<PAGE>
PROSPECTUS SUPPLEMENT DATED MAY 6, 1999
(to Prospectus dated December 4, 1998)
$178,200,000
Home Equity Loan-Backed Notes, Series 1999-2
Irwin Home Equity Loan Trust 1999-2
Issuer
Irwin Home Equity Corporation
Originator
Irwin Union Bank and Trust Company
Master Servicer
Bear Stearns Asset Backed Securities, Inc.
Depositor
You should consider carefully the risk factors beginning on page S-10 in this
prospectus supplement and page 18 in the prospectus.
The notes will represent obligations of the trust created for Series 1999-2 and
will not represent ownership interests in or obligations of Bear Stearns Asset
Backed Securities, Inc., Irwin Union Bank and Trust Company or any of their
affiliates.
This prospectus supplement may be used to offer and sell the notes offered
hereby only if accompanied by the prospectus.
Notes
The Irwin Home Equity Loan Trust 1999-2 consists of two groups of closed-end,
fixed-rate home equity loans secured by primarily second mortgages or deeds of
trust on residential properties. The trust will also include funds on deposit in
an account to be used to acquire home equity loans subsequent to the date of
issuance of the notes. The trust will issue four classes of notes, all of which
are offered hereby. You can find a list of these classes, together with their
note balances, note rates and certain other characteristics, on Page S-4 of this
prospectus supplement.
Credit Enhancement
Credit enhancement for the notes consists of:
o the portion of interest paid by the borrowers in excess of what is
necessary to pay interest earned on the notes;
o overcollateralization consisting of the excess of the balance of the
mortgage loans over the balance of the notes; and
o an irrevocable and unconditional financial guaranty insurance policy
issued by Ambac Assurance Corporation.
[Logo]
<TABLE>
<CAPTION>
Underwriting
Initial Price to Proceeds to
Note Balance(1) Note Rate Public(2) Depositor(3)
- ---------------------------------- ------------------- ----------------- --------------------- --------------------
<S> <C> <C> <C> <C>
Class A-1 Notes.............. $53,500,000 Variable 100.00000% 99.7000%
Class A-2 Notes.............. $85,100,000 6.830% 99.98293% 99.6829%
Class A-3 Notes.............. $17,400,000 Variable 100.00000% 99.7000%
Class A-4 Notes.............. $22,200,000 6.890% 99.96973% 99.6697%
- ---------------------------------- ------------------- ----------------- --------------------- --------------------
Total...................... $178,200,000 $178,178,756 $177,644,153
- ---------------------------------- ------------------- ----------------- --------------------- --------------------
</TABLE>
(1) Plus or minus 5%.
(2) Plus accrued interest, if any, from May 1, 1999, except with respect to
the Class A-1 and Class A-3 Notes.
(3) Before deducting expenses, estimated to be approximately $365,000.
-----------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the notes or determined that this
prospectus supplement or the prospectus is accurate or complete. It is illegal
for anyone to tell you otherwise.
The underwriter listed below will offer the notes subject to certain
conditions. See "Method of Distribution" in this prospectus supplement. Delivery
of the notes is expected to be made in book entry form on or about May 27, 1999.
The notes will be offered in the United States and Europe.
Bear, Stearns & Co. Inc.
<PAGE>
Important notice about information presented in this prospectus supplement and
the accompanying prospectus
We provide information to you about the notes in two separate documents that
provide progressively more detail:
o the accompanying prospectus, which provides general information, some
of which may not apply to your series of notes; and
o this prospectus supplement, which describes the specific terms of your
series of notes.
If the description of your notes in this prospectus supplement differs from the
related description in the accompanying prospectus, you should rely on the
information in this prospectus supplement.
You can find a listing of the pages where capitalized terms used both in the
prospectus and prospectus supplement are defined under the caption "Glossary of
Terms" beginning on page 98 in the accompanying prospectus and under the caption
"Index of Defined Terms" beginning on page 67 in this prospectus supplement.
The Depositor's principal offices are located at 245 Park Avenue, New York, New
York 10167, and its phone number is (212) 272-2000.
