PROSPECTUS SUPPLEMENT
(To Prospectus dated August 5, 1999)
$377,842,000
MORTGAGE LOAN TRUST, SERIES RASC 1999-RS3
MORTGAGE ASSET-BACKED PASS-THROUGH CERTIFICATES, SERIES 1999-RS3
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-11 IN THIS
PROSPECTUS SUPPLEMENT AND PAGE 3 IN THE PROSPECTUS.
The certificates will represent interests only in the trust created for Series
1999-RS3 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-RS3 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 a reserve fund funded by three yield maintenance agreements;
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.
[Logo]
UNDERWRITING
The underwriters will offer to the public the Class A Certificates at varying
prices to be determined at the time of sale. Each 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 underwriters will be approximately 99.80% 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. RESIDENTIAL FUNDING SECURITIES CORPORATION
Underwriter of the Class A-II Underwriter of the Class A-I
Certificates Certificates
The date of this Prospectus Supplement is September 27, 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.
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT
Summary................................. S-3
Risk Factors............................ S-11
Introduction............................ S-19
Description of the Mortgage Pool........ S-19
Description of the Certificates......... S-43
Year 2000 Considerations................ S-61
The Insurer............................. S-64
Bear Stearns Financial Products......... S-65
Certain Yield and Prepayment
Considerations........................ S-65
Pooling and Servicing Agreement......... S-71
Certain Federal Income Tax
Considerations........................ S-76
Method of Distribution.................. S-78
Experts................................. S-79
Legal Opinions.......................... S-79
Ratings................................. S-79
Legal Investment........................ S-80
ERISA Considerations.................... S-80
Annex I -- Global Clearance,
Settlement and Tax Document
Procedures............................ I-1
Appendix A -- Mortgage Loan
Assumptions........................... A-1
PAGE
----
PROSPECTUS
Important Notice About Information
in this Prospectus and Each
Accompanying Prospectus
Supplement............................ 2
Risk Factors............................ 3
Description of the Securities........... 8
The Trust Funds......................... 13
Enhancement............................. 22
Servicing of Loans...................... 25
The Agreements.......................... 32
Certain Legal Aspects of the
Loans................................. 42
The Depositor........................... 53
Use of Proceeds......................... 53
Certain Federal Income Tax
Consequences.......................... 53
State Tax Considerations................ 76
FASIT Securities........................ 76
ERISA Considerations.................... 79
Legal Matters........................... 85
Financial Information................... 85
Available Information................... 85
Incorporation of Certain
Information by Reference.............. 85
Rating.................................. 86
Legal Investment........................ 87
Plan of Distribution.................... 87
Index of Defined Terms.................. 88
S-2
<PAGE>
SUMMARY
The following summary is a 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-RS3.
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..................... 1,795 fixed and adjustable-rate mortgage
loans with an aggregate principal balance of
approximately $377,842,337 as of the cut-off
date, secured by first liens on one- to
four-family residential properties.
Cut-off date...................... September 1, 1999.
Closing date...................... On or about September 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 October 25, 1999.
Scheduled final distribution date September 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.
S-3
<PAGE>
OFFERED CERTIFICATES
- --------------------------------------------------------------------------------
INITIAL
CERTIFICATE
PASS-THROUGH PRINCIPAL INITIAL RATING
CLASS RATE BALANCE (S&P/MOODY'S(1)) DESIGNATIONS
- --------------------------------------------------------------------------------
CLASS A CERTIFICATES:
- --------------------------------------------------------------------------------
A-I Adjustable(2) $119,817,000 AAA/Aaa Senior/Floating Rate
- --------------------------------------------------------------------------------
A-II Adjustable(3) $258,025,000 AAA/Aaa Senior/Floating Rate
- --------------------------------------------------------------------------------
Total Class A Certificates: $377,842,000
- --------------------------------------------------------------------------------
NON-OFFERED CERTIFICATES(4)
- -------------------------------------------------------------------------------
SB-I N/A $ 23 N/A Subordinate
- -------------------------------------------------------------------------------
SB-II N/A $ 314 N/A Subordinate
- -------------------------------------------------------------------------------
R-I N/A N/A N/A Residual
- -------------------------------------------------------------------------------
R-II N/A N/A N/A Residual
- -------------------------------------------------------------------------------
R-III N/A N/A N/A Residual
- -------------------------------------------------------------------------------
Total Class SB and Class R $ 337
Certificates
- -------------------------------------------------------------------------------
Total offered and non- $377,842,337
offered certificates
- -------------------------------------------------------------------------------
_____________
(1) See "Ratings" in this prospectus supplement.
(2) 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 optional termination
date), (ii) 14.00% per annum and (iii) the weighted average of the net
mortgage rates of the Mortgage Loans, reduced by the rate per annum at which
the premium on the limited reimbursement agreement accrues.
(3) The least of (i) one-month LIBOR plus 0.45% per annum (or 0.90% per annum
beginning on the first distribution date after the optional termination
date), (ii) 14.00% per annum and (iii) the weighted average of the net
mortgage rates of the Mortgage Loans, reduced by the rate per annum at which
the premium on the limited reimbursement agreement accrues.
(4) The information presented for non-offered certificates is provided solely to
assist your understanding of the offered certificates.
S-4
<PAGE>
THE TRUST
The depositor will establish a trust with respect to the Series 1999-RS3
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 together with cash
for the trustee to acquire the yield maintenance agreements.
The trust will also include credit enhancement in the form of:
o three yield maintenance agreements, which will fund a reserve fund, which
will cover certain losses and interest shortfalls on the Class A
Certificates; and
o 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. The mortgage loans have the following characteristics as of the cut-off
date:
LOAN GROUP I
Range of principal $4,886 to $239,781
balances
Average principal balance $105,011
Range of mortgage rates 5.88% to 15.99%
Weighted average 8.6554%
mortgage rate
Range of remaining terms 35 months to 360
to stated maturity months
Weighted average 292 months
remaining term to
stated maturity
LOAN GROUP II
Range of principal $48,785 to $2,150,000
balances
Average principal balance $394,534
Range of mortgage rates 5.63% to 11.75%
Weighted average 7.4671%
mortgage rate
Range of remaining terms 34 months to 360
to stated maturity months
Weighted average 327 months
remaining term to
stated maturity
The interest rate on the adjustable rate mortgage loans will adjust on each
adjustment date following a fixed interest rate period 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.
The mortgage loans included in the mortgage pool generally consist of two types.
The first type of mortgage loan includes adjustable rate mortgage loans with
initial fixed rate periods of three or five years, all of which were originated
or acquired under the seller's core program described herein. These mortgage
loans constitute 4.6% and 39.6% of the mortgage loans in loan group I and loan
group II, respectively.
The second type of mortgage loan includes all of the fixed rate mortgage loans
and the rest of the adjustable rate mortgage loans. All of these 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;
o they were not originated in accordance with any standard secondary market
underwriting guidelines;
o they have document deficiencies;
o they are seasoned loans; and/or
S-5
<PAGE>
o the related mortgagors have delinquency histories.
These mortgage loans constitute 95.4% and 60.4% of the mortgage loans in loan
group I and loan group II, respectively.
SEE "RISK FACTORS -- RISK OF LOSS" IN THIS PROSPECTUS SUPPLEMENT.
Approximately 8.4% and 3.8% of the mortgage loans in loan group I and loan group
II, respectively, are balloon loans, which require a substantial portion of the
original principal amount to be paid on the respective scheduled maturity date.
Approximately 0.2% and 5.9% of the mortgage loans in loan group I and loan group
II, respectively, are convertible mortgage loans, which generally provide that,
at the option of the related mortgagors, the adjustable interest rate on the
mortgage loans may be converted to a fixed interest rate. Approximately 2.0% and
3.0% of the mortgage loans in loan group I and loan group II, respectively, are
negative amortization loans, which have a feature where, under certain
circumstances, interest due on the mortgage loans is added to the principal
balance thereof.
SEE "DESCRIPTION OF THE MORTGAGE POOL -- BALLOON MORTGAGE LOANS," " --
CONVERTIBLE MORTGAGE LOANS" AND " -- NEGATIVE AMORTIZATION LOANS" 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 and to the provider of the limited
reimbursement agreement, 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 certain interest shortfalls on the Class A
Certificates
- --------------------------------------------------------------------------------
S-6
<PAGE>
- --------------------------------------------------------------------------------
Step 7
Payments to the reserve fund in respect of certain interest shortfalls on
the Class A 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 the actual number of days in the related interest accrual period divided by
360
MINUS
o interest shortfalls allocated to that class.
The Class A Certificates may receive additional interest distributions, as
described below under "Credit Enhancement -- The Reserve Fund and the Yield
Maintenance Agreements."
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
reserve fund or the policy to cover realized losses not otherwise covered on the
mortgage loans.
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, the reserve fund, 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 be covered by a distribution in respect of
principal from the reserve fund,
o THIRD, realized losses will result in a decrease in the level of
overcollateralization, until reduced to zero, and
o FOURTH, 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
S-7
<PAGE>
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 RESERVE FUND AND THE YIELD MAINTENANCE AGREEMENTS. The trust will include
three yield maintenance agreements between Bear Stearns Financial Products Inc.
and the trustee on behalf of the certificateholders and the insurer, which will
be entered into on the closing date. Payments under the yield maintenance
agreements will be deposited in a reserve fund. Payments from the yield
maintenance agreements will be made pursuant to the formula described in
"Description of the Certificates -- The Reserve Fund and the Yield Maintenance
Agreements."
On each distribution date, to the extent of the balance of the reserve fund in
excess of $10,000, an amount will be withdrawn from the reserve fund and
distributed in the following order of priority:
o To reimburse the insurer for any payments made under the certificate guaranty
insurance policy; and
o To the Class A Certificates, to cover any losses on the mortgage loans that
were not covered by net monthly excess cash flow.
In addition, following the distributions to be made on any distribution date and
the allocation of realized losses with respect to such distribution date, if the
sum of the amount in the reserve fund and the current level of
overcollateralization exceeds the sum of the overcollateralization target and
$10,000, the amount of that excess will be withdrawn from the reserve fund and
distributed in the following order of priority:
o To cover certain amounts not paid to the Class A Certificates on prior
distribution dates because their pass-through rate cannot exceed the weighted
average of the net mortgage rates on the mortgage loans; and
o To the Class SB Certificates.
SEE "DESCRIPTION OF THE CERTIFICATES -- THE RESERVE FUND AND THE YIELD
MAINTENANCE AGREEMENTS" 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. Some payments that are covered by the policy may be paid
directly to the trustee from a separate limited reimbursement agreement obtained
by the insurer, instead of by a draw under the policy.
SEE "DESCRIPTION OF THE CERTIFICATES -- CERTIFICATE GUARANTY INSURANCE POLICY"
AND "THE INSURER" IN THIS PROSPECTUS SUPPLEMENT.
S-8
<PAGE>
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 ratings which are not lower
than those 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
S-9
<PAGE>
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 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. 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
The Class A Certificates may be purchased by persons investing assets of
employee benefit plans or individual retirement accounts subject to important
considerations.
SEE "ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND IN THE ACCOMPANYING
PROSPECTUS.
S-10
<PAGE>
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 have documentation defects, underwriting exceptions
and other attributes that may increase risk of loss on the mortgage loans.
The mortgage loans were evaluated pursuant to a variety of programs as described
in this prospectus supplement. SEE "DESCRIPTION OF THE MORTGAGE POOL -- PRODUCT
TYPES." However, 95.4% and 60.4% of the mortgage loans in loan group I and loan
group II, respectively, are portfolio transaction loans that are 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 do not comply with the underwriting standards for the program under which they
were originated (typically, because the loan-to-value ratio exceeded permitted
levels or due to the lack of a primary mortgage insurance policy as required);
o have deficiencies in legal documentation or are missing documents; 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 89 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 non-standard payment features, such as balloon payments, or they are
convertible from an adjustable rate to a fixed rate;
o are seasoned loans, which may not conform to the seller's current underwriting
criteria or documentation requirements;
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.
S-11
<PAGE>
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 28.7% and 6.2% 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. 22.7% and 10.9% 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 originally underwritten in accordance with a variety of
underwriting standards and programs, which may increase the risk of loss on the
mortgage loans.
The mortgage loans included in the trust were originally underwritten in
accordance with a variety of underwriting standards under several different
programs. See "DESCRIPTION OF THE MORTGAGE POOL -- PRODUCT TYPES." The standards
under which the mortgage loans were underwritten include those that 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 mortgage loans are high, which may increase the risk of
loss on the mortgage loans.
Some of the mortgage loans included in the trust are either currently delinquent
or have been delinquent in the past. As of the cut-off date, 2.2% and 0.6% of
the mortgage loans in loan group I and loan group II, respectively, are 30 to 59
days delinquent in payment of principal and interest. As of the cut-off date,
0.3% of the mortgage loans in loan group I are 60 to 89 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.
S-12
<PAGE>
For a description of the methodology used to categorize mortgage loans as
delinquent, see "Pooling and Servicing Agreement -- The Master Servicer" in this
prospectus supplement.
Many of the mortgage loan files are incomplete, which may increase the risk of
loss on the mortgage loans.
In a number of cases, the mortgage loan files are incomplete and, in particular,
do not contain all of the related original mortgage notes or intervening
assignments. Failure to obtain all the original mortgage notes or intervening
assignments with respect to a mortgage loan could cause delays in the ability of
the master servicer to foreclose upon and liquidate the related mortgaged
property. See "Description of the Mortgage Pool -- Missing Loan Notes" in this
prospectus supplement. In addition, such failure could prevent the master
servicer from releasing in a timely manner the related mortgage lien on the
mortgaged property in the event of a prepayment in full of the related mortgage
loan. Failure to release the related mortgage lien on the mortgaged property may
subject the master servicer (and perhaps the trust) to liability to the related
mortgagor in an action for damages and to administrative sanctions.
The mortgage pool is not homogeneous. As a result, it may be difficult to
anticipate the performance of the mortgage pool.
The mortgage pool consists of a wide variety of mortgage loans, including a wide
variety of underwriting standards, credit quality, mortgage loan types, payment
terms, seasoning and originators. In addition, the adjustable rate mortgage
loans have a wide range of interest rates, indices, initial adjustment dates and
periodic adjustment dates. As a result, the loss and delinquency experience of
the mortgage loans may differ substantially from the characteristics of more
homogeneous pools, and may be difficult to project. In addition, prepayments on
the mortgage loans may vary substantially over the life of the transaction, and
may be difficult to project. Investors in the Class A Certificates are strongly
encouraged to review the "Description of the Mortgage Pool" section in this
prospectus supplement.
Geographic concentration may affect risk of loss on the mortgage loans.
One risk associated with investing in securities backed by a pool of mortgage
loans is created by any concentration of the related mortgaged properties in one
or more geographic regions. Approximately 27.4% and 40.6% of the cut-off date
principal balance of the mortgage loans in loan group I and loan group II,
respectively, are located in California. If the regional economy or housing
market of a state (or any other region having a significant concentration of the
properties underlying the mortgage loans) becomes weak, the mortgage loans
related to properties in that region may experience high rates of loss and
delinquency, resulting in losses to certificateholders. A region's economic
condition and housing market may be
S-13
<PAGE>
adversely affected by a variety of events, including natural disasters such as
earthquakes, hurricanes, floods and eruptions, and civil disturbances such as
riots. The economic impact of any of these events may also be felt in areas
beyond the region immediately affected by the disaster or disturbance. If the
properties underlying the mortgage loans are concentrated in these regions
affected by a disaster or disturbance, this may result in greater losses to
certificateholders than those generally present for similar mortgage-backed
securities without this concentration.
Default rates may increase when the hybrid ARMS reach their first adjustment
dates.
Approximately 9.3% and 57.3% of the mortgage loans in loan group I and loan
group II, respectively, are hybrid ARMS that provide for a fixed rate for the
first three years or five years after origination and after that provide for an
adjustable rate. In addition, some of the hybrid ARMS provide for an initial
five-year interest-only period. On the first adjustment date, the related
mortgage rate on these mortgage loans may increase substantially, with a
corresponding increase in the borrower's monthly payment. Mortgage loans with
this conversion feature involve a greater degree of risk because the ability of
the related borrower to make the increased monthly payment may be impaired.
There may be an increase in delinquencies with respect to these loans on or
after the first adjustment date. SEE "DESCRIPTION OF THE MORTGAGE POOL --
MORTGAGE RATE ADJUSTMENT" IN THIS PROSPECTUS SUPPLEMENT.
Certain of the mortgage kloans are convertible to a fixed rate.
Approximately 0.2% and 5.9% of the mortgage loans in loan group I and loan group
II, respectively, provide that the mortgagors may, during a specified period of
time, convert the adjustable interest rate of such mortgage loans to a fixed
interest rate. As a result of the mortgagor's exercise of the conversion option,
the mortgage pool will include additional fixed-rate mortgage loans. The
inclusion of fixed-rate loans may affect the pass-through rate on the related
Class A Certificates or the amount of excess interest available to cover losses.
Neither the master servicer nor any other party is obligated to purchase a
converting mortgage loan from the trust. SEE "DESCRIPTION OF THE MORTGAGE POOL
- -- CONVERTIBLE MORTGAGE LOANS" IN THIS PROSPECTUS SUPPLEMENT.
Certain of the mortgage loans provide for large payments at maturity.
Approximately 8.4% and 3.8% of the mortgage loans in loan group I and loan group
II, respectively, are not fully amortizing over their terms to maturity and,
thus, will require substantial principal payments (i.e., a balloon payment) at
their stated maturity. Mortgage loans with balloon payments involve a greater
degree of risk because the ability of a mortgagor to make a balloon payment
typically will depend upon the mortgagor's ability either
S-14
<PAGE>
to timely refinance the loan or to sell the related mortgaged property. SEE
"DESCRIPTION OF THE MORTGAGE POOL -- BALLOON MORTGAGE 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) a reserve fund funded by three
yield maintenance agreements, (iii) overcollateralization represented by the
excess of the balance of the mortgage loans over the balance of the Class A
Certificates, (iv) cross-collateralization and (v) 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 trust are the only souce of payments on the
Class A Certificates.
The Class A Certificates will not represent an interest in or obligation of the
depositor, the master servicer, GMAC 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, the reserve fund, the yield maintenance agreements 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.
To the extent that payments on the Class A Certificates depend in part on
payments to be received under the yield maintenance agreements, the ability of
the trust to make payments on the Class A Certificates will be subject to the
credit risk of Bear Stearns Financial Products Inc.
S-15
<PAGE>
LIQUIDITY RISKS
An investor may have to hold its Class A Certificates to their maturity because
of diffculty in reselling the Class A Certificates.
A secondary market for the Class A Certificates may not develop. Even if a
secondary market does develop, it may not continue. Accordingly, the Class A
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. Class A Certificates.
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 maturity will depend on various factors.
The yield to maturity on the Class A Certificates will depend on a variety of
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 the mortgage loans will be affected by various
factors.
Since mortgagors can generally prepay their mortgage loans at any time, the rate
and 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
S-16
<PAGE>
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 Certificates may not always receive interest based on One-Month
LIBOR plus the related margin
The Class A Certificates may not always receive interest at a rate equal to
One-Month LIBOR plus the applicable margin. If the weighted average net mortgage
rate on the mortgage loans is less than the lesser of One-Month LIBOR plus the
related margin and 14%, the interest rate on the Class A Certificates will be
reduced to this weighted average net rate. Thus, the yield to investors in the
Class A 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. The prepayment of the mortgage loans
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 Certificates during the related
interest accrual period, the value of the Class A Certificates may be
temporarily or permanently reduced.
