first liens on fee simple interests in one- to four-family
residential real properties. The Mortgage Pool will consist of two groups of
Mortgage Loans ("LOAN GROUP I" and "LOAN GROUP II," and each, a "LOAN GROUP"),
designated as the "GROUP I LOANS" and "GROUP II LOANS."
With respect to Mortgage Loans that have been modified, references herein
to the date of origination shall be deemed to be the date of the most recent
modification. All percentages of the Mortgage Loans described herein are
approximate percentages (except as otherwise indicated) by aggregate principal
balance as of the Cut-off Date (after deducting payments of principal due in
the month of November).
The information set forth herein with respect to the Mortgage Loans, the
Seller and the Seller"s underwriting programs has been provided by the Seller.
No representation is made by the Depositor or its affiliates as to the
accuracy or completeness of the information regarding the Seller or its
underwriting programs.
PAYMENTS ON THE SIMPLE INTEREST MORTGAGE LOANS
98.1% of the Group I Loans provide for "simple interest" payments (the
"SIMPLE INTEREST MORTGAGE LOANS") which require that each monthly payment
consist of an installment of interest which is calculated according to the
simple interest method. Accrued interest is calculated based on the number of
days in the period elapsed since the preceding payment of interest was made
and a 365-day year. As payments are received on such Mortgage Loans, the
amount received is applied first to interest accrued to the date of payment
and the balance is applied to reduce the unpaid principal balance.
Accordingly, if a Mortgagor pays a fixed monthly installment before its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be less than it would have
been had the payment been made as scheduled, and the portion of the payment
applied to reduce the unpaid principal balance will be correspondingly
greater. However, the Master Servicer will advance the amount of any
shortfall. Also, the next succeeding payment will result in a greater portion
of such payment allocated to interest if such payment is made on its scheduled
due date.
Conversely, if a Mortgagor pays a fixed monthly installment after its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would have
been had the payment been made as scheduled, and the remaining portion, if
any, of the payment applied to reduce the unpaid principal balance will be
correspondingly less. If each scheduled payment is made on or prior to its
scheduled due date, the principal balance of the Mortgage Loan will amortize
in the manner described in the preceding paragraph. However, if the Mortgagor
consistently makes scheduled payments after the scheduled due date the
Mortgage Loan will amortize more slowly than scheduled. Any remaining unpaid
principal is payable on the final maturity date of the Mortgage Loan and may
be substantially higher than the scheduled monthly payment.
MORTGAGE LOANS WITH UNPAID AMOUNTS AT MATURITY
As to 0.3% of the Group I Loans, either or both of the following applies:
(i) the Monthly Payment is not sufficient to fully amortize the related
Mortgage Loan or (ii) the Monthly Payments received thereon were applied in a
manner that reduced the rate of principal amortization. As a result, each such
Mortgage Loan may have an unpaid principal amount on its scheduled maturity
date (assuming no prepayments) of greater than one time but not more than
eleven times the related monthly payment. It is not clear whether the related
Mortgagor will be legally obligated to pay such unpaid principal amount.
MORTGAGE RATE ADJUSTMENT
The Mortgage Rate on each Group II Loan will adjust annually, in each case
on the date set forth in the related Mortgage Note (such date, the "ADJUSTMENT
DATE") to a rate equal to the sum, generally rounded to the nearest one-eighth
of one percentage point (12.5 basis points), of (i) the related Index plus
(ii) a fixed percentage (the "GROSS MARGIN"). In addition, the Mortgage Rate
on each Group II Loan is subject on its first Adjustment Date following its
origination to a cap (the "INITIAL PERIODIC RATE CAP") and on each Adjustment
Date thereafter to a periodic rate cap (the "PERIODIC RATE CAP"). The Mortgage
Rate on a Group II Loan may not exceed the maximum rate set forth in the
related Mortgage Note (the "MAXIMUM MORTGAGE RATE") or be less than the
minimum rate set forth in the related Mortgage Note (the "MINIMUM MORTGAGE
RATE").
As of the Cut-off Date, 2.4% of the Group II Loans will have reached their
first Adjustment Date.
For the Group II Loans, the related index (the "INDEX") will be a per
annum rate equal to the weekly average yield on U.S. Treasury securities
adjusted to a constant maturity of one year as reported by the Federal Reserve
Board in statistical Release No. H.15(519) (the "RELEASE") as most recently
available as of the date forty-five days or thirty days prior to the
Adjustment Date (each such date as of which the Index is determined, a
"REFERENCE DATE") or on the Adjustment Date ("ONE-YEAR U.S. TREASURY"). Such
average yields reflect the yields for the week prior to that week. In the
event that the related Index specified in a Mortgage Note is no longer
available, an index reasonably acceptable to the Trustee that is based on
comparable information will be selected by the Master Servicer.
ONE-YEAR U.S. TREASURY. One-Year U.S. Treasury is currently calculated
based on information reported in the Release. Listed below are the weekly
average yields on actively traded U.S. Treasury securities adjusted to a
constant maturity of one year as reported in the Release on the date that
would have been applicable to mortgage loans whose index was most recently
available as of the date forty-five days prior to the adjustment date and
having the following adjustment dates for the indicated years. Such average
yields may fluctuate significantly from week to week as well as over longer
periods and may not increase or decrease in a constant pattern from period to
period. The following does not purport to be representative of future average
yields. No assurance can be given as to the average yields on such U.S.
Treasury securities on any Adjustment Date or during the life of any Group II
Loan with an Index of One-Year U.S. Treasury.
<TABLE>
<CAPTION>
ONE-YEAR U.S. TREASURY
<S> <C> <C> <C> <C> <C>
Adjustment Date 1995 1996 1997 1998 1999
- -------------------------------------------------------------- --------- --------- --------- --------- ---------
January 1..................................................... 6.42% 5.45% 5.44% 5.44% 4.52%
February 1.................................................... 7.10 5.35 5.46 5.53 4.49
March 1....................................................... 7.24 5.17 5.61 5.25 4.55
April 1....................................................... 6.79 4.85 5.53 5.28 4.67
May 1......................................................... 6.54 5.15 5.72 5.37 4.77
June 1........................................................ 6.28 5.62 5.99 5.39 4.67
July 1........................................................ 6.00 5.67 5.90 5.46 4.79
August 1...................................................... 5.69 5.86 5.72 5.42 5.12
September 1................................................... 5.47 5.90 5.54 5.36 5.01
October 1..................................................... 5.71 5.60 5.55 5.23 5.23
November 1.................................................... 5.63 5.88 5.59 4.76 5.28
December 1.................................................... 5.60 5.57 5.45 4.18 5.42
</TABLE>
The initial Mortgage Rate in effect on a Group II Loan generally will be
lower, and may be significantly lower, than the Mortgage Rate that would have
been in effect based on the related Index and Note Margin. Therefore, unless
the related Index declines after origination of a Mortgage Loan, the related
Mortgage Rate will generally increase on the first Adjustment Date following
origination of such Mortgage Loan subject to the Periodic Rate Cap. The
repayment of the Mortgage Loans will be dependent on the ability of the
Mortgagors to make larger monthly payments following adjustments of the
Mortgage Rate. Mortgage Loans that have the same initial Mortgage Rate may not
always bear interest at the same Mortgage Rate because such Mortgage Loans may
have different Adjustment Dates (and the Mortgage Rates therefore may reflect
different related Index values), Note Margins, Maximum Mortgage Rates and
Minimum Mortgage Rates. The Net Mortgage Rate with respect to each Mortgage
Loan as of the Cut-off Date will be set forth in the related Mortgage Loan
Schedule attached to the Pooling and Servicing Agreement. See "Description of
the Mortgage Pool -- Mortgage Pool Characteristics -- Mortgage Loans" herein.
MORTGAGE POOL CHARACTERISTICS -- GROUP I LOANS
The Group I Loans will have the following characteristics as of the
Cut-off Date (after deducting payments of principal due in the month of
November):
AGGREGATE
FOR ALL
GROUP I
LOANS
---------
Number of Mortgage Loans............................... 1,385
Weighted Average of Net Mortgage Rates................. 10.7689%
Range of Net Mortgage Rates............................ 8.17% to 14.18%
Mortgage Rates:
Weighted Average................................... 11.5539%
Range.............................................. 8.95% to 14.96%
The "MAXIMUM NET MORTGAGE RATE" on each Mortgage Loan is equal to the
Maximum Mortgage Rate thereon minus the sum of (i) the rate per annum at which
the related master servicing and subservicing fees accrue (the "SERVICING FEE
RATE") and (ii) the related Policy Premium Rate.
The Group I Loans consist of 1,385 Mortgage Loans with an aggregate
principal balance as of the Cut-off Date of approximately $143,946,911 (the
"GROUP I CUT-OFF DATE BALANCE"). The Group I Loans had individual principal
balances at origination of at least $40,129 but not more than $370,800, with
an average principal balance at origination of approximately $105,669. All of
the Group I Loans were purchased from Bank One, a non-affiliate of the Seller.
None of the Group I Loans will have been originated prior to December 4,
1996 or will have a maturity date later than June 15, 2029. No Group I Loan
will have a remaining term to stated maturity as of the Cut-off Date of less
than 43 months. The weighted average term to stated maturity of the Group I
Loans as of the Cut-off Date will be approximately 231 months. The weighted
average original term to maturity of the Group I Loans as of the Cut-off Date
will be approximately 240 months.
As of the Cut-off Date, 2.4% of the Group I Loans are currently 30 to 59
days delinquent in payment of principal and interest. For a description of the
methodology used to categorize mortgage loans as delinquent, see "Pooling and
Servicing Agreement -- The Master Servicer" herein. In addition, a significant
portion of the Group I Loans have had delinquency problems in the past.
None of the Group I Loans are Mortgage Loans subject to temporary buy-down
plans ("BUYDOWN LOANS").
The Group I Loans generally contain due-on-sale clauses. See "Certain
Yield and Prepayment Considerations" in this prospectus supplement.
Set forth below is a description of certain additional characteristics of
the Group I Loans as of the Cut-off Date (except as otherwise indicated). All
percentages of the Group I Loans are approximate percentages by aggregate
principal balance of the Group I Loans as of the Cut-off Date (except as
otherwise indicated). Unless otherwise specified, all principal balances of
the Group I Loans are as of the Cut-off Date (after deducting payments of
principal due in the month of November) and are rounded to the nearest dollar.
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES OF THE GROUP I LOANS
PERCENT
OF
NUMBER OF PRINCIPAL GROUP I
ORIGINAL MORTGAGE LOAN BALANCE MORTGAGE LOANS BALANCE LOANS
- --------------------------------- -------------- ------------- ---------
$ 0 - 50,000................ 65 $ 2,869,180 1.99%
50,001 - 100,000............... 666 49,038,540 34.07
100,001 - 150,000............... 447 53,239,879 36.99
150,001 - 200,000............... 144 24,161,420 16.78
200,001 - 250,000............... 46 10,068,307 6.99
250,001 - 300,000............... 16 4,216,548 2.93
Greater than 300,000............. 1 353,038 0.25
--------- ------------ --------
Total........................ 1,385 $143,946,911 100.00%
--------- ------------ --------
--------- ------------ --------
As of the Cut-off Date, the average unpaid principal balance of the Group
I Loans will be approximately $103,933.
<TABLE>
<CAPTION>
NET MORTGAGE RATES OF THE GROUP I LOANS
NUMBER OF PRINCIPAL PERCENT OF
NET MORTGAGE RATES (%) MORTGAGE LOANS BALANCE GROUP I LOANS
- -------------------------------------------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
8.000 - 8.499................................... 2 $ 219,465 0.15%
8.500 - 8.999................................... 72 9,882,993 6.87
9.000 - 9.499................................... 112 14,372,479 9.98
9.500 - 9.999................................... 215 26,045,257 18.09
10.000 - 10.499................................... 135 11,105,521 7.72
10.500 - 10.999................................... 179 15,732,587 10.93
11.000 - 11.499................................... 203 18,375,990 12.77
11.500 - 11.999................................... 229 25,006,719 17.37
12.000 - 12.499................................... 150 14,937,467 10.38
12.500 - 12.999................................... 40 3,620,596 2.52
13.000 - 13.499................................... 41 3,816,241 2.65
13.500 - 13.999................................... 5 548,753 0.38
14.000 - 14.499................................... 2 282,843 0.20
--------- ----------- ---------
Total......................................... 1,385 $143,946,911 100.00%
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
As of the Cut-off Date, the weighted average Net Mortgage Rate of the
Group I Loans will be approximately 10.7689% per annum.
<TABLE>
<CAPTION>
MORTGAGE RATES OF THE GROUP I LOANS
NUMBER OF PRINCIPAL PERCENT OF
MORTGAGE RATES (%) MORTGAGE LOANS BALANCE GROUP I LOANS
- -------------------------------------------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
8.500 - 8.999................................... 2 $ 219,465 0.15%
9.000 - 9.499................................... 1 101,837 0.07
9.500 - 9.999................................... 121 16,329,076 11.34
10.000 - 10.499................................... 127 16,637,162 11.56
10.500 - 10.999................................... 212 22,443,364 15.59
11.000 - 11.499................................... 109 9,398,417 6.53
11.500 - 11.999................................... 196 17,434,544 12.11
12.000 - 12.499................................... 271 26,085,272 18.12
12.500 - 12.999................................... 202 21,195,165 14.72
13.000 - 13.499................................... 76 7,520,838 5.22
13.500 - 13.999................................... 48 4,396,796 3.05
14.000 - 14.499................................... 15 1,589,350 1.10
14.500 - 14.999................................... 5 595,626 0.41
--------- ----------- ---------
Total......................................... 1,385 $143,946,911 100.00%
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
As of the Cut-off Date, the weighted average Mortgage Rate of the Group I
Loans will be approximately 11.5539% per annum.
s
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIOS OF THE GROUP I LOANS
NUMBER OF PRINCIPAL PERCENT OF
ORIGINAL LOAN-TO-VALUE RATIO (%) MORTGAGE LOANS BALANCE GROUP I LOANS
- -------------------------------------------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
50.01 - 55.00................................... 1 $ 68,615 0.05%
70.01 - 75.00................................... 1 50,034 0.03
80.01 - 85.00................................... 1 97,363 0.07
85.01 - 90.00................................... 3 394,531 0.27
90.01 - 95.00................................... 2 138,566 0.10
95.01 - 100.00................................... 8 723,517 0.50
100.01 - 105.00................................... 1,264 132,850,940 92.29
105.01 - 110.00................................... 100 9,136,331 6.35
115.01 - 120.00................................... 4 421,107 0.29
120.01 or Greater................................. 1 65,910 0.05
--------- ----------- ---------
Total......................................... 1,385 $143,946,911 100.00%
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Group I
Loans will be approximately 103.39%.
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES OF THE GROUP I LOANS
NUMBER OF PRINCIPAL PERCENT OF
STATE MORTGAGE LOANS BALANCE GROUP I LOANS
- -------------------------------------------------- --------------- ------------- -------------
<S> <C> <C> <C>
Ohio.............................................. 181 $17,452,763 12.12%
Michigan.......................................... 154 15,127,594 10.51
Indiana........................................... 136 11,875,660 8.25
Florida........................................... 86 9,172,278 6.37
New York.......................................... 71 8,235,408 5.72
Illinois.......................................... 58 8,054,485 5.60
Georgia........................................... 63 6,611,690 4.59
Arizona........................................... 67 6,427,899 4.47
Pennsylvania...................................... 71 6,147,838 4.27
Virginia.......................................... 53 5,639,018 3.92
California........................................ 32 4,991,059 3.47
Tennessee......................................... 53 4,898,888 3.40
Oklahoma.......................................... 51 4,454,297 3.09
Kentucky.......................................... 46 4,377,790 3.04
Other (1)......................................... 263 30,480,244 21.17
--------- ----------- ---------
Total......................................... 1,385 $143,946,911 100.00%
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
- ---------
(1) Other includes states and the District of Columbia with under 3%
concentrations individually.
No more than 0.4% of the Group I Loans will be secured by Mortgaged
Properties located in any one zip code area in Ohio and no more than 0.6% of
the Group I Loans will be secured by Mortgaged Properties located in any one
zip code area outside Ohio.
<TABLE>
<CAPTION>
MORTGAGE LOAN PURPOSE OF THE GROUP I LOANS
NUMBER OF PRINCIPAL PERCENT OF
LOAN PURPOSE MORTGAGE LOANS BALANCE GROUP I LOANS
- -------------------------------------------------- --------------- ------------- -------------
<S> <C> <C> <C>
Purchase.......................................... 36 $ 3,666,443 2.55%
Rate/Term Refinance............................... 137 15,112,000 10.50
Equity Refinance.................................. 1,212 125,168,469 86.95
--------- ----------- ---------
Total......................................... 1,385 $143,946,911 100.00%
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
The weighted average Loan-to-Value Ratio at origination of rate and term
refinance Group I Loans will be 103.41%. The weighted average Loan-to-Value
Ratio at origination of equity refinance Group I Loans will be 103.44%.
<TABLE>
<CAPTION>
OCCUPANCY TYPES OF THE GROUP I LOANS
NUMBER OF PRINCIPAL PERCENT OF
OCCUPANCY MORTGAGE LOANS BALANCE GROUP I LOANS
- -------------------------------------------------- --------------- ------------- -------------
<S> <C> <C> <C>
Primary Residence................................. 1,377 $143,318,633 99.56%
Non Owner-occupied................................ 8 628,278 0.44
--------- ----------- ---------
Total......................................... 1,385 $143,946,911 100.00%
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
<TABLE>
<CAPTION>
MORTGAGED PROPERTY TYPES OF THE GROUP I LOANS
NUMBER OF PRINCIPAL PERCENT OF
PROPERTY TYPE MORTGAGE LOANS BALANCE GROUP I LOANS
- -------------------------------------------------- --------------- ------------- -------------
<S> <C> <C> <C>
Single-family detached............................ 1,244 $129,253,792 89.79%
Planned Unit Developments (detached).............. 20 2,723,120 1.89
Condo High-Rise (9 stories or more)............... 25 2,366,950 1.64
Manufactured Home................................. 27 2,322,586 1.61
Townhouse......................................... 32 2,786,971 1.94
Two-to-Four-Family Units.......................... 37 4,493,491 3.12
--------- ----------- ---------
Total......................................... 1,385 $143,946,911 100.00%
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
<TABLE>
<CAPTION>
DEBT-TO-INCOME RATIOS OF THE GROUP I LOANS
RANGE OF DEBT-TO-INCOME NUMBER OF PRINCIPAL PERCENT OF
RATIOS (%) MORTGAGE LOANS BALANCE GROUP I LOANS
- -------------------------------------------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
5.01 - 10.00..................................... 3 $ 224,604 0.16%
10.01 - 15.00..................................... 6 402,886 0.28
15.01 - 20.00..................................... 41 2,887,732 2.01
20.01 - 25.00..................................... 84 6,748,021 4.69
25.01 - 30.00..................................... 129 12,787,214 8.88
30.01 - 35.00..................................... 180 17,668,222 12.27
35.01 - 40.00..................................... 194 19,838,990 13.78
40.01 - 45.00..................................... 213 23,095,307 16.04
45.01 - 50.00..................................... 189 20,236,082 14.06
50.01 - 55.00..................................... 176 19,880,005 13.81
55.01 - 60.00..................................... 102 12,174,923 8.46
Greater than 60................................... 66 7,772,208 5.40
Not Available..................................... 2 230,718 0.16
--------- ----------- ---------
Total......................................... 1,385 $143,946,911 100.00%
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
The weighted average debt-to-income ratio at origination of the Group I
Loans for which debt-to-income ratios were available will be approximately
42.62%.
MORTGAGE POOL CHARACTERISTICS -- GROUP II LOANS
The Group II Loans will have the following characteristics as of the
Cut-off Date (after deducting payments of principal due in the month of
November):
AGGREGATE FOR
ALL
GROUP II LOANS
----------------
Number of Mortgage Loans.................................. 86
Weighted Average of Net Mortgage Rates.................... 8.1230%
Range of Net Mortgage Rates............................... 5.97% to 11.16%
Mortgage Rates:
Weighted Average...................................... 8.7840%
Range................................................. 6.50% to 11.88%
Note Margins:
Weighted Average...................................... 6.1583%
Range................................................. 2.75% to 8.50%
Minimum Mortgage Rates:
Weighted Average...................................... 6.2296%
Range................................................. 2.75% to 11.50%
Minimum Net Mortgage Rates:
Weighted Average...................................... 5.5686%
Range................................................. 2.22% to 10.79%
Maximum Mortgage Rates:
Weighted Average...................................... 14.7355%
Range................................................. 10.50% to 17.50%
Maximum Net Mortgage Rates:
Weighted Average...................................... 14.0745%
Range................................................. 9.97% to 16.84%
Weighted Average Months to next Adjustment Date after
November 1, 1999........................................ 10
The Group II Loans consist of 86 Mortgage Loans with an aggregate
principal balance as of the Cut-off Date of approximately $13,320,059 (the
"GROUP II CUT-OFF DATE BALANCE"). The Group II Loans had individual principal
balances at origination of at least $70,200 but not more than $371,200, with
an average principal balance at origination of approximately $155,123.
Approximately 95.5% of the Group II Loans were purchased from HomeComings
Financial Network, Inc., an affiliate of the Seller.
None of the Group II Loans will have been originated prior to April 24,
1998, or will have a maturity date later than November 1, 2029. No Group II
Loan will have a remaining term to stated maturity as of the Cut-off Date of
less than 342 months. The weighted average term to stated maturity of the
Group II Loans as of the Cut-off Date will be approximately 357 months. The
weighted average original term to maturity of the Group II Loans as of the
Cut-off Date will be approximately 360 months.
None of the Group II Loans are Buydown Loans.
The Group II Loans are generally assumable pursuant to the terms of the
related Mortgage Note. See "Certain Yield and Prepayment Considerations" in
this prospectus supplement.
Set forth below is a description of certain additional characteristics of
the Group II Loans as of the Cut-off Date (except as otherwise indicated). All
percentages of the Group II Loans are approximate percentages by aggregate
principal balance of the Group II Loans as of the Cut-off Date (except as
otherwise indicated). Unless otherwise specified, all principal balances of
the Group II Loans are as of the Cut-off Date (after deducting payments of
principal due in the month of November) and are rounded to the nearest dollar.
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES OF THE GROUP II LOANS
<TABLE>
<CAPTION>
NUMBER OF PRINCIPAL PERCENT OF
ORIGINAL MORTGAGE LOAN BALANCE MORTGAGE LOANS BALANCE GROUP II LOANS
- ----------------------------------------- -------------- ----------- --------------
<S> <C> <C> <C>
50,001 - 100,000 ...................... 5 $ 430,336 3.23%
100,001 - 150,000....................... 44 5,659,222 42.49
150,001 - 200,000....................... 24 4,164,262 31.26
200,001 - 250,000....................... 10 2,171,429 16.30
250,001 - 300,000....................... 2 523,835 3.93
Greater Than 300,000.................... 1 370,975 2.79
--------- ----------- ---------
Total............................... 86 $13,320,059 100.00%
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
As of the Cut-off Date, the average unpaid principal balance of the Group
II Loans will be approximately $154,884.
NET MORTGAGE RATES OF THE GROUP II LOANS
PERCENT OF
NUMBER OF PRINCIPAL GROUP II
NET MORTGAGE RATES (%) MORTGAGE LOANS BALANCE LOANS
- ------------------------------ ----------------- ------------- -------------
5.500 - 5.999............... 1 $ 107,451 0.81%
6.000 - 6.499............... 1 137,387 1.03
6.500 - 6.999............... 15 2,472,929 18.57
7.000 - 7.499............... 14 1,955,592 14.68
7.500 - 7.999............... 18 3,131,965 23.51
8.000 - 8.499............... 9 1,298,094 9.75
8.500 - 8.999............... 9 1,539,886 11.56
9.000 - 9.499............... 5 790,417 5.93
9.500 - 9.999............... 8 1,090,262 8.19
10.000 - 10.499............... 3 421,922 3.17
10.500 - 10.999............... 2 304,354 2.28
11.000 - 11.499............... 1 69,799 0.52
--------- ----------- ---------
Total..................... 86 $13,320,059 100.00%
--------- ----------- ---------
--------- ----------- ---------
As of the Cut-off Date, the weighted average Net Mortgage Rate of the
Group II Loans will be approximately 8.1230% per annum.
MORTGAGE RATES OF THE GROUP II LOANS
NUMBER OF PRINCIPAL PERCENT OF
MORTGAGE RATES (%) MORTGAGE LOANS BALANCE GROUP II LOANS
- ------------------ -------------- --------- --------------
6.500 - 6.999 ............... 1 $ 107,451 0.81%
7.000 - 7.499 ............... 1 137,387 1.03
7.500 - 7.999 ............... 15 2,472,929 18.57
8.000 - 8.499 ............... 14 1,955,592 14.68
8.500 - 8.999 ............... 18 3,131,965 23.51
9.000 - 9.499 ............... 9 1,298,094 9.75
9.500 - 9.999 ............... 10 1,702,288 12.78
10.000 - 10.499 ............... 5 737,934 5.54
10.500 - 10.999 ............... 9 1,314,152 9.87
11.000 - 11.499 ............... 1 88,114 0.66
11.500 - 11.499 ............... 3 374,154 2.81
-- ---------- -------
Total .................... 86 $13,320,059 100.00%
As of the Cut-off Date, the weighted average Mortgage Rate of the Group II
Loans will be approximately 8.7840% per annum.
ORIGINAL LOAN-TO-VALUE RATIOS OF THE GROUP II LOANS
PERCENT OF
NUMBER OF PRINCIPAL GROUP II
ORIGINAL LOAN-TO-VALUE RATIO (%) MORTGAGE LOANS BALANCE LOANS
- ----------------------------------- ----------------- ------------ -----------
55.01 - 60.00.................... 1 $ 88,114 0.66%
65.01 - 70.00.................... 1 115,000 0.86
70.01 - 75.00.................... 3 394,814 2.96
75.01 - 80.00.................... 3 334,826 2.51
80.01 - 85.00.................... 6 821,020 6.16
85.01 - 90.00.................... 13 2,094,238 15.72
90.01 - 95.00.................... 10 1,494,171 11.22
95.01 - 100.00.................... 12 1,809,362 13.58
100.01 - 105.00.................... 12 2,129,412 15.99
105.01 - 110.00.................... 12 1,937,722 14.55
110.01 - 115.00.................... 8 1,358,610 10.20
115.01 - 120.00.................... 4 570,106 4.28
120.01 - 125.00.................... 1 172,665 1.30
--------- ----------- ---------
Total.......................... 86 $13,320,059 100.00%
--------- ----------- ---------
--------- ----------- ---------
The weighted average Loan-to-Value Ratio at origination of the Group II
Loans will be approximately 98.04%.
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES OF THE GROUP II LOANS
PERCENT OF
NUMBER OF PRINCIPAL GROUP II
STATE MORTGAGE LOANS BALANCE LOANS
- --------------------------- ----------------- ------------- -------------
Michigan................... 9 $ 1,471,204 11.05%
Wisconsin.................. 7 1,175,641 8.83
Illinois................... 6 921,085 6.92
Colorado................... 4 875,908 6.58
Georgia.................... 5 704,354 5.29
Idaho...................... 4 639,469 4.80
Florida.................... 5 623,099 4.68
Ohio....................... 4 502,055 3.77
Maryland................... 2 478,427 3.59
New York................... 3 455,704 3.42
Nevada..................... 2 442,732 3.32
Pennsylvania............... 3 422,308 3.17
North Carolina............. 3 408,245 3.06
Other (1).................. 29 4,199,831 31.53
--------- ----------- ---------
Total.................. 86 $13,320,059 100.00%
--------- ----------- ---------
--------- ----------- ---------
- ---------
(1) Other includes states and the District of Columbia with under 3%
concentrations individually.
No more than 3.0% of the Group II Loans will be secured by Mortgaged
Properties located in any one zip code area in Michigan and no more than 2.8%
of the Group II Loans will be secured by Mortgaged Properties located in any
one zip code area outside Michigan.
MORTGAGE LOAN PURPOSE OF THE GROUP II LOANS
PERCENT OF
NUMBER OF PRINCIPAL GROUP II
LOAN PURPOSE MORTGAGE LOANS BALANCE LOANS
- ---------------------------- ----------------- ------------- -------------
Purchase.................... 4 $ 423,535 3.18%
Rate/Term Refinance......... 81 12,696,123 95.32
Equity Refinance............ 1 200,401 1.50
--------- ----------- ---------
Total................... 86 $13,320,059 100.00%
--------- ----------- ---------
--------- ----------- ---------
The weighted average Loan-to-Value Ratio at origination of rate and term
refinance Group II Loans will be 98.60%. The weighted average Loan-to-Value
Ratio at origination of equity refinance Group II Loans will be 103.00%.
OCCUPANCY TYPES OF THE GROUP II LOANS
PERCENT OF
NUMBER OF PRINCIPAL GROUP II
OCCUPANCY MORTGAGE LOANS BALANCE LOANS
- ------------------------- ----------------- ------------- -------------
Primary Residence........ 86 $13,320,059 100.00%
--------- ----------- ---------
Total................ 86 $13,320,059 100.00%
--------- ----------- ---------
--------- ----------- ---------
<TABLE>
<CAPTION>
MORTGAGED PROPERTY TYPES OF THE GROUP II LOANS
PERCENT OF
NUMBER OF PRINCIPAL GROUP II
PROPERTY TYPE MORTGAGE LOANS BALANCE LOANS
- ------------------------------------------------- ----------------- ------------- -------------
<S> <C> <C> <C>
Single-family detached........................... 84 $13,045,519 97.94%
Planned Unit Developments (detached)............. 2 274,540 2.06
--------- ----------- ---------
Total........................................ 86 $13,320,059 100.00%
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
<TABLE>
<CAPTION>
NEXT INTEREST RATE ADJUSTMENT DATES OF THE GROUP II LOANS
NUMBER OF PRINCIPAL PERCENT OF SUCH
NEXT INTEREST ADJUSTMENT DATE MORTGAGE LOANS BALANCE MORTGAGE LOANS
- ---------------------------------- ----------------- ------------- ---------------
<S> <C> <C> <C>
January 2000...................... 1 $ 109,919 0.83%
February 2000..................... 2 167,772 1.26
April 2000........................ 1 133,466 1.00
May 2000.......................... 3 429,574 3.23
June 2000......................... 6 715,304 5.37
July 2000......................... 6 968,654 7.27
August 2000....................... 13 1,884,125 14.15
September 2000.................... 19 2,835,472 21.29
October 2000...................... 27 4,824,679 36.22
November 2000..................... 8 1,251,094 9.39
--------- ----------- ---------
Total......................... 86 $13,320,059 100.00%
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
- ---------
(1) As of the Cut-off Date, the weighted average Months to Next Interest Rate
Adjustment Date will be approximately 10.