Table of Contents
Page
----
SUMMARY...................................................... S-3
RISK FACTORS................................................. S-10
INTRODUCTION................................................. S-14
DESCRIPTION OF THE MORTGAGE LOANS............................ S-14
IRWIN FUNDING CORP........................................... S-31
IRWIN HOME EQUITY CORPORATION................................ S-31
PREPAYMENT AND YIELD CONSIDERATIONS.......................... S-35
THE MASTER SERVICER.......................................... S-42
SERVICING OF THE MORTGAGE LOANS.............................. S-42
THE ISSUER................................................... S-46
THE OWNER TRUSTEE............................................ S-46
THE INDENTURE TRUSTEE........................................ S-47
DESCRIPTION OF THE NOTES..................................... S-47
DESCRIPTION OF THE MORTGAGE LOAN SALE AGREEMENT AND THE
PURCHASE AND SALE AGREEMENT ............................ S-55
DESCRIPTION OF THE SALE AND SERVICING AGREEMENT.............. S-58
DESCRIPTION OF THE TRUST AGREEMENT AND INDENTURE............. S-59
DESCRIPTION OF THE POLICY.................................... S-61
THE CREDIT ENHANCER.......................................... S-62
CERTAIN FEDERAL INCOME TAX CONSEQUENCES...................... S-63
ERISA CONSIDERATIONS......................................... S-64
LEGAL INVESTMENT............................................. S-64
METHOD OF DISTRIBUTION....................................... S-65
EXPERTS...................................................... S-66
LEGAL MATTERS................................................ S-66
RATINGS...................................................... S-66
INDEX OF DEFINED TERMS....................................... S-67
ANNEX I GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION
PROCEDURES ............................................. A-I-1
S-2
<PAGE>
SUMMARY
The following summary is a general overview of the notes offered hereby
and does not contain all of the information that you should consider in making
your investment decision. To understand the terms of the notes, you should read
carefully this entire document and the accompanying prospectus.
Title of the offered securities.. Home Equity Loan-Backed Notes, Series 1999-2.
Issuer........................... Irwin Home Equity Loan Trust 1999-2.
Depositor........................ Bear Stearns Asset Backed Securities, Inc.
Transferor....................... Irwin Funding Corp.
Originator....................... Irwin Home Equity Corporation.
Master servicer.................. Irwin Union Bank and Trust Company.
Owner trustee.................... Wilmington Trust Company.
Indenture trustee................ Norwest Bank Minnesota, National Association.
Enhancer......................... Ambac Assurance Corporation.
Mortgage loans................... Initially, 3,462 closed-end, fixed rate home
equity loans with an aggregate principal
balance of approximately $140,526,912 as of
the statistical calculation date, secured by
primarily second mortgages or deeds of trust
on one- to four-family residential
properties. Additional fixed rate home equity
loans originated or acquired by the
transferor prior to the closing date will be
sold to the issuer on the closing date. Along
with the initial home equity loans and the
additional home equity loans, the issuer will
also purchase fixed rate home equity loans
from Irwin Union Bank and Trust Company prior
to October 31, 1999.
Statistical calculation date..... The close of business on April 26, 1999.
Cut-off date..................... The close of business on April 30, 1999 or,
in the case of any mortgage loan originated
after that date and sold to the trust, the
applicable date as of which such mortgage
loan is sold to the Trust.
Closing date..................... On or about May 27, 1999.
Payment dates.................... Beginning in June 1999 on the 15th day of
each month or, if the 15th day is not a
business day, on the next business day.
Form of notes.................... Book-entry form, same day funds through DTC.
S-3
<PAGE>
<TABLE>
<CAPTION>
Notes
- ---------------------------------------------------------------------------------------------------------
Initial
Note Note Initial Rating Final Scheduled
Class Rate Balance (Moody's/S&P)(1 ) Payment Date(2) Designations
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
A-1 Variable(3) $ 53,500,000 Aaa/AAA January 15, 2009 Senior/Variable Rate
A-2 6.830%(4) $ 85,100,000 Aaa/AAA June 15, 2029 Senior/Fixed Rate
A-3 Variable(4) $ 17,400,000 Aaa/AAA April 15, 2009 Senior/Variable Rate
A-4 6.890%(6) $ 22,200,000 Aaa/AAA June 15, 2029 Senior/Fixed Rate
- ---------------------------------------------------------------------------------------------------------
Total
Notes $ 178,200,000
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) See "Ratings" in this prospectus supplement.
(2) Based on the assumptions described in this prospectus supplement. See
"Prepayment and Yield Considerations" herein. Due to losses and
prepayments on the mortgage loans in each loan group, the final
scheduled payment dates on each class of notes may be substantially
earlier than such dates. In addition, the actual final payment dates
may be later than the final scheduled payment dates, except with
respect to the Class A-2 Notes and Class A-4 Notes.
(3) On any payment date, equal to the least of (i) LIBOR plus 0.10% per
annum, (ii) the weighted average net mortgage interest rate of the
mortgage loans in loan group I, and (iii) 14.50% per annum.
(4) The note rate will be 7.580% per annum after the related Step-Up Date.
The "Step-Up Date" for loan group I is the first payment date on which
the aggregate outstanding principal balance of the mortgage loans in
such loan group is less than 10% of the sum of (x) the aggregate
principal balance of the mortgage loans in such loan group as of the
related cut-off date and (y) the amount on deposit in the pre-funding
account on the closing date that is available to be used to purchase
mortgage loans for such loan group.
(5) On any payment date, equal to the least of (i) LIBOR plus 0.18% per
annum, (ii) the weighted average net mortgage interest rate of the
mortgage loans in loan group II, and (iii) 14.50% per annum.
(6) The note rate will be 7.640% per annum after the related Step-Up Date.