Investors in the Class A Certificates should be aware that the mortgage rates on
the adjustable rate mortgage loans are adjustable generally monthly,
semi-annually or annually based on the related index. Consequently, the interest
that becomes due on the mortgage loans during the related due period may be less
than interest that would accrue on the Class A Certificates at the rate of
One-Month LIBOR plus the related margin. In a rising interest rate environment,
the Class A 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 Certificates, the difference between the weighted average net mortgage rate
and the lesser of One-Month LIBOR plus the related margin and
S-17
<PAGE>
14% will create a shortfall that will carry forward with interest thereon. Such
shortfall will not be payable by the policy and will only be payable from the
balance of the reserve fund in excess of $10,000, to the extent funded by the
net monthly excess cash flow and the yield maintenance agreements, and only to
the extent that the overcollateralization target has been reached. In addition,
payments under the yield maintenance agreements are based on the actual
principal balance of the related fixed rate loans or hybrid ARM loans, but not
greater than the principal balance that would have resulted under an assumed
constant prepayment speed of 10%, with respect to the fixed rate loans, or 15%,
with respect to the hybrid ARMS; a slower or faster prepayment speed may result
in the yield maintenance agreements providing insufficient funds to cover such
shortfalls. Such shortfalls may remain unpaid on the final distribution date,
including the optional termination date.
S-18
<PAGE>
INTRODUCTION
The Depositor will establish a Trust (the "TRUST") with respect to Series
1999-RS3 on September 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
September 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, cash to purchase the Yield Maintenance Agreements
described herein and $10,000 to be deposited into the Reserve Fund described
herein.
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 September) of $377,842,337. 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 September).
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.
LOAN TYPES
The Mortgage Pool will include two principal types of Mortgage Loans:
o "Portfolio Transaction Loans": Mortgage Loans with a variety of payment
terms, including either fixed or adjustable interest rates, that were
acquired under the Seller's Portfolio Transaction program. See " --
Product Types -- The Portfolio Transaction Program" below for a
description of the criteria used to evaluate loans for acquisition under
this program.
o "Core Hybrid ARM Loans": Mortgage Loans that have fixed interest rates
for a period of three or five years after origination, and after that
have adjustable rates, that were acquired under the Seller's core lending
programs. See " -- Product Types -- Core Program Programs" below for a
description of the criteria used to underwrite loans under these
programs.
Approximately 95.4% of the Group I Loans and approximately 60.4% of the
Group II Loans are Portfolio Transaction Loans. Approximately 4.6% of the Group
I Loans and approximately 39.6% of the Group II Loans are Core Hybrid ARM Loans.
MISSING LOAN NOTES
The Mortgage Loan files for certain of the Mortgage Loans are missing the
original executed Mortgage Notes as a result of being lost, misfiled, misplaced
or destroyed due to a clerical error. With respect to all such mortgage loans,
the Depositor will deliver a lost note affidavit to the Trustee together with a
copy of such Mortgage Note. In addition, some of the Mortgage Loans are missing
intervening assignments. In the event of foreclosure on one of these Mortgage
Loans, to the extent such missing documents materially adversely affect the
Master Servicer's ability to foreclose on the related Mortgage Loan, Residential
Funding will be obligated to purchase such Mortgage Loan from the Trust. See
"Risk Factors -- Risk of Loss" herein.
S-19
<PAGE>
BALLOON MORTGAGE LOANS
Approximately 8.4% and 3.8% of the Group I Loans and Group II Loans,
respectively, all of which are Portfolio Transaction Loans, require monthly
payments of principal generally based on a 30-year amortization schedule and
generally have scheduled maturity dates of seven or fifteen years from the due
date of the first monthly payment (each such Mortgage Loan, a "BALLOON MORTGAGE
LOAN"), in each case leaving a substantial portion of the original principal
amount due and payable on the respective scheduled maturity date (a "BALLOON
PAYMENT"). The existence of a Balloon Payment generally will require the related
Mortgagor to refinance such Mortgage Loan or to sell the Mortgaged Property on
or prior to the scheduled maturity date. The ability of a Mortgagor to
accomplish either of these goals will be affected by a number of factors,
including the level of available mortgage rates at the time of sale or
refinancing, the Mortgagor's equity in the related Mortgaged Property, the
financial condition of the Mortgagor, tax laws and prevailing general economic
conditions. None of the Seller, the Depositor, the Master Servicer or the
Trustee is obligated to refinance any Balloon Mortgage Loan.
ADDITIONAL COLLATERAL LOANS
2.9% and 5.6% of the Group I Loans and Group II Loans, respectively (the
"ADDITIONAL COLLATERAL LOANS"), all of which are Core Hybrid ARM Loans, were
purchased from Merrill Lynch Credit Corporation ("MLCC"), have a Loan-to-Value
Ratio (as defined herein) at origination in excess of 80% (most or all of which
are in excess of 95%) and are secured, in addition to the related Mortgaged
Property and in lieu of any primary mortgage insurance, by collateral which may
include securities or a third party guarantee. Such additional collateral is not
included in the determination of the Loan-to-Value Ratio of the Additional
Collateral Loans as shown in the tables below. The additional collateral is
either (i) a security interest in securities owned by the borrower or (ii) a
third party guarantee (usually a parent of the borrower), which in turn is
secured by a security interest in securities or residential property owned by
such guarantor. The collateral referred to in clauses (i) and (ii) above is
herein referred to as "ADDITIONAL COLLATERAL." The amount of the Additional
Collateral does not exceed 30% of the principal amount of the related Mortgage
Loan (the "ADDITIONAL COLLATERAL REQUIREMENT"), and the requirement to maintain
Additional Collateral generally terminates when the Loan-to-Value Ratio of the
related Mortgage Loan is reduced to a predetermined amount (which amount shall
not be more than 75%) as a result of a reduction in the loan amount because of
principal payments by the Mortgagor or an increase in the appraised value of the
related Mortgaged Property. As long as MLCC is the related Subservicer, MLCC
will be required, in accordance with its normal servicing procedures, to attempt
to realize on any such Additional Collateral if the related Additional
Collateral Loan is liquidated upon default. The right to receive proceeds from
the realization of Additional Collateral upon any such liquidation will be
assigned to the Trustee. No assurance can be given as to the amount of proceeds,
if any, that might be realized by MLCC from such Additional Collateral and
thereafter remitted to the Trustee. Ambac Assurance Corporation has issued a
limited purpose surety bond (the "SURETY BOND") insuring any deficiency in the
amounts realized by MLCC from the liquidation of Additional Collateral, up to
the amount of the Additional Collateral Requirement. For additional
considerations concerning the Additional Collateral Loans, see "Certain Legal
Aspects of the Loans -- Anti-Deficiency Legislation and Other Limitations on
Lenders" in the Prospectus.
MORTGAGE RATE ADJUSTMENT
39.3% and 69.0% of the Group I Loans and Group II Loans, respectively (the
"GROUP I ADJUSTABLE RATE LOANS" and "GROUP II ADJUSTABLE RATE LOANS,"
respectively, and together the "ADJUSTABLE RATE LOANS") have adjustable rates.
The Mortgage Rate on each Adjustable Rate Loan will generally adjust monthly,
semi-annually or annually, commencing after an initial period after origination
(the "Initial Period") of generally six months, two years or three years, 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 Adjustable Rate 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 Adjustable Rate 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").
S-20
<PAGE>
Approximately 9.3% and 57.3% of the Group I Loans and Group II Loans,
respectively ("HYBRID ARM LOANS"), have fixed rates for a period of three years
or five years after origination, and have adjustable rates thereafter. In
addition, certain of these Mortgage Loans are interest-only for the first five
years prior to converting to an adjustable rate. 48.9% and 69.2% of the Hybrid
ARM Loans in Loan Group I and Loan Group II, respectively, were originated
pursuant to the Seller's Core Program as described herein. The remainder of the
Hybrid ARM Loans were originated pursuant to the Seller's Portfolio Transaction
program.
As of the Cut-off Date, 49.1% and 14.5% of the Group I Adjustable Rate
Loans and Group II Adjustable Rate Loans, respectively, will have reached their
first Adjustment Date.
With respect to 31.3% and 75.3% of the Group I Loans and Group II Loans,
respectively, which are Adjustable Rate 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 or on the Adjustment Date ("ONE-YEAR U.S. TREASURY"). Such
average yields reflect the yields for the week prior to that week. With respect
to 39.8% and 17.2% of the Group I Loans and Group II Loans, respectively, which
are Adjustable Rate Loans, the Index will be a per annum rate generally equal to
the average of interbank offered rates for six-month U.S. dollar-denominated
deposits in the London market based on quotations of major banks ("SIX-MONTH
LIBOR") as published in The Wall Street Journal and as most recently available
(i) as of the first business day of the month immediately preceding the month in
which the Adjustment Date occurs or (ii) as of the date forty-five days,
twenty-five days or ten days prior to the Adjustment Date (each such date as of
which Six-Month LIBOR is determined, a "REFERENCE DATE"). With respect to 23.3%
and 5.9% of the Group I Loans and Group II Loans, respectively, which are
Adjustable Rate Loans, the Index will be based on the weighted average cost of
savings, borrowings and advances for member institutions of the Eleventh
District of the Federal Home Loan Bank system (the "ELEVENTH DISTRICT COST OF
FUNDS INDEX"), in each case as published in the place specified in the related
mortgage note and as made available sixty days or forty-five days prior to the
Adjustment Date. With respect to 2.8% and 0.5% of the Group I Loans and Group II
Loans, respectively, which are Adjustable Rate Loans, the Index will be based on
the prime rate for commercial banks in the United States (the "PRIME RATE"), in
each case as published in the place specified in the related mortgage note and
as made available as of the date specified in the related mortgage note. With
respect to 2.8% and 1.1% of the Group I Loans and Group II Loans, respectively,
which are Adjustable Rate Loans, the Index will be another index not listed
above. 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 Adjustable Rate Loan with an
Index of One-Year U.S. Treasury.
S-21
<PAGE>
<TABLE>
<CAPTION>
ONE-YEAR U.S. TREASURY
ADJUSTMENT DATE 1995 1996 1997 1998 1999
- --------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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
</TABLE>
SIX-MONTH LIBOR. Listed below are levels of Six-Month LIBOR as published by
The Wall Street Journal that are or would have been applicable to mortgage loans
with a Reference Date of the first business day of the preceding month, and
having the following adjustment dates for the indicated years. Such average
yields may fluctuate significantly from month to month as well as over longer
periods and may not increase or decrease in a constant pattern from period to
period. There can be no assurance that levels of Six-Month LIBOR published by
Fannie Mae, or published in The Wall Street Journal on a different Reference
Date would have been at the same levels as those set forth below. The following
does not purport to be representative of future levels of Six-Month LIBOR (as
published by Fannie Mae or The Wall Street Journal). No assurance can be given
as to the level of Six-Month LIBOR on any Adjustment Date or during the life of
any Group II Loan based on Six-Month LIBOR.
<TABLE>
<CAPTION>
SIX-MONTH LIBOR
ADJUSTMENT DATE 1995 1996 1997 1998 1999
- --------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
January 1................................................ 6.562% 5.718% 5.562% 5.914% 5.148%
February 1............................................... 7.000 5.531 5.625 5.843 5.066
March 1.................................................. 6.687 5.281 5.687 5.625 4.971
April 1.................................................. 6.437 5.312 5.718 5.695 5.127
May 1.................................................... 6.500 5.531 5.968 5.750 5.060
June 1................................................... 6.375 5.562 6.000 5.812 5.043
July 1................................................... 6.000 5.656 6.000 5.750 5.245
August 1................................................. 6.000 5.812 5.937 5.781 5.650
September 1.............................................. 5.875 5.906 5.812 5.750 5.705
October 1................................................ 5.906 5.843 5.843 5.593 5.919
November 1............................................... 5.968 5.750 5.843 5.246
December 1............................................... 5.875 5.562 5.812 4.978
</TABLE>
The initial Mortgage Rate in effect on an Adjustable Rate 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.
S-22
<PAGE>
NEGATIVE AMORTIZATION LOANS
Approximately 2.0% and 3.0% of the Group I Loans and Group II Loans,
respectively ("NEGATIVE AMORTIZATION LOANS"), have a negative amortization
feature whereby interest payments on such Mortgage Loans may be deferred and may
be added to the Stated Principal Balance thereof (any such payments, "DEFERRED
INTEREST"). Because the rate at which interest accrues on a Negative
Amortization Loan changes more frequently than payment adjustments and because
such adjustment of monthly payments on such Mortgage Loans may be subject to
limitations, the amount of interest accruing on the remaining principal balance
of such a Mortgage Loan at the applicable Mortgage Rate may exceed the amount of
the Monthly Payment. The resulting excess is added to the unpaid principal
balance of the related Mortgage Loan in the month during which any such event
occurs as deferred interest, resulting in negative amortization of the Mortgage
Loan.
CONVERTIBLE LOANS
Approximately 0.2% and 5.9% of the Group I Loans and Group II Loans,
respectively, all of which are Portfolio Transaction Loans ("CONVERTIBLE
MORTGAGE LOANS"), provide that, at the option of the related Mortgagors, the
adjustable interest rate on such Mortgage Loans may be converted to a fixed
interest rate. Upon conversion, the Mortgage Rate will be converted to a fixed
interest rate determined in accordance with the formula set forth in the related
Mortgage Note which formula is intended to result in a Mortgage Rate which is
not less than the then current market interest rate (subject to applicable usury
laws). After such conversion, the monthly payments of principal and interest
will be adjusted to provide for full amortization over the remaining term to
scheduled maturity.
Any converting Mortgage Loan (such Mortgage Loan, following its conversion,
a "CONVERTED MORTGAGE LOAN") will remain in the Mortgage Pool as a fixed-rate
Mortgage Loan and as a result the Pass-Through Rate on the Class A Certificates
may be reduced. See "Certain Yield and Prepayment Considerations" 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 September):
AGGREGATE FOR ALL
GROUP I LOANS
-------------
Number of Mortgage Loans.................................... 1141
Weighted Average of Net Mortgage Rates...................... 8.0792%
Range of Net Mortgage Rates................................. 5.29% - 15.28%
Mortgage Rates:
Weighted Average....................................... 8.6554%
Range.................................................. 5.88% - 15.99%
Note Margins(1):
Weighted Average....................................... 3.7548%
Range.................................................. 0.75% - 10.00%
Minimum Mortgage Rates(1):
Weighted Average....................................... 5.0221%
Range.................................................. 0.75% - 13.64%
Minimum Net Mortgage Rates(1):
Weighted Average....................................... 4.4123%
Range.................................................. 0.16% - 12.84%
Maximum Mortgage Rates(1):
Weighted Average....................................... 14.0941%
Range.................................................. 10.88% - 20.50%
Maximum Net Mortgage Rates(1):
Weighted Average....................................... 13.4844%
Range.................................................. 10.29% - 18.84%
Weighted Average Months to next Adjustment
Date after September 1, 1999................................ 20
- ------------
(1) Only includes Adjustable Rate Group I Loans
S-23
<PAGE>
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 1141 Mortgage Loans with an aggregate
principal balance as of the Cut-off Date of approximately $119,817,023 (the
"GROUP I CUT-OFF DATE BALANCE"). The Group I Loans had individual principal
balances at origination of at least $5,350 but not more than $240,000, with an
average principal balance at origination of approximately $110,785. The Group I
Loans have a weighted average remaining term to stated maturity of approximately
292 months as of the Cut-off Date. No non-affiliate of the Seller sold more than
10.6% of the Group I Loans to the Seller. Approximately 4.7% of the Group I
Loans were purchased from HomeComings Financial Network, Inc. or GMAC Mortgage
Corporation, both of which are affiliates of the Seller.
None of the Group I Loans will have been originated prior to February 8,
1977 or will have a maturity date later than September 1, 2029. No Group I Loan
will have a remaining term to stated maturity as of the Cut-off Date of less
than 35 months. The weighted average term to stated maturity of the Group I
Loans as of the Cut-off Date will be approximately 292 months. The weighted
average original term to maturity of the Group I Loans as of the Cut-off Date
will be approximately 333 months.
As of the Cut-off Date, 2.2% of the Group I Loans are currently 30 to 59
days delinquent in payment of principal and interest, and 0.3% of the Group I
Loans are currently 60 to 89 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").
0.3% of the Group I Loans will be Mortgage Loans subject to special rules,
disclosure requirements and other provisions that were added to the federal
Truth-in-Lending Act by the Homeownership and Equity Protection Act of 1994
("HIGH COST LOANS").
1.3% of the Group I Loans are Mortgage Loans insured by the Federal Housing
Administration ("FHA LOANS") and Mortgage Loans partially guaranteed by the
Veterans Administration ("VA LOANS").
With respect to 0.5% of the Group I Loans, the related mortgagor is
currently the subject of bankruptcy proceedings. Approximately 71.8% of such
Mortgage Loans are currently 30 days or more delinquent and may be subject to
arrearages in the future. Repayment of delinquencies occurring while the
mortgagor is in bankruptcy proceedings may be discharged, reduced or deferred
for an indefinite period.
5.1% of the Group I Loans are interest-only loans for the first five years
and then amortize on a twenty-five year schedule.
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 September) and are rounded to the nearest dollar.
<TABLE>
<CAPTION>
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES OF THE GROUP I LOANS
NUMBER OF PERCENT OF
ORIGINAL MORTGAGE LOAN BALANCE MORTGAGE LOANS PRINCIPAL BALANCE GROUP I LOANS
- ------------------------------ -------------- ----------------- -------------
<S> <C> <C> <C>
$ 0 - 50,000................................ 211 $ 7,265,338 6.06%
50,001 - 100,000................................ 362 25,602,789 21.37
100,001 - 150,000................................ 262 31,383,503 26.19
150,001 - 200,000................................ 180 29,636,764 24.74
200,001 - 240,000................................ 126 25,928,629 21.64
----- ------------ ------
Total........................................ 1,141 $119,817,023 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
S-24
<PAGE>
As of the Cut-off Date, the average unpaid principal balance of the Group I
Loans will be approximately $105,011.
<TABLE>
<CAPTION>
NET MORTGAGE RATES OF THE GROUP I LOANS
NUMBER OF PERCENT OF
NET MORTGAGE RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE GROUP I LOANS
- ---------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
5.000 - 5.499................................... 4 $ 610,070 0.51%
5.500 - 5.999................................... 9 1,348,723 1.13
6.000 - 6.499................................... 100 12,242,825 10.22
6.500 - 6.999................................... 171 19,307,331 16.11
7.000 - 7.499................................... 136 16,324,960 13.62
7.500 - 7.999................................... 134 12,287,434 10.26
8.000 - 8.499................................... 142 15,412,520 12.86
8.500 - 8.999................................... 99 10,375,811 8.66
9.000 - 9.499................................... 103 11,816,829 9.86
9.500 - 9.999................................... 81 7,648,097 6.38
10.000 - 10.499................................... 58 5,130,463 4.28
10.500 - 10.999................................... 43 3,753,006 3.13
11.000 - 11.499................................... 30 1,909,027 1.59
11.500 - 11.999................................... 12 800,558 0.67
12.000 - 12.499................................... 8 352,534 0.29
12.500 - 12.999................................... 2 84,264 0.07
13.000 - 13.499................................... 1 18,479 0.02
13.500 - 13.999................................... 1 62,831 0.05
14.000 - 14.499................................... 5 305,615 0.26
15.000 - 15.499................................... 2 25,644 0.02
----- ------------ ------
Total........................................ 1,141 $119,817,023 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
As of the Cut-off Date, the weighted average Net Mortgage Rate of the Group
I Loans will be approximately 8.0792% per annum.