NOTE MARGINS OF THE GROUP II LOANS
NUMBER OF PRINCIPAL PERCENT OF SUCH
NOTE MARGINS (%) MORTGAGE LOANS BALANCE MORTGAGE LOANS
- ----------------------------- ----------------- ------------- ---------------
2.500 - 2.999................ 1 $ 107,451 0.81%
4.000 - 4.499................ 2 322,568 2.42
4.500 - 4.999................ 3 464,160 3.48
5.000 - 5.499................ 13 2,144,596 16.10
5.500 - 5.999................ 16 2,179,294 16.36
6.000 - 6.499................ 19 2,994,067 22.48
6.500 - 6.999................ 13 1,990,587 14.94
7.000 - 7.499................ 9 1,567,061 11.76
7.500 - 7.999................ 8 1,315,303 9.87
8.000 - 8.499................ 1 79,659 0.60
8.500 - 8.999................ 1 155,313 1.17
--------- ----------- ---------
Total.................... 86 $13,320,059 100.00%
--------- ----------- ---------
--------- ----------- ---------
As of the Cut-off Date, the weighted average Note Margin of the Group II
Loans will be approximately 6.1583% per annum.
MAXIMUM MORTGAGE RATES OF THE GROUP II LOANS
NUMBER OF PRINCIPAL PERCENT OF SUCH
MAXIMUM MORTGAGE RATES (%) MORTGAGE LOANS BALANCE MORTGAGE LOANS
- ----------------------------- ----------------- ------------- ---------------
10.000 - 10.999.............. 1 $ 107,451 0.81%
13.000 - 13.999.............. 16 2,610,316 19.60
14.000 - 14.999.............. 33 5,233,401 39.29
15.000 - 15.999.............. 20 3,070,181 23.05
16.000 - 16.999.............. 13 1,906,242 14.31
17.000 - 17.999.............. 3 392,468 2.95
--------- ----------- ---------
Total.................... 86 $13,320,059 100.00%
--------- ----------- ---------
--------- ----------- ---------
As of the Cut-off Date, the weighted average Maximum Mortgage Rate of the
Group II Loans will be approximately 14.7355% per annum.
DEBT-TO-INCOME RATIOS OF THE GROUP II LOANS
PERCENT OF
RANGE OF DEBT-TO-INCOME NUMBER OF PRINCIPAL GROUP II
RATIOS (%) MORTGAGE LOANS BALANCE LOANS
- ------------------------------ ----------------- ------------- -------------
20.01 - 25.00................. 1 $ 69,799 .52%
35.01 - 40.00................. 1 128,309 .96
40.01 - 45.00................. 16 2,256,855 16.94
45.01 - 50.00................. 9 1,293,839 9.71
50.01 - 55.00................. 9 1,556,629 11.69
55.01 - 60.00................. 11 1,769,350 13.28
Greater than 60............... 34 5,714,290 42.90
Not Available................. 5 530,987 3.99
--------- ----------- ---------
Total..................... 86 $13,320,059 100.00%
--------- ----------- ---------
--------- ----------- ---------
The weighted average debt-to-income ratio at origination of the Group II
Loans for which debt-to-income ratios were available will be approximately
61.66%.
CREDIT SCORES
"CREDIT SCORES" are obtained by many lenders in connection with mortgage
loan applications to help assess a borrower"s credit-worthiness. Some Credit
Scores were not obtained or used in connection with the origination of the
Mortgage Loans. A majority of the Credit Scores referred to in the tables
below were obtained by Residential Funding within three months prior to the
Cut-off Date. Credit Scores are obtained from credit reports provided by
various credit reporting organizations, each of which may employ differing
computer models and methodologies. The Credit Score is designed to assess a
borrower"s credit history at a single point in time, using objective
information currently on file for the borrower at a particular credit
reporting organization. Information utilized to create a Credit Score may
include, among other things, payment history, delinquencies on accounts,
levels of outstanding indebtedness, length of credit history, types of credit,
and bankruptcy experience. Credit Scores range from approximately 350 to
approximately 840, with higher scores indicating an individual with a more
favorable credit history compared to an individual with a lower score.
However, a Credit Score purports only to be a measurement of the relative
degree of risk a borrower represents to a lender, i.e., a borrower with a
higher score is statistically expected to be less likely to default in payment
than a borrower with a lower score. In addition, it should be noted that
Credit Scores were developed to indicate a level of default probability over a
two-year period, which does not correspond to the life of a mortgage loan.
Furthermore, Credit Scores were not developed specifically for use in
connection with mortgage loans, but for consumer loans in general, and assess
only the borrower"s past credit history. Therefore, a Credit Score does not
take into consideration the differences between mortgage loans and consumer
loans generally or the specific characteristics of the related mortgage loan
(for example, the Loan-to-Value Ratio, the collateral for the mortgage loan,
or the debt to income ratio). There can be no assurance that the Credit Scores
of the Mortgagors will be an accurate predictor of the likelihood of repayment
of the related Mortgage Loans.
The following tables set forth information as to the Credit Scores of the
related Mortgagors as determined generally three months prior to the Cut-off
Date.
CREDIT SCORE DISTRIBUTION OF THE GROUP I LOANS
NUMBER OF PRINCIPAL PERCENT OF
CREDIT SCORE RANGE MORTGAGE LOANS BALANCE GROUP I LOANS
- --------------------------------- --------------- ------------- -------------
499 or less...................... 14 $ 1,190,578 0.83%
500 - 519........................ 27 2,454,379 1.71
520 - 539........................ 49 4,894,129 3.40
540 - 559........................ 58 6,249,003 4.34
560 - 579........................ 83 7,809,277 5.43
580 - 599........................ 138 13,197,085 9.17
600 - 619........................ 163 17,354,525 12.06
620 - 639........................ 212 21,778,264 15.13
640 - 659........................ 198 19,621,585 13.63
660 - 679........................ 180 20,349,976 14.14
680 - 699........................ 106 11,164,303 7.76
700 - 719........................ 76 8,982,229 6.24
720 - 739........................ 39 4,580,742 3.18
740 - 759........................ 22 2,595,960 1.80
760 or Greater................... 9 1,097,158 0.76
--------- ----------- ---------
Subtotal with Credit Score....... 1,374 143,319,195 99.56
Not Available(1)................. 11 627,716 0.44
--------- ----------- ---------
Total Pool................... 1,385 $143,946,911 100.00%
--------- ----------- ---------
--------- ----------- ---------
- ---------
(1) Mortgage Loans indicated as having a Credit Score that is "not available"
include certain Mortgage Loans where the Credit Score was not provided by
the related Seller and Mortgage Loans where no credit history can be
obtained for the related Mortgagor.
CREDIT SCORE DISTRIBUTION OF THE GROUP II LOANS
PERCENT OF
NUMBER OF PRINCIPAL GROUP II
CREDIT SCORE RANGE MORTGAGE LOANS BALANCE LOANS
- ------------------------------ ----------------- ------------- -------------
499 or Less................... 2 $ 319,698 2.40%
500 - 519..................... 3 485,583 3.65
520 - 539..................... 4 663,064 4.98
540 - 559..................... 6 771,322 5.79
560 - 579..................... 3 296,817 2.23
580 - 599..................... 12 1,963,368 14.74
600 - 619..................... 11 1,839,511 13.81
620 - 639..................... 14 2,372,032 17.81
640 - 659..................... 10 1,476,470 11.08
660 - 679..................... 10 1,560,116 11.71
680 - 699..................... 6 814,266 6.11
700 - 719..................... 2 265,400 1.99
720 - 739..................... 1 181,455 1.36
760 or Greater................ 1 199,703 1.50
--------- ----------- ---------
Subtotal with Credit Score.... 85 13,208,805 99.16
Not Available(1).............. 1 111,254 0.84
--------- ----------- ---------
Total Pool................ 86 $13,320,059 100.00%
--------- ----------- ---------
--------- ----------- ---------
- ---------
(1) Mortgage Loans indicated as having a Credit Score that is "not available"
include certain Mortgage Loans where the Credit Score was not provided by
the related Seller and Mortgage Loans where no credit history can be
obtained for the related Mortgagor.
STANDARD HAZARD INSURANCE AND PRIMARY MORTGAGE INSURANCE
Each Mortgage Loan is required to be covered by a standard hazard
insurance policy. See "Servicing of Loans -- Maintenance of Insurance Policies
and Other Servicing Procedures" in the Prospectus. None of the Mortgage Loans
will be covered by a primary mortgage guaranty insurance policy.
PRODUCT TYPES
THE PORTFOLIO TRANSACTION PROGRAM
All of the Mortgage Loans included in the Trust were acquired and
evaluated under Residential Funding"s "Portfolio Transaction" program. The
Portfolio Transaction program targets loans with document deficiencies,
program violations, unusual property types, seasoned loans, delinquent loans,
loans originated for portfolio, and loans not eligible for Residential
Funding"s standard programs. The Portfolio Transaction loans are placed by
Residential Funding into various categories. The Mortgage Loans fall into the
category of "Portfolio Programs."
PORTFOLIO PROGRAMS. The Mortgage Loans, all of which were acquired by
Residential Funding in bulk or flow sales, were originated for portfolio and
not pursuant to any of Residential Funding"s standard programs or any other
secondary market program. Typically, as is the case with the Group I Loans,
these loans were originated under programs offered by financial depository
institutions that were designed to provide the financial institution with a
competitive origination advantage. This was achieved by permitting loan terms
and underwriting criteria that did not conform with typical secondary market
standards, with the intention that these loans would be held in the
originating institution"s portfolio rather than sold in the secondary market.
However, for various reasons including merger or acquisition or other
financial considerations specific to the originating institution, that
institution offered the loans for sale, and the loans were acquired by
Residential Funding in the secondary market. Alternatively, as is the case
with approximately 95.5% of the Group II Loans, the loans were originated by
HomeComings and involve loan terms and underwriting criteria that do not
conform with typical secondary market standards. The specific programs under
which the Mortgage Loans included in the Trust were originated are described
in the two following paragraphs.
THE GROUP I LOANS. All of the Group I Loans were originated by Bank One
Financial Services, Inc. ("BANK ONE"), under a program that allows fixed rate,
first lien loans with loan-to-value ratios in excess of 100%. Bank One"s
underwriting standards applicable to this program permit debt-to-income ratios
in excess of 55%, permit relatively low credit scores and in some cases do not
require a minimum credit score, and permit lending to borrowers with credit
histories that include delinquencies on mortgage and other debts, prior
bankruptcies and other derogatory items. As a result, the likelihood of
default and the potential severity of loss as to the Group I Loans may be
significantly higher than with loans pooled under Residential Funding"s other
securitization programs.
THE GROUP II LOANS. Approximately 95.5% of the Group II Loans were
originated by HomeComings. Approximately 95.5% of the Group II Loans (the
"DEGEORGE LOANS") were originated in order to provide permanent financing to
refinance construction loans made to the related borrower. In each case, the
construction loan was provided by DeGeorge Capital Corporation ("DEGEORGE"),
which is currently in bankruptcy. The construction loan was subsequently
transferred to Residential Funding. DeGeorge was in the business of providing
short-term construction loans to individuals for single family residences. The
loans would provide funds to cover the costs of acquiring an unimproved
residential lot, the cost of plans and materials which had to be purchased
from a DeGeorge affiliate, and the cost of subcontractors hired by the
borrower. Prior to originating each DeGeorge Loan, Homecomings verified that
all construction was completed and that a certificate of occupancy had been
issued, obtained title insurance, and obtained an appraisal of the mortgaged
property as completed. The DeGeorge Loans generally do not conform to
Residential Funding"s standard lending programs. The DeGeorge Loans may have
loan-to-value ratios as high as 125%, high debt-to-income ratios, and
relatively low credit scores. These criteria were permitted in order to allow
the borrower to qualify for the loan and to refinance the entire amount of the
construction loan. As a result, the likelihood of default and the potential
severity of loss as to the DeGeorge Loans may be significantly higher than
with loans pooled under Residential Funding"s other securitization programs.
EVALUATION STANDARDS FOR PORTFOLIO TRANSACTION LOANS. Every Portfolio
Transaction loan was evaluated by Residential Funding to determine whether the
characteristics of the loan, the borrower and the collateral, taken as a
whole, represent a prudent lending risk. The factors considered include:
o an evaluation of the financial capacity and eligibility of the seller
and/or servicer of the loan,
o the representations and warranties made by the seller,
o the loan"s payment terms and characteristics,
o the borrower"s credit score,
o the value of the mortgaged property,
o the credit and legal documentation associated with the Mortgage Loan,
and
o the seasoning of the Mortgage Loan.
Residential Funding orders an updated credit score for each loan reviewed.
The value of the mortgaged property is validated by review of the original
appraisal, by obtaining a drive-by appraisal, by obtaining a statistical
value, or by a broker"s price opinion. Broker"s price opinions are obtained
if, among other reasons, the loan is delinquent or the principal balance of
the loan exceeds $400,000.
Many of the Portfolio Transaction loans include characteristics
representing underwriting deficiencies as compared to other mortgage loans
originated in compliance with standard origination programs for the secondary
mortgage market. In addition, some of the mortgaged properties for these loans
are not typically permitted in the secondary market, including mixed-use
properties, incomplete properties, properties with deferred maintenance, and
properties with excess acreage.
RESIDENTIAL FUNDING
Residential Funding will be responsible for master servicing the Mortgage
Loans. Such responsibilities will include the receipt of funds from
Subservicers, the reconciliation of servicing activity with respect to the
Mortgage Loans, investor reporting, remittances to the Trustee to accommodate
distributions to Certificateholders, follow up with Subservicers with respect
to Mortgage Loans that are delinquent or for which servicing decisions may
need to be made, management and liquidation of mortgaged properties acquired
by foreclosure or deed in lieu of foreclosure, notices and other
responsibilities as detailed in the Pooling and Servicing Agreement.
Residential Funding and its affiliates are active purchasers of
non-conforming mortgage loans and have sold a substantial amount of mortgage
loans that do not present certain of the special risk factors presented by the
Mortgage Loans as described herein. Residential Funding serves as the master
servicer for transactions backed by most of such mortgage loans. As a result
of the program criteria and underwriting standards of the Mortgage Loans,
however, the Mortgage Loans may experience rates of delinquency, foreclosure
and loss that are higher than those experienced by other pools of mortgage
loans for which Residential Funding acts as master servicer.
SERVICING
Primary servicing will be provided with respect to all of the Group I
Loans and 4.5% of the Group II Loans by Cenlar Federal Savings Bank
("Cenlar"), a wholly-owned subsidiary of Cenlar Capital Corp. Cenlar is
subservicing such Mortgage Loans pursuant to a Subservicing Agreement with the
Master Servicer. Cenlar is engaged primarily in the servicing industry and has
been servicing mortgage loans since 1965.
Cenlar's executive offices are located at 425 Phillips Boulevard, Ewing,
New Jersey 08618.
Primary servicing will be provided by HomeComings Financial Network, Inc.
("HOMECOMINGS"), a wholly-owned subsidiary of Residential Funding, with
respect to 95.5% of the Group II Loans, including all of the DeGeorge Loans.
HomeComings' servicing operations are located at 9275 Sky Park Court,
Third Floor, San Diego 92123 and at 2711 North Haskell Avenue, Suite 900,
Dallas, Texas 75204.
SPECIAL SERVICING
Pursuant to the Pooling and Servicing Agreement, Residential Funding will
be responsible for performing, directly or through an affiliate, special
servicing functions with respect to the Mortgage Loans. If and when a Mortgage
Loan becomes 90 or more days delinquent, Residential Funding will start the
process of transferring the servicing for such Mortgage Loan to Residential
Funding"s Asset Resolution Division ("ARD"), a division of HomeComings.
ARD specializes in the servicing of sub-prime mortgage loans, the
acquisition and management of sub-performing and non-performing mortgage loans
and the real property securing such loans ("REO"). This division has been
engaged to perform the primary servicing for the AlterNet Program and has
acquired mortgage loan portfolios from the Resolution Trust Corporation and
private investors. ARD"s servicing operations are located at 9275 Sky Park
Court, Third Floor, San Diego, California 92123.
Residential Funding's Asset Resolution Division was awarded a "Special
Servicer" designation from Standard & Poor"s and Fitch in March 1999.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted at the
close of business on the Cut-off Date (after deducting payments of principal
due in the month of November). Prior to the issuance of the Class A
Certificates, Mortgage Loans may be removed from the Mortgage Pool as a result
of incomplete documentation or otherwise, if the Seller deems such removal
necessary or appropriate. A limited number of other mortgage loans may be
included in the Mortgage Pool prior to the issuance of the Class A
Certificates. The Depositor believes that the information set forth herein
will be substantially representative of the characteristics of the Mortgage
Pool as it will be constituted at the time the Class A Certificates are
issued, although the range of Mortgage Rates and maturities and certain other
characteristics of the Mortgage Loans in the Mortgage Pool may vary.
A Current Report on Form 8-K, together with the Pooling and Servicing
Agreement, will be filed with the Securities and Exchange Commission within
fifteen days after the initial issuance of the Class A Certificates. In the
event Mortgage Loans are removed from or added to the Mortgage Pool as set
forth in the preceding paragraph, such removal or addition will be noted in
the Current Report on Form 8-K.
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Series 1999-RS4 Mortgage Asset-Backed Pass-Through Certificates (the
"CERTIFICATES") will consist of the following seven classes of Certificates:
(i) the Class A-I Certificates (the "CLASS A-I CERTIFICATES"); (ii) the Class
A-II Certificates (the "CLASS A-II CERTIFICATES"); (iii) the Class SB-I
Certificates and Class SB-II Certificates (together, the "CLASS SB
CERTIFICATES"); and (iv) the Class R-I, Class R-II and Class R-III
Certificates (collectively, the "CLASS R CERTIFICATES" or the "RESIDUAL
CERTIFICATES"). The Class A-I Certificates and Class A-II Certificates are
referred to herein collectively as the "CLASS A CERTIFICATES." Only the Class
A Certificates are offered hereby.
The Certificates in the aggregate will evidence the entire beneficial
ownership interest in the Trust. The Trust will consist of: (i) the Mortgage
Loans; (ii) such assets as from time to time are identified as deposited in
respect of the Mortgage Loans in the Custodial Account and in the Certificate
Account and belonging to the Trust; (iii) property acquired by foreclosure of
such Mortgage Loans or deed in lieu of foreclosure; (iv) any standard hazard
insurance policies; (v) the Policy; and (vi) all proceeds of the foregoing.
Scheduled payments on the Mortgage Loans due on or before November 29, 1999,
will not be included in the Trust.
The Class A Certificates will be issued in minimum denominations of
$25,000 and integral multiples of $1 in excess thereof.
BOOK-ENTRY REGISTRATION OF THE CLASS A CERTIFICATES
Holders of the Class A Certificates may elect to hold their Class A
Certificates through the Depository Trust Company ("DTC") in the United
States, or Cedelbank, societe anonyme ("CEDELBANK") or the Euroclear System
("EUROCLEAR") in Europe, if they are Participants of such systems, or
indirectly through organizations which are Participants in such systems. Any
class of Class A Certificates issued through DTC (such Certificates,
"BOOK-ENTRY CERTIFICATES") will list DTC"s nominee as the record holder. Cedel
and Euroclear will hold omnibus positions on behalf of their Participants
through customers" securities accounts in Cedel"s and Euroclear"s names on the
books of their respective depositaries, which in turn will hold those
positions in customers" securities accounts in the depositaries" names on the
books of DTC.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, which holds securities for its participants ("DTC
PARTICIPANTS," and together with the Cedelbank and Euroclear participating
organizations, "PARTICIPANTS") and facilitates the clearance and settlement of
securities transactions between Participants through electronic book-entry
changes in the accounts of Participants. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include other organizations. Other institutions that are not Participants but
clear through or maintain a custodial relationship with Participants
("INDIRECT PARTICIPANTS") have indirect access to DTC"s clearance system.
Because of time zone differences, the securities account of a Cedel or
Euroclear participant as a result of a transaction with a DTC Participant
(other than a depositary holding on behalf of Cedel or Euroclear) will be
credited during subsequent securities settlement processing day, immediately
following the DTC settlement date (which must be a business day for Cedel or
Euroclear, as the case may be). Credits or any transactions in those
securities settled during this processing will be reported to the relevant
Euroclear Participant or Cedel Participants on that business day. Cash
received in Cedel or Euroclear as a result of sales of securities by or
through a Cedel Participant or Euroclear Participant to a DTC Participant,
other than the depositary for Cedel or Euroclear, will be received with value
on the DTC settlement date, but will be available in the relevant Cedel or
Euroclear cash account only as of the business day following settlement in
DTC.
Transfers between participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant depositaries; however, these cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in that system in accordance
with its rules and procedures and within its established deadlines, European
time. The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to its
depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Participants and Euroclear Participants may not deliver
instructions directly to the depositaries.
<PAGE>
Cedel, as a professional depository, holds securities for its
participating organizations ("CEDEL PARTICIPANTS") and facilitates the
clearance and settlement of securities transactions between Cedel Participants
through electronic book-entry changes in accounts of Cedel Participants,
thereby eliminating the need for physical movement of certificates. As a
professional depository, Cedel is subject to regulation by the Luxembourg
Monetary Institute.
Euroclear was created to hold securities for participants of Euroclear
("EUROCLEAR PARTICIPANTS") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities
and cash. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York, the Euroclear operator, under contract
with Euroclear Clearance Systems S.C., a Belgian co-operative corporation
referred to as the clearance cooperative. All operations are conducted by the
Euroclear operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear operator, not the
clearance cooperative. The clearance cooperative establishes policy for
Euroclear on behalf of Euroclear Participants. The Euroclear operator is the
Belgian branch of a New York banking corporation which is a member bank of the
Federal Reserve System. As a result, it is regulated and examined by the Board
of Governors of the Federal Reserve System and the New York State Banking
Department, as well as the Belgian Banking Commission. Securities clearance
accounts and cash accounts with the Euroclear operator are governed by the
Terms and Conditions Governing Use of Euroclear and the related Operating
Procedures of the Euroclear System and applicable Belgian law. The Terms and
Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments
relating to securities in Euroclear. All securities in Euroclear are held on a
fungible basis without attribution of specific certificates to specific
securities clearance accounts.
Payments on the Book-Entry Certificates will be forwarded by the Trustee
to DTC, and DTC will be responsible for forwarding those payments to
Participants, each of which will be responsible for disbursing the payments to
the beneficial owners it represents or, if applicable, to Indirect
Participants. Accordingly, beneficial owners may experience delays in the
receipt of payments on their Certificates. Under DTC"s procedures, DTC will
take actions permitted to be taken by holders of any class of Book-Entry
Certificates under the related agreement only at the direction of one or more
Participants to whose account the Book-Entry Certificates are credited and
whose aggregate holdings represent no less than any minimum amount of
percentage interests or voting rights required therefor. DTC may take
conflicting actions regarding any action of Class A Certificateholders of any
class to the extent that Participants authorize those actions.
Each class of Class A Certificates will be issued in one or more
securities which equal the aggregate initial Certificate Principal Balance of
such class of Class A Certificates and will initially be registered in the
name of Cede & Co. ("CEDE"), the nominee of DTC. Cedelbank and Euroclear will
hold omnibus positions on behalf of their Participants through customers"
securities accounts in Cedelbank"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. Except as described below, no Class A
Certificateholder will be entitled to receive a physical certificate
representing such security (a "DEFINITIVE CERTIFICATE"). Unless and until
Definitive Certificates are issued, it is anticipated that the only "Holder"
of the Class A Certificates will be Cede, as nominee of DTC. Class A
Certificateholders will not be Holders as that term is used in the Pooling and
Servicing Agreement.
The Class A Certificateholder"s ownership of a Class A Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "FINANCIAL INTERMEDIARY") that maintains
the Class A Certificateholder"s account for such purpose. In turn, the
Financial Intermediary"s ownership of such Class A Certificates 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 Class A Certificateholder"s Financial Intermediary is
not a DTC Participant and on the records of Cedelbank or Euroclear, as
appropriate).
<PAGE>
Class A Certificateholders will receive all payments of principal of, and
interest on, the Class A Certificates from the Trustee through DTC and DTC
Participants. While the Class A Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "RULES"), DTC is required
to make book-entry transfers among Participants on whose behalf it acts with
respect to the Class A Certificates and is required to receive and transmit
payments of principal of, and interest on, the Class A Certificates.
Participants and Indirect Participants with whom Class A Certificateholders
have accounts with respect to Class A Certificates are similarly required to
make book-entry transfers and receive and transmit such payments on behalf of
their respective Class A Certificateholders. Accordingly, although Class A
Certificateholders will not possess physical certificates, the Rules provide a
mechanism by which Class A Certificateholders will receive payments and will
be able to transfer their interest.
Class A Certificateholders will not receive or be entitled to receive
Definitive Certificates representing their respective interests in the Class A
Certificates, except under the limited circumstances described below. Unless
and until Definitive Certificates are issued, Class A Certificateholders who
are not Participants may transfer ownership of Class A Certificates only
through Participants and Indirect Participants by instructing such
Participants and Indirect Participants to transfer the Class A Certificates,
by book-entry transfer, through DTC for the account of the purchasers of such
Class A Certificates, which account is maintained with their respective
Participants. Under the Rules and in accordance with DTC"s normal procedures,
transfers of ownership of Class A Certificates will be executed through DTC
and the accounts of the respective Participants at DTC will be debited and
credited. Similarly, the Participants and Indirect Participants will make
debits or credits, as the case may be, on their records on behalf of the
selling and purchasing Class A Certificateholders.
Under a book-entry format, Class A Certificateholders of the Class A
Certificates may experience some delay in their receipt of payments, since
such payments will be forwarded by the Trustee to Cede. Payments with respect
to Class A Certificates held through Cedelbank or Euroclear will be credited
to the cash accounts of Cedelbank 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 Class A Certificateholder to pledge Class A Certificates to persons or
entities that do not participate in the Depositary system, or otherwise take
actions in respect of such Class A Certificates, may be limited due to the
lack of physical Class A Certificates for such Class A Certificates. In
addition, issuance of the Class A Certificates in book-entry form may reduce
the liquidity of such Class A Certificates 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 Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Class A Certificates under the Pooling and Servicing Agreement
only at the direction of one or more Financial Intermediaries to whose DTC
accounts the Class A Certificates are credited, to the extent that such
actions are taken on behalf of Financial Intermediaries whose holdings include
such Class A Certificates. Cedelbank or the Euroclear Operator, as the case
may be, will take any other action permitted to be taken by holders of Class A
Certificates under the Pooling and Servicing Agreement on behalf of a
Cedelbank 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
Class A Certificates which conflict with actions taken with respect to other
Class A Certificates.
Definitive Certificates will be issued to Class A Certificateholders, or
their nominees, rather than to DTC, if (a) the Trustee determines that DTC is
no longer willing, qualified or able to discharge properly its
responsibilities as nominee and depository with respect to the Class A
Certificates and the Trustee is unable to locate a qualified successor, (b)
the Trustee elects to terminate a book-entry system through DTC or (c) after
the occurrence of an Event of Default, pursuant to the Pooling and Servicing
Agreement, Class A Certificateholders of any class having Percentage Interests
aggregating at least a majority of the Certificate Principal Balances of such
Class A Certificates 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
such Class A Certificateholders.
<PAGE>
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Class A
Certificateholders of the occurrence of such event and the availability
through DTC of Definitive Certificates. Upon surrender by DTC of the global
certificate or certificates representing the Class A Certificates and
instructions for re-registration, the Trustee will issue and authenticate
Definitive Certificates, and thereafter the Trustee will recognize the holders
of such Definitive Certificates as Holders under the Pooling and Servicing
Agreement.
Although DTC, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Class A Certificates among
Participants of DTC, Cedelbank 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 Annex I hereto.
None of the Company, the Seller, the Master Servicer or the 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 Class A
Certificates held by Cede, as nominee for DTC, or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests.
Year 2000. 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 Indirect 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.
MULTIPLE LOAN GROUP STRUCTURE
The Mortgage Loans in the Trust consist of the Group I Loans and Group II
Loans, as described above under "Description of the Mortgage Pool."
Distributions of principal on the Class A-I Certificates and Class A-II
Certificates will be based primarily on principal received or advanced with
respect to the Group I Loans and Group II Loans, respectively. See " --
Principal Distributions on the Class A Certificates" herein.
AVAILABLE DISTRIBUTION AMOUNT
The "AVAILABLE DISTRIBUTION AMOUNT" for any Distribution Date will equal
the sum of (i) the aggregate amount of scheduled payments on the Mortgage
Loans due during the related Due Period and received on or prior to the
related Determination Date, after deduction of the related master servicing
fees and any related subservicing fees (collectively, the "SERVICING FEES") in
respect of the Mortgage Loans for such Distribution Date and the premium
payable on the Policy for such Distribution Date, (ii) certain unscheduled
payments, including Mortgagor prepayments on the Mortgage Loans, Insurance
Proceeds and Liquidation Proceeds from the Mortgage Loans, and proceeds from
repurchases of and substitutions for the Mortgage Loans occurring during the
preceding calendar month, net of amounts reimbursable therefrom to the Master
Servicer and any Subservicer, (iii) all Advances made for such Distribution
Date in respect of the Mortgage Loans and (iv) any Insured Amounts. In
addition to the foregoing amounts, with respect to unscheduled collections
(other than Mortgagor prepayments) on the Mortgage Loans, the Master Servicer
<PAGE>
may elect to treat such amounts as included in the Available Distribution
Amount for the Distribution Date in the month of receipt, but is not obligated
to do so. As described herein under " -- Principal Distributions on the Class
A Certificates," any such amount with respect to which such election is so
made shall be treated as having been received on the last day of the preceding
calendar month for the purposes of calculating the amount of principal and
interest distributions to any class of Certificates. With respect to any
Distribution Date, (i) the "DUE PERIOD" is the calendar month in which such
Distribution Date occurs and (ii) the "DETERMINATION DATE" is the 20th day of
the month in which such Distribution Date occurs or, if such day is not a
business day, the immediately succeeding business day. The "DUE DATE" with
respect to each Mortgage Loan is the date on which the monthly payment is due.