The "Step-Up Date" for loan group II is the first payment date on which
the aggregate outstanding principal balance of the mortgage loans in
such loan group is less than 10% of the sum of (x) the aggregate
principal balance of the mortgage loans in such loan group as of the
related cut-off date and (y) the amount on deposit in the pre-funding
account on the closing date that is available to be used to purchase
mortgage loans for such loan group.
S-4
<PAGE>
The Trust
The depositor will establish the Irwin Home Equity Loan Trust 1999-2, a Delaware
business trust. The trust will be established pursuant to a trust agreement,
dated as of April 30, 1999, between the depositor and the owner trustee. The
trust will issue the notes pursuant to an indenture dated as of April 30, 1999,
between the issuer and the indenture trustee. The assets of the trust will
consist of the mortgage loans and certain related assets.
In addition to the mortgage loans conveyed to the trust on the closing date, the
property of the trust will include cash on deposit in certain accounts,
including the pre-funding account, and other collections on the mortgage loans.
The trust will also include a financial guaranty insurance policy provided by
Ambac Assurance Corporation, which will guarantee certain payments on the notes.
Payments of interest and principal on the notes will be made only from payments
received in connection with the mortgage loans and the financial guaranty
insurance policy to the extent described herein.
Mortgage Loans
The statistical information presented in this prospectus supplement reflects the
pool of initial mortgage loans as of the statistical calculation date. Along
with the initial mortgage loans to be acquired by the trust on the closing date,
it is expected that the trust will also acquire on the closing date certain
additional fixed rate home equity loans. It is expected that the aggregate
principal balance of such additional mortgage loans will be approximately
$15,000,000. The additional mortgage loans will be selected using generally the
same criteria used to select the initial mortgage loans.
The mortgage loans to be acquired by the trust on the closing date will include
initial mortgage loans with the following characteristics as of the statistical
calculation date:
o fixed-rate, closed-end home equity loans secured by second mortgages or
deeds of trust on residential properties with combined loan-to-value ratios
generally greater than 100%. These mortgage loans are expected to have an
aggregate principal balance of approximately $89,776,583 as of the
statistical calculation date;
o fixed-rate, closed-end mortgage loans secured by first mortgages or deeds
of trust on residential properties with original terms to maturity of 30
years. These mortgage loans are expected to have an aggregate principal
balance of approximately $12,858,087 as of the statistical calculation
date; and
o fixed-rate, closed-end home equity loans secured by second mortgages or
deeds of trust on residential properties with combined loan-to-value ratios
less than or equal to 100%. These mortgage loans are expected to have an
aggregate principal balance of approximately $37,892,242 as of the
statistical calculation date.
Approximately 90.85% of the mortgage loans are secured by second mortgages or
deeds of trust and the remainder are secured by first mortgages or deeds of
trust. In addition, the mortgage loans have the following characteristics as of
the statistical calculation date:
Range of principal balances $1,303 to
$226,500
Average principal balance $40,591
Range of loan rates 7.125% to 17.400%
Weighted average loan rate 12.190%
Range of original terms to maturity 120 to 360 months
Weighted average original term to maturity 200 months
Range of remaining terms to maturity 79 to 360 months
Weighted average remaining term to
maturity 197 months
Range of combined loan-to-value ratios 8.48% to 125.00%
Weighted average combined loan-to-value
ratios 107.58%
See "Description of the Mortgage Loans" in this prospectus supplement.
Mortgage Loan Groups
The mortgage loans assigned and transferred to the issuer and pledged to the
indenture trustee as of the closing date will be divided into two loan groups.
Loan group I is expected to include initial mortgage loans which have an
aggregate principal balance of approximately $121,850,633 as of the statistical
calculation
S-5
<PAGE>
date and which consist solely of mortgage loans with (i) cut-off date principal
balances no greater than $240,000 and secured by first priority liens or (ii)
cut-off date principal balances no greater than $120,000 and secured by second
priority liens and, when combined with the balance of the related first mortgage
on the property, total balances no greater than $240,000. Loan group II is
expected to include initial mortgage loans which have an aggregate principal
balance of approximately $18,676,279 as of the statistical calculation date and
which will not have the restrictions applicable to loan group I.
The Class A-1 and Class A-2 Notes will be generally entitled to receive
collections on the mortgage loans in loan group I and the Class A-3 and Class
A-4 Notes will be generally entitled to receive collections on the mortgage
loans in loan group II.
The Certificates
The trust will also issue Home Equity Loan-Backed Certificates, Series 1999-2,
which will not be offered by this prospectus supplement. The certificates will
be issued pursuant to the trust agreement and will represent the beneficial
ownership interests in the trust.