<TABLE>
<CAPTION>
MORTGAGE RATES OF THE GROUP I LOANS
NUMBER OF PERCENT OF
MORTGAGE RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE GROUP I LOANS
- ------------------ -------------- ----------------- -------------
<S> <C> <C> <C>
5.500 - 5.999................................... 1 $ 222,873 0.19%
6.000 - 6.499................................... 7 873,847 0.73
6.500 - 6.999................................... 62 7,891,719 6.59
7.000 - 7.499................................... 189 21,296,077 17.77
7.500 - 7.999................................... 138 16,577,170 13.84
8.000 - 8.499................................... 143 13,560,336 11.32
8.500 - 8.999................................... 144 15,595,152 13.02
9.000 - 9.499................................... 82 8,861,978 7.40
9.500 - 9.999................................... 93 11,055,388 9.23
10.000 - 10.499................................... 79 8,136,208 6.79
10.500 - 10.999................................... 75 6,664,865 5.56
11.000 - 11.499................................... 40 3,046,014 2.54
11.500 - 11.999................................... 46 3,674,669 3.07
12.000 - 12.499................................... 14 1,033,802 0.86
12.500 - 12.999................................... 11 612,919 0.51
13.000 - 13.499................................... 6 262,285 0.22
13.500 - 13.999................................... 2 39,153 0.03
14.500 - 14.999................................... 5 304,881 0.25
15.000 - 15.499................................... 2 82,044 0.07
15.500 - 15.999................................... 2 25,644 0.02
----- ------------ ------
Total........................................ 1,141 $119,817,023 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
As of the Cut-off Date, the weighted average Mortgage Rate of the Group I
Loans will be approximately 8.6554% per annum.
S-25
<PAGE>
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIOS OF THE GROUP I LOANS(1)
NUMBER OF PERCENT OF
ORIGINAL LOAN-TO-VALUE RATIO (%) MORTGAGE LOANS PRINCIPAL BALANCE GROUP I LOANS
- -------------------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
0.01 - 50.00................................... 53 $ 3,684,995 3.08%
50.01 - 55.00................................... 23 2,064,949 1.72
55.01 - 60.00................................... 33 2,347,789 1.96
60.01 - 65.00................................... 51 4,919,490 4.11
65.01 - 70.00................................... 99 9,362,603 7.81
70.01 - 75.00................................... 128 12,760,319 10.65
75.01 - 80.00................................... 267 31,243,762 26.08
80.01 - 85.00................................... 85 8,926,869 7.45
85.01 - 90.00................................... 238 25,462,327 21.25
90.01 - 95.00................................... 75 8,415,587 7.02
95.01 - 100.00................................... 55 5,938,542 4.96
LTV > 100.00...................................... 34 4,689,790 3.91
----- ------------ ------
Total........................................ 1,141 $119,817,023 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
- ------------
(1) With respect to each Group I Loan, the "LOAN-TO-VALUE RATIO" is the original
principal balance of the Group I Loan divided by the appraised value, except
as described in "Product Types" herein.
The weighted average Loan-to-Value Ratio at origination of the Group I
Loans will be approximately 81.13%.
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES OF THE GROUP I LOANS
NUMBER OF PERCENT OF
STATE MORTGAGE LOANS PRINCIPAL BALANCE GROUP I LOANS
- ----- -------------- ----------------- -------------
<S> <C> <C> <C>
California........................................ 229 $ 32,846,707 27.41%
Florida........................................... 112 10,432,090 8.71
New York.......................................... 65 7,497,694 6.26
Texas............................................. 75 6,845,356 5.71
New Jersey........................................ 51 5,356,356 4.47
Georgia........................................... 42 4,106,685 3.43
Washington........................................ 31 4,040,628 3.37
Other (1)......................................... 536 48,691,508 40.64
----- ------------ ------
Total........................................ 1,141 $119,817,023 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
- ------------
(1) Other includes states and the District of Columbia with under 3%
concentrations individually.
No more than 0.9% of the Group I Loans will be secured by Mortgaged
Properties located in any one zip code area in California and no more than 0.4%
of the Group I Loans will be secured by Mortgaged Properties located in any one
zip code area outside California.
<TABLE>
<CAPTION>
MORTGAGE LOAN PURPOSE OF THE GROUP I LOANS
NUMBER OF PERCENT OF
LOAN PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE GROUP I LOANS
- ------------ -------------- ----------------- -------------
<S> <C> <C> <C>
Purchase.......................................... 661 $ 67,845,754 56.62%
Rate/Term Refinance............................... 188 23,609,957 19.71
Equity Refinance.................................. 292 28,361,312 23.67
----- ------------ ------
Total........................................ 1,141 $119,817,023 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
The weighted average Loan-to-Value Ratio at origination of rate and term
refinance Group I Loans will be 83.47%. The weighted average Loan-to-Value Ratio
at origination of equity refinance Group I Loans will be 73.20%.
S-26
<PAGE>
<TABLE>
<CAPTION>
OCCUPANCY TYPES OF THE GROUP I LOANS
NUMBER OF PERCENT OF
OCCUPANCY MORTGAGE LOANS PRINCIPAL BALANCE GROUP I LOANS
- --------- -------------- ----------------- -------------
<S> <C> <C> <C>
Primary Residence................................. 892 $101,087,180 84.37%
Second/Vacation................................... 34 3,763,770 3.14
Non Owner-occupied................................ 215 14,966,072 12.49
----- ------------ ------
Total........................................ 1,141 $119,817,023 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
<TABLE>
<CAPTION>
MORTGAGED PROPERTY TYPES OF THE GROUP I LOANS
NUMBER OF PERCENT OF
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE GROUP I LOANS
- ------------- -------------- ----------------- -------------
<S> <C> <C> <C>
Single-family detached............................ 766 $ 82,946,899 69.23%
Planned Unit Developments (detached).............. 83 11,328,656 9.45
Two- to four-family units......................... 90 8,222,267 6.86
Condo Low-Rise (less than 5 stories).............. 88 8,070,375 6.74
Condo Mid-Rise (5 to 8 stories)................... 5 666,035 0.56
Condotel (1-4 stories)............................ 1 16,854 0.01
Condotel (9 or more stories)...................... 2 94,344 0.08
Condo High-Rise (9 stories or more)............... 43 3,208,415 2.68
Manufactured Home................................. 23 1,636,704 1.37
Townhouse......................................... 16 1,319,341 1.10
Townhouse (2 to 4 family units)................... 2 186,478 0.16
Planned Unit Developments (attached).............. 20 1,743,473 1.46
Cooperative Units................................. 2 377,181 0.31
----- ------------ ------
Total........................................ 1,141 $119,817,023 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
S-27
<PAGE>
<TABLE>
<CAPTION>
NEXT INTEREST RATE ADJUSTMENT DATES OF THE GROUP I LOANS
NEXT INTEREST NUMBER OF PERCENT OF SUCH
ADJUSTMENT DATE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- --------------- -------------- ----------------- --------------
<S> <C> <C> <C>
N/A (Fixed Rate)................................. 741 $ 72,756,568 60.72%
October 1999..................................... 49 6,861,262 5.73
November 1999.................................... 21 2,641,168 2.20
December 1999.................................... 19 2,629,798 2.19
January 2000..................................... 13 1,310,349 1.09
February 2000.................................... 11 1,639,564 1.37
March 2000....................................... 25 2,933,284 2.45
April 2000....................................... 2 273,905 0.23
May 2000......................................... 5 674,664 0.56
June 2000........................................ 4 604,726 0.50
July 2000........................................ 17 1,662,351 1.39
August 2000...................................... 9 1,273,486 1.06
September 2000................................... 9 1,047,550 0.87
October 2000..................................... 7 525,445 0.44
November 2000.................................... 9 626,824 0.52
December 2000.................................... 5 441,784 0.37
January 2001..................................... 8 465,853 0.39
February 2001.................................... 15 1,143,026 0.95
March 2001....................................... 10 839,320 0.70
April 2001....................................... 20 1,804,287 1.51
May 2001......................................... 16 1,487,369 1.24
June 2001........................................ 12 1,117,960 0.93
July 2001........................................ 12 1,130,414 0.94
August 2001...................................... 1 47,579 0.04
September 2001................................... 2 228,555 0.19
November 2001.................................... 1 76,504 0.06
December 2001.................................... 3 277,149 0.23
February 2002.................................... 4 508,847 0.42
March 2002....................................... 2 70,707 0.06
April 2002....................................... 8 830,855 0.69
May 2002......................................... 3 371,829 0.31
June 2002........................................ 5 601,236 0.50
July 2002........................................ 7 1,201,260 1.00
August 2002...................................... 5 906,376 0.76
September 2002................................... 1 183,600 0.15
April 2004....................................... 1 210,000 0.18
May 2004......................................... 6 898,855 0.75
June 2004........................................ 37 4,772,695 3.98
July 2004........................................ 4 896,528 0.75
August 2004...................................... 5 668,653 0.56
September 2004................................... 6 980,000 0.82
November 2006.................................... 1 194,839 0.16
----- ------------ ------
Total....................................... 1,141 $119,817,023 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
As of the Cut-off Date, the weighted average Months to Next Interest Rate
Adjustment Date will be approximately 20 for those Group I Loans that have
Adjustment Dates.
S-28
<PAGE>
<TABLE>
<CAPTION>
NOTE MARGINS OF THE GROUP I LOANS
NUMBER OF PERCENT OF SUCH
NOTE MARGINS (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- ---------------- -------------- ----------------- --------------
<S> <C> <C> <C>
N/A (Fixed Rate)................................. 741 $ 72,756,568 60.72%
0.500 - 0.999.................................. 5 693,826 0.58
1.000 - 1.499.................................. 3 432,264 0.36
2.000 - 2.499.................................. 73 10,644,579 8.88
2.500 - 2.999.................................. 158 20,703,249 17.28
3.000 - 3.499.................................. 9 1,213,885 1.01
3.500 - 3.999.................................. 3 288,003 0.24
4.000 - 4.499.................................. 1 101,568 0.08
5.000 - 5.499.................................. 1 38,100 0.03
5.500 - 5.999.................................. 8 675,910 0.56
6.000 - 6.499.................................. 26 2,333,384 1.95
6.500 - 6.999.................................. 33 2,757,449 2.30
7.000 - 7.499.................................. 31 3,062,328 2.56
7.500 - 7.999.................................. 30 2,746,333 2.29
8.000 - 8.499.................................. 8 786,459 0.66
8.500 - 8.999.................................. 7 363,595 0.30
9.000 - 9.499.................................. 3 143,018 0.12
10.000 - 10.499.................................. 1 76,504 0.06
----- ------------ ------
Total....................................... 1,141 $119,817,023 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
As of the Cut-off Date, the weighted average Note Margin of the Group I
Loans that have Note Margins will be approximately 3.7548% per annum.
<TABLE>
<CAPTION>
MAXIMUM MORTGAGE RATES OF THE GROUP I LOANS
NUMBER OF PERCENT OF SUCH
MAXIMUM MORTGAGE RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- -------------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
N/A (Fixed Rate)................................. 741 $ 72,756,568 60.72%
10.000 - 10.999.................................. 6 648,437 0.54
11.000 - 11.999.................................. 10 1,209,403 1.01
12.000 - 12.999.................................. 75 11,246,735 9.39
13.000 - 13.999.................................. 133 17,279,907 14.42
14.000 - 14.999.................................. 23 2,925,081 2.44
15.000 - 15.999.................................. 28 3,285,263 2.74
16.000 - 16.999.................................. 50 4,628,153 3.86
17.000 - 17.999.................................. 53 4,606,635 3.84
18.000 - 18.999.................................. 14 969,990 0.81
19.000 - 19.999.................................. 7 239,534 0.20
20.000 - 20.999.................................. 1 21,318 0.02
----- ------------ ------
Total....................................... 1,141 $119,817,023 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
As of the Cut-off Date, the weighted average Maximum Mortgage Rate of the
Group I Loans that have Maximum Mortgage Rates will be approximately 14.0941%
per annum.
<TABLE>
<CAPTION>
INDICES OF GROUP I LOANS
NUMBER OF PERCENT OF
INDEX MORTGAGE LOANS PRINCIPAL BALANCE GROUP I LOANS
- ----- -------------- ----------------- -------------
<S> <C> <C> <C>
N/A (Fixed Rate)................................. 741 $ 72,756,568 60.72%
One Year U.S. Treasury........................... 106 14,706,385 12.27
Six-Month LIBOR (Wall Street Journal)............ 191 18,718,889 15.62
Eleventh District Cost of Funds.................. 82 10,981,145 9.16
Prime Based...................................... 10 1,338,528 1.12
Miscellaneous Indices............................ 11 1,315,508 1.10
----- ------------ ------
Total....................................... 1,141 $119,817,023 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
S-29
<PAGE>
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
September):
AGGREGATE FOR ALL
GROUP II LOANS
--------------
Number of Mortgage Loans.................................... 654
Weighted Average of Net Mortgage Rates...................... 6.9465%
Range of Net Mortgage Rates................................. 5.04% - 10.99%
Mortgage Rates:
Weighted Average....................................... 7.4671%
Range.................................................. 5.63% - 11.75%
Note Margins(1):
Weighted Average....................................... 2.6559%
Range.................................................. 0.75% - 6.95%
Minimum Mortgage Rates(1):
Weighted Average....................................... 2.9974%
Range.................................................. 0.75% - 10.25%
Minimum Net Mortgage Rates(1):
Weighted Average....................................... 2.4582%
Range.................................................. 0.16% - 9.66%
Maximum Mortgage Rates(1):
Weighted Average....................................... 12.6899%
Range.................................................. 10.38% - 17.15%
Maximum Net Mortgage Rates(1):
Weighted Average....................................... 12.1508%
Range.................................................. 9.79% - 16.56%
Weighted Average Months to next Adjustment
Date after September 1, 1999................................ 46
- ------------
(1) Only includes Adjustable Rate Group II Loans
The Group II Loans consist of 654 Mortgage Loans with an aggregate
principal balance as of the Cut-off Date of approximately $258,025,314 (the
"GROUP II CUT-OFF DATE BALANCE"). The Group II Loans had individual principal
balances at origination of at least $240,001 but not more than $2,150,000, with
an average principal balance at origination of approximately $407,739. The Group
II Loans have a weighted average remaining term to stated maturity of
approximately 327 months as of the Cut-off Date. No non-affiliate of the Seller
sold more than 17.1% of the Group II Loans to Residential Funding. Approximately
3.6% of the Group II Loans were purchased from HomeComings Financial Network,
Inc. or GMAC Mortgage Corporation, both of which are affiliates of the Seller.
None of the Group II Loans will have been originated prior to December 4,
1986, or will have a maturity date later than September 1, 2029. No Group II
Loan will have a remaining term to stated maturity as of the Cut-off Date of
less than 34 months. The weighted average term to stated maturity of the Group
II Loans as of the Cut-off Date will be approximately 327 months. The weighted
average original term to maturity of the Group II Loans as of the Cut-off Date
will be approximately 347 months.
As of the Cut-off Date, 0.6% of the Group II Loans are currently 30 to 59
days delinquent in payment of principal and interest, and none of the Group II
Loans are currently 60 to 89 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 II Loans have had
delinquency problems in the past.
None of the Group II Loans are Buydown Loans.
None of the Group II Loans will be High Cost Loans.
With respect to approximately 0.2% of the Group II Loans, the related
mortgagor is currently the subject of bankruptcy proceedings.
19.4% of the Group II Loans are interest-only loans for the first five
years, and then amortize on a twenty-five year schedule to maturity.
S-30
<PAGE>
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 September) and are rounded to the nearest dollar.
<TABLE>
<CAPTION>
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES OF THE GROUP II LOANS
NUMBER OF PERCENT OF
ORIGINAL MORTGAGE LOAN BALANCE MORTGAGE LOANS PRINCIPAL BALANCE GROUP II LOANS
- ------------------------------ -------------- ----------------- --------------
<S> <C> <C> <C>
200,001 - 300,000.............................. 272 $ 68,665,478 26.61%
300,001 - 400,000.............................. 193 64,432,785 24.97
400,001 - 500,000.............................. 72 31,615,234 12.25
500,001 - 600,000.............................. 34 18,773,298 7.28
600,001 - 700,000.............................. 32 20,597,136 7.98
700,001 - 800,000.............................. 14 10,365,202 4.02
800,001 - 900,000.............................. 5 4,334,683 1.68
900,001 - 1,000,000............................. 16 15,480,170 6.00
1,000,001 - 1,100,000............................ 4 4,371,762 1.69
1,100,001 - 1,200,000............................ 2 2,335,482 0.91
1,200,001 - 1,300,000............................ 1 1,283,000 0.50
1,300,001 - 1,400,000............................ 1 1,400,000 0.54
1,400,001 - 1,500,000............................ 2 2,919,656 1.13
1,500,001 - 1,600,000............................ 2 3,122,670 1.21
1,900,001 - 2,000,000............................ 1 1,978,758 0.77
Greater than 2,000,001........................... 3 6,350,000 2.46
--- ------------ ------
Total....................................... 654 $258,025,314 100.00%
--- ------------ ------
--- ------------ ------
</TABLE>
As of the Cut-off Date, the average unpaid principal balance of the Group
II Loans will be approximately $394,534.
<TABLE>
<CAPTION>
NET MORTGAGE RATES OF THE GROUP II LOANS
NUMBER OF PERCENT OF
NET MORTGAGE RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE GROUP II LOANS
- ---------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
5.000 - 5.499.................................. 5 $ 1,904,928 0.74%
5.500 - 5.999.................................. 28 10,285,166 3.99
6.000 - 6.499.................................. 156 68,391,355 26.51
6.500 - 6.999.................................. 200 86,932,808 33.69
7.000 - 7.499.................................. 100 42,438,965 16.45
7.500 - 7.999.................................. 33 10,171,375 3.94
8.000 - 8.499.................................. 60 17,373,931 6.73
8.500 - 8.999.................................. 50 13,331,039 5.17
9.000 - 9.499.................................. 18 5,903,824 2.29
9.500 - 9.999.................................. 2 590,279 0.23
10.500 - 10.999.................................. 2 701,645 0.27
--- ------------ ------
Total....................................... 654 $258,025,314 100.00%
--- ------------ ------
--- ------------ ------
</TABLE>
As of the Cut-off Date, the weighted average Net Mortgage Rate of the Group
II Loans will be approximately 6.9465% per annum.
S-31
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE RATES OF THE GROUP II LOANS
NUMBER OF PERCENT OF
MORTGAGE RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE GROUP II LOANS
- ------------------ -------------- ----------------- --------------
<S> <C> <C> <C>
5.500 - 5.999................................. 3 $ 1,339,360 0.52%
6.000 - 6.499................................. 20 7,753,255 3.00
6.500 - 6.999................................. 133 61,175,485 23.71
7.000 - 7.499................................. 218 92,638,598 35.90
7.500 - 7.999................................. 102 43,140,246 16.72
8.000 - 8.499................................. 39 12,254,661 4.75
8.500 - 8.999................................. 64 18,522,185 7.18
9.000 - 9.499................................. 51 13,456,020 5.21
9.500 - 9.999................................. 19 6,195,809 2.40
10.000 - 10.499................................. 3 848,050 0.33
11.500 - 11.999................................. 2 701,645 0.27
--- ------------ ------
Total...................................... 654 $258,025,314 100.00%
--- ------------ ------
--- ------------ ------
</TABLE>
As of the Cut-off Date, the weighted average Mortgage Rate of the Group II
Loans will be approximately 7.4671% per annum.