With respect to any Distribution Date, the premium due to the Certificate
Insurer will be an amount equal to one-twelfth of the product of the
percentage (the "POLICY PREMIUM RATE") specified in the Insurance and
Indemnity Agreement, dated as of November 29, 1999, among the Insurer, the
Depositor, the Trustee and the Master Servicer (the "INSURANCE AGREEMENT") and
the aggregate Certificate Principal Balance of the related Class A
Certificates immediately prior to such Distribution Date.
INTEREST DISTRIBUTIONS
On each Distribution Date, holders of each class of Class A Certificates
will be entitled to receive interest distributions (the "INTEREST DISTRIBUTION
AMOUNT") in an amount equal to the Accrued Certificate Interest thereon for
such Distribution Date to the extent of the Available Distribution Amount for
such Distribution Date, plus any Accrued Certificate Interest remaining unpaid
from any prior Distribution Date; provided, that on any Distribution Date on
which:
(i) the Accrued Certificate Interest with respect to the Class A-II
Certficates, calculated at a rate equal to One-Month LIBOR plus the Class
A-II Margin (which, if in excess of 14%, will be assumed to be 14%),
exceeds the Accrued Certificate Interest calculated at the
then-applicable Pass-Through Rate (any such excess, the "BASIS RISK
SHORTFALLS"); or
(ii) the amount of Prepayment Interest Shortfalls for such
Distribution Date exceeds the aggregate of (a) Eligible Master Servicing
Compensation and (b) Excess Cash Flow (the "PREPAYMENT INTEREST
SHORTFALLS");
the aggregate amount of any such differences will not be included in the
Interest Distribution Amount for such Distribution Date. Any such Prepayment
Interest Shortfalls will be allocated to the Class A Certificates in
accordance with the amount of Accrued Certificate Interest that would have
accrued on such Certificate absent such reduction, will accrue interest at the
applicable Pass-Through Rate on each class of Class A Certificates (as
adjusted from time to time) and will be paid (together with interest thereon)
on that Distribution Date or future Distribution Dates only to the extent of
any Excess Cash Flow available therefor on such Distribution Dates. Any such
Basis Risk Shortfalls will be paid by the Reserve Fund, subject to available
funds as described herein, but in no event prior to the time when the
Overcollateralization Amount and the amount in the Reserve Fund is greater
than the Required Overcollateralization Amount plus $10,000.
The ratings assigned to the Class A Certificates do not address the
likelihood of the receipt of any amounts in respect of any Prepayment Interest
Shortfalls or Basis Risk Shortfalls. The Policy will not cover any of such
shortfalls and such shortfalls may remain unpaid on the final Distribution
Date. See " -- Overcollateralization Provisions" and " -- Certificate Guaranty
Insurance Policy" below.
With respect to any class of Class A Certificates and any Distribution
Date, "ACCRUED CERTIFICATE INTEREST" on the Class A Certificates will be equal
to interest accrued during the related Interest Accrual Period on the
Certificate Principal Balance thereof immediately prior to such Distribution
Date at the related Pass-Through Rate less interest shortfalls, if any,
allocated thereto for such Distribution Date, to the extent not covered by
Subordination (as defined herein), including in each case: (i) the interest
portions of Excess Losses on the Mortgage Loans, (ii) the interest portion of
any Advances with respect to the Mortgage Loans that were made with respect to
delinquencies that were ultimately determined to be Excess Losses, and (iii)
any other interest shortfalls with respect to the Mortgage Loans not covered
by Subordination, including interest shortfalls relating to the Soldier"s and
Sailor"s Relief Act of 1940, as amended, or similar legislation or regulations
(the "RELIEF ACT"), all allocated to the related class or classes of Class A
<PAGE>
Certificates in accordance with the amount of Accrued Certificate Interest
that would have accrued on such Certificates absent such reduction; provided,
however, that in the event that any shortfall described in clause (i) or (ii)
of this sentence is allocated to any class of Class A Certificates, subject to
the terms of the Policy, the amount of such allocated shortfall will be drawn
under the Policy and distributed to the holders of the related Class A
Certificates. Other shortfalls described in the preceding sentence are not
covered by the Policy. In addition, to the extent the related Available
Distribution Amount is less than Accrued Certificate Interest on the related
Class A Certificates, such shortfall will be covered by the Policy, subject to
the terms thereof. Notwithstanding the foregoing, if payments are not made as
required under the Policy, any such interest shortfalls may be incurred by the
related Class A Certificates. See "Description of the Certificates --
Certificate Guaranty Insurance Policy."
With respect to the Class A-I Certificate, the "INTEREST ACCRUAL PERIOD"
shall be the prior calendar month. Interest for the Class A-I Certificates
will be calculated on the basis of a 360-day year consisting of twelve 30-day
months. With respect to the Class A-II Certificates, the "INTEREST ACCRUAL
PERIOD" shall be (i) with respect to the Distribution Date in December 1999,
the period commencing on the Closing Date and ending on the day preceding the
Distribution Date in December 1999, and (ii) with respect to any Distribution
Date after the Distribution Date in December 1999, the period commencing on
the Distribution Date in the month immediately preceding the month in which
such Distribution Date occurs and ending on the day preceding such
Distribution Date. Interest for the Class A-II Certificates will be calculated
on the basis of the actual number of days in the related Interest Accrual
Period and a 360-day year.
The "PASS-THROUGH RATE" on the Class A-I Certificates with respect to
each Distribution Date prior to the Step-Up Date will be 7.43% per annum, and
on and after the Step-Up Date, 7.93% per annum. The "PASS-THROUGH RATE" on the
Class A-II Certificates with respect to each Distribution Date will be the per
annum rate equal to the least of (i) One-Month LIBOR plus the related Class
A-II Margin, (ii) 14.00% per annum (the "MAXIMUM CLASS A-II RATE") and (iii)
the Net WAC Cap Rate for such Distribution Date. The "NET WAC CAP RATE" is a
per annum rate equal to the weighted average of the Net Mortgage Rates on the
Group II Loans (calculated based on the number of days in the preceding
Interest Accrual Period), determined as of the end of the related Due Period;
provided, that for determining the Net WAC Cap Rate the Policy Premium Rate
shall be multiplied by a fraction equal to (x) the aggregate Certificate
Principal Balance of the Class A Certificates immediately prior to the related
Distribution Date over (y) the aggregate Stated Principal Balance of the
Mortgage Loans at the end of the related Due Period. The "CLASS A-II MARGIN"
for the Class A-II Certificates is as follows: for any Distribution Date on or
prior to the Step-Up Date, 0.40% per annum, for any date thereafter, 0.80% per
annum. The "STEP-UP DATE" is the first Distribution Date after the first
possible Optional Termination Date. The "NET MORTGAGE RATE" on each Mortgage
Loan is equal to the Mortgage Rate thereon minus the sum of (i) the rate per
annum at which the related master servicing and subservicing fees accrue (the
"SERVICING FEE RATE") and (ii) the related Policy Premium Rate. Additional
interest may be payable on the Class A Certificates in excess of the related
Net WAC Cap Rate from the Reserve Fund to the extent described below under "
- -- The Reserve Fund."
The Pass-Through Rate on the Class A-II Certificates for the current and
immediately preceding calendar month may be obtained by telephoning the
Trustee at (800) 524-9274.
With respect to any Distribution Date, any Prepayment Interest Shortfalls
during the preceding calendar month will be offset: (i) first, by the Master
Servicer, but only to the extent such Prepayment Interest Shortfalls do not
exceed Eligible Master Servicing Compensation; and (ii) second, by Excess Cash
Flow available therefor for such Distribution Date as described in " --
Overcollateralization Provisions" below. Any Prepayment Interest Shortfalls
not covered by clauses (i) and (ii) of the previous sentence for the related
Distribution Date will be allocated to the Class A Certificates on a pro rata
basis and may be reimbursed on future Distribution Dates as described in " --
Overollateralization Provisions" below.
With respect to each Loan Group, "ELIGIBLE MASTER SERVICING COMPENSATION"
shall be an amount equal to the lesser of (a) one-twelfth of 0.125% of the
Stated Principal Balance (as defined herein) of the Mortgage Loans immediately
preceding such Distribution Date and (b) the sum of the master servicing fee
payable to the Master Servicer in respect of its master servicing activities
and reinvestment income received by the Master Servicer on amounts payable
with respect to such Distribution Date.
The "PREPAYMENT INTEREST SHORTFALL" for any Distribution Date is equal to
the aggregate shortfall, if any, in collections of interest resulting from
Mortgagor prepayments on the Mortgage Loans during the preceding calendar
month. Such shortfalls will result because interest on prepayments in full is
<PAGE>
distributed only to the date of prepayment, and because no interest is
distributed on prepayments in part, as such prepayments in part are applied to
reduce the outstanding principal balance of the Mortgage Loans as of the Due
Date immediately preceding the date of prepayment. No assurance can be given
that the amounts available to cover Prepayment Interest Shortfalls will be
sufficient therefor. See " -- Overcollateralization Provisions" and "The
Pooling and Servicing Agreement -- Servicing and Other Compensation and
Payment of Expenses" herein. The Policy does not cover any Prepayment Interest
Shortfalls.
As described herein, the Accrued Certificate Interest allocable to the
Class A Certificates is based on the Certificate Principal Balance thereof.
The "CERTIFICATE PRINCIPAL BALANCE" of any Class A Certificate as of any date
of determination is equal to the initial Certificate Principal Balance
thereof, reduced by the aggregate of (a) all amounts allocable to principal
previously distributed with respect to such Certificate (including, such
amounts paid pursuant to the Policy) and (b) any reductions in the Certificate
Principal Balance thereof deemed to have occurred in connection with
allocations of Realized Losses in the manner described herein (other than any
amounts that have been paid pursuant to the Policy). The initial Certificate
Principal Balance of each of the Class SB Certificates is equal to the excess,
if any, of (a) the initial aggregate Stated Principal Balance (as defined
herein) of the Mortgage Loans in the related Loan Group over (b) the initial
aggregate Certificate Principal Balance of the Class A-I Certificates or Class
A-II Certificates, as applicable.
DETERMINATION OF ONE-MONTH LIBOR
The Pass-Through Rate on the Class A-II Certificates for any Interest
Accrual Period, including the initial Interest Accrual Period, will be
determined on the second LIBOR Business Day immediately prior to the
commencement of such Interest Accrual Period (each, a "LIBOR RATE ADJUSTMENT
DATE").
On each LIBOR Rate Adjustment Date, One-Month LIBOR shall be established
by the Trustee and, as to any Interest Accrual Period, will equal the rate for
one month United States dollar deposits that appears on the Dow Jones Telerate
Screen Page 3750 as of 11:00 a.m., London time, on such LIBOR Rate Adjustment
Date. "TELERATE SCREEN PAGE 3750" means the display designated as page 3750 on
the Dow Jones Telerate Service (or such other page as may replace page 3750 on
that service for the purpose of displaying London interbank offered rates of
major banks). If such rate does not appear on such page (or such other page as
may replace that page on that service, or if such service is no longer
offered, such other service for displaying One-Month LIBOR or comparable rates
as may be selected by the Trustee after consultation with the Master Servicer
and the Insurer), the rate will be the Reference Bank Rate. The "REFERENCE
BANK RATE" will be determined on the basis of the rates at which deposits in
U.S. Dollars are offered by the reference banks (which shall be three major
banks that are engaged in transactions in the London interbank market,
selected by the Trustee after consultation with the Master Servicer and the
Insurer) as of 11:00 a.m., London time, on the LIBOR Rate Adjustment Date to
prime banks in the London interbank market for a period of one month in
amounts approximately equal to the Certificate Principal Balance of the Class
A-II Certificates. The Trustee will request the principal London office of
each of the reference banks to provide a quotation of its rate. If at least
two such quotations are provided, the rate will be the arithmetic mean of the
quotations. If on such date fewer than two quotations are provided as
requested, the rate will be the arithmetic mean of the rates quoted by one or
more major banks in New York City, selected by the Trustee after consultation
with the Master Servicer and the Insurer, as of 11:00 a.m., New York City
time, on such date for loans in U.S. Dollars to leading European banks for a
period of one month in amounts approximately equal to the Certificate
Principal Balance of the Class A-II Certificates. If no such quotations can be
obtained, the rate will be One-Month LIBOR for the prior Distribution Date;
provided however, if, under the priorities described above, One-Month LIBOR
for a Distribution Date would be based on One-Month LIBOR for the previous
Distribution Date for the third consecutive Distribution Date, the Trustee,
after consultation with the Insurer, shall select an alternative comparable
index (over which the Trustee has no control), used for determining one-month
Eurodollar lending rates that is calculated and published (or otherwise made
available) by an independent party. "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 One-Month LIBOR by the Trustee and the Trustee"s
subsequent calculation of the Pass-Through Rate applicable to the Class A-II
Certificates for the relevant Interest Accrual Period, in the absence of
manifest error, will be final and binding.
<PAGE>
PRINCIPAL DISTRIBUTIONS ON THE CLASS A CERTIFICATES
Holders of the Class A Certificates will be entitled to receive on each
Distribution Date, to the extent of the portion of the Available Distribution
Amount remaining after the Interest Distribution Amount is distributed and in
the manner set forth below, a distribution allocable to principal equal to the
Principal Distribution Amount.
The "PRINCIPAL DISTRIBUTION AMOUNT" for any Distribution Date will be the
lesser of (a) the excess of (i) the Available Distribution Amount over (ii)
the Interest Distribution Amount and (b) the amount described below:
(i) the principal portion of all scheduled monthly payments on the
Mortgage Loans received or Advanced (as defined herein) with respect to
the related Due Period;
(ii) the principal portion of all proceeds of the repurchase of
Mortgage Loans (or, in the case of a substitution, certain amounts
representing a principal adjustment) as required by the Pooling and
Servicing Agreement during the preceding calendar month;
(iii) the principal portion of all other unscheduled collections
received on the Mortgage Loans during the preceding calendar month (or
deemed to be received during the preceding calendar month) (including,
without limitation, full and partial Principal Prepayments made by the
respective Mortgagors), to the extent not distributed in the preceding
month;
(iv) the principal portion of any Realized Losses (other than Excess
Losses) incurred (or deemed to have been incurred) on any Mortgage Loans
in the calendar month preceding such Distribution Date to the extent
covered by Excess Cash Flow for such Distribution Date as described under
" -- Overcollateralization Provisions" below; and
(v) except on the first Distribution Date, the amount of any
Overcollateralization Increase Amount (as defined herein) for such
Distribution Date;
MINUS
(vi) the amount of any Overcollateralization Reduction Amount (as
defined herein) for such Distribution Date.
In no event will the Principal Distribution Amount on any Distribution
Date be (x) less than zero or (y) greater than the outstanding Certificate
Principal Balance of the Class A Certificates.
The Principal Distribution Amount will be distributed on each
Distribution Date concurrently to the Class A-I Certificates and Class A-II
Certificates on a pro rata basis in accordance with the percentage of the
amounts described in clauses (b)(i) through (iii) of the definition of
Principal Distribution Amount derived from Loan Group I and Loan Group II,
respectively (each, a "PRINCIPAL COLLECTION PERCENTAGE"), in each case until
the Certificate Principal Balance of either such class has been reduced to
zero and thereafter shall be distributed to the remaining class of Class A
Certificates until the Certificate Principal Balance thereof has been reduced
to zero.
On each Distribution Date, the Insurer shall be entitled to receive after
payment to the Class A Certificateholders of the Interest Distribution Amount
and the Principal Distribution Amount for such Certificates for such
Distribution Date (but before application of any Overcollateralization
Increase Amount), from the Excess Cash Flow to the extent available therefor,
the aggregate of any payment made with respect to the Class A Certificates
("CUMULATIVE INSURANCE PAYMENTS") by the Insurer under the Policy (other than
in respect of Excess Losses) to the extent not previously reimbursed, plus
interest thereon at the rate set forth in the Insurance Agreement.
OVERCOLLATERALIZATION PROVISIONS
The Pooling and Servicing Agreement requires that, on each Distribution
Date, Excess Cash Flow, if any, be applied on such Distribution Date as an
accelerated payment of principal on the Class A Certificates, but only in the
manner and to the extent hereafter described. The "EXCESS CASH FLOW" on any
Distribution Date generally will equal one month"s interest on the Mortgage
Loans at the weighted average of the Net Mortgage Rates for the Mortgage
Loans, to the extent paid or advanced, weighted on the basis of their
respective Stated Principal Balances as of the immediately preceding
Distribution Date, minus the Interest Distribution Amount. Excess Cash Flow
will be applied on any Distribution Date as follows:
<PAGE>
FIRST, to pay to the holders of the Class A Certificates pro rata,
based on the Principal Collection Percentages thereof, the principal
portion of Realized Losses (other than Excess Losses) incurred on the
Mortgage Loans for the preceding calendar month;
SECOND, to pay to the Insurer any Cumulative Insurance Payments;
THIRD, except on the first Distribution Date to pay any
Overcollateralization Increase Amount to the Class A Certificates, pro
rata, based on the Principal Collection Percentages thereof;
FOURTH, to pay the holders of the Class A Certificates, pro rata,
based on Accrued Certificate Interest otherwise due thereon, the amount
of any Prepayment Interest Shortfalls allocated thereto with respect to
the Mortgage Loans for such Distribution Date, to the extent not covered
by Eligible Master Servicing Compensation on such Distribution Date;
FIFTH, to pay to the holders of the Class A Certificates, pro rata,
based on unpaid Prepayment Interest Shortfalls previously allocated
thereto, any Prepayment Interest Shortfalls remaining unpaid from prior
Distribution Dates together with interest thereon;
SIXTH, to be deposited in the Reserve Fund, to the extent of any
Basis Risk Shortfall Carry-Forward Amount (as defined below) on the Class
A-II Certificates that would not otherwise be covered on such
Distribution Date by the Reserve Fund; and
SEVENTH, to pay to the holders of the Class SB Certificates any
balance remaining, in accordance with the terms of the Pooling and
Servicing Agreement.
The application of Excess Cash Flow to the payment of principal on the Class A
Certificates has the effect of accelerating the amortization of the Class A
Certificates relative to the amortization of the Mortgage Loans.
With respect to any Distribution Date, the excess, if any, of (a) the
aggregate Stated Principal Balances of the Mortgage Loans before giving effect
to distributions of principal to be made on such Distribution Date over (b)
the aggregate Certificate Principal Balance of the Class A Certificates as of
such date (before taking into account distributions of principal to be made on
such Distribution Date) is the "OVERCOLLATERALIZATION AMOUNT" as of such
Distribution Date. The Pooling and Servicing Agreement requires that the
Excess Cash Flow, to the extent available therefor as described above, will be
applied as an accelerated payment of principal on the Class A Certificates to
the extent that the Required Overcollateralization Amount exceeds the
Overcollateralization Amount as of such Distribution Date. With respect to any
Distribution Date, the "OVERCOLLATERALIZATION INCREASE AMOUNT" is equal to the
lesser of (i) Excess Cash Flow for such Distribution Date available to make
payments pursuant to clause third in the immediately preceding paragraph and
(ii) the excess, if any, of (x) the Required Overcollateralization Amount for
such Distribution Date over (y) the Overcollateralization Amount for such
Distribution Date; provided, that on the first Distribution Date, the
Overcollateralization Increase Amount shall be zero. The required level of the
Overcollateralization Amount with respect to a Distribution Date is the
"REQUIRED OVERCOLLATERALIZATION AMOUNT" with respect to such Distribution
Date, and will be set forth in the Pooling and Servicing Agreement.
In the event that the Required Overcollateralization Amount is permitted
to decrease or "step down" on a Distribution Date in the future, a portion of
the principal which would otherwise be distributed to the holders of the Class
A Certificates on such Distribution Date shall not be distributed to the
holders of the Class A Certificates on such Distribution Date. This has the
effect of decelerating the amortization of the Class A Certificates relative
to the amortization of the Mortgage Loans, and of reducing the
Overcollateralization Amount. With respect to any Distribution Date, the
excess, if any, of (a) the Overcollateralization Amount on such Distribution
Date over (b) the Required Overcollateralization Amount is the "EXCESS
OVERCOLLATERALIZATION AMOUNT" with respect to such Distribution Date. If, on
any Distribution Date, the Excess Overcollateralization Amount is, or, after
taking into account all other distributions to be made on such Distribution
Date would be, greater than zero (i.e., the Overcollateralization Amount is or
would be greater than the Required Overcollateralization Amount), then any
amounts relating to principal which would otherwise be distributed to the
holders of the Class A Certificates on such Distribution Date shall instead be
included in the Excess Cash Flow and distributed as described above; such
amount being the "OVERCOLLATERALIZATION REDUCTION AMOUNT" for such
Distribution Date.
<PAGE>
THE RESERVE FUND
On the Closing Date, the Trustee will establish a reserve fund (the
"RESERVE FUND"). The Reserve Fund will be an asset of the Trust Fund but not
of any REMIC. Amounts on deposit in the Reserve Fund shall be invested in
Permitted Investments.
On any Distribution Date for which the Overcollateralization Amount is
equal to the Required Overcollateralization Amount, a portion of the Excess
Cash Flow may be deposited in the Reserve Fund as described in " --
Overcollateralization Provisions" above, in an amount up to any Basis Risk
Shortfall Carry-Forward Amount for the Class A-II Certificates which would not
otherwise be covered by amounts currently in the Reserve Fund.
If following distributions to be made on any Distribution Date and the
allocation of Realized Losses with respect to such Distribution Date, the sum
of the Overcollateralization Amount and the amount in the Reserve Fund is
greater than the sum of the Required Overcollateralization Amount and $10,000,
such excess will be withdrawn from the Reserve Fund and paid as follows:
(i) first, to the Class A-II Certificates, the Basis Risk Shortfall
Carry-Forward Amount; and
(ii) second, to the holder of the Class SB Certificates.
The "BASIS RISK SHORTFALL CARRY-FORWARD AMOUNT" as determined for the Class
A-II Certificates is equal to the aggregate amount of Basis Risk Shortfall for
such class on such Distribution Date, plus any unpaid related Basis Risk
Shortfall from prior Distribution Dates, plus interest thereon to the extent
previously unreimbursed by amounts in the Reserve Fund.
CERTIFICATE GUARANTY INSURANCE 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
following information regarding the Policy has been supplied by the Insurer
for inclusion herein.
The Insurer, in consideration of the payment of the premium and subject
to the terms of the Policy, thereby unconditionally and irrevocably guarantees
to any Holder (as defined below) that an amount equal to each full and
complete Insured Amount will be paid to the Trustee or its successor, as
trustee for the Holders. The Insurer"s obligations under the Policy with
respect to a particular Insured Amount shall be discharged to the extent funds
equal to the applicable Insured Amount are received by the Trustee, whether or
not such funds are properly applied by the Trustee. Insured Amounts shall be
paid only at the time set forth in the Policy, and no accelerated Insured
Amounts shall be paid regardless of any acceleration of the Class A
Certificates, unless such acceleration is at the sole option of the Insurer.
The Policy does not cover any interest shortfalls relating to the Relief Act,
Prepayment Interest Shortfalls or Basis Risk Shortfalls.
Notwithstanding the preceding paragraph, the Policy does not cover
shortfalls, if any, attributable to the liability of the Trust, any REMIC or
the Trustee for withholding taxes, if any (including interest and penalties in
respect of any such liability).
The Insurer will pay any amounts payable under the Policy no later than
12:00 noon, New York City time, on the later of the Distribution Date on which
the related Deficiency Amount (as defined below) is due or the Business Day
following receipt in New York, New York on a Business Day of a Notice (as
described below); provided that if such Notice is received after 12:00 noon,
New York City time, on such Business Day, it will be deemed to be received on
the following Business Day. If any such Notice received is not in proper form
or is otherwise insufficient for the purpose of making a claim under the
Policy it shall be deemed not to have been received for purposes of this
paragraph, and the Insurer shall promptly so advise the Trustee and the
Trustee may submit an amended Notice.
Insured Amounts due under the Policy, unless otherwise stated therein,
are to be disbursed by the Insurer to the Trustee on behalf of the Holders by
wire transfer of immediately available funds in the amount of the Insured
Amount.
As used in this section and in the Policy, the following terms shall have
the following meanings:
<PAGE>
"AGREEMENT" means the Pooling and Servicing Agreement, dated as of
November 1, 1999, among the Depositor, Residential Funding and the Trustee,
without regard to any amendment or supplement thereto unless such amendment or
supplement has been approved in writing by the Insurer.
"BUSINESS DAY" means any day other than a Saturday, a Sunday or a day on
which banking institutions in New York City or in the city in which the
corporate trust office of the Trustee under the Agreement or the Insurer is
located are authorized or obligated by law or executive order to close.
"DEFICIENCY AMOUNT" means, with respect to the Class A Certificates as of
any Distribution Date, (i) any shortfall in amounts available in the
Certificate Account to pay one month"s interest on the Certificate Principal
Balance of the Class A Certificates at the applicable Pass-Through Rate, net
of any interest shortfalls relating to the Relief Act and Prepayment Interest
Shortfalls allocated to the Class A Certificates, (ii) the principal portion
of any Realized Loss allocated to the Class A Certificates and (iii) the
Certificate Principal Balance of the Class A Certificates to the extent unpaid
on the final Distribution Date or earlier termination of the Trust pursuant to
the terms of the Agreement. Any Deficiency Amount will not include any Basis
Risk Shortfalls.
"HOLDER" means any person who is the registered or beneficial owner of
any Class A Certificate and who, on the applicable Distribution Date, is
entitled under the terms of the Class A Certificates to payment thereunder.
"INSURED AMOUNT" means, as of any Distribution Date, any Deficiency Amount.
"NOTICE" means the telephonic or telegraphic notice, promptly confirmed
in writing by telecopy substantially in the form of Exhibit A attached to the
Policy, the original of which is subsequently delivered by registered or
certified mail from the Trustee specifying the Insured Amount which shall be
due and owing on the applicable Distribution Date.
Capitalized terms used in the Policy and not otherwise defined in the
Policy shall have the respective meanings set forth in the Agreement as of the
date of execution of the Policy, without giving effect to any subsequent
amendment to or modification of the Agreement unless such amendment or
modification has been approved in writing by the Insurer.
The Policy is being issued under and 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 cancelable for any reason. The premium on the Policy is
not refundable for any reason including payment, or provision being made for
payment, prior to maturity of the Class A Certificates.
ALLOCATION OF LOSSES; SUBORDINATION
Subject to the terms thereof, the Policy will cover all Realized Losses
allocated to the Class A Certificates. Notwithstanding the foregoing, if
payments are not made as required under the Policy, Realized Losses will be
allocable to the Class A Certificates based on the following priorities.
Realized Losses that are not Excess Losses will be allocated or covered
as follows: first, to the Excess Cash Flow for the related Distribution Date;
second, by the reduction of the Overcollateralization Amount until reduced to
zero; and third, to the Class A-I Certificates and Class A-II Certificates to
the extent of Realized Losses on the Group I Loans and Group II Loans,
respectively, provided, that any allocation of a Realized Loss to a Class A
Certificate shall be covered by the Policy.
The Subordination described above provided to the Class A Certificates by
the Excess Cash Flow, overcollateralization and the Policy will cover Realized
Losses on the Mortgage Loans that are Defaulted Mortgage Losses, Special
Hazard Losses, Fraud Losses and Bankruptcy Losses.
A "DEFAULTED MORTGAGE LOSS" is a Realized Loss that is attributable to the
Mortgagor"s failure to make any payment of principal or interest as required
under the Mortgage Note, but not including Special Hazard Losses,
Extraordinary Losses, Bankruptcy Losses or Fraud Losses. A "SPECIAL HAZARD
LOSS" is a Realized Loss that is due to either (i) direct physical damage to a
Mortgaged Property other than any loss of a type covered by a hazard insurance
policy or a flood insurance policy, if applicable, and (ii) losses from
partial damage caused by reason of the application of the co-insurance clauses
contained in hazard insurance policies. A "BANKRUPTCY LOSS" is a Realized Loss
attributable to certain actions which may be taken by a bankruptcy court in
connection with a Mortgage Loan, including a reduction by a bankruptcy court
<PAGE>
of the principal balance of or the Mortgage Rate on a Mortgage Loan or an
extension of its maturity. A "FRAUD LOSS" is a Realized Loss incurred on
defaulted Mortgage Loans as to which there was fraud in the origination of
such Mortgage Loans.
As used herein, "SUBORDINATION" refers to the provisions discussed above
for the allocation of Realized Losses, as well as all provisions effecting
such allocations including the priorities for distribution of cash flows in
the amounts described herein.
Any Special Hazard Losses in excess of the Special Hazard Amount ("EXCESS
SPECIAL HAZARD LOSSES"), Fraud Losses in excess of the Fraud Amount ("EXCESS
FRAUD LOSSES"), Bankruptcy Losses in excess of the related Bankruptcy Amount
("EXCESS BANKRUPTCY LOSSES"), losses occasioned by war, civil insurrection,
certain governmental actions, nuclear reaction and certain other risks
("EXTRAORDINARY LOSSES") which, when added to the aggregate of such Realized
Losses for all preceding Due Periods, exceed the limit set forth in the
Pooling and Servicing Agreement (collectively, "EXCESS LOSSES") will be
covered by the Policy; provided, that if a Certificate Insurer Default exists,
such losses will be allocated to the Class A Certificates pro rata, based on
the Principal Collection Percentage for the related Distribution Date in an
aggregate amount equal to the percentage of such loss equal to the amount by
which the then aggregate Certificate Principal Balance of the Class A
Certificates exceeds the then aggregate Stated Principal Balance of the
Mortgage Loans.
With respect to any defaulted Mortgage Loan that is finally liquidated,
through foreclosure sale, disposition of the related Mortgaged Property if
acquired on behalf of the Certificateholders by deed in lieu of foreclosure,
or otherwise, the amount of loss realized, if any, will equal the portion of
the Stated Principal Balance remaining, if any, plus interest thereon through
the date of liquidation, after application of all amounts recovered (net of
amounts reimbursable to the Master Servicer or the Subservicer for Advances
and expenses, including attorneys" fees) towards interest and principal owing
on the Mortgage Loan. Such amount of loss realized and any Special Hazard
Losses, Fraud Losses, Bankruptcy Losses (except for Bankruptcy Losses that
result from an extension of the maturity of a Mortgage Loan) and Extraordinary
Losses are referred to herein as "REALIZED LOSSES."