Pre-Funding Account
On the closing date, an amount equal to the excess of the aggregate initial
principal balance of the notes plus $1,800,000 over the aggregate principal
balance of the initial mortgage loans and the additional mortgage loans acquired
by the trust on the closing date will be deposited from the proceeds of the sale
of the notes into a pre-funding account. The transferor will be obligated to
sell mortgage loans to the trust after the closing date and the trust will be
obligated, subject to the consent of the enhancer, to purchase such subsequent
mortgage loans from funds on deposit in the pre-funding account during the
period from the closing date until the earliest of (i) the date on which the
amount on deposit in the pre-funding account is less than $100,000, (ii) October
31, 1999, and (iii) the occurrence, if any, of a servicer default under the sale
and servicing agreement. The subsequent mortgage loans, as well as the initial
mortgage loans and the additional mortgage loans, will conform to certain
specified characteristics. Amounts on deposit in the pre-funding account will be
invested in permitted investments specified in the indenture. Any amount
remaining in the pre-funding account at the end of the pre-funding period
described above will be used to prepay the class of notes then entitled to
receive distributions of principal.
Capitalized Interest Account
On the closing date, the transferor, if required by the enhancer, will make a
cash deposit from the proceeds of the sale of the notes into a capitalized
interest account held by the indenture trustee, unless a letter of credit
evidencing the availability of such amount is delivered to the owner trustee on
the closing date. Any letter of credit must be in form and substance, and from a
provider, acceptable to the enhancer. Amounts on deposit in the capitalized
interest account will be withdrawn, or drawings under such letter of credit will
be made, on each payment date during the pre-funding period to fund portions of
the interest payments on the notes to the extent set forth in the indenture and
the sale and servicing agreement.
Payments on the Notes
Payments of principal and interest on the mortgage loans will be collected each
month. After retaining its master servicing fee and amounts that reimburse the
master servicer or the subservicer for reimbursable expenses, the master
servicer will forward all collections on the mortgage loans to the indenture
trustee.
The aggregate amount of such monthly collections is described under the heading
"Description of the Sale and Servicing Agreement , Collections" in this
prospectus supplement.
On each payment date, principal and interest collections with respect to each
loan group will be allocated, together with any insured payment by the enhancer,
as follows:
Step 1
To pay any prepayment penalties collected on the mortgage loans in such loan
group to the holder of the certificates;
S-6
<PAGE>
Step 2
To pay the enhancer the accrued and unpaid premium for the policy, and to pay
the indenture trustee any accrued and unpaid indenture trustee fees;
Step 3
To pay accrued and unpaid interest due on the related classes of notes;
Step 4
To pay an amount equal to principal collected and losses incurred on mortgage
loans in loan group I to the holders of the Class A-1 and Class A-2 Notes, in
that order, and to pay an amount equal to principal collected and losses
incurred on mortgage loans in loan group II to the holders of the Class A-3 and
Class A-4 Notes, in that order;
Step 5
To reimburse the enhancer for any prior draws on the policy;
Step 6
To the extent of remaining available funds for loan group I, to pay as
additional principal on the Class A-1 and Class A-2 Notes, in that order, any
amount necessary to increase the amount of overcollateralization to the required
overcollateralization amount for loan group I, and to the extent of remaining
available funds for loan group II, to pay as additional principal on the Class
A-3 and Class A-4 Notes, in that order, any amount necessary to increase the
amount of overcollateralization to the required over-collateralization amount
for loan group II;
Step 7
To the extent of remaining available funds for loan group I, to pay as
additional principal on the Class A-3 and Class A-4 Notes, in that order, any
amount necessary to increase the amount of overcollateralization to the required
overcollateralization amount for loan group II, and to the extent of remaining
available funds for the loan group II, to pay as additional principal on the
Class A-1 and Class A-2 Notes, in that order, any amount necessary to increase
the amount of overcollateralization to the required overcollateralization amount
for loan group I;
Step 8
To pay the enhancer any other amounts owed pursuant to the insurance agreement;
Step 9
To the extent remaining unpaid by the master servicer, to pay the indenture
trustee any amount owing it under the indenture;
Step 10
To pay the holders of the Class A-1 and Class A-3 Notes any interest
carry-forward amounts from any prior payment date, together with interest
thereon at the applicable note rate; and
Step 11
To pay any remaining amount to the holder of the certificates.
Principal payments on the notes will be made in the amounts and in the order
described under "Description of the Notes , Priority of Distributions" in this
prospectus supplement.
Credit Enhancement
The credit enhancement provided for the benefit of the notes consists of:
S-7
<PAGE>
Excess Spread. The weighted average mortgage loan rate is generally expected to
be higher than the sum of (a) the servicing fees, (b) the trustee fees, (c) the
weighted average note rate and (d) the premium payable to the enhancer. On each
payment date, excess spread generated during the related collection period will
be available to cover losses and build overcollateralization.
Overcollateralization and Limited Cross-collateralization. Excess spread will be
applied, to the extent available, to make accelerated payments of principal to
the notes then entitled to receive payments of principal; such application will
cause the aggregate principal balance of the notes to amortize more rapidly than
the mortgage loans, resulting in overcollateralization. As of the closing date,
the overcollateralization amount will equal $1,800,000 or approximately 1.00% of
the original principal balance of the mortgage loans (including the amount on
deposit in the prefunding account).
As described in step 7 above, the indenture will allow excess cash on any
payment date with respect to the classes of notes backed by each loan group to
be applied to the funding of certain deficiencies in interest and principal with
respect to the classes of notes backed by the other loan group.