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIOS OF THE GROUP II LOANS(1)
NUMBER OF PERCENT OF
ORIGINAL LOAN-TO-VALUE RATIO (%) MORTGAGE LOANS PRINCIPAL BALANCE GROUP II LOANS
- -------------------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
0.01 - 50.00.................................. 28 $ 15,038,573 5.83%
50.01 - 55.00.................................. 11 4,830,666 1.87
55.01 - 60.00.................................. 12 8,620,515 3.34
60.01 - 65.00.................................. 38 18,217,601 7.06
65.01 - 70.00.................................. 56 24,339,201 9.43
70.01 - 75.00.................................. 110 42,796,885 16.59
75.01 - 80.00.................................. 235 84,286,814 32.67
80.01 - 85.00.................................. 19 7,731,328 3.00
85.01 - 90.00.................................. 86 27,486,124 10.65
90.01 - 95.00.................................. 31 9,665,656 3.75
95.01 - 100.00.................................. 22 12,529,518 4.86
LTV > 100.00..................................... 6 2,482,433 0.96
--- ------------ ------
Total....................................... 654 $258,025,314 100.00%
--- ------------ ------
--- ------------ ------
</TABLE>
- ------------
(1) With respect to each Group II Loan, the "LOAN-TO-VALUE RATIO" is the
original principal balance of the Group II Loan divided by the appraised
value, except as described in "Product Types" herein.
The weighted average Loan-to-Value Ratio at origination of the Group II
Loans will be approximately 75.95%.
S-32
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES OF THE GROUP II LOANS
NUMBER OF PERCENT OF
STATE MORTGAGE LOANS PRINCIPAL BALANCE GROUP II LOANS
- ----- -------------- ----------------- --------------
<S> <C> <C> <C>
California....................................... 303 $104,695,809 40.58%
New York......................................... 49 29,614,252 11.48
Virginia......................................... 30 12,847,862 4.98
New Jersey....................................... 23 10,807,077 4.19
Georgia.......................................... 23 9,859,178 3.82
Connecticut...................................... 13 8,788,575 3.41
Florida.......................................... 19 8,545,909 3.31
Illinois......................................... 20 7,779,522 3.02
Other (1)........................................ 174 65,087,131 25.23
--- ------------ ------
Total....................................... 654 $258,025,314 100.00%
--- ------------ ------
--- ------------ ------
</TABLE>
- ------------
(1) Other includes states and the District of Columbia with under 3%
concentrations individually.
No more than 1.3% of the Group II Loans will be secured by Mortgaged
Properties located in any one zip code area in California and no more than 2.0%
of the Group II Loans will be secured by Mortgaged Properties located in any one
zip code area outside California.
<TABLE>
<CAPTION>
MORTGAGE LOAN PURPOSE OF THE GROUP II LOANS
NUMBER OF PERCENT OF
LOAN PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE GROUP II LOANS
- ------------ -------------- ----------------- --------------
<S> <C> <C> <C>
Purchase......................................... 401 $158,362,085 61.37%
Rate/Term Refinance.............................. 115 39,761,729 15.41
Equity Refinance................................. 138 59,901,500 23.22
--- ------------ ------
Total....................................... 654 $258,025,314 100.00%
--- ------------ ------
--- ------------ ------
</TABLE>
The weighted average Loan-to-Value Ratio at origination of rate and term
refinance Group II Loans will be 75.07%. The weighted average Loan-to-Value
Ratio at origination of equity refinance Group II Loans will be 69.54%.
<TABLE>
<CAPTION>
OCCUPANCY TYPES OF THE GROUP II LOANS
NUMBER OF PERCENT OF
OCCUPANCY MORTGAGE LOANS PRINCIPAL BALANCE GROUP II LOANS
- --------- -------------- ----------------- --------------
<S> <C> <C> <C>
Primary Residence................................ 629 $244,141,832 94.62%
Second/Vacation.................................. 15 10,659,991 4.13
Non Owner-occupied............................... 10 3,223,491 1.25
--- ------------ ------
Total....................................... 654 $258,025,314 100.00%
--- ------------ ------
--- ------------ ------
</TABLE>
S-33
<PAGE>
<TABLE>
<CAPTION>
MORTGAGED PROPERTY TYPES OF THE GROUP II LOANS
NUMBER OF PERCENT OF
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE GROUP II LOANS
- ------------- -------------- ----------------- --------------
<S> <C> <C> <C>
Single-family detached........................... 451 $177,400,467 68.75%
Planned Unit Developments (detached)............. 135 53,687,864 20.81
Two- to four-family units........................ 20 8,028,893 3.11
Condo Low-Rise (less than 5 stories)............. 25 7,528,699 2.92
Condo Mid-Rise (5 to 8 stories).................. 3 1,060,062 0.41
Condo High-Rise (9 stories or more).............. 7 5,093,421 1.97
Planned Unit Developments (attached)............. 7 2,130,193 0.83
Cooperative Units................................ 6 3,095,716 1.20
--- ------------ ------
Total....................................... 654 $258,025,314 100.00%
--- ------------ ------
--- ------------ ------
</TABLE>
<TABLE>
<CAPTION>
NEXT INTEREST RATE ADJUSTMENT DATES OF THE GROUP II LOANS
NUMBER OF PERCENT OF SUCH
NEXT INTEREST ADJUSTMENT DATE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- ----------------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
N/A (Fixed Rate)................................ 217 $ 80,042,830 31.02%
October 1999.................................... 37 9,871,532 3.83
November 1999................................... 5 1,386,484 0.54
December 1999................................... 10 3,290,803 1.28
January 2000.................................... 8 2,707,036 1.05
February 2000................................... 5 1,360,474 0.53
March 2000...................................... 5 1,754,425 0.68
April 2000...................................... 2 1,008,798 0.39
May 2000........................................ 4 1,946,605 0.75
June 2000....................................... 4 1,108,067 0.43
July 2000....................................... 2 700,159 0.27
August 2000..................................... 1 276,789 0.11
October 2000.................................... 1 305,648 0.12
December 2000................................... 1 373,286 0.14
February 2001................................... 2 540,467 0.21
May 2001........................................ 1 263,469 0.10
June 2001....................................... 1 252,552 0.10
August 2001..................................... 1 427,232 0.17
February 2002................................... 1 247,301 0.10
April 2002...................................... 4 1,893,035 0.73
May 2002........................................ 2 715,382 0.28
June 2002....................................... 9 3,666,826 1.42
July 2002....................................... 22 9,433,083 3.66
August 2002..................................... 19 6,639,350 2.57
September 2002.................................. 2 773,826 0.30
June 2003....................................... 1 800,000 0.31
April 2004...................................... 10 9,062,886 3.51
May 2004........................................ 23 13,419,932 5.20
June 2004....................................... 77 36,097,781 13.99
July 2004....................................... 88 34,693,132 13.45
August 2004..................................... 71 25,475,751 9.87
September 2004.................................. 17 6,870,411 2.66
January 2007.................................... 1 619,961 0.24
--- ------------ ------
Total...................................... 654 $258,025,314 100.00%
--- ------------ ------
--- ------------ ------
</TABLE>
As of the Cut-off Date, the weighted average Months to Next Interest Rate
Adjustment Date will be approximately 46 for those Group II Loans that have
Adjustment Dates.
S-34
<PAGE>
<TABLE>
<CAPTION>
NOTE MARGINS OF THE GROUP II LOANS
NUMBER OF PERCENT OF SUCH
NOTE MARGINS (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- ---------------- -------------- ----------------- --------------
<S> <C> <C> <C>
N/A (Fixed Rate)................................ 217 $ 80,042,830 31.02%
0.500 - 0.999................................... 3 940,444 0.36
2.000 - 2.499................................... 80 36,264,994 14.05
2.500 - 2.999................................... 328 132,387,141 51.31
3.000 - 3.499................................... 16 5,545,890 2.15
3.500 - 3.999................................... 3 823,962 0.32
5.500 - 5.999................................... 1 305,648 0.12
6.000 - 6.499................................... 2 537,183 0.21
6.500 - 6.999................................... 4 1,177,223 0.46
--- ------------ ------
Total...................................... 654 $258,025,314 100.00%
--- ------------ ------
--- ------------ ------
</TABLE>
As of the Cut-off Date, the weighted average Note Margin of the Group II
Loans that have Note Margins will be approximately 2.6559% per annum.
<TABLE>
<CAPTION>
MAXIMUM MORTGAGE RATES OF THE GROUP II LOANS
NUMBER OF PERCENT OF SUCH
MAXIMUM MORTGAGE RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- -------------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
N/A (Fixed Rate)................................ 217 $ 80,042,830 31.02%
10.000 - 10.999................................. 3 1,239,437 0.48
11.000 - 11.999................................. 68 23,037,133 8.93
12.000 - 12.999................................. 217 89,846,316 34.82
13.000 - 13.999................................. 130 57,539,765 22.30
14.000 - 14.999................................. 7 2,468,178 0.96
15.000 - 15.999................................. 7 2,477,754 0.96
16.000 - 16.999................................. 4 1,089,271 0.42
17.000 - 17.999................................. 1 284,631 0.11
--- ------------ ------
Total...................................... 654 $258,025,314 100.00%
--- ------------ ------
--- ------------ ------
</TABLE>
As of the Cut-off Date, the weighted average Maximum Mortgage Rate of the
Group II Loans that have Maximum Mortgage Rates will be approximately 12.6899%
per annum.
<TABLE>
<CAPTION>
INDICES OF GROUP II LOANS
NUMBER OF PERCENT OF
INDEX MORTGAGE LOANS PRINCIPAL BALANCE GROUP II LOANS
- ----- -------------- ----------------- --------------
<S> <C> <C> <C>
N/A (Fixed Rate)................................. 217 $ 80,042,830 31.02%
One Year U.S. Treasury........................... 330 134,080,021 51.96
Six-Month LIBOR (Wall Street Journal)............ 59 30,581,788 11.85
Eleventh District Cost of Funds.................. 39 10,500,847 4.07
Prime Based...................................... 3 940,444 0.36
Miscellaneous Indices............................ 6 1,879,384 0.73
--- ------------ ------
Total....................................... 654 $258,025,314 100.00%
--- ------------ ------
--- ------------ ------
</TABLE>
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
S-35
<PAGE>
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.
<TABLE>
<CAPTION>
CREDIT SCORE DISTRIBUTION OF THE GROUP I LOANS
NUMBER OF PERCENT OF
CREDIT SCORE RANGE MORTGAGE LOANS PRINCIPAL BALANCE GROUP I LOANS
- ------------------ -------------- ----------------- -------------
<S> <C> <C> <C>
499 or Less....................................... 26 $ 2,331,313 1.95%
500 - 519......................................... 35 3,240,359 2.70
520 - 539......................................... 61 5,541,935 4.63
540 - 559......................................... 76 7,465,578 6.23
560 - 579......................................... 74 7,485,916 6.25
580 - 599......................................... 80 8,341,994 6.96
600 - 619......................................... 87 9,230,736 7.70
620 - 639......................................... 86 8,913,055 7.44
640 - 659......................................... 104 12,102,659 10.10
660 - 679......................................... 104 11,476,418 9.58
680 - 699......................................... 101 11,257,166 9.40
700 - 719......................................... 71 7,465,297 6.23
720 - 739......................................... 54 6,223,227 5.19
740 - 759......................................... 69 6,390,124 5.33
760 or Greater.................................... 96 10,231,560 8.54
----- ------------ ------
Subtotal with Credit Score........................ 1,124 117,697,337 98.23
Not Available..................................... 17 2,119,686 1.77
----- ------------ ------
Total Pool................................... 1,141 $119,817,023 100.00%
----- ------------ ------
----- ------------ ------
</TABLE>
- ------------
(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.
S-36
<PAGE>
<TABLE>
<CAPTION>
CREDIT SCORE DISTRIBUTION OF THE GROUP II LOANS
NUMBER OF PERCENT OF
CREDIT SCORE RANGE MORTGAGE LOANS PRINCIPAL BALANCE GROUP II LOANS
- ------------------ -------------- ----------------- --------------
<S> <C> <C> <C>
499 or Less...................................... 2 $ 677,094 0.26%
500 - 519........................................ 1 231,414 0.09
520 - 539........................................ 11 3,389,841 1.31
540 - 559........................................ 12 3,619,643 1.40
560 - 579........................................ 11 2,981,017 1.16
580 - 599........................................ 14 4,975,469 1.93
600 - 619........................................ 29 9,245,892 3.58
620 - 639........................................ 42 14,199,325 5.50
640 - 659........................................ 52 18,759,335 7.27
660 - 679........................................ 59 23,041,966 8.93
680 - 699........................................ 64 26,281,679 10.19
700 - 719........................................ 67 24,992,488 9.69
720 - 739........................................ 72 30,970,206 12.00
740 - 759........................................ 72 34,837,070 13.50
760 or Greater................................... 137 57,622,817 22.33
--- ------------ ------
Subtotal with Credit Score....................... 645 255,825,257 99.15
Not Available.................................... 9 2,200,057 0.85
--- ------------ ------
Total Pool.................................. 654 $258,025,314 100.00%
--- ------------ ------
--- ------------ ------
</TABLE>
- ------------
(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. In addition, the Seller has represented
that, to the best of the Seller's knowledge, each of the Mortgage Loans with
Loan-to-Value Ratios at origination in excess of 80% will be insured by a
primary mortgage guaranty insurance policy (a "PRIMARY INSURANCE POLICY")
(except for 22.7% and 10.9% of the Group I Loans and Group II Loans,
respectively, which are Mortgage Loans with a Loan-to-Value Ratio at origination
in excess of 80% that are not insured by a Primary Insurance Policy) covering
the amount of such Mortgage Loan in excess of 75% (or, with respect to 5 and 1
of the Group I Loans and Group II Loans, respectively, representing
approximately 0.5% and 0.2%, respectively, of the Mortgage Loans in the related
Loan Group, some other percentage) of the value of the related Mortgaged
Property used in determining such Loan-to-Value Ratio (the "APPRAISED VALUE"),
unless and until the principal balance of the Mortgage Loan is reduced to a
level that would produce a Loan-to-Value Ratio equal to or less than 80%.
Mortgage Loans which are subject to negative amortization will only be covered
by a Primary Insurance Policy if such coverage was so required upon their
origination, notwithstanding that subsequent negative amortization may cause
such Mortgage Loan's Loan-to-Value Ratio (based on the then-current balance) to
subsequently exceed the limits which would have required such coverage upon
their origination. Substantially all of such Primary Insurance Policies were
issued by General Electric Mortgage Insurance Corporation, Republic Mortgage
Insurance Company, United Guaranty Residential Insurance Company and Mortgage
Guaranty Insurance Corporation (collectively, the "PRIMARY INSURERS"). The
Seller has represented that each Primary Insurer has a claims paying ability
currently acceptable to the Rating Agencies that have been requested to rate the
Certificates; however, there is no assurance as to the actual ability of any
Primary Insurer to pay claims.
While the terms and conditions of the Primary Insurance Policies issued by
one Primary Insurer will differ from those in Primary Insurance Policies issued
by other Primary Insurers, each Primary Insurance Policy generally will pay
either: (i) the insured percentage of the loss on the related Mortgaged
Property; (ii) the entire amount of such loss, after receipt by the Primary
Insurer of good and merchantable title to, and possession of,
S-37
<PAGE>
the Mortgaged Property; or (iii) at the option of the Primary Insurer under
certain Primary Insurance Policies, the sum of the delinquent monthly payments
plus any advances made by the insured, both to the date of the claim payment
and, thereafter, monthly payments in the amount that would have become due under
the Mortgage Loan if it had not been discharged plus any advances made by the
insured until the earlier of (a) the date the Mortgage Loan would have been
discharged in full if the default had not occurred or (b) an approved sale. The
amount of the loss as calculated under a Primary Insurance Policy covering a
Mortgage Loan will generally consist of the unpaid principal amount of such
Mortgage Loan and accrued and unpaid interest thereon and reimbursement of
certain expenses, less (i) rents or other payments collected or received by the
insured (other than the proceeds of hazard insurance) that are derived from the
related Mortgaged Property, (ii) hazard insurance proceeds in excess of the
amount required to restore such Mortgaged Property and which have not been
applied to the payment of the Mortgage Loan, (iii) amounts expended but not
approved by the Primary Insurer, (iv) claim payments previously made on such
Mortgage Loan and (v) unpaid premiums and certain other amounts.
As conditions precedent to the filing or payment of a claim under a Primary
Insurance Policy, in the event of default by the Mortgagor, the insured will
typically be required, among other things, to: (i) advance or discharge (a)
hazard insurance premiums and (b) as necessary and approved in advance by the
Primary Insurer, real estate taxes, protection and preservation expenses and
foreclosure and related costs; (ii) in the event of any physical loss or damage
to the Mortgaged Property, have the Mortgaged Property restored to at least its
condition at the effective date of the Primary Insurance Policy (ordinary wear
and tear excepted); and (iii) tender to the Primary Insurer good and
merchantable title to, and possession of, the Mortgaged Property.
The Pooling and Servicing Agreement requires that the Master Servicer
maintain, or cause to be maintained, coverage under a Primary Insurance Policy
to the extent such coverage was in place on the Cut-off Date and the Master
Servicer had knowledge of such Primary Insurance Policy.
PRODUCT TYPES
CORE PROGRAMS
Approximately 4.6% and 39.6% of the Group I Loans and Group II Loans,
respectively, generally were originated for programs under the Residential
Funding's Seller Guide (the "GUIDE") or under similar programs, excluding the
underwriting standards relating to the Expanded Criteria Program, the Expanded
Credit program, the home equity program and the 125 Program (such loans, the
"CORE LOANS"). All of these Mortgage Loans are Hybrid ARM Loans with initial
fixed rate periods of three or five years.
The underwriting standards as set forth in the Guide are continuously
revised based on opportunities and prevailing conditions in the residential
mortgage market and the market for the Seller's mortgage pass-through
certificates. The Core Loans may be underwritten by Residential Funding or by a
designated third party. In certain circumstances, however, the Core Loans may be
underwritten only by the Seller. Residential Funding may perform only sample
quality assurance reviews to determine whether the Mortgage Loans in any
Mortgage Pool were underwritten in accordance with applicable standards.
The following is a brief description of the underwriting standards set
forth in the Guide for full documentation loan programs. Initially, a
prospective borrower (other than a trust if the trust is the borrower) is
required to fill out a detailed application providing pertinent credit
information. As part of the application, the borrower is required to provide a
current balance sheet describing assets and liabilities and a statement of
income and expenses, as well as an authorization to apply for a credit report
which summarizes the borrower's credit history with merchants and lenders and
any record of bankruptcy. In addition, an employment verification is obtained
which reports the borrower's current salary and may contain the length of
employment and an indication as to whether it is expected that the borrower will
continue such employment in the future. If a prospective borrower is
self-employed, the borrower may be required to submit copies of signed tax
returns. The borrower may also be required to authorize verification of deposits
at financial institutions where the borrower has accounts. In the case of a
Mortgage Loan secured by a property owned by a trust, the foregoing procedures
may be waived where the Mortgage Note is executed on behalf of the Trust.
In determining the adequacy of the Mortgaged Property as collateral, an
appraisal is made of each property considered for financing. The appraiser is
required to verify that the property is in good condition and that construction,
if new, has been completed. The appraisal is based on various factors, including
the market value
S-38
<PAGE>
of comparable homes and the cost of replacing the improvements. Alternatively,
property valuations may be made under various other methods.