In order to maximize the likelihood of distribution in full of amounts of
interest and principal to be distributed to holders of the Class A
Certificates on each applicable Distribution Date, holders of Class A
Certificates have a right to distributions of the Available Distribution
Amount that is prior to the rights of the holders of the Class SB and Class R
Certificates. In addition, overcollateralization will also increase the
likelihood of distribution of full amounts of interest and principal to the
Class A Certificates on each Distribution Date.
The aggregate amount of Realized Losses which may be allocated in
connection with Special Hazard Losses on the Mortgage Loans (the "SPECIAL
HAZARD AMOUNT") through Subordination shall initially be equal to $1,572,670.
As of any date of determination following the Cut-off Date, the Special Hazard
Amount shall equal $1,572,670 less the sum of (A) any amounts allocated
through Subordination in respect of Special Hazard Losses and (B) the related
Adjustment Amount. The Adjustment Amount will be equal to an amount calculated
pursuant to the terms of the Pooling and Servicing Agreement.
The aggregate amount of Realized Losses that may be allocated in
connection with Fraud Losses (the "FRAUD LOSS AMOUNT") through Subordination
shall initially be equal to $7,863,348. As of any date of determination after
the Cut-off Date, the Fraud Loss Amount shall equal (X) prior to the first
anniversary of the Cut-off Date an amount equal to 5.00% of the aggregate
principal balance of all of the Mortgage Loans as of the Cut-off Date minus
the aggregate amounts allocated through Subordination with respect to Fraud
Losses up to such date of determination; (Y) from the first to the second
anniversary of the Cut-off Date, an amount equal to (1) the lesser of (a) the
Fraud Loss Amount as of the most recent anniversary of the Cut-off Date and
(b) 3.00% of the aggregate principal balance of all of the Mortgage Loans as
of the most recent anniversary of the Cut-off Date minus (2) the aggregate
amount allocated through Subordination with respect to Fraud Losses since the
most recent anniversary of the Cut-off Date up to such date of determination;
and (Z) from the second to the fifth anniversary of the Cut-off Date, an
amount equal to (1) the lesser of (a) the Fraud Loss Amount as of the most
recent anniversary of the Cut-off Date and (b) 2.00% of the aggregate
principal balance of all of the Mortgage Loans as of the most recent
anniversary of the Cut-off Date minus (2) the aggregate amount allocated
through Subordination with respect to Fraud Losses since the most recent
anniversary of the Cut-off Date up to such date of determination. On and after
the fifth anniversary of the Cut-off Date, the Fraud Loss Amount shall be zero
and Fraud Losses shall not be allocated through Subordination.
<PAGE>
The aggregate amount of Realized Losses that may be allocated in
connection with Bankruptcy Losses (the "BANKRUPTCY AMOUNT") through
Subordination will initially be equal to $100,000. As of any date of
determination, the Bankruptcy Amount shall equal $100,000, less the sum of any
amounts allocated through Subordination for such losses up to such date of
determination.
Notwithstanding the foregoing, the provisions relating to Subordination
will not be applicable in connection with a Bankruptcy Loss so long as the
Master Servicer has notified the Trustee in writing that the Master Servicer
is diligently pursuing any remedies that may exist in connection with the
representations and warranties made regarding the related Mortgage Loan and
either (A) the related Mortgage Loan is not in default with regard to payments
due thereunder or (B) delinquent payments of principal and interest under the
related Mortgage Loan and any premiums on any applicable primary hazard
insurance policy and any related escrow payments in respect of such Mortgage
Loan are being advanced on a current basis by the Master Servicer or a
Subservicer.
Each of the Special Hazard Amount, Fraud Loss Amount and Bankruptcy
Amount may be subject to periodic reductions and may be subject to further
reduction or termination, without the consent of the Class A
Certificateholders, upon the written confirmation of the Insurer and each
Rating Agency that the then-current rating of the Class A Certificates
(without taking into account the Policy) will not be adversely affected
thereby.
ADVANCES
Prior to each Distribution Date, the Master Servicer is required to make
Advances (out of its own funds, advances made by a Subservicer, or funds held
in the Custodial Account (as described in the Prospectus under "Servicing of
Loans -- Deposits to and Withdrawals from the Collection Account") for future
distribution or withdrawal) with respect to any payments of principal and
interest (net of the related Servicing Fees) that were due on the Mortgage
Loans during the related Due Period and not received on the business day next
preceding the related Determination Date. With respect to the Simple Interest
Mortgage Loans, the related Subservicer or the Master Servicer will make such
Advances in an amount equal to the related Monthly Payments as if they had
been paid on the related Due Date.
Such Advances are required to be made only to the extent they are deemed
by the Master Servicer to be recoverable from related late collections,
Insurance Proceeds, or Liquidation Proceeds. The purpose of making such
Advances is to maintain a regular cash flow to the Certificateholders, rather
than to guarantee or insure against losses. The Master Servicer will not be
required to make any Advances with respect to reductions in the amount of the
monthly payments on the Mortgage Loans due to Debt Service Reductions or the
application of the Relief Act or similar legislation or regulations. Any
failure by the Master Servicer to make an Advance as required under the
Pooling and Servicing Agreement will constitute an Event of Default
thereunder, in which case the Trustee, as successor Master Servicer, will be
obligated to make any such Advance, in accordance with the terms of the
Pooling and Servicing Agreement.
All Advances will be reimbursable to the Master Servicer on a first
priority basis from late collections, Insurance Proceeds and Liquidation
Proceeds from the Mortgage Loan as to which such unreimbursed Advance was
made. In addition, any Advances previously made which are deemed by the Master
Servicer to be nonrecoverable from related late collections, Insurance
Proceeds and Liquidation Proceeds may be reimbursed to the Master Servicer out
of any funds in the Custodial Account prior to distributions on the Class A
Certificates.
YEAR 2000 CONSIDERATIONS
GENERAL
The following information has been supplied by Residential Funding for
inclusion herein. No representation is made by the Depositor or its affiliates
as to the accuracy or completeness of such information.
OVERVIEW OF THE YEAR 2000 ISSUE
The Year 2000 ("Y2K") issue is the term used to describe the potential
failure of information technology components on or after January 1, 2000
because existing computer programs, applications and microprocessors
frequently use only two digits to identify a year. Since the Year 2000 is also
<PAGE>
a leap year, there could be additional business disruptions as a result of the
inability of many computer systems to recognize February 29, 2000.
The failure to correct or replace computer programs, applications and
microprocessors with Y2K-ready alternatives may adversely impact the
operations of Residential Funding on or after January 1, 2000. The
responsibilities of Residential Funding as the Master Servicer include
collecting payments from the Subservicers relating to the Mortgage Loans,
calculating the Available Distribution Amount for each Distribution Date,
remitting such amount to the Trustee prior to each Distribution Date,
calculating the amount of principal and interest payments to be made to the
Certificateholders on each Distribution Date, and preparing the monthly
statement to be sent to Certificateholders on each Distribution Date.
OVERVIEW OF RESIDENTIAL FUNDING"S Y2K PROJECT
In January 1997, Residential Funding commenced activities to determine
the impact of Y2K on its critical computer systems. In April 1998, Residential
Funding established a formal Y2K project team (the "Y2K PROJECT TEAM") to
address Y2K issues. The Y2K Project Team remains in place and continues to
work on solving problems related to the Year 2000. In addition, the Y2K
Project Team coordinates its efforts with the Y2K programs established by
General Motors Acceptance Corporation and General Motors Corporation.
Members of the Y2K Project Team, together with relevant personnel from
Residential Funding"s business units have developed and implemented a
six-phase management strategy (as discussed below), which has been, and will
be, applied to information technology and non-information technology
components ("COMPONENTS") throughout the organization. Residential Funding"s
Components primarily consist of the following:
o HARDWARE, including mainframe computers, desktop computers and
network devices;
o FACILITIES EQUIPMENT, including elevators, telephone systems, heating
systems and security systems;
o SOFTWARE APPLICATIONS, including vendor purchased applications,
in-house developed applications and end-user developed applications;
o BUSINESS PARTNER COMMUNICATION LINKS, which primarily provide data
transmissions to and from business partners; and
o BUSINESS PARTNERS DATA SYSTEMS, which primarily process data for
Residential Funding.
The six phases by which the Y2K Project Team has sought, and will seek,
to achieve Y2K readiness throughout Residential Funding are as follows:
<TABLE>
<CAPTION>
PHASE OBJECTIVE
----- ---------
<S> <C>
Phase I -- Awareness To promote Y2K awareness throughout
Residential Funding. Emphasis has
been placed on ensuring that
Components recently purchased (or to
be purchased) by business units are
Y2K-ready prior to the implementation
of such Components.
Phase II -- Inventory To (i) create an inventory of all
Components and (ii) assess the Y2K
risks associated with such
Components.
Phase III -- Assessment To (i) determine which Components are
not Y2K-ready and (ii) decide whether
such Components should be replaced,
retired or repaired.
Phase IV -- Renovation To execute Component replacement,
retirement or repair to ensure Y2K
readiness.
Phase V -- Validation To test Components that have been
repaired to ensure Y2K readiness and
validate "mission critical"
Components that were assessed as
Y2K-ready in Phase III.
Phase VI -- Implementation To deploy repaired and validated
Components.
</TABLE>
<PAGE>
In order to execute the six-phase plan, a combination of internal
resources and external contractors has been, and will be, employed by the Y2K
Project Team.
Y2K PROJECT STATUS
The Y2K project team has completed the six phases for its internal
"mission critical" components. Additionally, the Y2K project team has
completed the renovation and validation of any non-mission critical components
that the Y2K project team and related business units determined to be
necessary. If Residential Funding introduces or replaces, prior to January 1,
2000, any "mission critical" components, the Y2K project team will ensure that
the components conform to the requirements of the above six-phase plan.
The potential impact on Residential Funding of problems related to Y2K,
however, will not depend solely on the corrective measures undertaken by the
Y2K project team. The manner in which Y2K issues are addressed by business
partners, governmental agencies and other entities that provide data to, or
receive data from, Residential Funding, or whose financial condition or
operational capability is important to Residential Funding and its ability to
act as master servicer, will have a significant impact upon Residential
Funding. These entities include, among others, subservicers, the trustee, the
custodian and some depositary institutions, as well as their respective
suppliers and vendors. Accordingly, Residential Funding has communicated, and
will continue to communicate, with some of these parties to assess their Y2K
readiness and evaluate any potential impact on Residential Funding.
Due to the various dates by which Residential Funding"s business partners
anticipate being Y2K ready, it is expected that the Y2K project team will
continue to spend significant time assessing Y2K business partner issues
throughout 1999. Any business partner, including any subservicer, the trustee
and the custodian, that:
o has not provided Residential Funding appropriate documentation
supporting its Y2K efforts
o has not responded in a timely manner to Residential Funding"s
inquiries regarding their Y2K efforts or
o did not expect to be Y2K-ready until after June 30, 1999
has been, and will be, placed in an "at risk" category. Currently, only a very
limited number of subservicers have been placed in the "at-risk" category.
Residential Funding will carefully monitor the efforts and progress of its "at
risk" business partners, and if additional steps are necessary, Residential
Funding will reassess the risk and act accordingly.
During 1998, Residential Funding also commenced a formal business
continuity plan that is designed to address potential Y2K problems and other
possible disruptions. Residential Funding"s business continuity plan has the
following four phases:
<TABLE>
<CAPTION>
PHASE OBJECTIVE
----- ---------
<S> <C>
Phase I -- Business Impact Assessment To assess the impact upon Residential
Funding business units if "mission
critical" components were suddenly
not available or significantly
impaired as a result of a natural
disaster or other type of disruption,
including as a result of Y2K.
Phase II -- Strategic Development To develop broad, strategic plans
regarding the manner in which
Residential Funding will operate in
the aftermath of a natural disaster
or other type of disruption,
including as a result of Y2K.
Phase III -- Business Continuity Planning To develop detailed procedures on how
Residential Funding and individual
business units will continue to
operate in the aftermath of a natural
disaster or other type of disruption,
including as a result of Y2K.
Phase IV -- Validation To test the plans developed in Phases
II and III above.
</TABLE>
As of March 31, 1999, Residential Funding had substantially completed
Phases I, II and III of its business continuity plan. As of June 30, 1999,
Residential Funding had substantially completed Phase IV of the plan.
<PAGE>
RISKS RELATED TO Y2K
Although Residential Funding"s remediation efforts are directed at
eliminating its Y2K exposure, there can be no assurance that these efforts
will fully mitigate the effect of all Y2K problems. If Residential Funding
fails to identify or correct any material Y2K problem, including any problems
related to its mission critical Master Servicing applications, there could be
significant disruptions in its normal business operations. Such disruptions
could have a material adverse effect on Residential Funding"s ability to (i)
collect (and monitor any Subservicer"s collection of) payments on the Mortgage
Loans, (ii) distribute such collections to the Trustee and (iii) provide
reports to Certificateholders as set forth herein. Furthermore, if any
Subservicer, the Trustee or any other business partner or any of their
respective vendors or third party service providers are not Y2K-ready, the
ability to (a) service the Mortgage Loans (in the case of any Subservicer or
any of their respective vendors or third party service providers) and (b) make
distributions to Certificateholders (in the case of the Trustee or any of its
vendors or third party service providers), may be materially and adversely
affected.
This section entitled "Year 2000 Considerations" contains
"forward-looking statements" within the meaning of Section 27A of the
Securities Act. All statements in this section that are not statements of
historical fact are forward-looking statements. Forward-looking statements
made in this Y2K discussion are subject to certain risks and uncertainties.
Important factors that could cause results to differ materially from such
forward-looking statements include, among other things, the ability of
Residential Funding to successfully identify Components that may pose Y2K
problems, the nature and amount of programming required to fix the affected
Components, the costs of labor and consultants related to such efforts, the
continued availability of resources (both personnel and technology) and the
ability of business partners that interface with Residential Funding to
successfully address their Y2K issues.
THE INSURER
The following information has been supplied by Ambac Assurance
Corporation (the "INSURER") for inclusion in this Prospectus Supplement. No
representation is made by the Depositor, the Master Servicer, the Underwriter
or any of their affiliates as to the accuracy or completeness of such
information.
The Insurer is a Wisconsin-domiciled stock insurance corporation
regulated by the Office of the Commissioner of Insurance of the State of
Wisconsin and licensed to do business in 50 states, the District of Columbia,
the Commonwealth of Puerto Rico and the Territory of Guam. The Insurer
primarily insures newly issued municipal and structured finance obligations.
The Insurer is a wholly owned subsidiary of Ambac Financial Group, Inc.
(formerly, AMBAC, Inc.) a 100% publicly-held company. Standard & Poor"s and
Fitch have each assigned a triple-A financial strength rating to the Insurer.
The consolidated financial statements of the Insurer and subsidiaries as
of December 31, 1998 and 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 Current Report on Form 10-K of Ambac
Financial Group, Inc. (which was filed with the Commission on March 30, 1999;
Commission File Number 1-10777) and the unaudited consolidated financial
statements of the Insurer 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 Insurer 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 Class A Certificates shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing such documents.
<PAGE>
The following table sets forth the Insurer"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.
AMBAC ASSURANCE CORPORATION
CONSOLIDATED CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
<TABLE>
<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)
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 Insurer effective January
1, 1998. As this new standard only requires additional information on the
financial statements, it does not affect the Insurer"s financial position
or results of operations.
For additional financial information concerning the Insurer, see the
audited financial statements of the Insurer incorporated by reference herein.
Copies of the financial statements of the Insurer incorporated herein by
reference and copies of the Insurer"s annual statement for the year ended
December 31, 1998 prepared in accordance with statutory accounting standards
are available, without charge, from the Insurer. The address of the Insurer"s
administrative offices and its telephone number are One State Street Plaza,
19th Floor, New York, New York 10004 and (212) 668-0340.
The Insurer makes no representation regarding the Class A Certificates or
the advisability of investing in the Class A Certificates and makes no
representation regarding, nor has it participated in the preparation of, this
Prospectus Supplement other than the information supplied by the Insurer and
presented under the headings "The Insurer" and "Description of the
Certificates -- Certificate Guaranty Insurance Policy" and in the financial
statements incorporated herein by reference.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The yields to maturity and the aggregate amount of distributions on the
Class A Certificates will be affected by the rate and timing of principal
payments on the Mortgage Loans and the amount and timing of Mortgagor defaults
resulting in Realized Losses. Such yields may be adversely affected by a
higher or lower than anticipated rate of principal payments on the Mortgage
Loans. The rate of principal payments on such Mortgage Loans will in turn be
affected by the amortization schedules of the Mortgage Loans, the rate and
timing of principal prepayments thereon by the Mortgagors, liquidations of
defaulted Mortgage Loans, purchases of Mortgage Loans due to certain breaches
of representations and warranties and purchases of Mortgage Loans due to
certain breaches of representations and warranties. The timing of changes in
the rate of prepayments, liquidations and purchases of the Mortgage Loans may,
and the timing of Realized Losses on the Mortgage Loans will, significantly
affect the yield to an investor in the Class A Certificates, even if the
average rate of principal payments experienced over time is consistent with an
investor"s expectation. Since the rate and timing of principal payments on the
<PAGE>
Mortgage Loans will depend on future events and on a variety of factors (as
described herein), no assurance can be given as to such rate or the timing of
principal payments on the Class A Certificates.
The rate and timing of principal payments on and the weighted average
lives of the Class A-I Certificates and Class A-II Certificates will be
affected primarily by the rate and timing of principal payments (including
prepayments, defaults, liquidations and purchases) on the Mortgage Loans in
the related Loan Group.
Investors in the Class A-II Certificates should be aware that the
prepayment of the Mortgage Loans with higher Maximum Net Mortgage Rates may
result in a lower Net WAC Cap Rate.
The interest rates on the Group II Loans adjust annually based upon the
related Index, whereas the Pass-Through Rates on the Class A-II Certificates
adjusts monthly based upon One-Month LIBOR as described under "Description of
the Certificates -- Determination of One-Month LIBOR" herein, subject to the
related Maximum Class A-II Rate and the Net WAC Cap Rate. Consequently, the
interest that becomes due on the Group II Loans during the related Due Period
may not equal the amount of interest that would accrue at One-Month LIBOR plus
the related Class A-II Margin on the Class A-II Certificates during the
related Interest Accrual Period. In particular, because the Pass-Through Rate
on the Class A-II Certificates will adjust monthly, while the interest rates
of the Group II Loans will adjust annually, subject to any applicable Initial
Periodic Rate Cap, Periodic Rate Cap, Maximum Mortgage Rate or Minimum
Mortgage Rate, in a rising interest rate environment, the sum of One-Month
LIBOR plus the related Class A-II Margin may be greater than the Net WAC Cap
Rate as of the first day of the calendar month in which the Interest Accrual
Period begins, possibly resulting in Basis Risk Shortfalls to holders of the
Class A-II Certificates. Any Basis Risk Shortfalls are payable only to the
extent of Excess Cash Flow (to the extent available therefor) and may remain
unpaid on the final Distribution Date. In addition, each of the Indices and
One-Month LIBOR may respond to different economic and market factors, and
there is not necessarily a correlation between any of the Indices and
One-Month LIBOR. Thus, it is possible, for example, that One-Month LIBOR may
rise during periods in which the Indices are stable or are falling or that,
even if One-Month LIBOR and the Indices rise during the same period, One-Month
LIBOR may rise more rapidly than the Indices, potentially resulting in the Net
WAC Cap Rate being lower than One-Month LIBOR plus the related Class A-II
Margin during the related Interest Accrual Period, resulting in Basis Risk
Shortfalls.
The Mortgage Loans generally may be prepaid by the Mortgagors at any time
in full or in part without payment of any prepayment fee or penalty. The Group
I Loans generally contain due-on-sale clauses. The terms of the Pooling and
Servicing Agreement generally require the Master Servicer or any Subservicer,
as the case may be, to enforce any due-on-sale clause to the extent it has
knowledge of the conveyance or the proposed conveyance of the underlying
Mortgaged Property and to the extent permitted by applicable law, except that
any enforcement action that would impair or threaten to impair any recovery
under any related insurance policy will not be required or permitted. The
Group II Loans generally are assumable under certain circumstances if, in the
sole judgment of the Master Servicer or Subservicer, the prospective purchaser
of a Mortgaged Property is creditworthy and the security for such Mortgage
Loan is not impaired by the assumption. Prepayments, liquidations and
purchases of the Mortgage Loans will result in distributions to holders of the
Class A Certificates of principal amounts which would otherwise be distributed
over the remaining terms of the Mortgage Loans. Factors affecting prepayment
(including defaults and liquidations) of mortgage loans include changes in
mortgagors" housing needs, job transfers, unemployment, mortgagors" net equity
in the mortgaged properties, changes in the value of the mortgaged properties,
mortgage market interest rates, solicitations and servicing decisions. In
addition, if prevailing mortgage rates fell significantly below the Mortgage
Rates on the Mortgage Loans, the rate of prepayments (including refinancings)
would be expected to increase. Conversely, if prevailing mortgage rates rose
significantly above the Mortgage Rates on the Mortgage Loans, the rate of
prepayments on the Mortgage Loans would be expected to decrease.
The rate of defaults on the Mortgage Loans will also affect the rate and
timing of principal payments on the Mortgage Loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years. The rate of default on Mortgage Loans which are refinance or limited
documentation mortgage loans, and on Mortgage Loans with high Loan-to-Value
Ratios or high debt-to-income ratios, may be higher than for other types of
Mortgage Loans. Furthermore, the rate and timing of prepayments, defaults and
liquidations on the Mortgage Loans will be affected by the general economic
condition of the region of the country in which the related Mortgaged
Properties are located. The risk of delinquencies and loss is greater and
<PAGE>
prepayments are less likely in regions where a weak or deteriorating economy
exists, as may be evidenced by, among other factors, increasing unemployment
or falling property values.
A Subservicer may allow the refinancing of a Mortgage Loan by accepting
prepayments thereon and permitting a new loan secured by a mortgage on the
same property. In the event of such a refinancing, the new loan would not be
included in the Trust Fund and, therefore, such refinancing would have the
same effect as a prepayment in full of the related Mortgage Loan. A
Subservicer or the Master Servicer will, from time to time, implement programs
designed to encourage refinancing. Such programs may include, without
limitation, modifications of existing loans, targeted solicitations, the
offering of pre-approved applications, reduced origination fees or closing
costs, or other financial incentives. Targeted solicitations may be based on a
variety of factors, including the credit of the borrower or the location of
the Mortgaged Property. In addition, Subservicers or the Master Servicer may
encourage the refinancing of Mortgage Loans, including defaulted Mortgage
Loans, that would permit creditworthy borrowers to assume the outstanding
indebtedness of such Mortgage Loans.
The amount of interest otherwise payable to holders of the Class A
Certificates will be reduced by any interest shortfalls on the Mortgage Loans
to the extent not covered by Subordination or by the Master Servicer in each
case as described herein, including Prepayment Interest Shortfalls and Basis
Risk Shortfalls. Such shortfalls will not be offset by a reduction in the
Servicing Fees payable to the Master Servicer or otherwise, except as
described herein with respect to certain Prepayment Interest Shortfalls. See
"Description of the Certificates -- Interest Distributions" herein for a
discussion of certain possible shortfalls in the collection of interest.
In addition, the yield to maturity on the Class A Certificates will
depend on, among other things, the price paid by the holders of the Class A
Certificates and the related Pass-Through Rate. The extent to which the yield
to maturity of a Class A Certificate is sensitive to prepayments will depend,
in part, upon the degree to which it is purchased at a discount or premium. In
general, if a Class A Certificate is purchased at a premium and principal
distributions thereon occur at a rate faster than assumed at the time of
purchase, the investor"s actual yield to maturity will be lower than that
anticipated at the time of purchase. Conversely, if a Class A Certificate is
purchased at a discount and principal distributions thereon occur at a rate
slower than assumed at the time of purchase, the investor"s actual yield to
maturity will be lower than that anticipated at the time of purchase.
The yield to investors on the Class A-II Certificates will be sensitive
to fluctuations in the level of One-Month LIBOR and may be adversely affected
by the application of the related Maximum Class A-II Rate and the Net WAC Cap
Rate. The prepayment of the Mortgage Loans with higher Mortgage Rates may
result in a lower Net WAC Cap Rate. Investors in the Class A-II Certificates
should also be aware that although the Mortgage Rates on the Group II Loans
will adjust periodically, such increases and decreases will be limited by the
Initial Periodic Rate Caps, Periodic Rate Caps, Maximum Mortgage Rates and
Minimum Mortgage Rates thereon. In addition, the Mortgage Rates on the Group
II Loans will be based on the related Index (which may not rise and fall
consistently with prevailing mortgage rates) plus the related Note Margin
(which may be different from the prevailing margins on other mortgage loans).
As a result, the Mortgage Rates on the Group II Loans at any time may not
equal the prevailing rates for other adjustable rate mortgage loans and the
rate of prepayment may be lower or higher than would otherwise be anticipated.
To the extent the Net WAC Cap Rate is paid on a class of Class A-II
Certificates, the difference between (x) the rate of the lesser of (i)
One-Month LIBOR plus the related Class A-II Margin and (ii) the Maximum Class
A-II Rate and (y) the Net WAC Cap Rate will create a shortfall that will carry
forward with interest thereon. Such shortfall will not by payable by the
Policy. Such shortfalls may remain unpaid on the final Distribution Date,
including the Optional Termination Date.
ASSUMED FINAL DISTRIBUTION DATE
The assumed final Distribution Date with respect to each class of Class A
Certificates is the Distribution Date in November 2029. No event of default
under the Pooling and Servicing Agreement will arise or become applicable
solely by reason of the failure to retire the entire Certificate Principal
Balance of any class of Class A Certificates on or before its assumed related
final Distribution Date.
<PAGE>
WEIGHTED AVERAGE LIFE
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 of
net reduction of principal balance of such security. The weighted average life
of the Class A Certificates will be influenced by, among other things, the
rate at which principal of the related Mortgage Loans is paid, which may be in
the form of scheduled amortization, prepayments or liquidations.
The prepayment model used in this Prospectus Supplement with respect to
the Group I Loans (the "PREPAYMENT ASSUMPTION") represents an assumed rate of
prepayment each month relative to the then outstanding principal balance of a
pool of mortgage loans. A 100% Prepayment Assumption assumes a constant
prepayment rate of 4% per annum of the then outstanding principal balance of
such mortgage loans in the first month of the life of the mortgage loans and
an additional approximate 1.1429% per annum in each month thereafter until the
fifteenth month. Beginning in the fifteenth month and in each month thereafter
during the life of the mortgage loans, a 100% Prepayment Assumption assumes a
constant prepayment rate of 20% per annum each month. As used in the tables
below, a 50% Prepayment Assumption assumes prepayment rates equal to 50% of
the Prepayment Assumption. Correspondingly, a 150% Prepayment Assumption
assumes prepayment rates equal to 150% of the Prepayment Assumption, and so
forth. The Prepayment Assumption does not purport to be a historical
description of prepayment experience or a prediction of the anticipated rate
of prepayment of any pool of mortgage loans, including the Group I Loans.
The prepayment model used in this Prospectus Supplement with respect to
the Group II Loans ("CPR"), assumes that the outstanding principal balance of
the Group II Loans prepays at a constant annual rate. In generating monthly
cash flows, this rate is converted to an equivalent constant monthly rate. To
assume a 30% CPR or any other CPR percentage is to assume that the stated
percentage of the outstanding principal balance of the Group II Loans is
prepaid over the course of a year. No representation is made that the Group II
Loans will prepay at that or any other rate.
The table set forth below has been prepared on the basis of certain
assumptions as described below regarding the weighted average characteristics
of the Mortgage Loans that are expected to be included in the Trust as
described under "Description of the Mortgage Pool" herein and the performance
thereof. The table assumes, among other things, that: (i) as of the date of
issuance of the Class A Certificates, the Group I Loans consist of five groups
of mortgage loans, with the mortgage loans in each group having the following
aggregate characteristics as of the Cut-off Date:
<TABLE>
<CAPTION>
AGGREGATE ORIGINAL REMAINING
PRINCIPAL MORTGAGE SERVICING FEE AMORTIZATION TERM TO
GROUP BALANCE RATE RATE TERM MATURITY
- ----- ------- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C>
1 $10,408,204.57 11.130% 0.55% 111 103
2 50,909,921.99 11.517 0.55 177 167
3 38,334,028.98 11.549 0.55 236 227
4 9,085,297.35 11.692 0.55 298 287
5 35,209,458.02 11.703 0.55 359 351
</TABLE>
(ii) as of the date of issuance of the Class A Certificates, the Group II
Loans consist of two groups of mortgage loans, with the mortgage loans in each
group having the following aggregate characteristics as of the Cut-off Date:
<TABLE>
<CAPTION>
MONTHS
AGGREGATE ORIGINAL REMAINING TO FIRST INITIAL SUBSEQUENT MINIMUM
PRINCIPAL MORTGAGE SERVICING AMORTIZATION TERM TO GROSS ADJUSTMENT PERIODIC PERIODIC MORTGAGE
GROUP BALANCE RATE FEE RATE TERM MATURITY MARGIN DATE CAP CAP RATE
- ----- ------- ---- -------- ---- -------- ------ ---- --- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 840,731.64 10.486% 0.443% 360 353 6.951% 5 2.000% 2.000% 7.700%
2 12,479,327.49 8.669 0.425 360 358 6.105 10 1.991 1.991 6.111
<CAPTION>
MAXIMUM
MORTGAGE
GROUP RATE
- ----- ----
<S> <C>
1 16.486%
2 14.618
</TABLE>
(iii) each Group II Loan adjusts every twelve months, (iv) the scheduled
monthly payment for each Mortgage Loan has been based on its outstanding
balance, interest rate and remaining term to maturity such that the Mortgage
Loan will amortize in amounts sufficient for repayment thereof over its
remaining term to maturity; (v) none of the Seller, the Master Servicer or the
Depositor will repurchase any Mortgage Loan and the Master Servicer does not
exercise its option to purchase the Mortgage Loans and thereby cause a
termination of the Trust on the Optional Termination Date (except where
indicated); (vi) all delinquencies of payments due on or
<PAGE>
prior to the Cut-off Date are brought current, and thereafter there are no
delinquencies or Realized Losses on the Mortgage Loans, and principal payments
on the Mortgage Loans will be timely received together with prepayments, if
any, at the percentages of the Prepayment Assumption and CPR set forth in the
table; (vii) One-Month LIBOR remains constant at 5.45875% per annum and
One-Year U.S. Treasury remains constant at 5.513% per annum; (viii) there is
no Prepayment Interest Shortfall or any other interest shortfall in any month;
(ix) payments on the Certificates will be received on the 25th day of each
month, commencing in December 1999; (x) payments on the Mortgage Loans earn no
reinvestment return; (xi) the expenses described under "Description of the
Certificates -- Interest Distribution" will be paid from Trust assets, and
there are no additional ongoing Trust expenses payable out of the Trust; (xii)
all of the Mortgage Loans accrue interest on the basis of a 360-day year
consisting of twelve 30-day months; and (xiii) the Certificates will be
purchased on November 29, 1999 (collectively, the "STRUCTURING ASSUMPTIONS").