Financial Guaranty Insurance Policy. The enhancer will unconditionally and
irrevocably guarantee, subject to the provisions in the policy: (a) timely
payment of interest, (b) the amount of any losses not covered by excess spread,
over-collateralization or crosscollateralization, and (c) the payment of any
outstanding principal on the notes on the final insured payment date (August 15,
2030). The financial guaranty insurance policy is not cancelable for any reason.
See "Description of the Policy" herein and "Enhancement" in the prospectus.
Optional Redemption
With respect to each of the two loan groups, the master servicer may, at its
option repurchase all but not less than all of the mortgage loans in a loan
group on any payment date on which the aggregate outstanding principal balance
of the mortgage loans in such loan group (after applying payments received in
the related collection period) is less than 10% of the sum of (x) the aggregate
principal balance of the mortgage loans in such loan group as of the related
cut-off date and (y) the amount on deposit in the pre-funding account on the
closing date that is available to be used to purchase mortgage loans for such
loan group. No such optional repurchase will be permitted without the prior
written consent of the enhancer if it would result in a draw on the financial
guaranty insurance policy.
An exercise of the optional redemption for either loan group will cause the
aggregate outstanding note balance of the related class or classes of notes to
be paid in full with accrued interest sooner than it otherwise would have been
paid.
See "Description of the Notes , Maturity and Optional Redemption" in this
prospectus supplement and "The Agreements , Termination" in the prospectus.
Ratings
When issued, the notes will receive the ratings shown on page S-4 of this
prospectus supplement. A security rating is not a recommendation to buy, sell or
hold a security and is subject to change or withdrawal at any time by the
assigning rating agency. The ratings also do not address the rate of principal
prepayments on the mortgage loans. The rate of prepayments, if different than
originally anticipated, could adversely affect the yield realized by holders of
the notes.
See "Ratings" in this prospectus supplement.
Legal Investment
The notes will not be "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984. You should consult your legal
advisors in determining whether and to what extent the notes constitute legal
investments for you.
See "Legal Investment" in this prospectus supplement for important information
concerning possible restrictions on ownership of the notes by regulated
institutions.
ERISA Considerations
Subject to important considerations, the depositor expects that the notes may be
S-8
<PAGE>
purchased by persons investing assets of employee benefit plans or individual
retirement accounts. Plans should consult with their legal advisors before
investing in the notes.
See "ERISA Considerations" in the prospectus supplement and in the accompanying
prospectus.
Tax Status
For federal income tax purposes, the notes will be treated as debt. The trust
itself will not be subject to tax.
See "Certain Federal Income Tax Consequences" in this prospectus supplement and
"Certain Federal Income Tax Considerations" in the accompanying prospectus.
S-9
<PAGE>
RISK FACTORS
In addition to the matters described elsewhere in this prospectus
supplement and the accompanying prospectus, you should carefully consider the
following risk factors before deciding to purchase a note.
Unpredictability of Approximately 29.53% of the mortgagors may, without
Prepayments and its penalty, prepay their Mortgage Loans in whole or in
Effect on Yields part at any time. We cannot predict the rate at which
borrowers will repay their Mortgage Loans. A
prepayment of a Mortgage Loan would result in a
prepayment on the related notes.
o If you purchase your notes at a discount and
principal is repaid slower than you anticipate,
then your yield may be lower than you anticipate.
o If you purchase your notes at a premium and
principal is repaid faster than you anticipate,
then your yield may be lower than you anticipate.
o The rate of prepayments on the Mortgage Loans will
be sensitive to prevailing interest rates.
Generally, if prevailing interest rates decline
significantly below the interest rates on the
Mortgage Loans, those Mortgage Loans are more
likely to prepay than if prevailing rates remain
above the interest rates on such Mortgage Loans.
Conversely, if prevailing interest rates rise
significantly, the prepayments on the Mortgage
Loans are likely to decrease.
o So long as credit enhancement is available,
liquidations of defaulted Mortgage Loans generally
will have the same effect on the related notes as
a prepayment of a Mortgage Loan.
o If the rate of default and the amount of losses on
the Mortgage is higher than you expect, then your
yield may be lower than you expect.
Risk of Mortgage The note rate on the Class A-1 Notes will be a
Interest Rates Reducing floating rate equal to the least of (i) LIBOR plus a
the Class A-1 Note Rate fixed margin of 0.10% per annum; (ii) the weighted
and the Class A-3 average net Mortgage Interest Rate of the Mortgage
Note Rate Loans in Loan Group I and (iii) 14.50% per annum. The
note rate on the Class A-3 Notes will be a floating
rate equal to the least of (i) LIBOR plus a fixed
margin of 0.18% per annum; (ii) the weighted average
net Mortgage Interest Rate of the Mortgage Loans in
Loan Group II and (iii) 14.50% per annum. The mortgage
interest rates of the Mortgage Loans are fixed and do
not adjust. As a result, if LIBOR rises, the foregoing
limitations on the Class A-1 and Class A-3 Note Rates
could result in noteholders receiving interest at a
rate less than LIBOR plus the specified margin. In
addition, the net Mortgage Interest Rate of the
Mortgage Loans will change, and may decrease, over
time due to scheduled amortization of the Mortgage
Loans and prepayments of the Mortgage Loans. There can
be no assurance that the weighted average Mortgage
Interest Rate of the Group I Mortgage Loans or the
Group II Mortgage Loans will not decrease after the
Closing Date.