Once all applicable employment, credit and property information is
received, a determination is made as to whether the prospective borrower has
sufficient monthly income available to meet the borrower's monthly obligations
on the proposed mortgage loan and other expenses related to the home (such as
property taxes and hazard insurance) and other financial obligations and monthly
living expenses. The Seller will generally underwrite Adjustable Rate Loans,
Buy-Down Mortgage Loans, graduated payment Mortgage Loans and certain other
Mortgage Loans on the basis of the borrower's ability to make monthly payments
as determined by reference to the Mortgage Rates in effect at origination or the
reduced initial monthly payments, as the case may be, and on the basis of an
assumption that the borrowers will likely be able to pay the higher monthly
payments that may result from later increases in the Mortgage Rates or from
later increases in the monthly payments, as the case may be, at the time of such
increase even though the borrowers may not be able to make such higher payments
at the time of origination. The Mortgage Rate in effect from the origination
date of an Adjustable Rate Loan or certain other types of loans to the first
adjustment date generally will be lower, and may be significantly lower, than
the sum of the then applicable Index and Note Margin. Similarly, the amount of
the monthly payment on Buy-Down Mortgage Loans and graduated payment Mortgage
Loans will increase periodically. If the borrowers' incomes do not increase in
an amount commensurate with the increases in monthly payments, the likelihood of
default will increase.
The underwriting standards set forth in the Guide will be varied in
appropriate cases, including "limited" or "reduced loan documentation" mortgage
loan programs. Certain reduced loan documentation programs, for example, do not
require income, employment or asset verifications. Generally, in order to be
eligible for a reduced loan documentation program, the Loan-to-Value Ratio must
meet applicable guidelines, the borrower must have a good credit history and the
borrower's eligibility for such program may be determined by use of a credit
scoring model.
In its evaluation of mortgage loans which have more than twelve months of
payment experience, Residential Funding generally places greater weight on
payment history and may take into account market and other economic trends while
placing less weight on underwriting factors generally applied to newly
originated mortgage loans. Certain Mortgage Loans seasoned for over twelve
months may be underwritten for purchase by Residential Funding based on the
borrower's credit score and payment history, with no current income
verification, and under alternative property valuation methods.
The Mortgaged Properties may be located in states where, in general, a
lender providing credit on a single-family property may not seek a deficiency
judgment against the mortgagor but rather must look solely to the property for
repayment in the event of foreclosure. See "Certain Legal Aspects of the Loans
- -- Anti-Deficiency Legislation and Other Limitations on Lenders" in the
Prospectus. The Seller's underwriting standards applicable to all states
(including anti-deficiency states) require that the value of the property being
financed, as indicated by the appraisal, currently supports and is anticipated
to support in the future the outstanding loan balance, although there can be no
assurance that such value will support the loan balance in the future.
THE PORTFOLIO TRANSACTION PROGRAM
Approximately 95.4% and 60.4% of the Group I Loans and Group II Loans,
respectively, 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, and loans not eligible for
Residential Funding's standard programs. The Portfolio Transaction loans fall
into three categories: Portfolio Programs, Program Violations and Seasoned
Loans.
PROGRAM VIOLATIONS. Approximately 63.1% and 43.4% of the Group I Loans and
Group II Loans, respectively, were originated for sale in the secondary market
with the intention that the loans would meet the criteria and underwriting
guidelines of a standard loan purchase program of Residential Funding
Corporation, Fannie Mae or Freddie Mac, or another secondary market participant.
However, after origination it was determined that the loans did not meet the
requirements of the intended program for any of a number of reasons, including
the failure to reach required loan-to-value ratios, debt-to-income ratios or
credit scores, or the mortgage file had document deficiencies. In addition, some
of these loans were underwritten pursuant to
S-39
<PAGE>
underwriting standards similar to the Guide, but have specific features, such as
initial five-year interest-only periods or an Index of Six-Month LIBOR, which
are not specifically provided for in the Guide.
SEASONED LOANS. Approximately 32.3% and 17.0% of the Group I Loans and
Group II Loans, respectively, are Mortgage Loans acquired by Residential Funding
through the exercise of the right to repurchase (a "clean-up call") the loans in
a mortgage pool previously securitized by the Seller or any of its affiliates,
or are other seasoned loans. They are typically not purchased through
Residential Funding's standard loan purchase programs, because these programs
require underwriting documentation that cannot be readily provided for seasoned
loans. These loans are seasoned longer than thirteen months. Due to the length
of time since origination, no assurance can be given as to whether such loans
would conform with current underwriting criteria or documentation requirements.
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 Transactions 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.
The following tables sets forth the additional information with respect to
the mortgage loans with respect to the product types above:
<TABLE>
<CAPTION>
GROUP I LOANS BY PRODUCT TYPES
DELINQUENCY
AS OF
THE CUT-OFF
NUMBER DATE WEIGHTED WEIGHTED
OF PERCENT OF ------------- AVERAGE AVERAGE
GROUP I PRINCIPAL GROUP I 30-59 60-89 LOAN-TO- SEASONING
PRODUCT TYPE LOANS BALANCE LOANS CURRENT DAYS DAYS VALUE RATE (MONTHS)
------------ ----- ------- ----- ------- ---- ---- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Core Program...................... 33 $ 5,471,022 4.56% 100.00% 0.00% 0.00% 76 1
Program Violations................ 802 75,630,557 63.12 97.77 1.99 0.23 81 13
Seasoned Loans.................... 306 38,715,444 32.31 96.41 3.03 0.56 82 99
----- ------------ ------ ------ ---- ---- -- --
Total or Weighted Average......... 1,141 $119,817,023 100.00% 97.43% 2.24% 0.33% 81 40
----- ------------ ------ ------
----- ------------ ------ ------
</TABLE>
S-40
<PAGE>
<TABLE>
<CAPTION>
GROUP II LOANS BY PRODUCT TYPES
DELINQUENCY
AS OF
THE CUT-OFF
NUMBER DATE WEIGHTED WEIGHTED
OF PERCENT OF ------------- AVERAGE AVERAGE
GROUP II PRINCIPAL GROUP II 30-59 60-89 LOAN-TO- SEASONING
PRODUCT TYPE LOANS BALANCE LOANS CURRENT DAYS DAYS VALUE RATE (MONTHS)
------------ ----- ------- ----- ------- ---- ---- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Core Program.................... 275 $102,285,834 39.64% 100.00% 0.00% 0.00% 77 1
Program Violations.............. 217 111,901,413 43.37 99.75 0.25 0.00 75 8
Seasoned Loans.................. 162 43,838,067 16.99 97.32 2.68 0.00 76 93
----- ------------ ------ ------ ---- ---- -- --
Total or Weighted Average....... 654 $258,025,314 100.00% 99.44% 0.56% 0.00% 76 20
----- ------------ ------ ------ ----
----- ------------ ------ ------ ----
</TABLE>
For a description of the methodology used to categorize mortgage loans as
delinquent, see "Pooling and Servicing Agreement -- The Master Servicer" herein.
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 49.9% and 24.3% of the
Group I Loans and Group II Loans, respectively, 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.
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 those Mortgage Loans that are currently
being subserviced by certain servicers (the "DESIGNATED SERVICERS"). Such
Mortgage Loans comprise approximately 64.6% and 44.0% of the Group I Loans and
Group II Loans, respectively. If and when any such 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 Financial Network, Inc.
("HOMECOMINGS"). HomeComings is a wholly-owned subsidiary of Residential
Funding.
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.
S-41
<PAGE>
Residential Funding's Asset Resolution Division was awarded a "Special
Servicer" designation from Standard & Poor's and Fitch IBCA, Inc. ("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 September). 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.
S-42
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Series 1999-RS3 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 applicable Primary
Insurance Policies and standard hazard insurance policies; (v) the Policy; (vi)
the Yield Maintenance Agreements and the Reserve Fund; (vii) the right to
receive amounts received from any Additional Collateral that has been assigned
to the Trustee; and (viii) all proceeds of the foregoing. Scheduled payments on
the Mortgage Loans due on or before September 30, 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
S-43
<PAGE>
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.
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
S-44
<PAGE>
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).
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
S-45
<PAGE>
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.
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, the premium payable on the Policy for
such Distribution Date and any payments in connection with the
S-46
<PAGE>
limited reimbursement agreement, (ii) certain unscheduled payments, including
Mortgagor prepayments on the Mortgage Loans, Insurance Proceeds and Liquidation
Proceeds from the Mortgage Loans, proceeds from repurchases of and substitutions
for the Mortgage Loans occurring during the preceding calendar month and
proceeds from the liquidation of Additional Collateral, 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 and any payments made in respect of the limited
reimbursement agreement. In addition to the foregoing amounts, with respect to
unscheduled collections (other than Mortgagor prepayments) on the Mortgage
Loans, the Master Servicer 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 September 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, calculated at a rate equal to
One-Month LIBOR plus the related Class A 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
S-47
<PAGE>
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,
(iii) any Deferred Interest allocated thereto and (iv) 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 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 Available Distribution Amount is less than Accrued
Certificate Interest on the Class A Certificates, such shortfall will be covered
by an Insured Amount from the Policy. Notwithstanding the foregoing, if payments
are not made as required under the Policy, any such interest shortfalls may be
incurred by the Class A Certificates. See "Description of the Certificates --
Certificate Guaranty Insurance Policy."
With respect to the Class A Certificates, the "INTEREST ACCRUAL PERIOD"
shall be (i) with respect to the Distribution Date in October 1999, the period
commencing on the Closing Date and ending on the day preceding the Distribution
Date in October 1999, and (ii) with respect to any Distribution Date after the
Distribution Date in October 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 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 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 Margin, (ii) 14.00% per annum (the "MAXIMUM CLASS
A RATE") and (iii) a per annum rate equal to the weighted average of the Net
Mortgage Rates on the Mortgage Loans, reduced by the rate per annum (not in
excess of 0.1%) at which the premium on the limited reimbursement agreement
accrues (in each case calculated based on the number of days in the preceding
Interest Accrual Period) (the "NET WAC CAP RATE"). The "CLASS A MARGIN" for the
Class A-I 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
"CLASS A MARGIN" for the Class A-II Certificates is as follows: for any
Distribution Date on or prior to the Step-Up Date, 0.45% per annum, for any date
thereafter, 0.90% per annum. The "STEP-UP DATE" is the first Distribution Date
after the 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 Net WAC Cap
Rate from the Reserve Fund to the extent described below under " -- The Reserve
Fund and the Yield Maintenance Agreements."
The Pass-Through Rate on the Class A 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 " --
Overcollateralization 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
S-48
<PAGE>
calendar month. Such shortfalls will result because interest on prepayments in
full is 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.
To the extent that Deferred Interest causes a shortfall in interest
collections on the Mortgage Loans that would otherwise cause a shortfall in the
amount of interest payable to either class of Class A Certificateholders, such
amount will be paid using principal collections on the Mortgage Loans through
the priority of payment provisions described herein. To the extent that the
aggregate Accrued Certificate Interest on either class of Class A Certificates
for any Distribution Date exceeds the Available Distribution Amount for such
Distribution Date, the lesser of such excess and the aggregate amount of
Deferred Interest, if any, that is added to the principal balance of the
Negative Amortization Loans on the Due Date occurring in the month in which such
Distribution Date occurs will be added to the Certificate Principal Balances of
the Class A Certificates on a pro rata basis in accordance with the amount of
Accrued Certificate Interest that would have accrued on such Certificate absent
such reduction and subtracted from the amount of Accrued Certificate Interest
otherwise payable to such Class A Certificates for such Distribution Date.
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,
plus any Deferred Interest added thereto, and 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 or from the
Reserve Fund) 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 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 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
S-49
<PAGE>
for a period of one month in amounts approximately equal to the Certificate
Principal Balance of the Class A 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
Certificates for the relevant Interest Accrual Period, in the absence of
manifest error, will be final and binding.
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 (iv) 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),
S-50
<PAGE>
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. Cumulative Insurance Payments do not
include any amounts that were paid to the trust pursuant to the limited
reimbursement agreement, or for which the Insurer is entitled to reimbursement
under the limited reimbursement 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,
reduced by the rate per annum at which the premium for the limited reimbursement
agreement accrues, 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:
FIRST, to pay to the holders of the Class A Certificates, pro rata,
based on the Certificate Principal Balances 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 Certificate Principal Balances 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 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
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.
S-51
<PAGE>
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.
THE RESERVE FUND AND THE YIELD MAINTENANCE AGREEMENTS
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. The Trustee will deposit into the Reserve Fund amounts paid
pursuant to the Yield Maintenance Agreements. On the Closing Date, the Trustee,
as trustee, will enter into the Yield Maintenance Agreements with BSFP. The
first Yield Maintenance Agreement (the "FIXED RATE YIELD MAINTENANCE AGREEMENT")
will be based off the mortgage loans with fixed rates, the second Yield
Maintenance Agreement (the "3/1 YIELD MAINTENANCE AGREEMENT") will be based off
the Hybrid ARM Loans with an initial fixed rate period of 3 years, and the third
Yield Maintenance Agreement (the "5/1 YIELD MAINTENANCE AGREEMENT") will be
based off the Hybrid ARM Loans with an initial fixed rate period of 5 years (the
5/1 Yield Maintenance Agreement collectively with the Fixed Rate Yield
Maintenance Agreement and the 3/1 Yield Maintenance Agreement, the "YIELD
MAINTENANCE AGREEMENTS").
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 either of the Class A Certificates which
would not otherwise be covered by amounts currently in the Reserve Fund.
On each Distribution Date, to the extent of the balance of the Reserve Fund
in excess of $10,000, the Trustee will withdraw from amounts in the Reserve Fund
to cover the following items, in the following order:
(i) first, to reimburse the Certificate Insurer up to any Cumulative
Insurance Payments; and
(ii) second, to pay the Class A Certificates on a pro rata basis as
described in " -- Allocation of Losses; Subordination" below in
respect of any Realized Losses (other than Excess Losses) to the
extent not covered by the related Excess Cash Flow.
In addition, 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 Certificates on a pro rata basis, 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 either
class of Class A 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.
With respect to any Distribution Date, each of the Yield Maintenance
Agreements will provide for the payment to the Trustee of an amount equal to
one-twelfth of the product of (a) the rate, expressed as a fraction,
S-52
<PAGE>
equal to the excess of (x) One-Month LIBOR (determined as described above under
" -- Determination of One-Month LIBOR" above; provided, however, on the first
Distribution Date, One-Month LIBOR for purposes of the Yield Maintenance
Agreements will be 5.38% per annum) over (y) the Strike Price for such Yield
Maintenance Agreement and (b) an amount equal to the lesser of the aggregate
Stated Principal Balance of the related Mortgage Loans (other than any Converted
Mortgage Loans) in the Mortgage Pool at the beginning of the related Due Period,
and the Projected Principal Balance of the related Mortgage Loans for such
Interest Accrual Period.
The "STRIKE PRICE" for the Fixed Rate Yield Maintenance Agreement, will
equal 7.40% per annum for the first 96 Distribution Dates. After the 96th
Distribution Date, the Fixed Rate Yield Maintenance Agreement will terminate.
The Strike Price for the 3/1 Yield Maintenance Agreement, will equal 6.00% per
annum for the first 36 Distribution Dates. After the 36th Distribution Date, the
3/1 Yield Maintenance Agreement will terminate. The Strike Price for the 5/1
Yield Maintenance Agreement, will equal 6.00% per annum for the first 60
Distribution Dates. After the 60th Distribution Date, the 5/1 Yield Maintenance
Agreement will terminate.