The actual characteristics and performance of the Mortgage Loans will
differ from the assumptions used in constructing the table set forth below,
which is hypothetical in nature and is provided only to give a sense of how
the principal cash flows might behave under varying prepayment scenarios. For
example, it is very unlikely that the Mortgage Loans will prepay at a constant
percentage of the Prepayment Assumption or CPR until maturity or that all of
the Mortgage Loans will prepay at the same rate of prepayment. Moreover, the
diverse remaining terms to stated maturity and Mortgage Rates of the Mortgage
Loans could produce slower or faster principal distributions than indicated in
the table at the various constant percentages of the Prepayment Assumption or
CPR specified, even if the weighted average remaining term to stated maturity
and weighted average Mortgage Rates of the Mortgage Loans in such Mortgage
Pool are as assumed. Any difference between such assumptions and the actual
characteristics and performance of the Mortgage Loans, or actual prepayment
experience, will affect the percentages of initial Certificate Principal
Balances of the related Certificates outstanding over time and the weighted
average lives of the Class A Certificates.
Subject to the foregoing discussion and assumptions, the following table
indicates the weighted average life of the Class A Certificates, and sets
forth the percentages of the initial Certificate Principal Balance of the
Class A Certificates that would be outstanding after each of the dates shown
at various constant percentages of the Prepayment Assumption and CPR.
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING OF THE CLASS A
CERTIFICATES AT THE
FOLLOWING CONSTANT PERCENTAGES OF THE PREPAYMENT ASSUMPTION AND CPR
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A-I Class A-II
Fixed Rate Mortgage Loan ---------------------------------------------------------------- --------------------
(Prepayment Assumption) 0% 50% 75% 100% 125% 150% 0% 50%
- --------------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Adjustable Rate Mortgage Loan
(CPR) 0% 20% 25% 30% 35% 40% 0% 20%
- --------------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Distribution Date
Initial Percentage............... 100% 100% 100% 100% 100% 100% 100% 100%
November 25, 2000................ 96 86 82 77 72 67 99 75
November 25, 2001................ 93 75 66 58 51 44 98 58
November 25, 2002................ 90 65 54 44 37 30 98 44
November 25, 2003................ 87 55 43 34 27 20 97 34
November 25, 2004................ 83 47 35 26 19 14 96 25
November 25, 2005................ 79 40 29 20 14 9 96 19
November 25, 2006................ 75 35 23 15 10 6 95 14
November 25, 2007................ 70 29 19 12 7 4 94 11
November 25, 2008................ 64 25 15 9 5 2 93 8
November 25, 2009................ 59 21 12 7 3 1 92 5
November 25, 2010................ 54 17 9 5 2 1 90 3
November 25, 2011................ 48 14 7 3 1 * 89 2
November 25, 2012................ 41 11 5 2 1 0 87 *
November 25, 2013................ 35 8 4 1 * 0 85 0
November 25, 2014................ 32 7 3 1 0 0 84 0
November 25, 2015................ 29 6 2 * 0 0 81 0
November 25, 2016................ 26 5 1 * 0 0 79 0
November 25, 2017................ 22 4 1 0 0 0 77 0
November 25, 2018................ 18 2 * 0 0 0 74 0
November 25, 2019................ 17 2 * 0 0 0 70 0
November 25, 2020................ 15 2 * 0 0 0 67 0
November 25, 2021................ 14 1 0 0 0 0 62 0
November 25, 2022................ 12 1 0 0 0 0 58 0
November 25, 2023................ 10 * 0 0 0 0 53 0
November 25, 2024................ 8 * 0 0 0 0 47 0
November 25, 2025................ 7 0 0 0 0 0 40 0
November 25, 2026................ 5 0 0 0 0 0 33 0
November 25, 2027................ 3 0 0 0 0 0 24 0
November 25, 2028................ 0 0 0 0 0 0 12 0
November 25, 2029................ 0 0 0 0 0 0 0 0
Weighted Average Life in Years**
(to Maturity)................... 12.4 6.1 4.6 3.7 3.0 2.5 22.2 3.5
Weighted Average Life in Years**
(to Call)....................... 12.3 5.7 4.3 3.4 2.8 2.3 21.4 3.5
</TABLE>
TABLE CONT.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Fixed Rate Mortgage Loan
(Prepayment Assumption) 75% 100% 125% 150%
- --------------------------------- --------- --------- --------- ---------
Adjustable Rate Mortgage Loan
(CPR) 25% 30% 35% 40%
- --------------------------------- --------- --------- --------- ---------
Distribution Date
Initial Percentage............... 100% 100% 100% 100%
November 25, 2000................ 70 65 60 55
November 25, 2001................ 50 43 36 30
November 25, 2002................ 35 28 22 17
November 25, 2003................ 25 19 13 9
November 25, 2004................ 18 12 8 4
November 25, 2005................ 12 8 4 2
November 25, 2006................ 8 4 2 *
November 25, 2007................ 5 2 * 0
November 25, 2008................ 3 1 0 0
November 25, 2009................ 2 0 0 0
November 25, 2010................ * 0 0 0
November 25, 2011................ 0 0 0 0
November 25, 2012................ 0 0 0 0
November 25, 2013................ 0 0 0 0
November 25, 2014................ 0 0 0 0
November 25, 2015................ 0 0 0 0
November 25, 2016................ 0 0 0 0
November 25, 2017................ 0 0 0 0
November 25, 2018................ 0 0 0 0
November 25, 2019................ 0 0 0 0
November 25, 2020................ 0 0 0 0
November 25, 2021................ 0 0 0 0
November 25, 2022................ 0 0 0 0
November 25, 2023................ 0 0 0 0
November 25, 2024................ 0 0 0 0
November 25, 2025................ 0 0 0 0
November 25, 2026................ 0 0 0 0
November 25, 2027................ 0 0 0 0
November 25, 2028................ 0 0 0 0
November 25, 2029................ 0 0 0 0
Weighted Average Life in Years**
(to Maturity)................... 2.8 2.3 1.9 1.6
Weighted Average Life in Years**
(to Call)....................... 2.8 2.3 1.9 1.6
</TABLE>
- ---------
* Indicates a number that is greater than zero but less than 0.5%.
** The weighted average life of a Certificate is determined by (i) multiplying
the net reduction, if any, of the Certificate Principal Balance by the
number of years from the date of issuance of the Certificate to the related
Distribution Date, (ii) adding the results, and (iii) dividing the sum by
the aggregate of the net reductions of the Certificate Principal Balance
described in (i) above.
THIS TABLE HAS BEEN PREPARED BASED ON THE STRUCTURING ASSUMPTIONS (INCLUDING
THE ASSUMPTIONS REGARDING THE CHARACTERISTICS AND PERFORMANCE OF THE MORTGAGE
LOANS WHICH DIFFER FROM THE ACTUAL CHARACTERISTICS AND PERFORMANCE THEREOF)
AND SHOULD BE READ IN CONJUNCTION THEREWITH.
<PAGE>
For additional considerations relating to the yield on the Certificates,
see "Certain Yield and Prepayment Considerations" herein.
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement dated as of November 1, 1999, among the Depositor, the Master
Servicer and the Trustee. Reference is made to the Prospectus for important
information in addition to that set forth herein regarding the terms and
conditions of the Pooling and Servicing Agreement and the Class A
Certificates. The Trustee, or any of its affiliates, in its individual or any
other capacity, may become the owner or pledgee of Certificates with the same
rights as it would have if it were not Trustee. The Trustee will appoint
Norwest Bank Minnesota, National Association to serve as Custodian in
connection with the Certificates. The Class A Certificates will be
transferable and exchangeable at the corporate trust office of the Trustee,
which will serve as Certificate Registrar and Paying Agent. The Depositor will
provide a prospective or actual Certificateholder, without charge, on written
request, a copy (without exhibits) of the Pooling and Servicing Agreement.
Requests should be addressed to the President, Bear Stearns Asset Backed
Securities, Inc., 245 Park Avenue, New York, New York 10167. In addition to
the circumstances described in the Prospectus, the Depositor may terminate the
Trustee for cause under certain circumstances. See "The Agreements --
Resignation of Trustees" in the Prospectus.
THE MASTER SERVICER
The following information has been supplied by Residential Funding for
inclusion herein. No representation is made by the Depositor or its affiliates
as to the accuracy or completeness of such information.
Residential Funding, an indirect wholly-owned subsidiary of GMAC Mortgage
Group, Inc., will act as master servicer for the Certificates pursuant to the
Pooling and Servicing Agreement. Residential Funding, either directly or
through affiliates, buys mortgage loans under several loan purchase programs
from mortgage loan originators or sellers nationwide, including affiliates,
that meet its seller/servicer eligibility requirements and services mortgage
loans for its own account and for others. Residential Funding"s principal
executive offices are located at 8400 Normandale Lake Boulevard, Suite 700,
Minneapolis, Minnesota 55437. Its telephone number is (612) 832-7000.
Residential Funding conducts operations from its headquarters in Minneapolis
and from offices located in California, Colorado, Connecticut, Florida,
Georgia, Maryland, New Jersey, New York, North Carolina, Pennsylvania, Rhode
Island and Texas. At December 31, 1998, Residential Funding was master
servicing a first lien loan portfolio of approximately $55.0 billion and a
second lien loan portfolio of approximately $2.9 billion. See also
"Description of the Mortgage Pool -- Residential Funding" herein.
The following table sets forth certain information concerning the
delinquency experience (including pending foreclosures) on one- to four-family
residential mortgage loans that generally complied with Residential Funding"s
mortgage loan program for sub-prime mortgage loans (the "ALTERNET MORTGAGE
PROGRAM") at the time of purchase by Residential Funding and were being master
serviced by Residential Funding on December 31, 1997, December 31, 1998 and
September 30, 1999. Due to the substantial differences between the types of
loans included in the Mortgage Pool and the AlterNet Program loans, there can
be no assurance that the information set forth below will be representative of
the delinquency and loss experience of the Mortgage Loans, and in particular
the Portfolio Transaction Loans.
As used herein, a loan is considered to be "30 to 59 days" or "30 or more
days" delinquent when a payment due on any due date remains unpaid as of the
close of business on the next following monthly due date. However, since the
determination as to whether a loan falls into this category is made as of the
close of business on the last business day of each month, a loan with a
payment due on April 1 that remained unpaid as of the close of business on
April 30 would still be considered current as of April 30. If that payment
remained unpaid as of the close of business on May 31, the loan would then be
considered to be 30 to 59 days delinquent as of the Cut-off Date. Delinquency
information presented herein as of the Cut-off Date is determined and prepared
as of the close of business on the last business day immediately prior to the
Cut-off Date.
<TABLE>
<CAPTION>
ALTERNET MORTGAGE PROGRAM DELINQUENCY EXPERIENCE(1)
AT DECEMBER 31, 1997 AT DECEMBER 31, 1998 AT SEPTEMBER 30, 1999
---------------------- ---------------------- ----------------------
BY NO. BY DOLLAR BY NO. BY DOLLAR BY NO. BY DOLLAR
OF AMOUNT OF AMOUNT OF AMOUNT
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
----------- --------- ----------- --------- ----------- ---------
(DOLLAR AMOUNTS IN (DOLLAR AMOUNTS IN (DOLLAR AMOUNTS IN
THOUSANDS) THOUSANDS) THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Loan Portfolio.......... 20,758 $2,201,668 57,562 $5,370,940 88,441 $8,045,968
Period of Delinquency
31 to 59 days............. 397 41,416 1,442 135,153 2,085 177,154
60 to 89 days............. 106 9,836 621 60,031 946 81,463
90 days or more(2)........ 70 6,325 990 83,139 1,723 130,216
Foreclosures Pending.......... 720 83,363 1,062 110,238 1,937 185,468
--------- --------- --------- --------- --------- ---------
Total Delinquent Loans........ 1,293 $ 140,940 4,115 $ 388,561 6,691 $ 574,300
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Percent of Loan Portfolio..... 6.23% 6.40% 7.149% 7.235% 7.565% 7.138%
</TABLE>
<TABLE>
<CAPTION>
ALTERNET MORTGAGE PROGRAM FORECLOSURE EXPERIENCE(1)
AT OR FOR
AT OR FOR AT OR FOR THE NINE MONTH
THE YEAR ENDED THE YEAR ENDED PERIOD ENDING
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1998 1999
-------------- -------------- --------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Total Loan Portfolio....................... $2,201,668 $5,370,940 $8,045,968
Average Portfolio Balance.................. $1,893,046 $3,358,709 $6,679,070
Foreclosed Loans(2)........................ $ 17,532 $ 28,417 $ 58,804
Liquidated Foreclosed Loans(3)............. $ 23,567 $ 42,653 $ 36,087
Foreclosed Loans Ratio..................... 0.796% 0.529% 0.731%
Gross Loss(4).............................. $ 5,371 $ 10,388 $ 9,102
Gross Loss Ratio........................... 0.284% 0.309% 0.136%
Covered Loss(5)............................ $ 3,648 $ 8,717 $ 7,580
Net Loss(6)................................ $ 1,723 $ 1,670 $ 1,521
Net Loss Ratio............................. 0.091% 0.050% 0.023%
Excess Recovery(7)......................... $ 121 $ 137 $ 60
</TABLE>
- ---------
(1) The tables relate only to the mortgage loans referred to above.
(2) For purposes of these tables, Foreclosed Loans includes the principal
balance of mortgage loans secured by mortgaged properties the title to
which has been acquired by Residential Funding, by investors or by an
insurer following foreclosure or delivery of a deed in lieu of foreclosure
and which had not been liquidated by the end of the period indicated.
(3) Liquidated Foreclosed Loans is the sum of the principal balances of the
foreclosed loans liquidated during the period indicated.
(4) Gross Loss is the sum of gross losses less net gains (Excess Recoveries)
on all Mortgage Loans liquidated during the period indicated. Gross Loss
for any Mortgage Loan is equal to the difference between (a) the principal
balance plus accrued interest plus all liquidation expenses related to
such Mortgage Loan and (b) all amounts received in connection with the
liquidation of the related Mortgaged Property, excluding amounts received
from mortgage pool or special hazard insurance or other forms of credit
enhancement, as described in footnote (4) below. Net gains from the
liquidation of mortgage loans are identified in footnote (6) below.
(5) Covered Loss, for the period indicated, is equal to the aggregate of all
proceeds received in connection with liquidated Mortgage Loans from
mortgage pool insurance, special hazard insurance (but not including
primary mortgage insurance, hazard insurance or other insurance available
for specific mortgaged properties)
(FOOTNOTES CONTINUED ON NEXT PAGE)
(FOOTNOTES CONTINUED FROM PREVIOUS PAGE)
or other insurance as well as all proceeds received from or losses borne
by other credit enhancement, including subordinate certificates.
(6) Net Loss is determined by subtracting Covered Loss from Gross Loss. As is
the case in footnote (3) above, Net Loss indicated here may reflect Excess
Recovery (see footnote (6) below). Net Loss includes losses on mortgage
loan pools which do not have the benefit of credit enhancement.
(7) Excess Recovery is calculated only with respect to defaulted Mortgage
Loans as to which the liquidation of the related Mortgaged Property
resulted in recoveries in excess of the principal balance plus accrued
interest thereon plus all liquidation expenses related to such Mortgage
Loan. Excess recoveries are not applied to reinstate any credit
enhancement, and generally are not allocated to holders of Certificates.
-------------------
There can be no assurance that the delinquency and foreclosure experience
set forth above will be representative of the results that may be experienced
with respect to the Mortgage Loans.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicing Fee for each Mortgage Loan is payable out of the interest
payments on such Mortgage Loan. The Servicing Fee Rate in respect of each
Mortgage Loan will be at least 0.30% per annum of the outstanding principal
balance of such Mortgage Loan. The Servicing Fee consists of (a) servicing
compensation payable to the Master Servicer in respect of its master servicing
activities, and (b) subservicing and other related compensation payable to the
related primary servicer or Subservicer, as applicable (including such
compensation paid to the Master Servicer as the direct servicer of a Mortgage
Loan for which there is no primary servicer or Subservicer). The primary
compensation to be paid to the Master Servicer in respect of its master
servicing activities will be 0.05% per annum of the outstanding principal
balance of each Mortgage Loan. The primary servicer or Subservicer, as
applicable, is entitled to servicing compensation in a minimum amount ranging
from 0.25% to 0.50% per annum of the outstanding principal balance of each
Mortgage Loan serviced by it. As of the Cut-off Date, the weighted average of
the Servicing Fee Rates for the Mortgage Loans is approximately 0.5395% per
annum. The Master Servicer is obligated to pay certain ongoing expenses
associated with the Trust and incurred by the Master Servicer in connection
with its responsibilities under the Pooling and Servicing Agreement. See
"Servicing of Loans -- Deposits and Withdrawals from the Collection Account"
in the Prospectus for information regarding other possible compensation to the
Master Servicer and the primary servicer or Subservicer, as applicable, and
for information regarding expenses payable by the Master Servicer.
VOTING RIGHTS
Certain actions specified in the Prospectus that may be taken by holders
of Certificates evidencing a specified percentage of all undivided interests
in the Trust may be taken by holders of Certificates entitled in the aggregate
to such percentage of the Voting Rights. 97.25% of all Voting Rights will be
allocated among all holders of the Class A Certificates in proportion to their
then outstanding Certificate Principal Balances, 1% and 1% of all Voting
Rights will be allocated among the holders of the Class SB-I Certificates and
Class SB-II Certificates, respectively, and 0.25%, 0.25% and 0.25% of all
Voting Rights will be allocated to holders of the Class R-I, Class R-II and
Class R-III Certificates, respectively, in proportion to the Percentage
Interests evidenced by their Certificates. The "PERCENTAGE INTEREST" of a
Class A Certificate is equal to the percentage obtained by dividing the
initial Certificate Principal Balance of such Certificate by the aggregate
initial Certificate Principal Balance of all of the Certificates of such
class. So long as there does not exist a failure by the Insurer to make a
required payment under the Policy (such event, a "CERTIFICATE INSURER
DEFAULT"), the Insurer shall have the right to exercise all rights of the
holders of the Class A Certificates under the Pooling and Servicing Agreement
without any consent of such holders, and such holders may exercise such rights
only with the prior written consent of the Insurer except as provided in the
Pooling and Servicing Agreement.
TERMINATION
The circumstances under which the obligations created by the Pooling and
Servicing Agreement will terminate in respect of the Certificates are
described in "Description of the Securities -- Optional Redemption, Purchase
or Termination" in the Prospectus. The Master Servicer will have the option on
any Distribution Date when the aggregate Stated Principal Balance of the
Mortgage Loans is less than 10% of the initial aggregate principal balance of
the Mortgage Loans as of the Cut-off Date (the "OPTIONAL TERMINATION DATE")
(i) to purchase all remaining Mortgage Loans and other assets in the Trust
related thereto (except for the Policy), thereby effecting early retirement of
the Class A Certificates, or (ii) to purchase in whole, but not in part, the
Class A Certificates; provided, however, in each case, that no such early
termination of the Trust will be permitted if it would result in a draw under
the Policy unless the Insurer consents to such termination. Any such purchase
of Mortgage Loans and other assets of the Trust related thereto for the Class
A Certificates shall be made at a price equal to the sum of (a) 100% of the
unpaid principal balance of each Mortgage Loan (or, if less than such unpaid
principal balance, the fair market value of the related underlying Mortgaged
Properties with respect to the Mortgage Loans as to which title to such
underlying Mortgaged Properties has been acquired) (net of any unreimbursed
Advance attributable to principal) as of the date of repurchase, (b) accrued
interest thereon at the Net Mortgage Rate plus the Policy Premium Rate to, but
not including, the first day of the month in which such repurchase price is
distributed, (c) any amounts due to the Insurer pursuant to the Insurance
Agreement and (d) any unpaid Prepayment Interest Shortfalls and Basis Risk
Shortfalls, as applicable, together with interest thereon. Distributions on
the Class A Certificates in respect of any such optional termination will be
paid, first, to the Class A-I Certificates and Class A-II Certificates on a
pro rata basis and second, except as set forth in the Pooling and Servicing
Agreement, to the related Class SB and Class R Certificates. The proceeds of
any such distribution may not be sufficient to distribute the full amount to
the related Class A Certificates if the purchase price is based in part on the
fair market value of any underlying Mortgaged Property and such fair market
value is less than 100% of the unpaid principal balance of the related
Mortgage Loan; provided, however, with respect to the Class A Certificates, if
such amount is an Insured Amount, such amount will be paid under the Policy.
Any such purchase of Mortgage Loans and termination of the Trust requires the
consent of the Insurer if it would result in a draw on the Policy, subject to
the terms thereof.
Any such purchase of the Class A Certificates as discussed above, will be
made at a price equal to 100% of the Certificate Principal Balance thereof
plus the sum of interest accrued thereon at the applicable Pass-Through Rate
(including any unpaid Prepayment Interest Shortfalls, unpaid Basis Risk
Shortfall Carry-Forward Amount and accrued interest thereon) and any
previously accrued and unpaid interest. Upon the purchase of the Class A
Certificates or at any time thereafter, at the option of the Master Servicer
or the Depositor, the Mortgage Loans may be sold, thereby effecting a
retirement of the Class A Certificates and the termination of the Trust, or
the Class A Certificates so purchased may be held or resold by the Master
Servicer. Upon presentation and surrender of the Class A Certificates in
connection with a purchase thereof, the holders of the Class A Certificates
will receive an amount equal to the Certificate Principal Balance of their
class plus interest accrued thereon at the related Pass-Through Rate plus any
previously accrued and unpaid interest.
THE MORTGAGE LOAN PURCHASE AGREEMENT
The Mortgage Loans to be deposited in the Trust Fund by the Depositor will
be purchased by the Depositor from the Seller pursuant to the Mortgage Loan
Purchase Agreement dated as of November 23, 1999 (the "MORTGAGE LOAN PURCHASE
AGREEMENT") among the Seller, the Depositor and Bear, Stearns & Co. Inc. The
following summary describes certain terms of the Mortgage Loan Purchase
Agreement and is qualified in its entirety by reference to the Mortgage Loan
Purchase Agreement.
PURCHASE OF MORTGAGE LOANS
Pursuant to the Mortgage Loan Purchase Agreement, the Seller will transfer
and assign to the Depositor all of its right, title and interest in and to the
Mortgage Loans and the Mortgage Note, mortgages and other documents related
thereto (collectively, the "Related Documents"). The purchase prices for the
Mortgage Loans are specified percentages of the face amounts thereof as of the
time of transfer and are payable by the Depositor as provided in the Mortgage
Loan Purchase Agreement.
The Mortgage Loan Purchase Agreement will require that, within the time
period specified therein, the Seller deliver to the Trustee (or the Custodian)
the Mortgage Loans sold by the Seller and the Related Documents for such
Mortgage Loans. In lieu of delivery of original mortgages, the Seller may
deliver true and correct copies thereof which have been certified as to
authenticity by the appropriate county recording office where such mortgage is
recorded.
REPRESENTATIONS AND WARRANTIES
Residential Funding will make certain limited representations and
warranties to the Depositor regarding the Mortgage Loans as of the date of
issuance of the Certificates, including, among other things, (a) the
information with respect to the Mortgage Loans set forth in the schedule
attached to the Mortgage Loan Purchase Agreement is true and correct in all
material respects and (b) immediately prior to the sale of such Mortgage Loans
to the Depositor, the Seller was the sole owner and holder of such Mortgage
Loans free and clear of any and all liens and security interests. The Seller
will also represent and warrant that, among other things, as of the Closing
Date, (a) the Mortgage Loan Purchase Agreement constitutes a legal, valid and
binding obligation of the Seller and (b) the Mortgage Loan Purchase Agreement
constitutes a valid transfer and assignment of all right, title and interest
of the Seller in and to the Mortgage Loans and the proceeds thereof. The
benefit of the representations and warranties made by the Seller will be
assigned to the Trust Fund. Residential Funding will be required to repurchase
or substitute for any Mortgage Loan as to which a breach of its
representations and warranties with respect to such Mortgage Loan occurs if
such breach materially and adversely affects the interests of the
Certificateholders or the Insurer in any such Mortgage Loan. The Depositor, as
assignee of Residential Funding, will also assign to the Trustee for the
benefit of the Certificateholders and the Insurer its rights, title and
interest in the Mortgage Loan Purchase Agreement. However, Residential Funding
will not be required to repurchase or substitute for any Mortgage Loan in the
event of a breach of its representations and warranties with respect to such
Mortgage Loan if the substance of any such breach also constitutes fraud in
the origination of such affected Mortgage Loan. In no event will any of the
foregoing representations and warranties include any representation or
warranty that any Portfolio Transaction Loan was originated in accordance with
any specific set of underwriting guidelines.
Within 90 days of the Closing Date, Norwest Bank Minnesota, N.A. (the
"CUSTODIAN") will review or cause to be reviewed the Mortgage Loans and the
Related Documents, and if any Mortgage Loan or related document is found to be
defective in any material respect, which may materially and adversely affect
the value of the related Mortgage Loan, or the interests of the Trustee (as
pledgee of the Mortgage Loans), the Certificateholders or the Insurer in such
Mortgage Loan and such defect is not cured within 90 days following
notification thereof to the Seller and the Trust Fund by the Custodian, the
Seller will be obligated under the Mortgage Loan Purchase Agreement to deposit
the Repurchase Price into the Custodial Account. In lieu of any such deposit,
the Seller may substitute a Qualified Substitute Mortgage Loan; provided that
such substitution may be subject to the delivery of an opinion of counsel
regarding certain tax matters. Any such purchase or substitution will result
in the removal of such Mortgage Loan required to be removed from the Trust
Fund (each such Mortgage Loan, a "DELETED LOAN"). The obligation of the Seller
to remove Deleted Loans sold by it from the Trust Fund is the sole remedy
regarding any defects in the Mortgage Loans sold by the Seller and Related
Documents for such Mortgage Loans available against the Seller.
With respect to any Mortgage Loan, the "REPURCHASE PRICE" is equal to the
Stated Principal Balance of such Mortgage Loan at the time of any removal
described above plus accrued and unpaid interest thereon to the date of
removal. In connection with the substitution of a Qualified Substitute
Mortgage Loan, the Seller will be required to deposit in the Custodial Account
an amount (the "SUBSTITUTION ADJUSTMENT AMOUNT") equal to the excess of the
Stated Principal Balance of the related Deleted Loan to be removed from the
Trust Fund over the Stated Principal Balance of such Qualified Substitute
Mortgage Loan.
A "QUALIFIED SUBSTITUTE MORTGAGE LOAN" is a home loan substituted by the
Seller for a Deleted Loan which must, on the date of such substitution, (i)
have an outstanding Stated Principal Balance (or in the case of a substitution
of more than one Mortgage Loan for a Deleted Loan, an aggregate Stated
Principal Balance) not in excess of the Stated Principal Balance relating to
such Deleted Loan; (ii) have a Loan Rate no lower than and not more than 1% in
excess of the Loan Rate of such Deleted Loan; (iii) have a Loan-to-Value Ratio
at the time of substitution no higher than that of the Deleted Loan at the
time of substitution; (iv) have, at the time of substitution, a remaining term
to maturity not more than one year earlier and not later than the remaining
term to maturity of the Deleted Loan; (v) comply with each representation and
warranty as to the Mortgage Loans set forth in the Mortgage Loan Purchase
Agreement (deemed to be made as of the date of substitution); (vi) be eligible
for inclusion in a REMIC; and (vii) satisfy certain other conditions specified
in the Pooling and Servicing Agreement.
In addition, the Seller will be obligated to deposit the Repurchase Price
or substitute a Qualified Substitute Mortgage Loan with respect to a Mortgage
Loan as to which there is a breach of a representation or warranty in the
Mortgage Loan Purchase Agreement and such breach is not cured by the Seller
within the time provided in the Mortgage Loan Purchase Agreement.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Several separate REMIC elections will be made with respect to the Trust
Fund (other than the Reserve Fund) for federal income tax purposes (the REMICs
formed thereby being referred to as the "LOWER TIER REMICs" and the "UPPER
TIER REMIC"). Upon the issuance of the Class A Certificates, Brown & Wood,
LLP, counsel to the Depositor, will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the Pooling and
Servicing Agreement, for federal income tax purposes, each Lower Tier REMIC
and the Upper Tier REMIC will qualify as a REMIC under Sections 860A through
860G of the Code.
Each Lower Tier REMIC will issue uncertificated regular interests and
those interests will be held entirely by the REMIC immediately above it in the
tiered structure. Each of the Lower Tier REMICs and the Upper Tier REMIC will
designate a single class of interests as the residual interest in that REMIC.
The Class R Certificate will represent ownership of the residual interests in
each of the REMICs. Elections will be made to treat each Lower Tier REMIC and
the Upper Tier REMIC as a REMIC for federal income tax purposes.
For federal income tax purposes the Class A Certificates (exclusive of the
right of the Class A-II Certificates to receive payments, if any, from the
Reserve Fund) and the Class SB Certificates will represent the "regular
interests" in, and generally will be treated as debt obligations of the Upper
Tier REMIC.
For federal income tax reporting purposes, the Class A Certificates will
not be treated as having been issued with original issue discount. The
prepayment assumption that will be used in determining the rate of accrual of
market discount and premium, if any, for federal income tax purposes will be
based on the assumption that subsequent to the date of any determination the
Group I Loans and the Group II Loans will prepay at a rate equal to 100% of
the Prepayment Assumption and 30% CPR, respectively. No representation is made
that the Mortgage Loans will prepay at those rates or at any other rate. See
"Certain Federal Income Tax Considerations -- Taxation of Debt Securities --
Interest and Acquisition Discount" in the Prospectus.