Limited Operating History The originator of the Mortgage Loans, Irwin Home
of the Originator Equity Corporation, was incorporated in September
1994. Because the originator began originating
Mortgage Loans only in January 1995, it does not have
significant historical delinquency, bankruptcy,
foreclosure or default information that would be
helpful to you in trying to estimate the future
delinquency and loss experience of such Originator
loans.
S-10
<PAGE>
Underwriting Standards The originator's closed-end, fixed-rate, second
mortgage products are targeted primarily as debt
consolidation loans for repeat or frequent borrowers
with strong credit ratings. Borrowers with similarly
strong credit ratings are targeted for the
Originator's first mortgage refinance program. Such
borrowers are drawn from the most creditworthy and
profitable customer segments within the originator's
targeted mailing lists and are solicited by mail.
Since the Mortgage Loans are originated by mail
solicitation, you should be aware that delinquencies
and defaults with respect to the pool of Mortgage
Loans may differ from those of a pool of similar
mortgage loans originated through other means of
solicitation. In addition, because the original
combined loan-to-value ratio of the Mortgage Loans may
be high relative to that of other similar mortgage
loans, recoveries on defaulted Mortgage Loans may be
lower than the level of recoveries experienced by such
other defaulted mortgage loans. There can be no
assurance as to the level of delinquencies and
defaults that may be experienced by the Mortgage
Loans.
Geographic Concentration When measured by aggregate principal balance of the
related Loan Group as of the Statistical Calculation
Date, mortgaged properties located in (i) California
secure approximately 24.40% of the Group I Mortgage
Loans and 49.19% of the Group II Mortgage Loans, (ii)
Florida secure approximately 12.43% of the Group I
Mortgage Loans and 4.49% of the Group II Mortgage
Loans, (iii) Ohio secure approximately 6.60% of the
Group I Mortgage Loans and 1.58% of the Group II
Mortgage Loans; (iv) Virginia secure approximately
5.79% of the Group I Mortgage Loans and 5.56% of the
Group II Mortgage Loans, and (v) New Jersey secure
approximately 6.22% of the Group I Mortgage Loans and
6.97% of the Group II Mortgage Loans. This geographic
concentration might magnify the effect on the mortgage
pool of adverse economic conditions or of special
hazards in these areas and therefore might increase
the rate of delinquencies, defaults and losses on the
Mortgage Loans in the related Loan Group more than
would be the case if the mortgaged properties were
more geographically diversified. Further, Mortgage
Loans in the State of California are subject to "one
action" and "anti-deficiency" laws which generally
means that in the event of default on Mortgage Loans
in that state, the lender, in this case the Master
Servicer, on behalf of the Trustee, must elect either
(i) to seek a judicial foreclosure of the Mortgaged
Property and, in the event the loan balance exceeds
the sales price at the foreclosure sale, seek a
deficiency judgment against the borrower or (ii) to
seek a non-judicial foreclosure, in which case any
such deficiency would be waived.
High Combined Loan-to- Approximately 66.98% of the Group I Mortgage Loans and
Value Ratios approximately 43.40% of the Group II Mortgage Loans
(based on principal balance on the Statistical
Calculation Date) had combined loan-to-value ratios at
origination that were between 100% and 125%. Based on
the appraised value or purchase price of the related
mortgaged property at the time of origination of such
a Mortgage Loan, the value or price of the related
mortgaged property was less than the sum of the
principal balance of the Mortgage Loan and the
principal balance of any related senior mortgage.
Mortgage Loans with high combined loan-to-value
ratios, in particular those mortgage loans with
original combined loan-to-value ratios in excess of
100%, will be more sensitive to declining property
values than those loans with lower combined
loan-to-value ratios and may present a greater risk of
loss upon liquidation.
S-11
<PAGE>
Amount of Borrower's Approximately 95.10% of the Group I Mortgage Loans and
Equity approximately 93.30% of the Group II Mortgage Loans
(based on principal balance on the Statistical
Calculation Date) had original combined loan-to-value
ratios that were greater than 80%. The value of the
mortgaged properties may have declined since those
Mortgage Loans were originated or the borrowers may
have obtained additional financing on the properties.
If a borrower on one of those Mortgage Loans defaults,
there may not be enough value in the property to repay
the Mortgage Loan and the trust may suffer a loss.
Seasoning of Mortgage Defaults on mortgage loans tend to occur at higher
Loans rates during the early years of the mortgage loans.
Substantially all of the Mortgage Loans were
originated within twelve months prior to sale to the
trust. As a result, the trust may experience higher
rates of default than if the Mortgage Loans had been
outstanding for a longer period of time.