The "PROJECTED PRINCIPAL BALANCE" for the Fixed Rate Yield Maintenance
Agreement for each Distribution Date shall be as follows:
PROJECTED PRINCIPAL BALANCES
MONTH OF PROJECTED
DISTRIBUTION DATE PRINCIPAL BALANCE
----------------- -----------------
Initial Balance............................................. $152,799,397.16
October 1999................................................ 151,297,003.85
November 1999............................................... 149,808,061.97
December 1999............................................... 148,332,453.29
January 2000................................................ 146,870,060.63
February 2000............................................... 145,420,767.83
March 2000.................................................. 143,984,459.73
April 2000.................................................. 142,561,022.20
May 2000.................................................... 141,150,342.09
June 2000................................................... 139,752,307.28
July 2000................................................... 138,366,806.56
August 2000................................................. 136,993,729.78
September 2000.............................................. 135,632,967.67
October 2000................................................ 134,284,411.98
November 2000............................................... 132,947,955.38
December 2000............................................... 131,623,491.47
January 2001................................................ 130,310,914.83
February 2001............................................... 129,010,120.88
March 2001.................................................. 127,721,006.04
April 2001.................................................. 126,443,467.58
May 2001.................................................... 125,177,403.70
June 2001................................................... 123,922,713.49
July 2001................................................... 122,679,296.89
August 2001................................................. 121,447,054.75
September 2001.............................................. 120,225,888.79
October 2001................................................ 119,015,701.55
November 2001............................................... 117,816,396.48
December 2001............................................... 116,627,877.84
January 2002................................................ 115,450,050.71
S-53
<PAGE>
MONTH OF PROJECTED
DISTRIBUTION DATE PRINCIPAL BALANCE
----------------- -----------------
February 2002............................................... $114,282,821.07
March 2002.................................................. 113,126,095.64
April 2002.................................................. 111,979,782.01
May 2002.................................................... 110,843,788.58
June 2002................................................... 109,718,024.51
July 2002................................................... 108,602,399.80
August 2002................................................. 107,496,825.21
September 2002.............................................. 106,401,212.29
October 2002................................................ 105,315,473.39
November 2002............................................... 104,239,521.56
December 2002............................................... 103,173,270.69
January 2003................................................ 102,116,635.38
February 2003............................................... 101,069,530.99
March 2003.................................................. 100,031,873.61
April 2003.................................................. 99,003,580.06
May 2003.................................................... 97,984,567.92
June 2003................................................... 96,974,755.47
July 2003................................................... 95,974,061.71
August 2003................................................. 94,982,406.34
September 2003.............................................. 93,999,709.76
October 2003................................................ 93,025,893.09
November 2003............................................... 92,060,878.13
December 2003............................................... 91,104,587.35
January 2004................................................ 90,156,943.93
February 2004............................................... 89,217,871.69
March 2004.................................................. 88,287,295.14
April 2004.................................................. 87,365,139.44
May 2004.................................................... 86,451,330.41
June 2004................................................... 85,545,794.50
July 2004................................................... 84,648,458.85
August 2004................................................. 83,759,251.19
September 2004.............................................. 82,878,099.91
October 2004................................................ 82,004,934.03
November 2004............................................... 81,139,683.15
December 2004............................................... 80,282,277.55
January 2005................................................ 79,432,648.07
February 2005............................................... 78,590,726.18
March 2005.................................................. 77,756,443.96
April 2005.................................................. 76,929,734.06
May 2005.................................................... 76,110,529.70
June 2005................................................... 75,298,764.76
July 2005................................................... 74,494,373.64
August 2005................................................. 73,697,291.31
September 2005.............................................. 72,907,453.33
October 2005................................................ 72,124,795.85
S-54
<PAGE>
MONTH OF PROJECTED
DISTRIBUTION DATE PRINCIPAL BALANCE
----------------- -----------------
November 2005............................................... $ 71,349,255.51
December 2005............................................... 70,580,769.59
January 2006................................................ 69,819,275.86
February 2006............................................... 69,064,712.63
March 2006.................................................. 68,317,018.80
April 2006.................................................. 67,576,133.76
May 2006.................................................... 66,841,997.45
June 2006................................................... 66,114,550.35
July 2006................................................... 65,393,733.42
August 2006................................................. 64,679,488.17
September 2006.............................................. 63,971,756.63
October 2006................................................ 63,270,481.32
November 2006............................................... 62,575,605.24
December 2006............................................... 61,887,071.95
January 2007................................................ 61,204,825.43
February 2007............................................... 60,528,810.24
March 2007.................................................. 59,858,971.34
April 2007.................................................. 59,195,254.21
May 2007.................................................... 58,537,604.83
June 2007................................................... 57,885,969.63
July 2007................................................... 57,240,295.49
August 2007................................................. 56,600,529.77
The "PROJECTED PRINCIPAL BALANCE" for the 3/1 Yield Maintenance Agreement
for each Distribution Date shall be determined as follows:
MONTH OF PROJECTED
DISTRIBUTION DATE PRINCIPAL BALANCE
----------------- -----------------
Initial Balance............................................. $ 24,080,769.37
October 1999................................................ 23,736,908.58
November 1999............................................... 23,397,827.02
December 2000............................................... 23,063,459.21
January 2000................................................ 22,733,740.56
February 2000............................................... 22,408,607.39
March 2000.................................................. 22,087,996.84
April 2000.................................................. 21,771,846.93
May 2000.................................................... 21,460,096.50
June 2000................................................... 21,152,685.25
July 2000................................................... 20,849,553.70
August 2000................................................. 20,550,643.14
September 2000.............................................. 20,255,895.72
October 2000................................................ 19,965,254.30
November 2000............................................... 19,678,662.58
December 2001............................................... 19,396,065.01
January 2001................................................ 19,117,406.78
February 2001............................................... 18,842,633.84
March 2001.................................................. 18,571,692.87
S-55
<PAGE>
MONTH OF PROJECTED
DISTRIBUTION DATE PRINCIPAL BALANCE
----------------- -----------------
April 2001.................................................. $126,443,467.58
May 2001.................................................... 125,177,403.70
June 2001................................................... 123,922,713.49
July 2001................................................... 122,679,296.89
August 2001................................................. 121,447,054.75
September 2001.............................................. 120,225,888.79
October 2001................................................ 119,015,701.55
November 2001............................................... 16,535,952.54
December 2001............................................... 16,297,216.43
January 2002................................................ 16,061,817.40
February 2002............................................... 15,829,709.62
March 2002.................................................. 15,600,847.83
April 2002.................................................. 15,375,187.43
May 2002.................................................... 15,152,684.39
June 2002................................................... 14,933,406.86
July 2002................................................... 14,717,449.62
August 2002................................................. 14,506,692.54
The "PROJECTED PRINCIPAL BALANCE" for the 5/1 Yield Maintenance Agreement
for each Distribution Date shall be determined as follows:
MONTH OF PROJECTED
DISTRIBUTION DATE PRINCIPAL BALANCE
----------------- -----------------
Initial Balance............................................. $134,846,624.65
October 1999................................................ 132,958,729.35
November 1999............................................... 131,096,795.37
December 1999............................................... 129,260,469.13
January 2000................................................ 127,449,401.88
February 2000............................................... 125,663,249.58
March 2000.................................................. 123,901,672.86
April 2000.................................................. 122,164,336.92
May 2000.................................................... 120,450,911.51
June 2000................................................... 118,761,070.86
July 2000................................................... 117,094,493.63
August 2000................................................. 115,450,862.79
September 2000.............................................. 113,829,865.65
October 2000................................................ 112,231,193.72
November 2000............................................... 110,654,542.72
December 2000............................................... 109,099,612.49
January 2001................................................ 107,566,106.92
February 2001............................................... 106,053,733.91
March 2001.................................................. 104,562,205.36
April 2001.................................................. 103,091,237.02
May 2001.................................................... 101,640,548.53
June 2001................................................... 100,209,863.33
July 2001................................................... 98,798,908.60
August 2001................................................. 97,407,415.19
S-56
<PAGE>
MONTH OF PROJECTED
DISTRIBUTION DATE PRINCIPAL BALANCE
----------------- -----------------
September 2001.............................................. $ 96,035,117.66
October 2001................................................ 94,681,754.12
November 2001............................................... 93,347,066.25
December 2001............................................... 92,030,799.23
January 2002................................................ 90,732,701.68
February 2002............................................... 89,452,525.68
March 2002.................................................. 88,190,026.59
April 2002.................................................. 86,944,963.16
May 2002.................................................... 85,717,097.39
June 2002................................................... 84,506,194.49
July 2002................................................... 83,312,022.87
August 2002................................................. 82,134,354.09
September 2002.............................................. 80,972,962.78
October 2002................................................ 79,827,626.66
November 2002............................................... 78,698,126.45
December 2002............................................... 77,584,245.84
January 2003................................................ 76,485,771.46
February 2003............................................... 75,402,492.84
March 2003.................................................. 74,334,202.37
April 2003.................................................. 73,280,695.23
May 2003.................................................... 72,241,769.42
June 2003................................................... 71,217,225.64
July 2003................................................... 70,206,867.34
August 2003................................................. 69,210,500.59
September 2003.............................................. 68,227,934.12
October 2003................................................ 67,258,979.27
November 2003............................................... 66,303,449.90
December 2003............................................... 65,361,162.43
January 2004................................................ 64,431,935.76
February 2004............................................... 63,515,591.26
March 2004.................................................. 62,611,952.71
April 2004.................................................. 61,720,846.28
May 2004.................................................... 60,842,100.52
June 2004................................................... 59,975,546.30
July 2004................................................... 59,101,974.84
August 2004................................................. 58,245,271.95
The Projected Principal Balances above are equal to the aggregate principal
balances of the related Mortgage Loans as of the related Due Date preceding the
indicated Distribution Date assuming: (i) for the Fixed Rate Yield Maintenance
Agreement, a prepayment rate of 10% CPR on the related Mortgage Loans, (ii) for
the 3/1 Yield Maintenance Agreement, a prepayment rate of 15% CPR on the related
Mortgage Loans, and (iii) for the 5/1 Yield Maintenance Agreement, a prepayment
rate of 15% CPR on the related Mortgage Loans. There can be no assurance that
the Mortgage Loans will pay at these rates or at any other rate. See "Certain
Yield and Prepayment Considerations" herein.
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.
S-57
<PAGE>
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. The Policy does not cover any Deferred Interest except
to the extent it is added to the Certificate Principal Balance of the Class A
Certificates. Notwithstanding the foregoing, the amount of the draw under the
policy will be reduced by any amount paid directly to the Trust under the
limited reimbursement agreement described in the next paragraph.
The Insurer has entered into a limited reimbursement agreement whereby some
amounts otherwise payable under the Policy will be reimbursed to the Insurer, or
if directed by the Insurer, will be paid directly to the Trust by a third party.
The Trust is not a party to the limited reimbursement agreement and has no
rights with respect to it. In the event those amounts are not paid to the Trust
under the limited reimbursement agreement, the Insurer will nevertheless remain
obligated to make all payments required to be made under the Policy as described
in this section.
Notwithstanding the second 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:
"AGREEMENT" means the Pooling and Servicing Agreement, dated as of
September 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 Deferred Interest, 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 not covered by
payments from the Reserve Fund 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.
S-58
<PAGE>
"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, to the Reserve Fund, until the amount therein has been reduced to zero;
third, by the reduction of the Overcollateralization Amount, until reduced to
zero; and fourth, 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, the Reserve Fund, 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 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 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,
S-59
<PAGE>
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 $4,300,000. As of any
date of determination following the Cut-off Date, the Special Hazard Amount
shall equal $4,300,000 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 $11,335,270. 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 3.00% 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) 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; 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) 1.00% 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.
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 $137,315. As of any date of determination, the Bankruptcy
Amount shall equal $137,315, 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.
S-60
<PAGE>
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.
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. In connection with the failure by the
related Mortgagor to make a Balloon Payment, to the extent deemed recoverable,
the Master Servicer will Advance the amount of the Monthly Payment for such
Balloon Loan immediately prior to the Balloon Payment. 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 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.
S-61
<PAGE>
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:
HARDWARE, including mainframe computers, desktop computers and network
devices;
FACILITIES EQUIPMENT, including elevators, telephone systems, heating
systems and security systems;
SOFTWARE APPLICATIONS, including vendor purchased applications, in-house
developed applications and end-user developed applications;
BUSINESS PARTNER COMMUNICATION LINKS, which primarily provide data
transmissions to and from business partners; and
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:
PHASE OBJECTIVE
----- ---------
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.
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.
S-62
<PAGE>
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:
PHASE OBJECTIVE
----- ---------
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.
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.
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
S-63
<PAGE>
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 Underwriters 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, Moody'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 June 30, 1999 and for the
periods ending June 30, 1999 and June 30, 1998 included in the Quarterly Report
on Form 10-Q of Ambac Financial Group, Inc. for the period ended June 30, 1999
(which was filed with the Commission on August 13, 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.
The following table sets forth the Insurer's capitalization as of December
31, 1996, December 31, 1997, December 31, 1998 and June 30, 1999, respectively,
in conformity with generally accepted accounting principles.
<TABLE>
<CAPTION>
AMBAC ASSURANCE CORPORATION
CONSOLIDATED CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998 1999
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Unearned premiums............................ $ 995 $1,184 $1,303 $1,349
Other liabilities............................ 259 562 548 413
------ ------ ------ ------
Total liabilities....................... 1,254 1,746 1,851 1,762
------ ------ ------ ------
Stockholder's equity:(1)
Common Stock............................ 82 82 82 82
Additional paid-in capital.............. 515 521 541 644
Accumulated other comprehensive
income................................ 66 118 138 39
Retained earnings....................... 992 1,180 1,405 1,530
------ ------ ------ ------
Total stockholder's equity.............. 1,655 1,901 2,166 2,295
------ ------ ------ ------
Total liabilities and stockholder's
equity................................ $2,909 $3,647 $4,017 $4,057
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
(FOOTNOTES ON NEXT PAGE)
S-64
<PAGE>
(FOOTNOTES FROM PREVIOUS PAGE)
(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.
BEAR STEARNS FINANCIAL PRODUCTS
Bear Stearns Financial Products Inc. will be the counterparty for the Yield
Maintenance Agreements. BSFP is a bankruptcy remote derivatives product company
based in New York, New York that has been established as a wholly owned
subsidiary of The Bear Stearns Companies Inc. BSFP maintains a ratings
classification of "AAA" from Standard & Poor's and "Aaa" from Moody's. As of
June 30, 1999, BSFP had assets of approximately $441.7 million, liabilities of
approximately $277.3 million and a stockholder's equity of approximately $164.4
million. BSFP will provide upon request, without charge, to each person to whom
this Prospectus Supplement is delivered, a copy of (i) the ratings analysis from
each of Standard & Poor's and Moody's evidencing those respective ratings or
(ii) the most recent audited annual financial statements of BSFP. Requests for
such information should be directed to Paul Raymond, DPC Manager of Bear Stearns
Financial Products Inc. at (212) 272-4009 or in writing at 245 Park Avenue,
Suite 1700, New York, New York 10167.
BSFP is an affiliate of Bear, Stearns & Co. Inc.
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, the negative amortization feature of the
Negative Amortization Loans 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 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.
S-65
<PAGE>
Investors in the Class A 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 Adjustable Rate Loans adjust monthly,
semi-annually or annually based upon the related Index, whereas the Pass-Through
Rates on the Class A 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 Rate and the Net WAC Cap
Rate. Consequently, the interest that becomes due on the Adjustable Rate 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 Margin on the Class A
Certificates during the related Interest Accrual Period. In particular, because
the Pass-Through Rate on the Class A Certificates will adjust monthly, while the
interest rates of the Adjustable Rate Loans will adjust semi-annually or
annually (and in some cases, not at all or only after the expiration of the
related fixed rate period), 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
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 Certificates. Any Basis Risk
Shortfalls are payable only to the extent of Excess Cash Flow and amounts on
deposit in the Reserve Fund (in each case 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 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
Mortgage 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
Mortgage Loans (except for the Convertible Mortgage 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. The Convertible Mortgage Loans are not assumable if the related
Mortgagor has exercised its option to convert such Mortgage Loan into a fixed
rate Mortgage Loan, in which case the Mortgage Note with respect to such
mortgage loan would generally contain a customary "due on sale" provision.
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 Negative Amortization Loans may have an increased risk of default. The
outstanding principal balance of a mortgage loan which is subject to negative
amortization increases by the amount of interest which is deferred as herein
described. During periods in which the outstanding principal balance of a
Negative Amortization Loan is increasing due to the addition of Deferred
Interest thereto, such increasing principal balance of the Negative Amortization
Loan may approach or exceed the value of the related Mortgaged Property, thus
increasing the likelihood of defaults as well as the amount of any loss
experienced with respect to any such Negative Amortization Loan that is required
to be liquidated. Furthermore, each Negative Amortization Loan provides for the
payment of any remaining unamortized principal balance of such Negative
Amortization Loan (due to the addition of Deferred Interest, if any, to the
principal balance of such Negative Amortization Loan) in a single payment at the
maturity of the Negative Amortization Loan. Because the Mortgagors may be
S-66
<PAGE>
so required to make a larger single payment upon maturity, it is possible that
the default risk associated with the Negative Amortization Loans is greater than
that associated with fully amortizing mortgage loans.
The Convertible Mortgage Loans provide that the Mortgagors may, during a
specified period of time, convert the adjustable interest rate of such Mortgage
Loans to a fixed interest rate. The Depositor is not aware of any publicly
available statistics that set forth principal prepayment or conversion
experience or conversion forecasts of adjustable-rate mortgage loans over an
extended period of time, and its experience with respect to adjustable-rate
mortgages is insufficient to draw any conclusions with respect to the expected
prepayment or conversion rates on the Convertible Mortgage Loans. As is the case
with conventional, fixed-rate mortgage loans originated in a high interest rate
environment which may be subject to a greater rate of principal prepayments when
interest rates decrease, adjustable-rate mortgage loans may be subject to a
greater rate of principal prepayments (or purchases by the related Subservicer
or the Master Servicer) due to their refinancing or conversion to fixed interest
rate loans in a low interest rate environment. For example, if prevailing
interest rates fall significantly, adjustable-rate mortgage loans could be
subject to higher prepayment and conversion rates than if prevailing interest
rates remain constant because the availability of fixed-rate or other
adjustable-rate mortgage loans at competitive interest rates may encourage
Mortgagors to refinance their adjustable-rate mortgages to "lock in" a lower
fixed interest rate or to take advantage of the availability of such other
adjustable-rate mortgage loans, or, in the case of convertible adjustable-rate
mortgage loans, to exercise their option to convert the adjustable interest
rates to fixed interest rates. The conversion feature may also be exercised in a
rising interest rate environment as Mortgagors attempt to limit their risk of
higher rates. Such a rising interest rate environment may also result in an
increase in the rate of defaults on the Mortgage Loans. As a result of the
Mortgagor's exercise of the conversion option, the Mortgage Pool will include
fixed-rate Mortgage Loans.
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, 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 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. In addition, because
borrowers of Balloon Mortgage Loans are required to make a relatively large
single payment upon maturity, it is possible that the default risk associated
with Balloon Mortgage Loans is greater than that associated with
fully-amortizing mortgage loans. See "Risk Factors" herein.
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
S-67
<PAGE>
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 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 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 Certificates should also be
aware that although the Mortgage Rates on the Adjustable Rate 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 Adjustable Rate
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 Adjustable Rate 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
Certificates, the difference between (x) the rate of the lesser of (i) One-Month
LIBOR plus the related Class A Margin and (ii) the Maximum Class A Rate and (y)
the Net WAC Cap Rate will create a shortfall that will carry forward with
interest thereon. However, such shortfall will only be payable from the balance
of the Reserve Fund in excess of $10,000, and only to the extent that the
overcollateralization target has been reached. In addition, payments under the
Yield Maintenance Agreements are based on the actual principal balance of the
related Fixed Rate Mortgage Loans and Hybrid ARM Loans, but not greater than the
principal balance that would have resulted under an assumed prepayment rate of
10% CPR or 15% CPR, as applicable; a slower or faster prepayment speed may
result in the Yield Maintenance Agreements providing insufficient funds to cover
such shortfalls. 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 September 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.
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 to the
investor of each dollar distributed in reduction of principal of such security
(assuming no losses). The weighted average life of the Class A Certificates will
be influenced by, among other 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 (the "CPR"),
assumes that the outstanding principal balance of the fixed rate Mortgage Loans
and the adjustable rate Mortgage Loans prepays at a constant annual rate of 18%
CPR and 25% CPR, respectively. In generating monthly cash flows, this rate is
converted to an equivalent constant monthly rate. To assume a 18% CPR or 25% CPR
or any other CPR percentage is to assume that the stated percentage of the
outstanding principal balance of the related Mortgage Loans is prepaid over the
course of a year. No representation is made that the Mortgage Loans will prepay
at that or any other rate.
The 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 Mortgage Loans have the characteristics of the
hypothetical Mortgage Loans described in Appendix A hereto; (ii) the scheduled
monthly payment for each Mortgage Loan has been based on its outstanding
balance, interest rate and remaining
S-68
<PAGE>
term to maturity (or remaining amortization term, with respect to a Balloon
Loan) such that the Mortgage Loan will amortize in amounts sufficient for
repayment thereof over its remaining term to maturity; (iii) 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; (iv)
all delinquencies of payments due on or 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 respective CPR percentages
set forth in the table; (v) One-Month LIBOR remains constant at 5.38%; (vi)
there is no Prepayment Interest Shortfall or any other interest shortfall in any
month; (vii) payments on the Certificates will be received on the 25th day of
each month, commencing in October 1999; (viii) payments on the Mortgage Loans
earn no reinvestment return; (ix) 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; and (x)
the Certificates will be purchased on September 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 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
specified, even if the weighted average remaining term to stated maturity and
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
percentages of the Prepayment Assumption.