The IRS has issued the OID Regulations under sections 1271 to 1275 of the
Code generally addressing the treatment of debt instruments issued with
original issue discount. Purchasers of the Class A-II Certificates should be
aware that Section 1272(a)(6) of the Code and the OID Regulations do not
adequately address certain issues relevant to, or applicable to, prepayable
securities bearing a variable rate of interest such as the Class A-II
Certificates. In the absence of other authority, the Master Servicer intends
to be guided by certain principles of the OID Regulations applicable to
variable rate debt instruments in determining whether such Certificates should
be treated as issued with original issue discount and in adapting the
provisions of Section 1272(a)(6) of the Code to such Certificates for the
purpose of preparing reports furnished to Certificateholders and the IRS.
Because of the uncertainties concerning the application of Section 1272(a)(6)
of the Code to such Certificates and because the rules relating to debt
instruments having a variable rate of interest are limited in their
application in ways that could preclude their application to such Certificates
even in the absence of Section 1272(a)(6) of the Code, the IRS could assert
that the Class A-II Certificates should be governed by some other method not
yet set forth in regulations or should be treated as having been issued with
original issue discount. Prospective purchasers of the Class A-II Certificates
are advised to consult their tax advisors concerning the tax treatment of such
Certificates.
In certain circumstances the OID Regulations permit the holder of a debt
instrument to recognize original issue discount under a method that differs
from that used by the issuer. Accordingly, the holder of an Class A
Certificate may be able to select a method for recognizing original issue
discount that differs from that used by the Master Servicer in preparing
reports to the Certificateholders and the IRS.
Each holder of a Class A-II Certificate is deemed to own an undivided
beneficial ownership interest in two assets, a REMIC regular interest and the
right to receive payments from the Reserve Fund in respect of the Basis
Risk Shortfall Carry-Forward Amount. The Reserve Fund is not an asset of the
Lower Tier REMICs or Upper Tier REMIC. The treatment of amounts received by a
Class A-II Certificateholder under such Certificateholder"s right to receive
the Basis Risk Shortfall Carry-Forward Amount will depend on the portion, if
any, of the Class A-II Certificateholder"s purchase price allocable thereto.
Under the REMIC Regulations, each holder of a Class A-II Certificate must
allocate its purchase price for the Class A-II Certificate between its
undivided interest in the REMIC regular interest and its undivided interest in
the right to receive payments from the Reserve Fund in respect of the Basis
Risk Shortfall Carry-Forward Amount in accordance with the relative fair
market values of each property right. The Trustee intends to treat payments
made to the holders of the Class A-II Certificates with respect to the Basis
Risk Shortfall Carry-Forward Amount as includible in income based on the
regulations relating to notional principal contracts (the "NOTIONAL PRINCIPAL
CONTRACT REGULATIONS"). The OID Regulations provide that the Trust"s
allocation of the issue price is binding on all holders unless the holder
explicitly discloses on its tax return that its allocation is different from
the Trust"s allocation. For tax reporting purposes, the Master Servicer
estimates that Basis Risk Shortfall Carry-Forward Amount has a de minimis
value. Under the REMIC Regulations, the Master Servicer is required to account
for the REMIC regular interest and the right to receive payments from the
Reserve Fund in respect of the Basis Risk Shortfall Carry-Forward Amount as
discrete property rights. Holders of the Class A-II Certificates are advised
to consult their own tax advisors regarding the allocation of issue price,
timing, character and source of income and deductions resulting from the
ownership of the Class A-II Certificates. Treasury regulations have been
promulgated under Section 1275 of the Code generally providing for the
integration of a "qualifying debt instrument" with a hedge if the combined
cash flows of the components are substantially equivalent to the cash flows on
a variable rate debt instrument. However, such regulations specifically
disallow integration of debt instruments subject to Section 1272(a)(6) of the
Code. Therefore, holders of the Class A-II Certificates will be unable to use
the integration method provided for under such regulations with respect to
such Class A-II Certificates. If the Trustee"s treatment of Basis Risk
Shortfall Carry-Forward Amount is respected, ownership of the right to the
Basis Risk Shortfall Carry-Forward Amount will nevertheless entitle the owner
to amortize the separate price paid for the right to the Basis Risk Shortfall
Carry-Forward Amount under the Notional Principal Contract Regulations.
In the event that the Class A-II Certificateholder"s rights to receive the
Basis Risk Shortfall Carry Forward Amounts is characterized as a "notional
principal contract" for federal income tax purposes, upon the sale of a Class
A-II Certificate, the amount of the sale allocated to the selling Class A-II
Certificateholder"s right to receive payments from the Reserve Fund in respect
of the Basis Risk Shortfall Carry-Forward Amount would be considered a
"termination payment" under the Notional Principal Contract Regulations
allocable to the related Class A-II Certificate. A Class A-II
Certificateholder will have gain or loss from such a termination of the right
to receive payments from the Reserve Fund in respect of the Basis Risk
Shortfall Carry-Forward Amount equal to (i) any termination payment it
received or is deemed to have received minus (ii) the unamortized portion of
any amount paid (or deemed paid) by such Certificateholder upon entering into
or acquiring its interest in the right to receive payments from the Reserve
Fund in respect of the Basis Risk Shortfall Carry-Forward Amount.
Gain or loss realized upon the termination of the right to receive
payments from the Reserve Fund in respect of the Basis Risk Shortfall
Carry-Forward Amount will generally be treated as capital gain or loss.
Moreover, in the case of a bank or thrift institution, Code Section 582(c)
would likely not apply to treat such gain or loss as ordinary.
This paragraph applies to the Class A-II Certificates exclusive of any
rights in the Reserve Fund. The Class A-II Certificates will be treated as
assets described in Section 7701(a)(19)(C) of the Code and "real estate
assets" under Section 856(c)(4)(A) of the Code generally in the same
proportion that the assets of the Trust would be so treated. In addition,
interest on the Class A-II Certificates will be treated as "interest on
obligations secured by mortgages on real property" under Section 856(c)(3)(B)
of the Code generally to the extent that such Class A-II Certificates are
treated as "real estate assets" under Section 856(c)(4)(A) of the Code.
Moreover, the Class A-II Certificates will be "qualified mortgages" within the
meaning of Section 860G(a)(3) of the Code. However, prospective investors in
Class A-II Certificates that will be generally treated as assets described in
Section 860G(a)(3) of the Code should note that, notwithstanding such
treatment, any repurchase of such a Certificate pursuant to the right of the
Master Servicer or the Depositor to repurchase such Class A-II Certificates
may adversely affect any REMIC that holds such Class A-II Certificates if such
repurchase is made under circumstances giving rise to a Prohibited Transaction
Tax. See "Pooling and Servicing Agreement -- Termination" herein and "Certain
Federal Income Tax Considerations -- Taxation of Debt Securities -- Status as
Real Property Loans" in the Prospectus.
The holders of the Class A Certificates will be required to include in
income interest on such Certificates in accordance with the accrual method of
accounting. As noted above, each holder of a Class A-II Certificate will be
required to allocate a portion of the purchase price paid for the Class A-II
Certificates to the right to receive payments from the Reserve Fund in respect
of the Basis Risk Shortfall Carry-Forward Amount. The value of the right to
receive any such Basis Risk Shortfall Carry-Forward Amount is a question of
fact which could be subject to differing interpretations. Because the Basis
Risk Shortfall Carry-Forward Amount is treated as a separate right of the
Class A-II Certificates not payable by the Lower Tier REMICs or Upper Tier
REMIC, such right will not be treated as a qualifying asset for any
Certificateholder that is a mutual savings bank, domestic building and loan
association, real estate investment trust, or real estate mortgage investment
conduit and any amounts received from the Reserve Fund will not be qualifying
real estate income for real estate investment trusts.
For further information regarding federal income tax considerations of
investing in the Class A Certificates, see "Certain Federal Income Tax
Considerations -- Tax of Debt Securities" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting
Agreement, dated November 23, 1999 (the "UNDERWRITING AGREEMENT"), Bear,
Stearns & Co. Inc. (the "Underwriter") has agreed to purchase and the
Depositor has agreed to sell to the Underwriter the Class A Certificates. It
is expected that delivery of the Class A Certificates will be made only in
book-entry form through the Same Day Funds Settlement System of DTC, Cedelbank
and Euroclear on or about November 29, 1999, against payment therefor in
immediately available funds.
The Underwriting Agreement provides that the obligation of the Underwriter
to pay for and accept delivery of the related Class A Certificates is subject
to, among other things, the receipt of certain legal opinions and to the
conditions, among others, that no stop order suspending the effectiveness of
the Depositor"s Registration Statement shall be in effect, and that no
proceedings for such purpose shall be pending before or threatened by the
Securities and Exchange Commission.
The distribution of the Class A Certificates by the Underwriter may be
effected from time to time in one or more negotiated transactions, or
otherwise, at varying prices to be determined at the time of sale. Proceeds to
the Depositor from the sale of the Class A Certificates, before deducting
expenses payable by the Depositor, will be approximately 99.68% of the
aggregate Certificate Principal Balance of the Class A Certificates. The
Underwriter may effect such transactions by selling the Class A Certificates
to or through dealers, and such dealers may receive compensation in the form
of underwriting discounts, concessions or commissions from the Underwriter for
whom they act as agent. In connection with the sale of the Class A
Certificates, the Underwriter may be deemed to have received compensation from
the Depositor in the form of underwriting compensation. The Underwriter and
any dealers that participate with the Underwriter in the distribution of the
Class A Certificates may be deemed to be underwriters and any profit on the
resale of the Class A Certificates positioned by them may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933, as
amended.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter, and that under limited circumstances the Underwriter will
indemnify the Depositor, against certain civil liabilities under the
Securities Act of 1933, or contribute to payments required to be made in
respect thereof.
There can be no assurance that a secondary market for the Class A
Certificates will develop or, if it does develop, that it will continue. The
Class A Certificates will not be listed on any securities exchange. The
primary source of information available to investors concerning the Class A
Certificates will be the monthly statements discussed in the Prospectus under
"The Agreements -- Reports to Holders," which will include information as to
the outstanding principal balance of the Class A Certificates. There can be no
assurance that any additional information regarding the Class A Certificates
will be available through any other source. In addition, the Depositor is not
aware of any source through which price information about the Class A
Certificates will be generally available on an ongoing basis. The limited
nature of such information regarding the Class A Certificates may adversely
affect the liquidity of the Class A Certificates, even if a secondary market
for the Class A Certificates becomes available.
The Underwriter is an affiliate of the Depositor.
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 said firm as experts in accounting and
auditing.
LEGAL OPINIONS
Certain legal matters relating to the Certificates will be passed upon for
the Depositor and the Underwriter by Brown & Wood LLP, New York, New York and
for the Seller by Thacher Proffitt & Wood, New York, New York.
RATINGS
It is a condition of the issuance of the Class A Certificates that they be
rated "AAA" by Standard & Poor"s Ratings Services, a division of The
McGraw-Hill Companies, Inc. ("STANDARD & POOR'S") and Fitch IBCA, Inc.
("FITCH").
Standard & Poor's ratings on mortgage pass-through certificates address
the likelihood of the receipt by Certificateholders of payments required under
the Pooling and Servicing Agreement. Standard & Poor's ratings take into
consideration the credit quality of the mortgage pool, structural and legal
aspects associated with the Certificates, and the extent to which the payment
stream in the mortgage pool is adequate to make payments required under the
Certificates. Standard & Poor"s rating on the Class A Certificates is based on
the financial strength rating of the Certificate Insurer. Standard & Poor"s
ratings on the Class A Certificates do not, however, constitute a statement
regarding frequency of prepayments on the mortgages. See "Certain Yield and
Prepayment Considerations" herein. In addition, the ratings do not address the
likelihood of the receipt of any amounts in respect of Prepayment Interest
Shortfalls.
The rating assigned by Fitch to the Class A Certificates is based on the
financial strength rating of the Insurer. Ratings by Fitch address the
structural, legal and issuer-related aspects associated with the Certificates,
including the nature and quality of the underlying mortgage loans. Such
ratings do not represent any assessment of the likelihood of principal
prepayments by mortgagors or of the degree by which such prepayments might
differ from those originally anticipated. In addition, the ratings do not
address the likelihood of the receipt of any amounts in respect of Prepayment
Interest Shortfalls.
The Depositor has not requested a rating on the Class A Certificates by
any rating agency other than Standard & Poor's and Fitch. However, there can
be no assurance as to whether any other rating agency will rate the Class A
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. A rating on the Certificates by another rating agency, if
assigned at all, may be lower than the ratings assigned to the Class A
Certificates by Standard & Poor's and Fitch.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
rating organization. Each security rating should be evaluated independently of
any other security rating. In the event that the ratings initially assigned to
the Class A Certificates are subsequently lowered for any reason, no person or
entity is obligated to provide any additional support or credit enhancement
with respect to the Class A Certificates.
The ratings do not address the likelihood that Class A-II
Certificateholders will be paid any Basis Risk Shortfall Carry-Forward Amount.
LEGAL INVESTMENT
The Class A Certificates will constitute "mortgage related securities" for
purposes of SMMEA so long as they are rated in at least the second highest
rating category by one or more nationally recognized statistical rating
agencies, and, as such, are legal investments for certain entities to the
extent provided in SMMEA. SMMEA provides, however, that states could override
its provisions on legal investment and restrict or condition investment in
mortgage related securities by taking statutory action on or prior to October
3, 1991. Certain states have enacted legislation which overrides the
preemption provisions of SMMEA. Institutions whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities may be subject to
restrictions on investment in such Certificates and should consult with their
legal advisors.
The Office of Thrift Supervision (the "OTS") has issued Thrift Bulletin
13a, entitled "Management of Interest Rate Risk, Investment Securities, and
Derivatives Activities" ("TB 13a"), which is effective as of December 1, 1998
and applies to thrift institutions regulated by the OTS. One of the primary
purposes of TB 13a is to require thrift institutions, prior to taking any
investment position, to (i) conduct a pre-purchase portfolio sensitivity
analysis for any "significant transaction" involving securities or financial
derivatives, and (ii) conduct a pre-purchase price sensitivity analysis of any
"complex security" or financial derivative. For the purposes of TB 13a,
"complex security" includes among other things any collateralized mortgage
obligation or REMIC security, other than any "plain vanilla" mortgage
pass-through security (that is, securities that are part of a single class of
securities in the related pool that are non-callable and do not have any
special features). One or more classes of the Class A Certificates may be
viewed as "complex securities". The OTS recommends that while a thrift
institution should conduct its own in-house pre-acquisition analysis, it may
rely on an analysis conducted by an independent third-party as long as
management understands the analysis and its key assumptions. Further, TB 13a
recommends that the use of "complex securities with high price sensitivity" be
limited to transactions and strategies that lower a thrift institution"s
portfolio interest rate risk. TB 13a warns that investment in complex
securities by thrift institutions that do not have adequate risk measurement,
monitoring and control systems may be viewed by OTS examiners as an unsafe and
unsound practice.
The Depositor makes no representations as to the proper characterization
of the Class A Certificates for legal investment or other purposes, or as to
the ability of particular investors to purchase the Class A Certificates under
applicable legal investment restrictions. These uncertainties may adversely
affect the liquidity of the Class A Certificates. Accordingly, all
institutions whose investment activities are subject to legal investment laws
and regulations, regulatory capital requirements or review by regulatory
authorities should consult with their own legal advisors in determining
whether and to what extent an investment in the Class A Certificates
constitutes a legal investment or is subject to investment, capital or other
restrictions.
See "Legal Investment" in the Prospectus.
ERISA Considerations
Because the exemptive relief afforded by the Exemption or Prohibited
Transaction Class Exemption ("PTCE") 95-60 (or any similar exemption that may
be available) will not likely apply to the purchase, sale or holding of the
Class A Certificates, no Class A Certificate (or any interest therein) may be
acquired or held by any an employee benefit or other plan subject to the
prohibited transaction provisions of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), or Section 4975 of the Internal Revenue
Code of 1986, as amended (the "CODE") (a "PLAN"), or any other person
(including an insurance company (whether through its general or separate
accounts), an investment manager, a named fiduciary or a trustee of any Plan)
acting, directly or indirectly, on behalf of or purchasing any Certificate
with "plan assets" of any Plan within the meaning of the U.S. Department of
Labor ("DOL") regulation at 29 C.F.R. "SS"2510.3-101 (each, a "PLAN
INVESTOR").
Each Beneficial Owner of a Class A Certificate (or any interest therein)
shall be deemed to have represented, by virtue of its acquisition or holding
of such Certificate (or interest therein), that it is not a Plan Investor.
If any Class A Certificate (or any interest therein) is acquired or held
in violation of the provisions of the preceding paragraph, the next preceding
permitted Beneficial Owner will be treated as the Beneficial Owner of such
Class A Certificate, retroactive to the date of transfer to the purported
Beneficial Owner. Any purported Beneficial Owner whose acquisition or holding
of any such Certificate (or interest therein) was effected in violation of the
provisions of the preceding paragraph shall indemnify and hold harmless the
Depositor, the Trustee, the Master Servicer, any Subservicer, and the Trust
from and against any and all liabilities, claims, costs or expenses incurred
by such parties as a result of such acquisition or holding.
Investors in the Class A Certificates are urged to obtain from a
transferee of such Certificates a certification of such transferee"s
eligibility to purchase such Certificates in the form of the representation
letter attached as Annex II hereto.
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Bear Stearns
Asset Backed Securities Corp., Mortgage Asset-Backed Pass-Through
Certificates, Series 1999-RS4 (collectively, 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 tradeable as home market instruments in both the European
and U.S. domestic markets. Initial settlement and all secondary trades will
settle in same-day funds.
Secondary market trading between investors 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 certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of Cedel
and Euroclear (in such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name
of Cede & Co. as nominee of DTC. Investors" interests in the Global Securities
will be represented through financial institutions acting on their behalf as
direct and indirect Participants in DTC. As a result, Cedel and Euroclear will
hold positions on behalf of their participants through their 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 certificates 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.
TRADING BETWEEN DTC, SELLER 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 SELLER AND DTC PURCHASER. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through
the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. In these cases
Cedel or Euroclear will instruct the respective Depositary, as appropriate, to
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 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) 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 Certificate 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 organized in or under the laws of the
United States or any political subdivision thereof (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 other than a "foreign trust," as defined in Section
7701(a)(31) of the Code. 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.
<PAGE>
ANNEX II
ERISA Representation Letter
[date]
BEAR STEARNS ASSET BACKED SECURITIES, INC.
245 Park Avenue
New York, New York 10167
Bank One, National Association
One North State Street, 9th Floor
Chicago, Illinois 60602
Re: Bear Stearns Asset Backed Securities, Inc.
Mortgage Asset-Backed Pass-Through Certificates, Series 1999-RS4, Class A-
Ladies and Gentlemen:
[ ________________________ ] (the "Purchaser") intends to purchase from [
] (the "Seller") $[ ______ ] initial Certificate Principal Balance of the
above-referenced certificates (the "Certificates"), issued pursuant to the
Pooling and Servicing Agreement (the "Pooling and Servicing Agreement"), dated
as of November 1, 1999, among Bear Stearns Asset Backed Securities, Inc., as
seller (the "Company"), Residential Funding Corporation, as master servicer
(the "Master Servicer") and Bank One, National Association, as trustee (the
"Trustee"). All terms used herein and not otherwise defined shall have the
meanings set forth in the Pooling and Servicing Agreement.
The Purchaser hereby certifies, represents and warrants to, and covenants
with the Company, the Trustee and the Master Servicer that the Purchaser is
not an employee benefit or other plan subject to the prohibited transaction
provisions of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Internal Revenue Code of 1986, as amended
(the "Code") (a "Plan"), or any other person (including an insurance company
(whether through its general or separate accounts), an investment manager, a
named fiduciary or a trustee of any Plan) acting, directly or indirectly, on
behalf of or purchasing any Certificate with "plan assets" of any Plan within
the meaning of the U.S. Department of Labor ("DOL") regulation at 29 C.F.R.
"SS"2510.3-101.
In addition, the Purchaser hereby certifies, represents and warrants to,
and covenants with, the Company, the Trustee and the Master Servicer that the
Purchaser will not transfer the Certificates to any Plan or person unless such
Plan or person meets the requirements set forth above.
Very truly yours,
By:
------------------------------------
Name:
Title:
<PAGE>
$149,659,000
MORTGAGE LOAN TRUST, SERIES RASC 1999-RS4
ISSUER
RESIDENTIAL FUNDING CORPORATION
SELLER AND MASTER SERVICER
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
MORTGAGE ASSET-BACKED PASS-THROUGH CERTIFICATES
SERIES 1999-RS4
----------------
PROSPECTUS SUPPLEMENT
----------------
Bear, Stearns & Co. Inc.
November 23, 1999
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
WE ARE NOT OFFERING THE CLASS A CERTIFICATES IN ANY STATE WHERE THE OFFER IS
NOT PERMITTED.
Dealers will be required to deliver a prospectus supplement and prospectus
when acting as underwriters of the certificates offered hereby and with
respect to their unsold allotments or subscriptions. In addition, all dealers
selling the certificates, whether or not participating in this offering, may
be required to deliver a prospectus supplement and prospectus until February
21, 2000.
<PAGE>
Asset-Backed Securities
(Issuable in Series)
BEAR STEARNS ASSET BACKED SECURITIES, INC.
Depositor
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.
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 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.
<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.
<PAGE>
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 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;
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 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 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 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.
<PAGE>
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.
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;
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.
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 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).
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.
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 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.
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.
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 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
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 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;
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
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.
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 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 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
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;
(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;
(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.
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 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. 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;
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.
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,
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:
<PAGE>
(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;
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 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
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
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 (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 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,
(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.
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 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 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 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.
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.
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 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 loans.
Also, the Garn-St. Germain Act does "encourage" lenders to permit assumption
of loans at the original rate of interest or at some other rate less than the
average of the original rate and the market rate.
In addition, under federal bankruptcy law, due-on-sale clauses may
not be enforceable in bankruptcy proceedings and may, under certain
circumstances, be eliminated in any modified mortgage resulting from such
bankruptcy proceeding.
Enforceability of Prepayment and Late Payment Fees
Forms of notes, mortgages and deeds of trust used by lenders may
contain provisions obligating the borrower to pay a late charge if payments
are not timely made, and in some circumstances may provide for prepayment fees
or penalties if the obligation is paid prior to maturity. In certain states,
there are or may be specific limitations, upon the late charges a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if
the loan is prepaid. Late charges and prepayment fees are typically retained
by servicers as additional servicing compensation.
Equitable Limitations on Remedies
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his
defaults under the loan documents. Examples of judicial remedies that have
been fashioned include judicial requirements that the lender undertake
affirmative and expensive actions to determine the causes of the borrower's
default and the likelihood that the borrower will be able to reinstate the
loan. In some cases, courts have substituted their judgment for the lender's
judgment and have required that lenders reinstate loans or recast payment
schedules in order to accommodate borrowers who are suffering from temporary
financial disability. In other cases, courts have limited the right of a
lender to realize upon his security if the default under the security
agreement is not monetary, such as the borrower's failure to adequately
maintain the property or the borrower's execution of secondary financing
affecting the property. Finally, some courts have been faced with the issue of
whether or not federal or state constitutional provisions reflecting due
process concerns for adequate notice require that borrowers under security
agreements receive notices in addition to the statutorily-prescribed minimums.
For the most part, these cases have upheld the notice provisions as being
reasonable or have found that, in cases involving the sale by a trustee under
a deed of trust or by a mortgagee under a mortgage having a power of sale,
there is insufficient state action to afford constitutional protections to the
borrower.
Most conventional single-family mortgage loans may be prepaid in full
or in part without penalty. The regulations of the Office of Thrift
Supervision (the "OTS") prohibit the imposition of a prepayment penalty or
equivalent fee for or in connection with the acceleration of a loan by
exercise of a due-on-sale clause. A mortgagee to whom a prepayment in full has
been tendered may be compelled to give either a release of the mortgage or an
instrument assigning the existing mortgage. The absence of a restraint on
prepayment, particularly with respect to mortgage loans having higher mortgage
rates, may increase the likelihood of refinancing or other early retirements
of such mortgage loans.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations shall not apply to certain types of residential first
mortgage loans originated by certain lenders after March 31, 1980. Similar
federal statutes were in effect with respect to mortgage loans made during the
first three months of 1980. The OTS, as successor to the Federal Home Loan
Bank Board, is authorized to issue rules and regulations and to publish
interpretations governing implementation of Title V.
Title V authorizes any state to reimpose interest rate limits by
adopting, before April 1, 1983, a state law, or by certifying that the voters
of such state have voted in favor of any provision, constitutional or
otherwise, which expressly rejects an application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1983 deadline. In addition,
even where Title V is not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on mortgage loans
covered by Title V.
The Home Improvement Contracts
General
The Home Improvement Contracts, other than those Home Improvement
Contracts that are unsecured or secured by mortgages on real estate, 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
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 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.
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.
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."
Tax Counsel is of the opinion that Debt Securities that are Compound
Interest Securities will, and certain of the other Debt Securities issued at a
discount may, be issued with "original issue discount" ("OID"). The following
discussion is based in part on the rules governing OID, which are set forth in
Sections 1271-1275 of the Code and the Treasury regulations issued thereunder
on February 2, 1994 and amended on June 11, 1996 (the "OID Regulations"). A
Holder should be aware, however, that the OID Regulations do not adequately
address certain issues relevant to prepayable securities, such as the Debt
Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. In the
opinion of Tax Counsel, a Holder of a Debt Security must include such OID in
gross income as ordinary interest income as it accrues under a method taking
into account an economic accrual of the discount. In general, OID must be
included in income in advance of the receipt of the cash representing that
income. The amount of OID on a Debt Security will be considered to be zero if
it is less than a de minimis amount determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that Class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular Class of Debt Securities is sold for cash
on or prior to the Closing Date, the issue price for such Class will be
treated as the fair market value of such Class on the Closing Date. The issue
price of a Debt Security also includes the amount paid by an initial Debt
Security Holder for accrued interest that relates to a period prior to the
issue date of the Debt Security. The stated redemption price at maturity of a
Debt Security includes the original principal amount of the Debt Security, but
generally will not include distributions of interest if such distributions
constitute "qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as
described below); provided, that such interest payments are unconditionally
payable at intervals of one year or less during the entire term of the Debt
Security. The OID Regulations state that interest payments are unconditionally
payable only if a late payment or nonpayment is expected to be penalized or
reasonable remedies exist to compel payment. Certain Debt Securities may
provide for default remedies in the event of late payment or nonpayment of
interest. In the opinion of Tax Counsel, the interest on such Debt Securities
will be unconditionally payable and constitute qualified stated interest, not
OID. However, absent clarification of the OID Regulations, where Debt
Securities do not provide for default remedies, the interest payments will be
included in the Debt Security's stated redemption price at maturity and taxed
as OID. Interest is payable at a single fixed rate only if the rate
appropriately takes into account the length of the interval between payments.
Distributions of interest on Debt Securities with respect to which deferred
interest will accrue, will not constitute qualified stated interest payments,
in which case the stated redemption price at maturity of such Debt Securities
includes all distributions of interest as well as principal thereon. Where the
interval between the issue date and the first Distribution Date on a Debt
Security is either longer or shorter than the interval between subsequent
Distribution Dates, all or part of the interest foregone, in the case of the
longer interval, and all of the additional interest, in the case of the
shorter interval, will be included in the stated redemption price at maturity
and tested under the de minimis rule described below. In the case of a Debt
Security with a long first period that has non-de minimis OID, all stated
interest in excess of interest payable at the effective interest rate for the
long first period will be included in the stated redemption price at maturity
and the Debt Security will generally have OID. Holders of Debt Securities
should consult their own tax advisors to determine the issue price and stated
redemption price at maturity of a Debt Security.
Under the de minimis rule, OID on a Debt Security will be considered
to be zero if such OID is less than 0.25% of the stated redemption price at
maturity of the Debt Security multiplied by the weighted average maturity of
the Debt Security. For this purpose, the weighted average maturity of the Debt
Security is computed as the sum of the amounts determined by multiplying the
number of full years (i.e., rounding down partial years) from the issue date
until each distribution in reduction of stated redemption price at maturity is
scheduled to be made by a fraction, the numerator of which is the amount of
each distribution included in the stated redemption price at maturity of the
Debt Security and the denominator of which is the stated redemption price at
maturity of the Debt Security. Holders generally must report de minimis OID
pro rata as principal payments are received, and such income will be capital
gain if the Debt Security is held as a capital asset. However, accrual method
Holders may elect to accrue all de minimis OID as well as market discount
under a constant interest method.
Debt Securities may provide for interest based on a qualified
variable rate. Under the OID Regulations, interest is treated as payable at a
qualified variable rate and not as contingent interest if, generally, (i) such
interest is unconditionally payable at least annually, (ii) the issue price of
the debt instrument does not exceed the total noncontingent principal payments
and (iii) interest is based on a "qualified floating rate," an "objective
rate," or a combination of "qualified floating rates" that do not operate in a
manner that significantly accelerates or defers interest payments on such Debt
Security. In the case of Compound Interest Securities, certain Interest
Weighted Securities, and certain of the other Debt Securities, none of the
payments under the instrument will be considered qualified stated interest,
and thus the aggregate amount of all payments will be included in the stated
redemption price.
The Internal Revenue Service (the "IRS") recently issued final
regulations (the "Contingent Payment Regulations") governing the calculation
of OID on instruments having contingent interest payments. The Contingent
Payment Regulations, represent the only guidance regarding the views of the
IRS with respect to contingent interest instruments and specifically do not
apply for purposes of calculating OID on debt instruments subject to Code
Section 1272(a)(6), such as the Debt Security. Additionally, the OID
Regulations do not contain provisions specifically interpreting Code Section
1272(a)(6). Until the Treasury issues guidance to the contrary, the applicable
Trustee intends to base its computation on Code Section 1272(a)(6) and the OID
Regulations as described in this Prospectus. However, because no regulatory
guidance currently exists under Code Section 1272(a)(6), there can be no
assurance that such methodology represents the correct manner of calculating
OID.
The Holder of a Debt Security issued with OID must include in gross
income, for all days during its taxable year on which it holds such Debt
Security, the sum of the "daily portions" of such original issue discount. The
amount of OID includible in income by a Holder will be computed by allocating
to each day during a taxable year a pro rata portion of the original issue
discount that accrued during the relevant accrual period. In the case of a
Debt Security that is not a Regular Interest Security and the principal
payments on which are not subject to acceleration resulting from prepayments
on the Loans, the amount of OID includible in income of a Holder for an
accrual period (generally the period over which interest accrues on the debt
instrument) will equal the product of the yield to maturity of the Debt
Security and the adjusted issue price of the Debt Security, reduced by any
payments of qualified stated interest. The adjusted issue price is the sum of
its issue price plus prior accruals or OID, reduced by the total payments made
with respect to such Debt Security in all prior periods, other than qualified
stated interest payments.