Subordinate Loans Approximately 89.45% of the Group I Mortgage Loans and
approximately 100% of the Group II Mortgage Loans
(based on principal balance on the Statistical
Calculation Date) evidence a lien that is subordinate
to the rights of the mortgagee under a senior mortgage
or mortgages. The proceeds from any liquidation,
insurance or condemnation proceedings will be
available to satisfy the outstanding principal balance
of such junior loans only to the extent that the
claims of such senior mortgages have been satisfied in
full, including any foreclosure costs. In
circumstances where the master servicer determines
that it would be uneconomical to foreclose on the
related mortgaged property, the master servicer may
write off the entire outstanding principal balance of
the related loan as bad debt. The foregoing
considerations will be particularly applicable to
junior loans that have high combined loan-to-value
ratios because in such cases, the master servicer is
more likely to determine that foreclosure would be
uneconomical. You should consider the risk that to the
extent losses on Mortgage Loans are not covered by
available credit enhancement, such losses will be
borne by the holders of the notes.
Potential Inadequacy of Each group of Mortgage Loans is expected to generate
Credit Enhancement more interest than is needed to pay interest on the
related group of notes because the weighted average
interest rate on the related Mortgage Loans is
expected to be higher than the weighted average
interest rate on the related group of notes. If the
related Mortgage Loans generate more interest than is
needed to pay interest on the related group of notes
and certain fees and expenses of the trust, the
remaining interest will be used to compensate for
losses on the related Mortgage Loans. After these
financial obligations of the trust have been
satisfied, any available excess interest will be used
to create and maintain overcollateralization. We
cannot assure you, however, that enough excess
interest will be generated to maintain the required
level of overcollateralization.
The excess interest available on any payment date will
be affected by the actual amount of interest received,
collected or recovered in respect of the Mortgage
Loans during the preceding month. Such amount will be
influenced by changes in the weighted average of the
mortgage interest rates resulting from prepayments and
liquidations of the related Mortgage Loans.
The Sale and Servicing Agreement requires the Trustee
to make a claim for an insured payment under the
financial guaranty insurance policy not later than the
second business day prior to any payment date as to
which the Trustee has
S-12
<PAGE>
determined that an insured payment will be necessary.
Investors in the notes should realize that, under
extreme loss or delinquency scenarios, they may
temporarily receive no distributions of principal.
If the protection afforded by overcollateralization is
insufficient and if the enhancer is unable to meet
its obligations under the policy, then the holders of
the notes could experience a loss on their investment.
Year 2000 Systems Risk As is the case with most companies using computers in
their operations, the master servicer is faced with
the task of completing its compliance goals in
connection with the year 2000 issue. The year 2000
issue is the result of computer programs being written
using two digits, rather than four digits, to define
the applicable year. Any of the master servicer's
computer programs that have time-sensitive software
may recognize a date using "00" as the year 1900
rather than the year 2000. Any such occurrence could
result in major computer system failure or
miscalculations. The master servicer is presently
engaged in various procedures with the goal of
attaining year 2000 compliance for its computer
systems and software. However, in the event that the
master servicer, or any of its suppliers, customers,
brokers or agents do not successfully and timely
achieve year 2000 compliance, the performance of
obligations of the master servicer under the sale and
servicing agreement could be materially adversely
affected.
S-13
<PAGE>
INTRODUCTION
The Irwin Home Equity Trust 1999-2 (the "Issuer" or the "Trust") will
be formed pursuant to a trust agreement (the "Trust Agreement"), dated as of
April 30, 1999 between Bear Stearns Asset Backed Securities, Inc. (the
"Depositor") and Wilmington Trust Company, the Owner Trustee. The Issuer will
issue $178,200,000 aggregate principal amount of Home Equity Loan-Backed Notes,
Series 1999-2 (the "Notes"). The Notes will be issued pursuant to an Indenture
(the "Indenture"), to be dated as of April 30, 1999 between the Issuer and
Norwest Bank Minnesota, National Association as Indenture Trustee. Pursuant to
the Trust Agreement, the Issuer will issue one class of Home Equity Loan-Backed
Certificates, Series 1999-2 (the "Certificates"). The Notes and the Certificates
are collectively referred to herein as the "Securities." Only the Notes are
offered hereby.
DESCRIPTION OF THE MORTGAGE LOANS
General
The statistical information presented in this Prospectus Supplement is
based upon the characteristics of the pool of Mortgage Loans as of the
Statistical Calculation Date (the "Initial Mortgage Loans"). Along with the
Initial Mortgage Loans to be acquired by the Trust on the Closing Date, it is
expected that the Trust will also acquire on the Closing Date certain additional
Mortgage Loans (the "Additional Mortgage Loans"). The Transferor expects that
the aggregate Principal Balance of the Additional Mortgage Loans will be
approximately $15,000,000. The Additional Mortgage Loans will be selected using
generally the same criteria used to select the Initial Mortgage Loans and the
Subsequent Mortgage Loans, and generally the same representations and warranties
will be made with respect thereto. The statistical characteristics of the entire
pool of Mortgage Loans on the Closing Date may vary from the statistical
information presented in this Prospectus Supplement upon the acquisition of
Additional Mortgage Loans. See "Conveyance of Subsequent Mortgage Loans" herein.