S-69
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING OF THE CLASS A CERTIFICATES AT THE
FOLLOWING CONSTANT PERCENTAGES OF CPR
CLASS A-I
-----------------------------------------------------------------------
FIXED RATE MORTGAGE LOAN (CPR) 0% 10% 15% 18% 25% 30% 40%
- ------------------------------ -- --- --- --- --- --- ---
ADJUSTABLE RATE MORTGAGE LOAN (CPR) 0% 15% 20% 25% 30% 35% 45%
- ----------------------------------- -- --- --- --- --- --- ---
DISTRIBUTION DATE
- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.............. 100% 100% 100% 100% 100% 100% 100%
September 25, 2000.............. 97 86 81 77 71 66 56
September 25, 2001.............. 96 74 66 60 51 44 32
September 25, 2002.............. 94 64 54 47 37 30 18
September 25, 2003.............. 93 56 44 37 26 20 10
September 25, 2004.............. 91 48 36 29 19 13 6
September 25, 2005.............. 89 42 29 23 14 9 3
September 25, 2006.............. 87 36 24 18 10 6 2
September 25, 2007.............. 85 31 20 14 7 4 1
September 25, 2008.............. 82 27 16 11 5 2 *
September 25, 2009.............. 80 23 13 8 3 1 0
September 25, 2010.............. 77 20 10 6 2 1 0
September 25, 2011.............. 74 17 8 5 1 * 0
September 25, 2012.............. 70 14 6 4 1 0 0
September 25, 2013.............. 67 12 5 3 * 0 0
September 25, 2014.............. 57 9 3 2 0 0 0
September 25, 2015.............. 53 7 3 1 0 0 0
September 25, 2016.............. 50 6 2 1 0 0 0
September 25, 2017.............. 45 5 1 * 0 0 0
September 25, 2018.............. 41 4 1 * 0 0 0
September 25, 2019.............. 37 3 1 0 0 0 0
September 25, 2020.............. 33 2 * 0 0 0 0
September 25, 2021.............. 29 2 * 0 0 0 0
September 25, 2022.............. 24 1 0 0 0 0 0
September 25, 2023.............. 19 1 0 0 0 0 0
September 25, 2024.............. 13 * 0 0 0 0 0
September 25, 2025.............. 7 0 0 0 0 0 0
September 25, 2026.............. 4 0 0 0 0 0 0
September 25, 2027.............. 3 0 0 0 0 0 0
September 25, 2028.............. 1 0 0 0 0 0 0
September 25, 2029.............. 0 0 0 0 0 0 0
Weighted Average Life in Years**
(to Maturity).................. 16.5 6.4 4.7 3.9 3.0 2.5 1.8
Weighted Average Life in Years**
(to Call)...................... 16.5 6.0 4.4 3.6 2.7 2.2 1.6
</TABLE>
<TABLE>
<CAPTION>
CLASS A-II
----------------------------------------------------------------------
Fixed Rate Mortgage Loan (CPR) 0% 10% 15% 18% 25% 30% 40%
- ------------------------------ -- --- --- --- --- --- ---
Adjustable Rate Mortgage Loan (CPR) 0% 15% 20% 25% 30% 35% 45%
- ----------------------------------- -- --- --- --- --- --- ---
Distribution Date
- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.............. 100% 100% 100% 100% 100% 100% 100%
September 25, 2000.............. 98 84 80 75 70 65 55
September 25, 2001.............. 97 72 64 57 49 42 30
September 25, 2002.............. 95 61 51 43 34 28 17
September 25, 2003.............. 94 52 41 33 24 18 9
September 25, 2004.............. 93 45 33 25 17 12 5
September 25, 2005.............. 91 38 27 19 12 8 3
September 25, 2006.............. 89 32 21 15 8 5 1
September 25, 2007.............. 87 27 17 11 6 3 *
September 25, 2008.............. 85 23 14 8 4 2 *
September 25, 2009.............. 83 20 11 6 3 1 0
September 25, 2010.............. 80 17 8 5 2 * 0
September 25, 2011.............. 77 14 7 3 1 * 0
September 25, 2012.............. 75 12 5 2 1 0 0
September 25, 2013.............. 69 9 4 2 * 0 0
September 25, 2014.............. 66 7 3 1 0 0 0
September 25, 2015.............. 63 6 2 1 0 0 0
September 25, 2016.............. 60 5 1 * 0 0 0
September 25, 2017.............. 56 4 1 * 0 0 0
September 25, 2018.............. 52 3 1 0 0 0 0
September 25, 2019.............. 48 2 * 0 0 0 0
September 25, 2020.............. 44 2 * 0 0 0 0
September 25, 2021.............. 40 1 0 0 0 0 0
September 25, 2022.............. 35 1 0 0 0 0 0
September 25, 2023.............. 30 * 0 0 0 0 0
September 25, 2024.............. 25 * 0 0 0 0 0
September 25, 2025.............. 20 0 0 0 0 0 0
September 25, 2026.............. 14 0 0 0 0 0 0
September 25, 2027.............. 8 0 0 0 0 0 0
September 25, 2028.............. 3 0 0 0 0 0 0
September 25, 2029.............. 0 0 0 0 0 0 0
Weighted Average Life in Years**
(to Maturity).................. 18.3 5.9 4.4 3.6 2.8 2.3 1.7
Weighted Average Life in Years**
(to Call)...................... 18.2 5.6 4.1 3.3 2.6 2.2 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.
S-70
<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 September 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 June
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.
S-71
<PAGE>
<TABLE>
<CAPTION>
ALTERNET MORTGAGE PROGRAM DELINQUENCY EXPERIENCE(1)
AT DECEMBER 31, 1997 AT DECEMBER 31, 1998 AT JUNE 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 77,294 $7,108,217
Period of Delinquency
31 to 59 days............ 397 41,416 1,442 135,153 1,626 146,134
60 to 89 days............ 106 9,836 621 60,031 695 61,455
90 days or more(2)....... 70 6,325 990 83,139 1,310 103,715
Foreclosures Pending.......... 720 83,363 1,062 110,238 1,746 166,869
------ ---------- ------ ---------- ------ ----------
Total Delinquent Loans........ 1,293 $ 140,940 4,115 $ 388,561 5,377 $ 478,173
------ ---------- ------ ---------- ------ ----------
------ ---------- ------ ---------- ------ ----------
Percent of Loan Portfolio..... 6.23% 6.40% 7.149% 7.235% 6.957% 6.727%
</TABLE>
<TABLE>
<CAPTION>
ALTERNET MORTGAGE PROGRAM FORECLOSURE EXPERIENCE(1)
AT OR FOR
AT OR FOR AT OR FOR THE SIX MONTH
THE YEAR ENDED THE YEAR ENDED PERIOD ENDING
DECEMBER 31, 1997 DECEMBER 31, 1998 JUNE 30, 1999
----------------- ----------------- -------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Total Loan Portfolio....................... $2,201,668 $5,370,940 $7,108,217
Average Portfolio Balance.................. $1,893,046 $3,358,709 $6,183,952
Foreclosed Loans(2)........................ $ 17,532 $ 28,417 $ 50,147
Liquidated Foreclosed Loans(3)............. $ 23,567 $ 42,653 $ 31,972
Foreclosed Loans Ratio..................... 0.796% 0.529% 0.705%
Gross Loss(4).............................. $ 5,371 $ 10,388 $ 9,524
Gross Loss Ratio........................... 0.284% 0.309% 0.154%
Covered Loss(5)............................ $ 3,648 $ 8,717 $ 7,915
Net Loss(6)................................ $ 1,723 $ 1,670 $ 1,609
Net Loss Ratio............................. 0.091% 0.050% 0.026%
Excess Recovery(7)......................... $ 121 $ 137 $ 16
</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)
S-72
<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, and in particular the Portfolio Transaction
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 0.05% 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 0.00% to 2.85% 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 0.32% 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.
S-73
<PAGE>
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 September 27, 1999 (the "MORTGAGE LOAN PURCHASE
AGREEMENT") among the Seller, the Depositor, Bear, Stearns & Co. Inc. and
Residential Funding Securities Corporation. 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"), except as described in
"Description of the Mortgage Pool -- Missing Loan Notes" herein. 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.
S-74
<PAGE>
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
The 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
S-75
<PAGE>
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 Yield Maintenance Agreements and 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 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
fixed rate Mortgage Loans and the adjustable rate Mortgage Loans will prepay at
a rate equal to 18% CPR and 25% 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 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 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 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
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.
S-76
<PAGE>
Each holder of a Class A 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
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 Certificateholder's purchase price allocable thereto. Under the REMIC
Regulations, each holder of a Class A Certificate must allocate its purchase
price for the Class A 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
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 intends to assign a value of 55 basis points to the Basis Risk
Shortfall Carry-Forward Amount. 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
CarryForward Amount as discrete property rights. Holders of the Class A
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 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 Certificates will be unable to use the
integration method provided for under such regulations with respect to such
Class A 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 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
Certificate, the amount of the sale allocated to the selling Class A
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 Certificate. A Class A 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 the
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 Certificates exclusive of any rights
in the Reserve Fund. The Class A 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
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 Certificates are treated as "real estate assets" under Section
856(c)(4)(A) of the Code. Moreover, the Class A Certificates will be "qualified
mortgages" within the meaning of Section 860G(a)(3) of the Code. However,
prospective investors in Class A 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
Certificates may adversely affect any REMIC that holds such Class A Certificates
if such repurchase is made under circumstances giving rise to a Prohibited
Transaction Tax. See "Pooling and Servicing Agreement --
S-77
<PAGE>
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 Certificate will be
required to allocate a portion of the purchase price paid for the Class A
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
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 September 27, 1999 (the "BEAR STEARNS UNDERWRITING AGREEMENT"), Bear,
Stearns & Co. Inc. ("BEAR STEARNS") has agreed to purchase and the Depositor has
agreed to sell to Bear Stearns the Class A-II Certificates. Subject to the terms
and conditions set forth in an Underwriting Agreement, dated September 27, 1999
(the "RFSC UNDERWRITING AGREEMENT"; and together with the Bear Stearns
Underwriting Agreement, the "UNDERWRITING AGREEMENTS"), Residential Funding
Securities Corporation ("RFSC"; and together with Bear Stearns, the
"UNDERWRITERS") has agreed to purchase and the Depositor has agreed to sell to
RFSC the Class A-I 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 September 29,
1999, against payment therefor in immediately available funds.
The Underwriting Agreements provide that the obligation of the related
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 related 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 99.80% of the aggregate
Certificate Principal Balance of the Class A Certificates. Each Underwriter may
effect such transactions by selling the related Class A Certificates to or
through dealers, and such dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from such Underwriter for
whom they act as agent. In connection with the sale of the Class A Certificates,
the Underwriters may be deemed to have received compensation from the Depositor
in the form of underwriting compensation. The Underwriters and any dealers that
participate with the Underwriters 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 Agreements provide that the Depositor will indemnify the
related Underwriter, and that under limited circumstances the related
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
S-78
<PAGE>
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.
Bear Stearns is an affiliate of the Depositor. RFSC is an affiliate of the
Seller.
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 Bear Stearns by Brown & Wood LLP, New York, New York and for
RFSC and 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 that they be rated "Aaa" by Moody's
Investors Service, Inc. ("MOODY'S").
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 Moody's to the Class A Certificates is based on the
financial strength rating of the Insurer. Ratings by Moody's 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 Moody's. 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 Moody's.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. 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 Deferred Interest except to the extent
Deferred Interest is added to the Certificate Principal Balance of the Class
A-II
S-79
<PAGE>
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
A fiduciary of any employee benefit plan or other plan or arrangement
subject to ERISA or Section 4975 of the Code (a "PLAN"), any insurance company
(whether through its general or separate accounts) or any other person investing
"Plan Assets" of any Plan, as defined by the Plan Asset Regulation, should
carefully review with its legal advisors whether the purchase or holding of
Class A Certificates could give rise to a transaction prohibited or not
otherwise permissible under ERISA or Section 4975 of the Code. The purchase or
holding of the Class A Certificates by or on behalf of, or with Plan Assets of,
a Plan may qualify for exemptive relief under the Underwriter Exemption, as
described under "ERISA Considerations" in the Prospectus. However, the
Underwriter Exemption contains a number of conditions which must be met for the
Underwriter Exemption to apply, including the requirement that any such Plan
must be an "accredited investor" as defined in Rule 501(a)(1) of Regulation D of
the Securities and Exchange Commission under the Securities Act of 1933, as
amended.
In addition to any exemption that may be available under PTCE 95-60 for the
purchase and holding of the Class A Certificates by an insurance company general
account, the Small Business Job Protection Act of 1996
S-80
<PAGE>
added a new Section 401(c) to ERISA, which provides some exemptive relief from
the provisions of Part 4 of Title I of ERISA and Section 4975 of the Code,
including the prohibited transaction restrictions imposed by ERISA and the
related excise taxes imposed by Section 4975 of the Code, for transactions
involving an insurance company general account. Under Section 401(c) of ERISA,
the DOL published proposed regulations on December 22, 1997, but the 401(c)
Regulations have not been issued as of the date of this prospectus supplement.
The 401(c) Regulations are to provide guidance for the purpose of determining,
in cases where insurance policies or annuity contracts supported by an insurer's
general account are issued to or for the benefit of a Plan on or before December
31, 1998, which general account assets constitute Plan assets. Section 401(c) of
ERISA generally provides that, until the date which is 18 months after the
401(c) Regulations become final, no person shall be subject to liability under
Part 4 of Title I of ERISA and Section 4975 of the Code on the basis of a claim
that the assets of an insurance company general account constitute Plan assets,
unless (a) as otherwise provided by the Secretary of Labor in the 401(c)
Regulations to prevent avoidance of the regulations or (b) an action is brought
by the Secretary of Labor for some breaches of fiduciary duty which would also
constitute a violation of federal or state criminal law. Any assets of an
insurance company general account which support insurance policies issued to a
Plan after December 31, 1998 or issued to Plans on or before December 31, 1998
for which the insurance company does not comply with the 401(c) Regulations may
be treated as Plan assets. In addition, because Section 401(c) does not relate
to insurance company separate accounts, separate account assets are still
treated as Plan assets of any Plan invested in the separate account. Insurance
companies contemplating the investment of general account assets in the notes
should consult with their legal counsel about the applicability of PTCE 95-60
and Section 401(c) of ERISA, including the general account's ability to continue
to hold the notes after the date which is 18 months after the date the 401(c)
Regulations become final.
Any fiduciary or other investor of Plan Assets that proposes to acquire or
hold the Class A Certificates on behalf of or with Plan Assets of any Plan
should consult with its counsel with respect to:
(i) whether the specific and general conditions and the other requirements
in the Underwriter Exemption would be satisfied, or whether any other
prohibited transaction exemption would apply, and
(ii) the potential applicability of the general fiduciary responsibility
provisions of ERISA and the prohibited transaction provisions of ERISA
and the Code to the proposed investment. See "ERISA Considerations" in
the Prospectus.
The sale of Class A Certificates to a Plan is in no respect a
representation by the Depositor or the Underwriters that such an investment
meets all relevant legal requirements with respect to investments by Plans
generally or any particular Plan, or that such an investment is appropriate for
Plans generally or any particular Plan.
S-81
<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-RS3 (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
I-1
<PAGE>
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
I-2
<PAGE>
(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.
I-3
<PAGE>
APPENDIX A
<TABLE>
<CAPTION>
MORTGAGE LOAN ASSUMPTIONS
MORTGAGE ORIGINAL MONTHS
RATE REMAINING TERM MONTHS TO BETWEEN INITIAL SUBSEQUENT
AGGREGATE MINUS TERM TO TO FIRST RATE RATE PERIODIC PERIODIC
LOAN PRINCIPAL SERVICING SERVICING MATURITY MATURITY ADJUSTMENT ADJUSTMENT RATE RATE
NUMBER BALANCE FEE RATE FEE RATE (MONTHS) (MONTHS) DATE DATE CAP CAP
- ------ ------- -------- -------- -------- -------- ---- ---- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $10,066,669.43 9.2253% 0.4131% 174 180 N/A N/A N/A N/A
2 6,684,640.65 7.7708 0.3317 160 178 N/A N/A N/A N/A
3 56,005,257.54 8.4602 0.3921 314 356 N/A N/A N/A N/A
4 42,473.47 7.5750 0.3000 127 180 1 6 1.0000% 1.0000%
5 1,338,527.54 8.3085 0.6452 239 360 5 6 1.0000 1.0000
6 838,061.91 7.2809 0.4250 226 360 3 6 0.9825 0.9825
7 12,211,788.72 10.0177 0.5397 354 360 20 6 2.9719 1.0623
8 203,509.50 6.6247 0.3735 347 360 23 12 2.0000 2.0000
9 402,075.58 9.0596 0.3000 224 360 54 120 5.4987 5.4987
10 8,901,344.53 7.1001 0.4250 307 359 7 12 1.8847 1.8847
11 75,370.56 9.4580 0.5420 189 360 10 36 2.0000 2.0000
12 872,859.93 9.6062 0.6311 338 360 3 6 1.0623 1.0623
13 1,594,803.40 6.9444 0.4551 231 360 3 12 2.0000 2.0000
14 7,000,647.68 6.8655 0.4697 231 360 3 6 1.0000 1.0000
15 2,385,694.41 7.2044 0.4550 233 360 1 1 5.5134 5.5134
16 1,884,828.08 6.7659 0.3407 357 359 34 12 2.0000 2.0000
17 881,738.86 6.5982 0.3000 356 360 32 12 6.0000 2.0000
18 2,350,491.02 7.0901 0.3000 359 360 59 12 4.4475 2.0000
19 5,634,239.90 6.6173 0.3000 357 360 57 6 6.1124 6.1124
20 442,000.00 7.1367 0.3000 360 360 60 12 5.0000 2.0000
21 9,900,034.17 7.2113 0.3052 168 179 N/A N/A N/A N/A
22 7,916,589.48 7.3111 0.3182 147 180 N/A N/A N/A N/A
23 62,226,205.89 7.9695 0.3155 329 360 N/A N/A N/A N/A
24 940,444.28 8.1813 0.4666 244 360 4 6 1.0000 1.0000
25 1,259,422.24 7.0861 0.4250 230 360 3 6 1.0000 1.0000
26 2,322,767.48 9.1607 0.4434 352 360 18 6 3.1140 1.0000
27 2,197,202.84 6.8877 0.4250 353 360 31 12 2.0000 2.0000
28 619,961.49 9.2000 0.3000 208 360 88 120 5.7500 5.7500
29 12,407,743.93 7.1757 0.3893 285 360 5 12 1.9299 1.9299
30 557,542.53 6.8883 0.4250 232 360 4 12 2.0000 2.0000
31 2,242,329.43 7.2017 0.4459 233 360 3 6 1.0000 1.0000
32 7,700,975.01 7.2306 0.4550 233 360 1 1 5.5543 5.5543
33 18,871,282.12 6.6153 0.3498 357 360 34 12 2.0000 2.0000
34 2,442,920.31 6.7815 0.3000 357 360 33 12 6.0000 2.0000
35 77,048,734.63 6.6909 0.4017 358 360 58 12 4.5513 2.0115
36 28,259,020.89 6.6851 0.2972 357 360 57 6 6.1263 6.1263
37 21,112,137.37 6.6535 0.3417 356 360 56 12 4.2699 2.0000
</TABLE>
MONTHS
BETWEEN NET NET
PAYMENT MAXIMUM MINIMUM
LOAN ADJUSTMENT GROSS MORTGAGE MORTGAGE
NUMBER DATES MARGIN RATE RATE INDEX
- ------ ----- ------ ---- ---- -----
1 N/A N/A N/A N/A FIX
2 N/A N/A N/A N/A FIX
3 N/A N/A N/A N/A FIX
4 6 3.2500% 12.200% 2.9500% TY1
5 6 1.0495 13.8314 0.4043 PRM
6 6 2.8129 13.4854 2.3939 MIS
7 6 7.1176 16.3529 9.7950 LM6
8 12 3.0648 12.6247 2.6913 TY1
9 120 3.0000 14.5583 2.7000 TY0
10 12 2.7496 11.9253 2.2595 TY1
11 36 2.5000 15.9580 1.9580 TY3
12 6 6.3390 15.6443 8.7126 LM6
13 12 2.5301 13.1303 2.0750 COF
14 6 2.5131 12.9976 3.2826 COF
15 12 2.2382 12.7178 5.8203 COF
16 12 2.8130 12.4405 2.4723 TY1
17 12 2.8750 12.5982 2.5750 TY1
18 12 2.7934 12.3243 2.4934 TY1
19 6 2.0000 12.7298 1.7000 LM6
20 12 2.7500 12.1367 2.4500 TY1
21 N/A N/A N/A N/A FIX
22 N/A N/A N/A N/A FIX
23 N/A N/A N/A N/A FIX
24 6 0.7916 13.4917 0.3250 PRM
25 6 2.7870 13.8017 2.8162 MIS
26 6 6.1290 15.5159 8.5253 LM6
27 12 2.7500 12.8877 2.3250 TY1
28 120 3.2500 14.9500 2.9500 TY0
29 12 2.8098 12.2049 3.2545 TY1
30 12 2.5000 13.3234 2.0750 COF
31 6 2.5221 13.2653 4.7646 COF
32 12 2.1725 12.7849 6.4880 COF
33 12 2.7697 12.5278 2.4427 TY1
34 12 2.8608 12.7815 2.5608 TY1
35 12 2.7733 11.7792 2.3716 TY1
36 6 2.0000 12.7760 1.7028 LM6
37 12 2.7500 12.5513 2.4116 TY1
A-1
<PAGE>
EXPLANATORY NOTES AND ADDITIONAL ASSUMPTIONS
The following hypothetical Loan Numbers represent Group I Loans: 1 through
20; the rest represent Group II Loans.