The amount of OID to be included in income by a Holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a "Pay-Through Security"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments
is to be determined on the basis of three factors: (i) the original yield to
maturity of the Pay-Through Security (determined on the basis of compounding
at the end of each accrual period and properly adjusted for the length of the
accrual period), (ii) events that have occurred before the end of the accrual
period and (iii) the assumption that the remaining payments will be made in
accordance with the original Prepayment Assumption. The effect of this method
is to increase the portions of OID required to be included in income by a
Holder to take into account prepayments with respect to the Loans at a rate
that exceeds the Prepayment Assumption, and to decrease (but not below zero
for any period) the portions of OID required to be included in income by a
Holder of a Pay-Through Security to take into account prepayments with respect
to the Loans at a rate that is slower than the Prepayment Assumption. Although
OID will be reported to Holders of Pay-Through Securities based on the
Prepayment Assumption, no representation is made to Holders that Loans will be
prepaid at that rate or at any other rate.
The Depositor may adjust the accrual of OID on a Class of Regular
Interest (or other regular interests in a REMIC) in a manner that it believes
to be appropriate, to take account of realized losses on the Loans, although
the OID Regulations do not provide for such adjustments. If the IRS were to
require that OID be accrued without such adjustments, the rate of accrual of
OID for a Class of Regular Interest Securities could increase.
Certain Classes of Regular Interest Securities may represent more
than one Class of REMIC regular interests. Unless otherwise provided in the
related Prospectus Supplement, the applicable Trustee intends, based on the
OID Regulations, to calculate OID on such Securities as if, solely for the
purposes of computing OID, the separate regular interests were a single debt
instrument.
A subsequent Holder of a Debt Security will also be required to
include OID in gross income, but such a Holder who purchases such Debt
Security for an amount that exceeds its adjusted issue price will be entitled
(as will an initial Holder who pays more than a Debt Security's issue price)
to offset such OID by comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. In the opinion of Tax Counsel,
Holders will be required to report income with respect to the related
Securities under an accrual method without giving effect to delays and
reductions in distributions attributable to a default or delinquency on the
Loans, except possibly to the extent that it can be established that such
amounts are uncollectible. As a result, the amount of income (including OID)
reported by a Holder of such a Security in any period could significantly
exceed the amount of cash distributed to such Holder in that period. The
Holder will eventually be allowed a loss (or will be allowed to report a
lesser amount of income) to the extent that the aggregate amount of
distributions on the Securities is reduced as a result of a Loan default.
However, the timing and character of such losses or reductions in income are
uncertain and, accordingly, Holders of Securities should consult their own tax
advisors on this point.
Interest Weighted Securities. It is not clear how income should be
accrued with respect to Regular Interest Securities or Stripped Securities (as
defined under "--Tax Status as a Grantor Trust; General" herein) the payments
on which consist solely or primarily of a specified portion of the interest
payments on qualified mortgages held by the REMIC or on Loans underlying
Pass-Through Securities ("Interest Weighted Securities"). The Trustee intends
to take the position that all of the income derived from an Interest Weighted
Security should be treated as OID and that the amount and rate of accrual of
such OID should be calculated by treating the Interest Weighted Security as a
Compound Interest Security. However, in the case of Interest Weighted
Securities that are entitled to some payments of principal and that are
Regular Interest Securities the Internal Revenue Service could assert that
income derived from an Interest Weighted Security should be calculated as if
the Security were a security purchased at a premium equal to the excess of the
price paid by such Holder for such Security over its stated principal amount,
if any. Under this approach, a Holder would be entitled to amortize such
premium only if it has in effect an election under Section 171 of the Code
with respect to all taxable debt instruments held by such Holder, as described
below. Alternatively, the IRS could assert that an Interest Weighted Security
should be taxable under the rules governing bonds issued with contingent
payments. Such treatment may be more likely in the case of Interest Weighted
Securities that are Stripped Securities as described below. See "--Tax Status
as a Grantor Trust--Discount or Premium on Pass-Through Securities."
Variable Rate Debt Securities. In the opinion of Tax Counsel, in the
case of Debt Securities bearing interest at a rate that varies directly,
according to a fixed formula, with an objective index, it appears that (i) the
yield to maturity of such Debt Securities and (ii) in the case of Pay-Through
Securities, the present value of all payments remaining to be made on such
Debt Securities, should be calculated as if the interest index remained at its
value as of the issue date of such Securities. Because the proper method of
adjusting accruals of OID on a variable rate Debt Security is uncertain,
Holders of variable rate Debt Securities should consult their own tax advisers
regarding the appropriate treatment of such Securities for federal income tax
purposes.
Market Discount. In the opinion of Tax Counsel, a purchaser of a
Security may be subject to the market discount rules of Sections 1276-1278 of
the Code. A Holder that acquires a Debt Security with more than a prescribed
de minimis amount of "market discount" (generally, the excess of the principal
amount of the Debt Security over the purchaser's purchase price) will be
required to include accrued market discount in income as ordinary income in
each month, but limited to an amount not exceeding the principal payments on
the Debt Security received in that month and, if the Securities are sold, the
gain realized. Such market discount would accrue in a manner to be provided in
Treasury regulations but, until such regulations are issued, such market
discount would in general accrue either (i) on the basis of a constant yield
(in the case of a Pay-Through Security, taking into account a prepayment
assumption) or (ii) in the ratio of (a) in the case of Securities (or in the
case of a Pass-Through Security, as set forth below, the Loans underlying such
Security) not originally issued with original issue discount, stated interest
payable in the relevant period to total stated interest remaining to be paid
at the beginning of the period or (b) in the case of Securities (or, in the
case of a Pass-Through Security, as described below, the Loans underlying such
Security) originally issued at a discount, OID in the relevant period to total
OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination
date of the Debt Security (or, in the case of a Pass-Through Security, the
Loans), the excess of interest paid or accrued to purchase or carry a Security
(or, in the case of a Pass-Through Security, as described below, the
underlying Loans) with market discount over interest received on such Security
is allowed as a current deduction only to the extent such excess is greater
than the market discount that accrued during the taxable year in which such
interest expense was incurred. In general, the deferred portion of any
interest expense will be deductible when such market discount is included in
income, including upon the sale, disposition, or repayment of the Security (or
in the case of a Pass-Through Security, an underlying Loan). A Holder may
elect to include market discount in income currently as it accrues, on all
market discount obligations acquired by such Holder during the taxable year
such election is made and thereafter, in which case the interest deferral rule
will not apply.
Premium. In the opinion of Tax Counsel, a Holder who purchases a Debt
Security (other than an Interest Weighted Security to the extent described
above) at a cost greater than its stated redemption price at maturity,
generally will be considered to have purchased the Security at a premium,
which it may elect to amortize as an offset to interest income on such
Security (and not as a separate deduction item) on a constant yield method.
Although no regulations addressing the computation of premium accrual on
securities similar to the Securities have been issued, the legislative history
of the 1986 Act indicates that premium is to be accrued in the same manner as
market discount. Accordingly, it appears that the accrual of premium on a
Class of Pay-Through Securities will be calculated using the prepayment
assumption used in pricing such Class. If a Holder makes an election to
amortize premium on a Debt Security, such election will apply to all taxable
debt instruments (including all REMIC regular interests and all pass-through
certificates representing ownership interests in a trust holding debt
obligations) held by the Holder at the beginning of the taxable year in which
the election is made, and to all taxable debt instruments acquired thereafter
by such Holder, and will be irrevocable without the consent of the IRS.
Purchasers who pay a premium for the Securities should consult their tax
advisers regarding the election to amortize premium and the method to be
employed.
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.
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.
For purposes of computing its taxable income or net loss, the REMIC
should have an initial aggregate tax basis in its assets equal to the
aggregate fair market value of the regular interests and the residual
interests on the Startup Day (generally, the day that the interests are
issued). That aggregate basis will be allocated among the assets of the REMIC
in proportion to their respective fair market values.
The OID provisions of the Code apply to loans of individuals
originated on or after March 2, 1984, and the market discount provisions apply
to loans originated after July 18, 1984. Subject to possible application of
the de minimis rules, the method of accrual by the REMIC of OID income on such
loans will be equivalent to the method under which Holders of Pay-Through
Securities accrue original issue discount (i.e., under the constant yield
method taking into account the Prepayment Assumption). The REMIC will deduct
OID on the Regular Interest Securities in the same manner that the Holders of
the Regular Interest Securities include such discount in income, but without
regard to the de minimis rules. See "Taxation of Debt Securities" above.
However, a REMIC that acquires loans at a market discount must include such
market discount in income currently, as it accrues, on a constant interest
basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant
yield method. Although the law is somewhat unclear regarding recovery of
premium attributable to loans originated on or before such date, it is
possible that such premium may be recovered in proportion to payments of loan
principal.
Prohibited Transactions and Contributions Tax. The REMIC will be
subject to a 100% tax on any net income derived from a "prohibited
transaction." For this purpose, net income will be calculated without taking
into account any losses from prohibited transactions or any deductions
attributable to any prohibited transaction that resulted in a loss. In
general, prohibited transactions include: (i) subject to limited exceptions,
the sale or other disposition of any qualified mortgage transferred to the
REMIC; (ii) subject to a limited exception, the sale or other disposition of a
cash flow investment; (iii) the receipt of any income from assets not
permitted to be held by the REMIC pursuant to the Code; or (iv) the receipt of
any fees or other compensation for services rendered by the REMIC. It is
anticipated that a REMIC will not engage in any prohibited transactions in
which it would recognize a material amount of net income. In addition, subject
to a number of exceptions, a tax is imposed at the rate of 100% on amounts
contributed to a REMIC after the close of the three-month period beginning on
the Startup Day. The Holders of Residual Interest Securities will generally be
responsible for the payment of any such taxes imposed on the REMIC. To the
extent not paid by such Holders or otherwise, however, such taxes will be paid
out of the Trust Fund and will be allocated pro rata to all outstanding
Classes of Securities of such REMIC.
Taxation of Holders of Residual Interest Securities
In the opinion of Tax Counsel, the Holder of a Certificate
representing a residual interest (a "Residual Interest Security") will take
into account the "daily portion" of the taxable income or net loss of the
REMIC for each day during the taxable year on which such Holder held the
Residual Interest Security. The daily portion is determined by allocating to
each day in any calendar quarter its ratable portion of the taxable income or
net loss of the REMIC for such quarter, and by allocating that amount among
the Holders (on such day) of the Residual Interest Securities in proportion to
their respective holdings on such day.
In the opinion of Tax Counsel, the Holder of a Residual Interest
Security must report its proportionate share of the taxable income of the
REMIC whether or not it receives cash distributions from the REMIC
attributable to such income or loss. The reporting of taxable income without
corresponding distributions could occur, for example, in certain REMIC issues
in which the loans held by the REMIC were issued or acquired at a discount,
since mortgage prepayments cause recognition of discount income, while the
corresponding portion of the prepayment could be used in whole or in part to
make principal payments on REMIC Regular Interests issued without any discount
or at an insubstantial discount (if this occurs, it is likely that cash
distributions will exceed taxable income in later years). Taxable income may
also be greater in earlier years of certain REMIC issues as a result of the
fact that interest expense deductions, as a percentage of outstanding
principal on REMIC Regular Interest Securities, will typically increase over
time as lower yielding Securities are paid, whereas interest income with
respect to loans will generally remain constant over time as a percentage of
loan principal.
In any event, because the Holder of a residual interest is taxed on
the net income of the REMIC the taxable income derived from a Residual
Interest Security in a given taxable year will not be equal to the taxable
income associated with investment in a corporate bond or stripped instrument
having similar cash flow characteristics and pretax yield. Therefore, the
after-tax yield on the Residual Interest Security may be less than that of
such a bond or instrument.
Limitation on Losses. In the opinion of Tax Counsel, the amount of
the REMIC's net loss that a Holder may take into account currently is limited
to the Holder's adjusted basis at the end of the calendar quarter in which
such loss arises. A Holder's basis in a Residual Interest Security will
initially equal such Holder's purchase price, and will subsequently be
increased by the amount of the REMIC's taxable income allocated to the Holder,
and decreased (but not below zero) by the amount of distributions made and the
amount of the REMIC's net loss allocated to the Holder. Any disallowed loss
may be carried forward indefinitely, but may be used only to offset income of
the REMIC generated by the same REMIC. The ability of Holders of Residual
Interest Securities to deduct net losses may be subject to additional
limitations under the Code, as to which such Holders should consult their tax
advisers.
Distributions. In the opinion of Tax Counsel distributions on a
Residual Interest Security (whether at their scheduled times or as a result of
prepayments) will generally not result in any additional taxable income or
loss to a Holder of a Residual Interest Security. If the amount of such
payment exceeds a Holder's adjusted basis in the Residual Interest Security,
however, the Holder will recognize gain (treated as gain from the sale of the
Residual Interest Security) to the extent of such excess.
Sale or Exchange. In the opinion of Tax Counsel a Holder of a
Residual Interest Security will recognize gain or loss on the sale or exchange
of a Residual Interest Security equal to the difference, if any, between the
amount realized and such Holder's adjusted basis in the Residual Interest
Security at the time of such sale or exchange. 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 were to own a Residual Interest
Security, a portion of dividends (or other distributions) paid by the real
estate investment trust (or other entity) would be treated as excess inclusion
income. If a Residual Security is owned by a foreign person, excess inclusion
income is subject to tax at a rate of 30%, which may not be reduced by treaty,
is not eligible for treatment as "portfolio interest" and is subject to
certain additional limitations. See "Tax Treatment of Foreign Investors." The
Small Business Job Protection Act of 1996 has eliminated the special rule
permitting Section 593 institutions ("thrift institutions") to use net
operating losses and other allowable deductions to offset their excess
inclusion income from Residual Interest Securities that have "significant
value" within the meaning of the REMIC Regulations, effective for taxable
years beginning after December 31, 1995, except with respect to Residual
Interest Securities continuously held by a thrift institution since November
1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides
three rules for determining the effect on excess inclusions on the alternative
minimum taxable income of a residual Holder. First, alternative minimum
taxable income for such residual Holder is determined without regard to the
special rule that taxable income cannot be less than excess inclusions.
Second, a residual Holder's alternative minimum taxable income for a tax year
cannot be less than excess inclusions for the year. Third, the amount of any
alternative minimum tax net operating loss deductions must be computed without
regard to any excess inclusions. These rules are effective for tax years
beginning after December 31, 1986, unless a residual Holder elects to have
such rules apply only to tax years beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal
to the excess, if any, of REMIC taxable income for the quarterly period
allocable to a Residual Interest Security, over the daily accruals for such
quarterly period of (i) 120% of the long term applicable federal rate on the
Startup Day multiplied by (ii) the adjusted issue price of such Residual
Interest Security at the beginning of such quarterly period. The adjusted
issue price of a Residual Interest at the beginning of each calendar quarter
will equal its issue price (calculated in a manner analogous to the
determination of the issue price of a Regular Interest), increased by the
aggregate of the daily accruals for prior calendar quarters, and decreased
(but not below zero) by the amount of loss allocated to a Holder and the
amount of distributions made on the Residual Interest Security before the
beginning of the quarter. The long-term federal rate, which is announced
monthly by the Treasury Department, is an interest rate that is based on the
average market yield of outstanding marketable obligations of the United
States government having remaining maturities in excess of nine years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Securities may be disregarded. See "--Restrictions on Ownership and
Transfer of Residual Interest Securities" and "--Tax Treatment of Foreign
Investors" below.
Restrictions on Ownership and Transfer of Residual Interest
Securities. As a condition to qualification as a REMIC, reasonable
arrangements must be made to prevent the ownership of a REMIC residual
interest by any "Disqualified Organization." Disqualified Organizations
include the United States, any State or political subdivision thereof, any
foreign government, any international organization, or any agency or
instrumentality of any of the foregoing, a rural electric or telephone
cooperative described in Section 1381(a)(2)(C) of the Code, or any entity
exempt from the tax imposed by Sections 1-1399 of the Code, if such entity is
not subject to tax on its unrelated business income. Accordingly, the
applicable Pooling and Servicing Agreement will prohibit Disqualified
Organizations from owning a Residual Interest Security. In addition, no
transfer of a Residual Interest Security will be permitted unless the proposed
transferee shall have furnished to the Trustee an affidavit representing and
warranting that it is neither a Disqualified Organization nor an agent or
nominee acting on behalf of a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
Interest Security at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
Residual Interest Security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all
federal tax purposes unless no significant purpose of the transfer was to
impede the assessment or collection of tax. A Residual Interest Security is a
"noneconomic residual interest" unless, at the time of the transfer (i) the
present value of the expected future distributions on the Residual Interest
Security at least equals the product of the present value of the anticipated
excess inclusions and the highest rate of tax for the year in which the
transfer occurs and (ii) the transferor reasonably expects that the transferee
will receive distributions from the REMIC at or after the time at which the
taxes accrue on the anticipated excess inclusions in an amount sufficient to
satisfy the accrued taxes. If a transfer of a Residual Interest is
disregarded, the transferor would be liable for any federal income tax imposed
upon taxable income derived by the transferee from the REMIC. The REMIC
Regulations provide no guidance as to how to determine if a significant
purpose of a transfer is to impede the assessment or collection of tax. A
similar type of limitation exists with respect to certain transfers of
residual interests by foreign persons to United States persons. See "--Tax
Treatment of Foreign Investors."
Mark to Market Rules. Prospective purchasers of a REMIC Residual
Interest Security should be aware that the IRS recently finalized regulations
(the "Final Mark-to-Market Regulations"), which provide that a REMIC Residual
Interest Security acquired after January 3, 1995 cannot be marked-to-market.
Prospective purchasers of a REMIC Residual Interest Security should consult
their tax advisors regarding the possible application of the Mark to Market
Regulations.
Administrative Matters
The REMIC's books must be maintained on a calendar year basis and the
REMIC must file an annual federal income tax return. The REMIC will also be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit, by the IRS in
a unified administrative proceeding.
Tax Status as a Grantor Trust
General. As further specified in the related Prospectus Supplement,
if a REMIC election is not made and the Trust Fund is not structured as a
partnership, then, in the opinion of Tax Counsel, the Trust Fund relating to a
Series of Securities will be classified for federal income tax purposes as a
grantor trust under Subpart E, Part 1 of Subchapter J of the Code and not as
an association taxable as a corporation (the Securities of such Series,
"Pass-Through Securities"). In some Series there will be no separation of the
principal and interest payments on the Loans. In such circumstances, a Holder
will be considered to have purchased a pro rata undivided interest in each of
the Loans. In other cases ("Stripped Securities"), sale of the Securities will
produce a separation in the ownership of all or a portion of the principal
payments from all or a portion of the interest payments on the Loans.
In the opinion of Tax Counsel, each Holder must report on its federal
income tax return its share of the gross income derived from the Loans (not
reduced by the amount payable as fees to the applicable Trustee and the
Servicer and similar fees (collectively, the "Servicing Fee")), at the same
time and in the same manner as such items would have been reported under the
Holder's tax accounting method had it held its interest in the Loans directly,
received directly its share of the amounts received with respect to the Loans,
and paid directly its share of the Servicing Fees. In the case of Pass-Through
Securities other than Stripped Securities, such income will consist of a pro
rata share of all of the income derived from all of the Loans and, in the case
of Stripped Securities, such income will consist of a pro rata share of the
income derived from each stripped bond or stripped coupon in which the Holder
owns an interest. The Holder of a Security will generally be entitled to
deduct such Servicing Fees under Section 162 or Section 212 of the Code to the
extent that such Servicing Fees represent "reasonable" compensation for the
services rendered by the applicable Trustee and the Servicer (or third parties
that are compensated for the performance of services). In the case of a
noncorporate Holder, however, Servicing Fees (to the extent not otherwise
disallowed, e.g., because they exceed reasonable compensation) will be
deductible in computing such Holder's regular tax liability only to the extent
that such fees, when added to other miscellaneous itemized deductions, exceed
2% of adjusted gross income and may not be deductible to any extent in
computing such Holder's alternative minimum tax liability. In addition, for
taxable years beginning after December 31, 1990, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation in taxable years beginning after 1990) will be reduced
by the lesser of (i) 3% of the excess of adjusted gross income over the
applicable amount or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year.
Discount or Premium on Pass-Through Securities. In the opinion of Tax
Counsel, the Holder's purchase price of a Pass-Through Security is to be
allocated among the Loans in proportion to their fair market values,
determined as of the time of purchase of the Securities. In the typical case,
the Trustee (to the extent necessary to fulfill its reporting obligations)
will treat each Loan as having a fair market value proportional to the share
of the aggregate Principal Balances of all of the Loans that it represents,
since the Securities, unless otherwise specified in the related Prospectus
Supplement, will have a relatively uniform interest rate and other common
characteristics. To the extent that the portion of the purchase price of a
Pass-Through Security allocated to a Loan (other than to a right to receive
any accrued interest thereon and any undistributed principal payments) is less
than or greater than the portion of the Principal Balance of the Loan
allocable to the Security, the interest in the Loan allocable to the
Pass-Through Security will be deemed to have been acquired at a discount or
premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Loan with OID in excess of
a prescribed de minimis amount or a Stripped Security, a Holder of a Security
will be required to report as interest income in each taxable year its share
of the amount of OID that accrues during that year in the manner described
above. OID with respect to a Loan could arise, for example, by virtue of the
financing of points by the originator of the Loan, or by virtue of the
charging of points by the originator of the Loan in an amount greater than a
statutory de minimis exception, in circumstances under which the points are
not currently deductible pursuant to applicable Code provisions. Any market
discount or premium on a Loan will be includible in income, generally in the
manner described above, except that in the case of Pass-Through Securities,
market discount is calculated with respect to the Loans underlying the
Certificate, rather than with respect to the Security. A Holder that acquires
an interest in a Loan originated after July 18, 1984 with more than a de
minimis amount of market discount (generally, the excess of the principal
amount of the Loan over the purchaser's allocable purchase price) will be
required to include accrued market discount in income in the manner set forth
above. See "--Taxation of Debt Securities Market Discount" and "--Premium"
above.
In the case of market discount on a Pass-Through Security
attributable to Loans originated on or before July 18, 1984, the Holder
generally will be required to allocate the portion of such discount that is
allocable to a loan among the principal payments on the Loan and to include
the discount allocable to each principal payment in ordinary income at the
time such principal payment is made. Such treatment would generally result in
discount being included in income at a slower rate than discount would be
required to be included in income using the method described in the preceding
paragraph.
Stripped Securities. A Stripped Security may represent a right to
receive only a portion of the interest payments on the Loans, a right to
receive only principal payments on the Loans, or a right to receive certain
payments of both interest and principal. Certain Stripped Securities ("Ratio
Strip Securities") may represent a right to receive differing percentages of
both the interest and principal on each Loan. Pursuant to Section 1286 of the
Code, the separation of ownership of the right to receive some or all of the
interest payments on an obligation from ownership of the right to receive some
or all of the principal payments results in the creation of "stripped bonds"
with respect to principal payments and "stripped coupons" with respect to
interest payments. Section 1286 of the Code applies the OID rules to stripped
bonds and stripped coupons. For purposes of computing original issue discount,
a stripped bond or a stripped coupon is treated as a debt instrument issued on
the date that such stripped interest is purchased with an issue price equal to
its purchase price or, if more than one stripped interest is purchased, the
ratable share of the purchase price allocable to such stripped interest.
Servicing fees in excess of reasonable servicing fees (the "excess
servicing fee") will be treated under the stripped bond rules. If the excess
servicing fee is less than 100 basis points (i.e., 1% interest on the Loan's
Principal Balance) or the Securities are initially sold with a de minimis
discount (assuming no prepayment assumption is required), any non-de minimis
discount arising from a subsequent transfer of the Securities should be
treated as market discount. The IRS appears to require that reasonable
servicing fees be calculated on a Loan by Loan basis, which could result in
some Loans being treated as having more than 100 basis points of interest
stripped off.
The Code, OID Regulations and judicial decisions provide no direct
guidance as to how the interest and original issue discount rules are to apply
to Stripped Securities and other Pass-Through Securities. Under the method
described above for Pay-Through Securities (the "Cash Flow Bond Method"), a
prepayment assumption is used and periodic recalculations are made that take
into account with respect to each accrual period the effect of prepayments
during such period. However, the 1986 Act does not, absent Treasury
regulations, appear specifically to cover instruments such as the Stripped
Securities, which technically represent ownership interests in the underlying
Loans, rather than being debt instruments "secured by" those loans.
Nevertheless, it is believed that the Cash Flow Bond Method is a reasonable
method of reporting income for such Securities, and it is expected that OID
will be reported on that basis unless otherwise specified in the related
Prospectus Supplement. In applying the calculation to Pass-Through Securities,
the Trustee will treat all payments to be received by a Holder with respect to
the underlying Loans as payments on a single installment obligation. The IRS
could, however, assert that original issue discount must be calculated
separately for each Loan underlying a Security.
Under certain circumstances, if the Loans prepay at a rate faster
than the Prepayment Assumption, the use of the Cash Flow Bond Method may
accelerate a Holder's recognition of income. If, however, the Loans prepay at
a rate slower than the Prepayment Assumption, in some circumstances the use of
this method may decelerate a Holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted
Security, the applicable Trustee intends, absent contrary authority, to report
income to Holders as OID, in the manner described above for Interest Weighted
Securities.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations
of the applicable Code provisions. Among other possibilities, the Internal
Revenue Service could contend that (i) in certain Series, each non-Interest
Weighted Security is composed of an unstripped undivided ownership interest in
Loans and an installment obligation consisting of stripped principal payments;
(ii) the non-Interest Weighted Securities are subject to the contingent
payment provisions of the Proposed Regulations; or (iii) each Interest
Weighted Stripped Security is composed of an unstripped undivided ownership
interest in Loans and an installment obligation consisting of stripped
interest payments.
Given the variety of alternatives for treatment of the Stripped
Securities and the different federal income tax consequences that result from
each alternative, potential purchasers are urged to consult their own tax
advisers regarding the proper treatment of the Securities for federal income
tax purposes.
Character as Qualifying Loans. In the case of Stripped Securities,
there is no specific legal authority existing regarding whether the character
of the Securities, for federal income tax purposes, will be the same as the
Loans. The IRS could take the position that the Loans character is not carried
over to the Securities in such circumstances. Pass-Through Securities will be,
and, although the matter is not free from doubt, Stripped Securities should be
considered to represent "real estate assets" within the meaning of Section
856(c)(4)(A) of the Code, and "loans secured by an interest in real property"
within the meaning of Section 7701(a)(19)(C)(v) of the Code; and interest
income attributable to the Securities should be considered to represent
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of Section 856(c)(3)(B) of the Code.
Reserves or funds underlying the Securities may cause a proportionate
reduction in the above-described qualifying status categories of Securities.
Sale or Exchange
Subject to the discussion below with respect to Trust Funds as to
which a partnership election is made, in the opinion of Tax Counsel, a
Holder's tax basis in its Security is the price such Holder pays for a
Security, plus amounts of original issue or market discount included in income
and reduced by any payments received (other than qualified stated interest
payments) and any amortized premium. Gain or loss recognized on a sale,
exchange, or redemption of a Security, measured by the difference between the
amount realized and the Security's basis as so adjusted, 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 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 income that constitutes excess inclusion
income, a Holder of a Residual Interest Security will not be entitled to an
exemption from or reduction of the 30% (or lower treaty rate) withholding tax
rule. If the payments are subject to United States withholding tax, they
generally will be taken into account for withholding tax purposes only when
paid or distributed (or when the Residual Interest Security is disposed of).
The Treasury has statutory authority, however, to promulgate regulations that
would require such amounts to be taken into account at an earlier time in
order to prevent the avoidance of tax. Such regulations could, for example,
require withholding prior to the distribution of cash in the case of Residual
Interest Securities that do not have significant value. Under the REMIC
Regulations, if a Residual Interest Security has tax avoidance potential, a
transfer of a Residual Interest Security to a Nonresident will be disregarded
for all federal tax purposes. A Residual Interest Security has tax avoidance
potential unless, at the time of the transfer the transferor reasonably
expects that the REMIC will distribute to the transferee residual interest
Holder amounts that will equal at least 30% of each excess inclusion, and that
such amounts will be distributed at or after the time at which the excess
inclusions accrue and not later than the calendar year following the calendar
year of accrual. If a Nonresident transfers a Residual Interest Security to a
United States person, and if the transfer has the effect of allowing the
transferor to avoid tax on accrued excess inclusions, then the transfer is
disregarded and the transferor continues to be treated as the owner of the
Residual Interest Security for purposes of the withholding tax provisions of
the Code. See "--Excess Inclusions."
Tax Characterization of the Trust Fund as a Partnership
Tax Counsel is of the opinion that a Trust Fund structured as a
partnership will not be an association (or publicly traded partnership)
taxable as a corporation for federal income tax purposes. This opinion is
based on the assumption that the terms of the Trust Agreement and related
documents will be complied with, and on counsel's conclusions that the nature
of the income of the Trust Fund will exempt it from the rule that certain
publicly traded partnerships are taxable as corporations or the issuance of
the Certificates has been structured as a private placement under an IRS safe
harbor, so that the Trust Fund will not be characterized as a publicly traded
partnership taxable as a corporation.
If the Trust Fund were taxable as a corporation for federal income
tax purposes, in the opinion of Tax Counsel, the Trust Fund would be subject
to corporate income tax on its taxable income. The Trust Fund's taxable income
would include all its income, possibly reduced by its interest expense on the
Notes. Any such corporate income tax could materially reduce cash available to
make payments on the Notes and distributions on the Certificates, and
Certificateholders could be liable for any such tax that is unpaid by the
Trust Fund.
Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. The Trust Fund will agree,
and the Noteholders will agree by their purchase of Notes, to treat the Notes
as debt for federal income tax purposes. In such a circumstance, Tax Counsel
is, except as otherwise provided in the related Prospectus Supplement, of the
opinion that the Notes will be classified as debt for federal income tax
purposes. The discussion below assumes this characterization of the Notes is
correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities or Strip Notes. Moreover, the discussion assumes that
the interest formula for the Notes meets the requirements for "qualified
stated interest" under the OID Regulations, and that any OID on the Notes
(i.e., any excess of the principal amount of the Notes over their issue price)
does not exceed a de minimis amount (i.e., 0.25% of their principal amount
multiplied by the number of full years included in their term), all within the
meaning of the OID regulations. If these conditions are not satisfied with
respect to any given Series of Notes, additional tax considerations with
respect to such Notes will be disclosed in the applicable Prospectus
Supplement.