The following hypothetical Loan Numbers represent Balloon Loans: 1, with a
remaining amortization term of 354 months, and 21, with a remaining amortization
term of 348 months.
The following hypothetical Loan Numbers represent Negative Amortization
Loans: 15 and 32. Their first payment date change is in the seventh month
following origination.
The following hypothetical Loan Numbers represent Mortgage Loans with
initial interest-only periods: 19, with an interest-only period of 57 months,
20, with an interest-only period of 60 months, 36, with an interest-only period
of 57 months, and 37, with an interest-only period of 56 months.
The indices under the heading "Index" mean the following: FIX means a fixed
rate (no index), COF means the Eleventh District Cost of Funds Index, which
remains constant at 4.500% per annum, LM6 means Six-Month LIBOR, which remains
constant at 5.94125% per annum, PRM means the Prime Rate, which remains constant
at 8.250% per annum, TYI means a One-Year U.S. Treasury Rate, which remains
constant at 5.232% per annum, TY3 means a Three-Year U.S. Treasury Rate, which
remains constant at 5.696% per annum, TY0 means a Ten-Year U.S. Treasury Rate,
which remains constant at 5.892% per annum, and MIS means a miscellaneous index,
which remains constant at 5.94125% per annum.
A-2
<PAGE>
PROSPECTUS
ASSET-BACKED SECURITIES
(ISSUABLE IN SERIES)
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
- --------------------------------------------------------------------------------
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 3 OF THIS PROSPECTUS.
The secruties represent obligations of the trust only and do not represent an
interest in or obligation of the depositor, the seller, the master servicer or
any of their affiliates.
This prospectus may be used to offer and sell the securities only if accompanied
by a prospectus supplement.
- --------------------------------------------------------------------------------
THE SECURITIES
Bear Stearns Asset Backed Securities, Inc., as depositor, will sell the
securities, which may be in the form of asset-backed certificates or
asset-backed notes. Each issue of securities will have its own series
designation and will evidence either:
o ownership interests in certain assets in a trust fund or
o debt obligations secured by certain assets in a trust fund.
Each series of securities will consist of one or more classes. Each
class of securities will represent the entitlement to a specified portion of
future interest payments and a specified portion of future principal payments on
the assets in the related trust fund. In each case, the specified portion may
equal from 0% to 100%. A series may include one or more classes of securities
that are senior in right of payment to one or more other classes. One or more
classes of securities may be entitled to receive distributions of principal,
interest or both prior to one or more other classes, or before or after certain
specified events have occurred. The related prospectus supplement will specify
each of these features.
THE TRUST FUND AND ITS ASSETS
As specified in the related prospectus supplement, each trust fund will
consist primarily of assets from one of the following categories:
o closed-end and/or revolving home equity loans secured by senior
or subordinate liens on one- to four-family residential or
mixed-use properties;
o home improvement installment sales contracts and installment loan
agreements that are either unsecured or secured by senior or
subordinate liens on one- to four-family residential or mixed-use
properties or by purchase money security interests in the related
home improvements; and
o private asset backed securities.
Each trust fund may be subject to early termination in certain
circumstances.
MARKET FOR THE SECURITIES
No market will exist for the securities of any series before they are
issued. In addition, even after the securities of a series have been issued and
sold, there can be no assurance that a resale market will develop.
OFFERS OF THE SECURITIES
Offers of the securities are made through Bear, Stearns & Co. Inc. and
the other underwriters listed in the related prospectus supplement.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
BEAR, STEARNS & CO. INC.
AUGUST 5, 1999
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS
AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT
Information about each series of securities is contained in the
following documents:
o this prospectus, which provides general information, some of
which may not apply to a particular series; and
o the accompanying prospectus supplement for a particular series,
which describes the specific terms of the securities of that
series. If the prospectus supplement contains information about a
particular series that differs from the information contained in
this prospectus, you should rely on the information in the
prospectus supplement.
You should rely only on the information contained in this prospectus
and the accompanying prospectus supplement. We have not authorized anyone to
provide you with information that is different from that contained in this
prospectus and the accompanying prospectus supplement. The information in this
prospectus is accurate only as of the date of this prospectus.
Each prospectus supplement generally will include the following
information with respect to the related series of securities:
o the principal amount, interest rate and authorized denominations
of each class of securities;
o information concerning the home equity loans, home improvement
contracts and/or private securities in the related trust fund;
o information concerning the seller or sellers of the home equity
loans, home improvement contracts and/or private securities and
information concerning any servicer;
o the terms of any credit enhancement with respect to particular
classes of the securities;
o information concerning other trust fund assets, including any
reserve fund;
o the final scheduled distribution date for each class of
securities;
o the method for calculating the amount of principal to be paid to
each class of securities, and the timing and order of priority of
principal payments;
o information about any REMIC or FASIT tax elections for some or
all of the trust fund assets; and
o particulars of the plan of distribution for the securities.
If you require additional information, the mailing address of our
principal executive offices is Bear Stearns Asset Backed Asset Securities, Inc.,
245 Park Avenue, New York, New York 10167 and our telephone number is (212)
272-4095. For other means of acquiring additional information about us or a
series of securities, see "The Trust Funds -- Incorporation of Certain
Information by Reference" beginning on page 85 of this prospectus.
2
<PAGE>
RISK FACTORS
You should consider the following information carefully, since it
identifies certain significant sources of risk associated with an investment in
the securities.
LIMITED LIQUIDITY
No market will exist for the securities of any series before they are
issued. In addition, we cannot give you any assurance that a resale market will
develop following the issuance and sale of any series of the securities. Even if
a resale market does develop, it might not provide you with liquidity of
investment or continue for the life of the securities.
LIMITED ASSETS FOR MAKING PAYMENTS
The securities of each series will be payable solely from the assets of
the related trust fund, including any credit enhancement that may be applicable
to certain classes. In the case of securities that are in the form of notes, the
related indenture will require that noteholders proceed only against the assets
of the related trust fund. We cannot give you any assurance that the market
value of the assets in any trust fund will be equal to or greater than the total
principal amount of the related series of securities then outstanding, plus
accrued interest. Moreover, if the assets of a trust fund are ever sold, the
sale proceeds will be applied first to reimburse any related trustee, servicer
and credit enhancement provider for their unpaid fees and expenses before any
remaining amounts are distributed to securityholders.
In addition, at the times specified in the related prospectus
supplement, certain assets of the trust fund and the related security accounts
may be released to the depositor, the servicer, the credit enhancement provider
or other persons, if
o all payments then due on the related securities have been made,
and
o any other payments specified in the related prospectus supplement
have been made.
Once released, such assets will no longer be available to make payments
to securityholders.
You will have no recourse against the depositor or any other person if
any required distribution on the securities is not made or for any other
default. The only obligations of the depositor with respect to the related trust
fund or the securities would result from a breach of the representations and
warranties that the depositor may make concerning the trust assets. However,
because of the depositor's very limited assets, even if the depositor should be
required to repurchase a loan from a particular trust fund because of the breach
of a representation or warranty, its sole source of funds for the repurchase
would be:
o funds obtained from enforcing any similar obligation of the
originator of the loan, or
o monies from any reserve fund established to pay for loan
repurchases.
LIMITED PROTECTION AGAINST LOSSES
Credit enhancement is intended to reduce the effect of delinquent
payments or loan losses on those classes of securities that have the benefit of
the credit enhancement. Nevertheless, the amount of any credit enhancement is
subject to the limits described in the related prospectus supplement. Moreover,
the amount of credit enhancement may decline or be depleted under certain
circumstances before the related securities are paid in full. As a result,
securityholders may suffer losses.
YOUR YIELDS ON THE SECURITIES MAY VARY
The timing of principal payments on the securities of a series will be
affected by a number of factors, including the following:
o the extent of prepayments on the underlying loans in the trust
fund or, if the trust fund contains underlying
3
<PAGE>
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;
4
<PAGE>
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
5
<PAGE>
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
6
<PAGE>
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
7
<PAGE>
underlying loans will be made, the degree to which the rate of prepayments might
differ from that originally anticipated or the likelihood of an early
termination of the securities. You should not view a rating as a recommendation
to purchase, hold or sell securities because it does not address the market
price or suitability of the securities for any particular investor.
There is no assurance that any rating will remain in effect for any
given period or that the rating agency will not lower or withdraw the rating in
the future. The rating agency could lower or withdraw its rating due to:
o any decrease in the adequacy of the value of the trust fund
assets or any related credit enhancement, or
o an adverse change in the financial or other condition of a credit
enhancement provider.
DESCRIPTION OF THE SECURITIES
GENERAL
Bear Stearns Asset Backed Securities, Inc. (the "Depositor") will
establish a trust fund (each, a "Trust Fund") for each series (a "Series") of
its Asset-Backed Notes (the "Notes") and of its Asset-Backed Certificates (the
"Certificates").
Each Series of Notes will be issued pursuant to an indenture (each, an
"Indenture") between the Trust Fund and the entity named in the related
Prospectus Supplement as trustee (the "Trustee") with respect to that Series. A
form of Indenture has been filed as an exhibit to the Registration Statement of
which this prospectus forms a part. If the Trust Fund includes Loans, the Trust
Fund and the related servicer (the "Servicer") will also enter into a Servicing
Agreement (each, a "Servicing Agreement") with respect to the Loans.
The Certificates will also be issued in Series pursuant to separate
agreements (each, a "Pooling and Servicing Agreement" or a "Trust Agreement")
among the Depositor, the related Servicer (if the Trust Fund includes Loans) and
the related Trustee A form of Pooling and Servicing Agreement has been filed as
an exhibit to the Registration Statement of which this prospectus forms a part.
A Series may consist of both Notes and Certificates. We refer to both Notes and
Certificates in this prospectus as "Securities."
The seller or sellers named in the related Prospectus Supplement
(collectively, the "Seller"), from which the Depositor will have purchased
certain of the assets included in the Trust Fund, may agree to reimburse the
Depositor for certain fees and expenses that the Depositor incurs in connection
with the offering of the related Securities.
The following summaries describe certain provisions in the Pooling and
Servicing Agreement or Trust Agreement, in the case of a Series of Certificates,
and the Indenture and the Servicing Agreement, in the case of a Series of Notes
(collectively, the "Agreements") common to each Series of Securities. The
summaries do not purport to be complete and are subject to, and are qualified in
their entirety by reference to, the provisions of the Agreements and the
Prospectus Supplement relating to each Series of Securities. Where particular
provisions or terms used in the Agreements are referred to, the actual
provisions (including definitions of terms) are incorporated in this prospectus
by reference as part of such summaries.
8
<PAGE>
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;
9
<PAGE>
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.
10
<PAGE>
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
11
<PAGE>
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).
12
<PAGE>
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.
13
<PAGE>
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
14
<PAGE>
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.
15
<PAGE>
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.
16
<PAGE>
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
17
<PAGE>
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
18
<PAGE>
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
19
<PAGE>
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;
20
<PAGE>
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
21
<PAGE>
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.
22
<PAGE>
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
23
<PAGE>
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
24
<PAGE>
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
25
<PAGE>
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;
26
<PAGE>
(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;
27
<PAGE>
(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.
28
<PAGE>
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
29
<PAGE>
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.
30
<PAGE>
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;
31
<PAGE>
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.
32
<PAGE>
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,
33
<PAGE>
o its unpaid Principal Balance as of the Cut-off Date,
o the current interest rate,
o the current Scheduled Payment of principal and interest,
o the maturity date, if any, of the related note, and
o if the Loan is an adjustable rate Loan, the lifetime rate cap, if
any, and the current index.
ASSIGNMENT OF PRIVATE SECURITIES. The Depositor will cause Private
Securities to be registered in the name of the PS Trustee (or its nominee or
correspondent). The PS Trustee (or its nominee or correspondent) will have
possession of any certificated Private Securities. Unless otherwise specified in
the related Prospectus Supplement, the PS Trustee will not be in possession of
or be assignee of record of any underlying assets for a Private Security. See
"The Trust Funds--Private Securities" in this prospectus. Each Private Security
will be identified in a schedule appearing as an exhibit to the related
Agreement, which will specify the original principal amount, Principal Balance
as of the Cut-off Date, annual pass-through rate or interest rate and maturity
date for each Private Security conveyed to the Trust Fund. In the Agreement, the
Depositor will represent and warrant to the PS Trustee regarding the Private
Securities that:
o the information contained in the Private Securities schedule is
true and correct in all material respects;
o immediately prior to the conveyance of the Private Securities,
the Depositor had good title, and was their sole owner (subject
to any retained interest);
o there has been no other sale by the Private Securities; and
o there is no existing lien, charge, security interest or other
encumbrance (other than any retained interest) on the Private
Securities.
REPURCHASE AND SUBSTITUTION OF NON-CONFORMING PRIMARY ASSETS. Unless
otherwise provided in the related Prospectus Supplement, if any document in the
file relating to the Primary Assets delivered by the Depositor to the Trustee
(or Custodian) is found by the Trustee, within 90 days of the execution of the
related Agreement (or promptly after the Trustee's receipt of any document
permitted to be delivered after the Closing Date), to be defective in any
material respect and the Depositor or Seller does not cure such defect within 90
days, (or within any other period specified in the related Prospectus
Supplement), the Depositor or Seller will, not later than 90 days (or within
such any period specified in the related Prospectus Supplement), after the
Trustee's notice to the Depositor or the Seller, as the case may be, of the
defect, repurchase the related Primary Asset or any property acquired in respect
thereof from the Trustee. Unless otherwise specified in the related Prospectus
Supplement, the repurchase shall be effected at a price equal to the:
(a) the lesser of
(i) the Principal Balance of the Primary Asset, and
(ii) the Trust Fund's federal income tax basis in the
Primary Asset;
plus
----
(b) accrued and unpaid interest to the date of the next Scheduled
Payment on the Primary Asset at the rate set forth in the related
Agreement;
34
<PAGE>
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
35
<PAGE>
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
36
<PAGE>
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
37
<PAGE>
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
38
<PAGE>
(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
39
<PAGE>
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,
40
<PAGE>
(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.
41
<PAGE>
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
42
<PAGE>
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
43
<PAGE>
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
44
<PAGE>
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.
45
<PAGE>
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.
46
<PAGE>
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
47
<PAGE>
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
48
<PAGE>
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
49
<PAGE>
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
50
<PAGE>
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
51
<PAGE>
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.
52
<PAGE>
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.
53
<PAGE>
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."
54
<PAGE>
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
55
<PAGE>
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
56
<PAGE>
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
57
<PAGE>
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
58
<PAGE>
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.
59
<PAGE>
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.
60
<PAGE>
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
61
<PAGE>
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
62
<PAGE>
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.
63
<PAGE>
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
64
<PAGE>
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
65
<PAGE>
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
66
<PAGE>
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
67
<PAGE>
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
68
<PAGE>
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,
69
<PAGE>
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
70
<PAGE>
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, 2000, 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.
71
<PAGE>
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.
72
<PAGE>
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.
73
<PAGE>
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
74
<PAGE>
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, 2000, subject to certain transition rules. Prospective investors are urged
to consult their own tax advisors regarding the New Regulations.
75
<PAGE>
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.
76
<PAGE>
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
77
<PAGE>
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
78
<PAGE>
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
79
<PAGE>
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
80
<PAGE>
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
81
<PAGE>
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"
82
<PAGE>
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
83
<PAGE>
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
84
<PAGE>
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
85
<PAGE>
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
86
<PAGE>
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.
87
<PAGE>
INDEX OF DEFINED TERMS
Additional Obligations:............................83
Advances...........................................27
Agreements..........................................8
Amortizable Bond Premium Regulations...............59
Asset Value........................................10
Assumed Reinvestment Rate..........................10
Available Interest Amount..........................11
Capitalized Interest Account.......................22
Cash Flow Bond Method..............................66
CERCLA.............................................45
Certificates........................................8
Class...............................................9
Closed-End Loans...................................14
Code...............................................12
Collection Account..............................9, 26
Contingent Payment Regulations.....................56
Custodian..........................................33
Cut-off Date.......................................14
Debt Securities....................................54
Deleted Primary Asset..............................35
Depositor...........................................8
Depositor Securities...............................53
Disqualified Organization..........................63
Distribution Account................................9
Distribution Date...................................9
DOL................................................80
Eligible Investments...............................21
Enhancement....................................13, 22
EPA................................................45
ERISA..............................................79
Escrow Account.....................................25
Events of Default..............................37, 38
FASIT..............................................54
FASIT Qualification Test...........................76
FASIT Securities...................................76
FHA................................................16
Final Mark-to-Market Regulations...................64
Final Scheduled Distribution Date..................11
Garn-St. Germain Act...............................48
High-Yield Interest................................77
Holder..............................................9
Holders............................................41
Home Improvement Contracts.....................10, 16
Home Improvements..............................10, 16
HUD................................................17
Indenture...........................................8
Installment Sales Contract.........................51
Insurance Proceeds.................................27
Interest Weighted Securities.......................57
IRS................................................56
Liquidation Proceeds...............................26
Loans..............................................10
Mortgage...........................................33
Mortgage Loans......................................9
New Regulations....................................68
Nonresidents.......................................68
Notes...............................................8
Obligations:.......................................83
OID................................................55
OID Regulations....................................55
OTS................................................49
Parties in Interest................................80
Pass-Through Securities............................64
Pay-Through Security...............................56
Permitted Investments..............................84
Plan Asset Regulation..............................80
Plans..............................................79
Pool Insurance Policy..............................23
Pooling and Servicing Agreement.....................8
Pre-Funded Amount..................................21
Pre-Funding Account................................21
Pre-Funding Period.................................21
Prepayment Assumption..............................56
Primary Assets......................................9
Private Securities.................................10
Property...........................................16
PS Agreement.......................................19
PS Servicer........................................19
PS Sponsor.........................................19
PS Trustee.........................................19
PTCE...............................................81
PTCE 83-1..........................................81
Qualifying Substitute Primary Asset................35
Rating Agency...................................9, 86
Ratio Strip Securities.............................66
Regular Interest Securities........................54
Regular Interests..................................59
REMIC..........................................12, 54
REO Property.......................................13
Reserve Fund....................................9, 24
Residual Interest Security.........................61
Residual Interests.................................59
Revolving Credit Line Loans........................14
Revolving Mortgage Loans...........................14
Scheduled Payments.................................26
Securities..........................................8
Seller..............................................8
Servicing Fee..................................26, 65
88
<PAGE>
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
89
<PAGE>
$377,842,000
MORTGAGE LOAN TRUST, SERIES RASC 1999-RS3
ISSUER
RESIDENTIAL FUNDING CORPORATION
SELLER AND MASTER SERVICER
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
MORTGAGE ASSET-BACKED PASS-THROUGH CERTIFICATES
SERIES 1999-RS3
----------------
PROSPECTUS SUPPLEMENT
----------------
BEAR, STEARNS & CO. INC. RESIDENTIAL FUNDING SECURITIES CORPORATION
Underwriter of the Class A-II Underwriter of the Class A-I Certificates
Certificates
September 27, 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 December 26, 1999.