Interest Income on the Notes. Based on the above assumptions, except
as discussed in the following paragraph, in the opinion of Tax Counsel, the
Notes will not be considered issued with OID. The stated interest thereon will
be taxable to a Noteholder as ordinary interest income when received or
accrued in accordance with such Noteholder's method of tax accounting. Under
the OID Regulations, a Holder of a Note issued with a de minimis amount of OID
must include such OID in income, on a pro rata basis, as principal payments
are made on the Note. It is believed that any prepayment premium paid as a
result of a mandatory redemption will be taxable as contingent interest when
it becomes fixed and unconditionally payable. A purchaser who buys a Note for
more or less than its principal amount will generally be subject,
respectively, to the premium amortization or market discount rules of the
Code.
A Holder of a Note that has a fixed maturity date of not more than
one year from the issue date of such Note (a "Short-Term Note") may be subject
to special rules. An accrual basis Holder of a Short-Term Note (and certain
cash method Holders, including regulated investment companies, as set forth in
Section 1281 of the Code) generally would be required to report interest
income as interest accrues on a straight-line basis over the term of each
interest period. Other cash basis Holders of a Short-Term Note would, in
general, be required to report interest income as interest is paid (or, if
earlier, upon the taxable disposition of the Short-Term Note). However, a cash
basis Holder of a Short-Term Note reporting interest income as it is paid may
be required to defer a portion of any interest expense otherwise deductible on
indebtedness incurred to purchase or carry the Short-Term Note until the
taxable disposition of the Short-Term Note. A cash basis taxpayer may elect
under Section 1281 of the Code to accrue interest income on all nongovernment
debt obligations with a term of one year or less, in which case the taxpayer
would include interest on the Short-Term Note in income as it accrues, but
would not be subject to the interest expense deferral rule referred to in the
preceding sentence. Certain special rules apply if a Short-Term Note is
purchased for more or less than its principal amount.
Sale or Other Disposition. In the opinion of Tax Counsel, if a
Noteholder sells a Note, the Holder will recognize gain or loss in an amount
equal to the difference between the amount realized on the sale and the
Holder's adjusted tax basis in the Note. The adjusted tax basis of a Note to a
particular Noteholder will equal the Holder's cost for the Note, increased by
any market discount, acquisition discount, OID and gain previously included by
such Noteholder in income with respect to the Note and decreased by the amount
of bond premium (if any) previously amortized and by the amount of principal
payments previously received by such Noteholder with respect to such Note. Any
such gain or loss will be capital gain or loss if the Note was held as a
capital asset, except for gain representing accrued interest and accrued
market discount not previously included in income. Capital losses generally
may be used only to offset capital gains.
Foreign Holders. In the opinion of Tax Counsel, interest payments
made (or accrued) to a Noteholder who is a nonresident alien, foreign
corporation or other non-United States person (a "foreign person") generally
will be considered "portfolio interest," and generally will not be subject to
United States federal income tax and withholding tax, if the interest is not
effectively connected with the conduct of a trade or business within the
United States by the foreign person and the foreign person (i) is not actually
or constructively a "10 percent shareholder" of the Trust Fund or the Seller
(including a Holder of 10% of the outstanding Certificates) or a "controlled
foreign corporation" with respect to which the Trust Fund or the Seller is a
"related person" within the meaning of the Code and (ii) provides the Trustee
or other person who is otherwise required to withhold U.S. tax with respect to
the Notes with an appropriate statement (on Form W-8 or a similar form),
signed under penalties of perjury, certifying that the beneficial owner of the
Note is a foreign person and providing the foreign person's name and address.
If a Note is held through a securities clearing organization or certain other
financial institutions, the organization or institution may provide the
relevant signed statement to the withholding agent; in that case, however, the
signed statement must be accompanied by a Form W-8 or substitute form provided
by the foreign person that owns the Note. If such interest is not portfolio
interest, then it will be subject to United States federal income and
withholding tax at a rate of 30 percent, unless reduced or eliminated pursuant
to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or
other taxable disposition of a Note by a foreign person will be exempt from
United States federal income and withholding tax; provided, that (i) such gain
is not effectively connected with the conduct of a trade or business in the
United States by the foreign person and (ii) in the case of an individual
foreign person, the foreign person is not present in the United States for 183
days or more in the taxable year.
Backup Withholding. Each Holder of a Note (other than an exempt
Holder such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the Holder's
name, address, correct federal taxpayer identification number and a statement
that the Holder is not subject to backup withholding. Should a nonexempt
Noteholder fail to provide the required certification, the Trust Fund will be
required to withhold 31 percent of the amount otherwise payable to the Holder,
and remit the withheld amount to the IRS as a credit against the Holder's
federal income tax liability.
The New Regulations described herein make certain modifications to
the backup withholding and information reporting rules. The New Regulations
generally will be effective for payments made after December 31, 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.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series
of Securities includes a single Class of Certificates. If these conditions are
not satisfied with respect to any given Series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
Partnership Taxation. If the Trust Fund is a partnership, in the
opinion of Tax Counsel, the Trust Fund will not be subject to federal income
tax. Rather, in the opinion of Tax Counsel, each Certificateholder will be
required to separately take into account such Holder's allocated share of
income, gains, losses, deductions and credits of the Trust Fund. The Trust
Fund's income will consist primarily of interest and finance charges earned on
the Loans (including appropriate adjustments for market discount, OID and bond
premium) and any gain upon collection or disposition of Loans. The Trust
Fund's deductions will consist primarily of interest accruing with respect to
the Notes, servicing and other fees, and losses or deductions upon collection
or disposition of Loans.
In the opinion of Tax Counsel, the tax items of a partnership are
allocable to the partners in accordance with the Code, Treasury regulations
and the partnership agreement (here, the Trust Agreement and related
documents). The Trust Agreement will provide, in general, that the
Certificateholders will be allocated taxable income of the Trust Fund for each
month equal to the sum of (i) the interest that accrues on the Certificates in
accordance with their terms for such month, including interest accruing at the
Pass-Through Rate for such month and interest on amounts previously due on the
Certificates but not yet distributed; (ii) any Trust Fund income attributable
to discount on the Loans that corresponds to any excess of the principal
amount of the Certificates over their initial issue price (iii) prepayment
premium payable to the Certificateholders for such month; and (iv) any other
amounts of income payable to the Certificateholders for such month. Such
allocation will be reduced by any amortization by the Trust Fund of premium on
Loans that corresponds to any excess of the issue price of Certificates over
their principal amount. All remaining taxable income of the Trust Fund will be
allocated to the Depositor. Based on the economic arrangement of the parties,
in the opinion of Tax Counsel, this approach for allocating Trust Fund income
should be permissible under applicable Treasury regulations, although no
assurance can be given that the IRS would not require a greater amount of
income to be allocated to Certificateholders. Moreover, in the opinion of Tax
Counsel, even under the foregoing method of allocation, Certificateholders may
be allocated income equal to the entire Pass-Through Rate plus the other items
described above even though the Trust Fund might not have sufficient cash to
make current cash distributions of such amount. Thus, cash basis Holders will
in effect be required to report income from the Certificates on the accrual
basis and Certificateholders may become liable for taxes on Trust Fund income
even if they have not received cash from the Trust Fund to pay such taxes. In
addition, because tax allocations and tax reporting will be done on a uniform
basis for all Certificateholders but Certificateholders may be purchasing
Certificates at different times and at different prices, Certificateholders
may be required to report on their tax returns taxable income that is greater
or less than the amount reported to them by the Trust Fund.
In the opinion of Tax Counsel, all of the taxable income allocated to
a Certificateholder that is a pension, profit sharing or employee benefit plan
or other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
Holder under the Code.
In the opinion of Tax Counsel, an individual taxpayer's share of
expenses of the Trust Fund (including fees to the Servicer but not interest
expense) would be miscellaneous itemized deductions. Such deductions might be
disallowed to the individual in whole or in part and might result in such
Holder being taxed on an amount of income that exceeds the amount of cash
actually distributed to such Holder over the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to
income and allocations to Certificateholders on an aggregate basis. If the IRS
were to require that such calculations be made separately for each Loan, the
Trust Fund might be required to incur additional expense but it is believed
that there would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Loans were not issued
with OID, and, therefore, the Trust Fund should not have OID income. However,
the purchase price paid by the Trust Fund for the Loans may be greater or less
than the remaining Principal Balance of the Loans at the time of purchase. If
so, in the opinion of Tax Counsel, the Loan will have been acquired at a
premium or discount, as the case may be. (As indicated above, the Trust Fund
will make this calculation on an aggregate basis, but might be required to
recompute it on a Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium,
the Trust Fund will elect to include any such discount in income currently as
it accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
Section 708 Termination. In the opinion of Tax Counsel, under Section
708 of the Code, the Trust Fund will be deemed to terminate for federal income
tax purposes if 50% or more of the capital and profits interests in the Trust
Fund are sold or exchanged within a 12-month period. Pursuant to final
Treasury regulations issued May 9, 1997 under Section 708 of the Code, if such
a termination occurs, the Trust Fund (the "old partnership") would be deemed
to contribute its assets to a new partnership (the "new partnership") in
exchange for interests in the new partnership. Such interests would be deemed
distributed to the partners of the old partnership in liquidation thereof,
which would not constitute a sale or exchange.
Disposition of Certificates. Generally, in the opinion of Tax
Counsel, capital gain or loss will be recognized on a sale of Certificates in
an amount equal to the difference between the amount realized and the seller's
tax basis in the Certificates sold. A Certificateholder's tax basis in a
Certificate will generally equal the Holder's cost increased by the Holder's
share of Trust Fund income (includible in income) and decreased by any
distributions received with respect to such Certificate. In addition, both the
tax basis in the Certificates and the amount realized on a sale of a
Certificate would include the Holder's share of the Notes and other
liabilities of the Trust Fund. A Holder acquiring Certificates at different
prices may be required to maintain a single aggregate adjusted tax basis in
such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the
Certificates sold (rather than maintaining a separate tax basis in each
Certificate for purposes of computing gain or loss on a sale of that
Certificate).
Any gain on the sale of a Certificate attributable to the Holder's
share of unrecognized accrued market discount on the Loans would generally be
treated as ordinary income to the Holder and would give rise to special tax
reporting requirements. The Trust Fund does not expect to have any other
assets that would give rise to such special reporting requirements. Thus, to
avoid those special reporting requirements, the Trust Fund will elect to
include market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount
of income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise
to a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the
Trust Fund's taxable income and losses will be determined monthly and the tax
items for a particular calendar month will be apportioned among the
Certificateholders in proportion to the principal amount of Certificates owned
by them as of the close of the last day of such month. As a result, a Holder
purchasing Certificates may be allocated tax items (which will affect its tax
liability and tax basis) attributable to periods before the actual
transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or
losses of the Trust Fund might be reallocated among the Certificateholders.
The Trust Fund's method of allocation between transferors and transferees may
be revised to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder
had. The tax basis of the Trust Fund's assets will not be adjusted to reflect
that higher (or lower) basis unless the Trust Fund were to file an election
under Section 754 of the Code. In order to avoid the administrative
complexities that would be involved in keeping accurate accounting records, as
well as potentially onerous information reporting requirements, the Trust Fund
will not make such election. As a result, Certificateholders might be
allocated a greater or lesser amount of Trust Fund income than would be
appropriate based on their own purchase price for Certificates.
Administrative Matters. The Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained
for financial reporting and tax purposes on an accrual basis and the fiscal
year of the Trust Fund will be the calendar year. The Trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Trust Fund and will report each Certificateholder's allocable
share of items of Trust Fund income and expense to Holders and the IRS on
Schedule K-1. The Trust Fund will provide the Schedule K-l information to
nominees that fail to provide the Trust Fund with the information statement
described below and such nominees will be required to forward such information
to the beneficial owners of the Certificates. Generally, Holders must file tax
returns that are consistent with the information return filed by the Trust
Fund or be subject to penalties unless the Holder notifies the IRS of all such
inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as
a nominee at any time during a calendar year is required to furnish the Trust
Fund with a statement containing certain information on the nominee, the
beneficial owners and the Certificates so held. Such information includes (i)
the name, address and taxpayer identification number of the nominee and (ii)
as to each beneficial owner (a) the name, address and identification number of
such person, (b) whether such person is a United States person, a tax-exempt
entity or a foreign government, an international organization or any wholly
owned agency or instrumentality of either of the foregoing, and (c) certain
information on Certificates that were held, bought or sold on behalf of such
person throughout the year. In addition, brokers and financial institutions
that hold Certificates through a nominee are required to furnish directly to
the Trust Fund information as to themselves and their ownership of
Certificates. A clearing agency registered under Section 17A of the Exchange
Act is not required to furnish any such information statement to the Trust
Fund. The information referred to above for any calendar year must be
furnished to the Trust Fund on or before the following January 31. Nominees,
brokers and financial institutions that fail to provide the Trust Fund with
the information described above may be subject to penalties.
The Depositor will be designated as the tax matters partner in the
related Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which
the partnership information return is filed. Any adverse determination
following an audit of the return of the Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the
Certificateholders, and, under certain circumstances, a Certificateholder may
be precluded from separately litigating a proposed adjustment to the items of
the Trust Fund. An adjustment could also result in an audit of a
Certificateholder's returns and adjustments of items not related to the income
and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear
whether the Trust Fund would be considered to be engaged in a trade or
business in the United States for purposes of federal withholding taxes with
respect to non-U.S. persons because there is no clear authority dealing with
that issue under facts substantially similar to those described herein.
Although it is not expected that the Trust Fund would be engaged in a trade or
business in the United States for such purposes, the Trust Fund will withhold
as if it were so engaged in order to protect the Trust Fund from possible
adverse consequences of a failure to withhold. The Trust Fund expects to
withhold on the portion of its taxable income that is allocable to foreign
Certificateholders pursuant to Section 1446 of the Code, as if such income
were effectively connected to a U.S. trade or business, at a rate of 35% for
foreign Holders that are taxable as corporations and 39.6% for all other
foreign Holders. Subsequent adoption of Treasury regulations or the issuance
of other administrative pronouncements may require the Trust Fund to change
its withholding procedures. In determining a Holder's withholding status, the
Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the Holder's
certification of nonforeign status signed under penalties of perjury.
Each foreign Holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the
branch profits tax) on its share of the Trust Fund's income. Each foreign
Holder must obtain a taxpayer identification number from the IRS and submit
that number to the Trust Fund on Form W-8 in order to assure appropriate
crediting of the taxes withheld. A foreign Holder generally would be entitled
to file with the IRS a claim for refund with respect to taxes withheld by the
Trust Fund taking the position that no taxes were due because the Trust Fund
was not engaged in a U.S. trade or business. However, interest payments made
(or accrued) to a Certificateholder who is a foreign person generally will be
considered guaranteed payments to the extent such payments are determined
without regard to the income of the Trust Fund. If these interest payments are
properly characterized as guaranteed payments, then the interest will not be
considered "portfolio interest." As a result, Certificateholders will be
subject to United States federal income tax and withholding tax at a rate of
30 percent, unless reduced or eliminated pursuant to an applicable treaty. In
such case, a foreign Holder would only be entitled to claim a refund for that
portion of the taxes in excess of the taxes that should be withheld with
respect to the guaranteed payments.
Backup Withholding. Distributions made on the Certificates and
proceeds from the sale of the Certificates will be subject to a "backup"
withholding tax of 31% if, in general, the Certificateholder fails to comply
with certain identification procedures, unless the Holder is an exempt
recipient under applicable provisions of the Code. The New Regulations
described herein make certain modifications to the backup withholding and
information reporting rules. The New Regulations will generally be effective
for payments made after December 31, 1999, subject to certain transition
rules. Prospective investors are urged to consult their own tax advisors
regarding the New Regulations.
STATE TAX CONSIDERATIONS
In addition to the federal income tax considerations described in
"Certain Federal Income Tax Considerations," potential investors should
consider the state and local income tax consequences of the acquisition,
ownership, and disposition of the Securities. State and local income tax law
may differ substantially from the corresponding federal law, and this
discussion does not purport to describe any aspect of the income tax laws of
any state or locality. Therefore, potential investors should consult their own
tax advisors with respect to the various state and local tax consequences of
an investment in the Securities.
FASIT SECURITIES
General. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory
vehicle for the issuance of mortgage-backed and asset-backed securities
("FASIT Securities"). Although the FASIT provisions of the Code became
effective on September 1, 1997, no Treasury regulations or other
administrative guidance has been issued with respect to those provisions.
Accordingly, definitive guidance cannot be provided with respect to many
aspects of the tax treatment of Holders of FASIT Securities. Investors also
should note that the FASIT discussions contained herein constitutes only a
summary of the federal income tax consequences to Holders of FASIT Securities.
With respect to each Series of FASIT Securities, the related Prospectus
Supplement will provide a detailed discussion regarding the federal income tax
consequences associated with the particular transaction.
FASIT Securities will be classified as either FASIT Regular
Securities, which generally will be treated as debt for federal income tax
purposes, or FASIT Ownership Securities, which generally are not treated as
debt for such purposes, but rather as representing rights and responsibilities
with respect to the taxable income or loss of the related Series. The
Prospectus Supplement for each Series of Securities will indicate whether one
or more FASIT elections will be made for such Series, and which Securities of
such Series will be designated as Regular Securities, and which, if any, will
be designated as Ownership Securities.
Qualification as a FASIT. The Trust Fund underlying a Series (or one
or more designated pools of assets held in the Trust Fund) will qualify under
the Code as a FASIT in which the FASIT Regular Securities and the FASIT
Ownership Securities will constitute the "regular interests" and the
"ownership interests," respectively, if (i) a FASIT election is in effect,
(ii) certain tests concerning (a) the composition of the FASIT's assets and
(b) the nature of the Holders' interest in the FASIT are met on a continuing
basis and (iii) the Trust Fund is not a regulated company as defined in
Section 851(a) of the Code.
Asset Composition. In order for a Trust Fund (on one or more
designated pools of assets held by a Trust Fund) to be eligible for FASIT
status, substantially all of the assets of the Trust Fund (or the designated
pool) must consist of "permitted assets" as of the close of the third month
beginning after the Closing Date and at all times thereafter (the "FASIT
Qualification Test"). Permitted assets include (i) cash or cash equivalents,
(ii) debt instruments with fixed terms that would qualify as REMIC regular
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.
Interests in a FASIT. In addition to the foregoing asset
qualification requirements, the interests in a FASIT also must meet certain
requirements. All of the interests in a FASIT must belong to either of the
following: (i) one or more Classes of regular interests or (ii) a single Class
of ownership interest that is held by a fully taxable domestic corporation. In
the case of Series that include FASIT Ownership Securities, the ownership
interest will be represented by the FASIT Ownership Securities.
A FASIT interest generally qualifies as a regular interest if (i) it
is designated as a regular interest, (ii) it has a stated maturity no greater
than thirty years, (iii) it entitles its Holder to a specified principal
amount, (iv) the issue price of the interest does not exceed 125% of its
stated principal amount, (v) the yield to maturity of the interest is less
than the applicable Treasury rate published by the IRS plus 5% and (vi) if it
pays interest, such interest is payable at either (a) a fixed rate with
respect to the principal amount of the regular interest or (b) a permissible
variable rate with respect to such principal amount. Permissible variable
rates for FASIT regular interests are the same as those for REMIC regular
interest (i.e., certain qualified floating rates and weighted average rates).
See "Certain Federal Income Tax Considerations--Taxation of Debt
Securities--Variable Rate Debt Securities."
If a FASIT Security fails to meet one or more of the requirements set
out in clauses (iii), (iv) or (v) above, but otherwise meets the above
requirements, it may still qualify as a type of regular interest known as a
"High-Yield Interest." In addition, if a FASIT Security fails to meet the
requirements of clause (vi), but the interest payable on the Security consists
of a specified portion of the interest payments on permitted assets and that
portion does not vary over the life of the Security, the Security also will
qualify as a High-Yield Interest. A High-Yield Interest may be held only by
domestic corporations that are fully subject to corporate income tax
("Eligible Corporations"), other FASITs and dealers in securities who acquire
such interests as inventory, rather than for investment. In addition, Holders
of High-Yield Interests are subject to limitations on offset of income derived
from such interest. See "Certain Federal Income Tax Considerations--FASIT
Securities--Tax Treatment of FASIT Regular Securities--Treatment of High-Yield
Interests."
Consequences of Disqualification. If a Series of FASIT Securities
fails to comply with one or more of the Code's ongoing requirements for FASIT
status during any taxable year, the Code provides that its FASIT status may be
lost for that year and thereafter. If FASIT status is lost, the treatment of
the former FASIT and the interests therein for federal income tax purposes is
uncertain. The former FASIT might be treated as a grantor trust, as a separate
association taxed as a corporation, or as a partnership. The FASIT Regular
Securities could be treated as debt instruments for federal income tax
purposes or as equity interests. Although the Code authorizes the Treasury to
issue regulations that address situations where a failure to meet the
requirements for FASIT status occurs inadvertently and in good faith, such
regulations have not yet been issued. It is possible that disqualification
relief might be accompanied by sanctions, such as the imposition of a
corporate tax on all or a portion of the FASIT's income for a period of time
in which the requirements for FASIT status are not satisfied.
Tax Treatment of FASIT Regular Securities. Payments received by
Holders of FASIT Regular Securities generally should be accorded the same tax
treatment under the Code as payments received on other taxable corporate debt
instruments and on REMIC Regular Securities. As in the case of Holders of
REMIC Regular Securities, Holders of FASIT Regular Securities must report
income from such Securities under an accrual method of accounting, even if
they otherwise would have used the case receipts and disbursements method.
Except in the case of FASIT Regular Securities issued with original issue
discount or acquired with market discount or premium, interest paid or accrued
on a FASIT Regular Security generally will be treated as ordinary income to
the Holder and a principal payment on such Security will be treated as a
return of capital to the extent that the Holder's basis is allocable to that
payment. FASIT Regular Securities issued with original issue discount or
acquired with market discount or premium generally will treat interest and
principal payments on such Securities in the same manner described for REMIC
Regular Securities. See "Certain Federal Income Tax Considerations--Taxation
of Debt Securities,""--Market Discount," and "--Premium" above. High-Yield
Securities may be held only by fully taxable domestic corporations, other
FASITs, and certain securities dealers. Holders of High-Yield Securities are
subject to limitations on their ability to use current losses or net operating
loss carryforwards or carrybacks to offset any income derived from those
Securities.
If a FASIT Regular Security is sold or exchanged, the Holder
generally will recognize gain or loss upon the sale in the manner described
above for REMIC Regular Securities. See "Certain Federal Income Tax
Considerations--Sale or Exchange." In addition, if a FASIT Regular Security
becomes wholly or partially worthless as a result of Default and Delinquencies
of the underlying assets, the Holder of such Security should be allowed to
deduct the loss sustained (or alternatively be able to report a lesser amount
of income). See "Certain Federal Income Tax Considerations--Taxation of Debt
Instruments--Effects of Default and Delinquencies."
FASIT Regular Securities held by a REIT will qualify as "real estate
assets" within the meaning of section 856(c) (4)(A) of the Code, and interest
on such Securities will be considered Qualifying REIT Interest to the same
extent that REMIC Securities would be so considered. FASIT Regular Securities
held by a Thrift Institution taxed as a "domestic building and loan
association" will represent qualifying assets for purposes of the
qualification requirements set forth in Code Section 7701(a)(19) to the same
extent that REMIC Securities would be so considered. See "Certain Federal
Income Tax Considerations--Taxation of Debt Securities--Status as Real
Property Loans." In addition, FASIT Regular Securities held by a financial
institution to which Section 585 of the Code applies will be treated as
evidences of indebtedness for purposes of Section 582(c)(1) of the Code. FASIT
Securities will not qualify as "Government Securities" for either REIT or RIC
qualification purposes.
Treatment of High-Yield Interests. High-Yield Interests are subject
to special rules regarding the eligibility of Holders of such interests, and
the ability of such Holders to offset income derived from their FASIT Security
with losses. High-Yield Interests may be held only by Eligible Corporations
other FASITs, and dealers in securities who acquire such interests as
inventory. If a securities dealer (other than an Eligible Corporation)
initially acquires a High-Yield Interest as inventory, but later begins to
hold it for investment, the dealer will be subject to an excise tax equal to
the income from the High-Yield Interest multiplied by the highest corporate
income tax rate. In addition, transfers of High-Yield Interests to
disqualified Holders will be disregarded for federal income tax purposes, and
the transferor still will be treated as the Holder of the High-Yield Interest.
The Holder of a High-Yield Interest may not use non-FASIT current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from the High-Yield Interest, for either regular federal income tax
purposes or for alternative minimum tax purposes. In addition, the FASIT
provisions contain an anti-abuse rule that imposes corporate income tax on
income derived from a FASIT Regular Security that is held by a pass-through
entity (other than another FASIT) that issues debt or equity securities backed
by the FASIT Regular Security and that have the same features as High-Yield
Interests.
Tax Treatment of FASIT Ownership Securities. A FASIT Ownership
Security represents the residual equity interest in a FASIT. As such, the
Holder of a FASIT Ownership Security determines its taxable income by taking
into account all assets, liabilities and items of income, gain, deduction,
loss and credit of a FASIT. In general, the character of the income to the
Holder of a FASIT Ownership Interest will be the same as the character of such
income of the FASIT, except that any tax-exempt interest income taken into
account by the Holder of a FASIT Ownership Interest is treated as ordinary
income. In determining that taxable income, the Holder of a FASIT Ownership
Security must determine the amount of interest, original issue discount,
market discount and premium recognized with respect to the FASIT's assets and
the FASIT Regular Securities issued by the FASIT according to a constant yield
methodology and under an accrual method of accounting. In addition, Holders of
FASIT Ownership Securities are subject to the same limitations on their
ability to use losses to offset income from their FASIT Security as are the
Holders of High-Yield Interests. See "Certain Federal Income Tax
Considerations--Treatment of High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Securities. Accordingly, losses
on dispositions of a FASIT Ownership Security generally will be disallowed
where, within six months before or after the disposition, the seller of such
Security acquires any other FASIT Ownership Security or, in the case of a
FASIT holding mortgage assets, any interest in a Taxable Mortgage Pool that is
economically comparable to a FASIT Ownership Security. In addition, if any
security that is sold or contributed to a FASIT by the Holder of the related
FASIT Ownership Security was required to be marked-to-market under Code
section 475 by such Holder, then section 475 will continue to apply to such
securities, except that the amount realized under the mark-to-market rules
will be a greater of the securities' value under present law or the
securities' value after applying special valuation rules contained in the
FASIT provisions. Those special valuation rules generally require that the
value of debt instruments that are not traded on an established securities
market be determined by calculating the present value of the reasonably
expected payments under the instrument using a discount rate of 120% of the
applicable federal rate, compounded semiannually.
The Holder of a FASIT Ownership Security will be subject to a tax
equal to 100% of the net income derived by the FASIT from any "prohibited
transactions." Prohibited transactions include (i) the receipt of income
derived from assets that are not permitted assets, (ii) certain dispositions
of permitted assets, (iii) the receipt of any income derived from any loan
originated by a FASIT and (iv) in certain cases, the receipt of income
representing a servicing fee or other compensation. Any Series for which a
FASIT election is made generally will be structured in order to avoid
application of the prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration. Holders of
FASIT Securities will be subject to backup withholding to the same extent
Holders of REMIC Securities would be subject. See "Certain Federal Income Tax
Considerations--Miscellaneous Tax Aspects--Backup Withholding." For purposes
of reporting and tax administration, Holders of record of FASIT Securities
generally will be treated in the same manner as Holders of REMIC Securities.
Due to the complexity of the federal income tax rules applicable to
Holders and the considerable uncertainty that exists with respect to many
aspects of those rules, potential investors should consult their own tax
advisors regarding the tax treatment of the acquisition, ownership, and
disposition of the securities.
ERISA CONSIDERATIONS
The following describes certain considerations under 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 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 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 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" 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 Specified Funding Period
than the rating that was obtained at the time of the
initial issuance of the certificates by the trust.
(4) Solely as a result of the use of pre-funding, the
weighted average annual percentage interest rate for all
of the Obligations in the trust at the end of the
Specified Funding Period must not be more than 100 basis
points lower than the average interest rate for the
Obligations transferred to the trust on the Closing
Date.
(5) In order to insure that the characteristics of the
Additional Obligations are substantially similar to the
original Obligations which were transferred to the Trust
Fund:
(i) the characteristics of the Additional
Obligations must be monitored by an insurer
or other credit support provider that is
independent of the depositor; or
(ii) an independent accountant retained by the
depositor must provide the depositor with a
letter (with copies provided to each
Exemption Rating Agency rating the
certificates, the related underwriter and the
related trustee) stating whether or not the
characteristics of the Additional Obligations
conform to the characteristics described in
the related prospectus or Prospectus
Supplement and/or pooling and servicing
agreement. In preparing such letter, the
independent accountant must use the same type
of procedures as were applicable to the
Obligations transferred to the trust as of
the Closing Date.
(6) The period of pre-funding must end no later than three
months or 90 days after the Closing Date or earlier in
certain circumstances if the pre-funding account falls
below the minimum level specified in the pooling and
servicing agreement or an Event of Default occurs.
(7) Amounts transferred to any pre-funding account and/or
capitalized interest account used in connection with the
pre-funding may be invested only in certain permitted
investments ("Permitted Investments").
(8) The related prospectus or Prospectus Supplement must
describe:
(i) any pre-funding account and/or capitalized
interest account used in connection with a
pre-funding account;
(ii) the duration of the period of pre-funding;
(iii) the percentage and/or dollar amount of the
Specified Funding Limit for the trust; and
(iv) that the amounts remaining in the pre-funding
account at the end of the Specified Funding
Period will be remitted to certificateholders
as repayments of principal.
(9) The related pooling and servicing agreement must
describe the Permitted Investments for the pre-funding
account and/or capitalized interest account and, if not
disclosed in the related prospectus or Prospectus
Supplement, the terms and conditions for eligibility of
Additional Obligations.
Neither PTCE 83-1 nor the Underwriter Exemption applies to a trust
which contains unsecured obligations.
Any Plan fiduciary that proposes to cause a Plan to purchase
Securities should consult with 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 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 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.
<PAGE>
Index of Defined Terms
<PAGE>
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
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