Initial Mortgage Loans
The Initial Mortgage Loans assigned and transferred to the Issuer and
pledged to the Indenture Trustee as of the Closing Date will be divided into two
groups (each, a "Loan Group"). Loan Group I is expected to have an aggregate
principal balance of approximately $121,850,633 as of the Statistical
Calculation Date and will consist of Initial Mortgage Loans (the "Group I
Mortgage Loans") with (i) Cut-Off Date principal balances no greater than
$240,000 and secured by first priority liens or (ii) Cut-Off Date principal
balances no greater than $120,000 and secured by second priority liens and, when
combined with the balance of the related first mortgage on the property, total
balances no greater than $240,000. Such requirements are referred to herein as
the "Loan Group I Restrictions." Loan Group II is expected to have an aggregate
principal balance of approximately $18,676,279 as of the Statistical Calculation
Date and will not be subject to the Loan Group I Restrictions.
Unless otherwise indicated, all percentages set forth in this
Prospectus Supplement are based upon the aggregate Principal Balances of the
Group I Mortgage Loans and Group II Mortgage Loans as of the Statistical
Calculation Date.
The Mortgage Loans are evidenced by Mortgage Notes (each, a "Mortgage
Note"), secured by mortgages or deeds of trust (the "Mortgages"), of which
approximately 89.45% are second lien Mortgages with respect to the Group I
Mortgage Loans and of which approximately 100.00% are second lien Mortgages with
respect to the Group II Mortgage Loans, on one- to four-family residential
properties (the "Mortgaged Properties") and have the additional characteristics
described below.
Each Group I Mortgage Loan for which information is presented in this
Prospectus Supplement has an original term to stated maturity of up to 30 years,
satisfies the Loan Group I Restrictions, and was selected for inclusion in the
Trust from among those that met the following additional criteria as of the
Statistical Calculation Date: (i) a current principal balance of no less than
$1,303 and (ii) not more than 59 days past due. The Group I Mortgage Loans were
selected by the Originator from the mortgage loans in IUB's portfolio that met
the above criteria using a selection process believed by the Originator not to
be adverse to the Certificateholders or to the
S-14
<PAGE>
Enhancer. As of the Statistical Calculation Date, the average principal balance
of the Group I Mortgage Loans was approximately $38,843. As of the Statistical
Calculation Date, the weighted average Mortgage Interest Rate of the Group I
Mortgage Loans was approximately 12.258%. The "Mortgage Interest Rate" of each
Mortgage Loan is the per annum interest rate required to be paid by the
mortgagor under the terms of the related note. The Mortgage Interest Rate borne
by each Mortgage Loan is fixed as of the date of origination of such Mortgage
Loan. The weighted average "Combined Loan-to-Value Ratio" (calculated by
dividing the sum of (x) any outstanding first mortgage balance as of the date of
origination of the related Group I Mortgage Loan plus (y) the principal balance
of such Group I Mortgage Loan as of the Statistical Calculation Date, by the
Appraised Value of such Mortgaged Property at origination) of the Group I
Mortgage Loans was approximately 108.506%. The weighted average remaining term
to maturity was 199 months and the latest scheduled maturity of any Group I
Mortgage Loan is April 2029; however the actual date on which any Mortgage Loan
is paid in full may be earlier than the stated maturity date due to unscheduled
payments of principal.
Based on information supplied by the Mortgagors in connection with
their loan applications at origination, 3,114 of the Mortgaged Properties
securing the Group I Mortgage Loans, which secure approximately 99.11% of the
outstanding principal balance of the Group I Mortgage Loans, will be owner
occupied primary residences and 23 of the Mortgaged Properties securing the
Group I Mortgage Loans, which secure approximately 0.89% of the outstanding
principal balance of the Group I Mortgage Loans, will be non-owner occupied or
second homes.
Each Group II Mortgage Loan for which information is presented in this
Prospectus Supplement has an original term to stated maturity of up to 30 years
and was selected for inclusion in the Trust from among those that met the
following criteria of the Statistical Calculation Date: (i) a current principal
balance of no less than $19,100 and (ii) not more than 59 days past due. The
Group II Mortgage Loans were selected by the Originator from the mortgage loans
in IUB's portfolio that met the above criteria using a selection process
believed by the Originator not to be adverse to the Certificateholders or to the
Enhancer. As of the Statistical Calculation Date, the average principal balance
of the Group II Mortgage Loans was approximately $57,465. As of the Statistical
Calculation Date, the weighted average Mortgage Interest Rate of the Group II
Mortgage Loans was approximately 11.742%. The weighted average "Combined
Loan-to-Value Ratio" (calculated by dividing the sum of (x) any outstanding
first mortgage balance as of the date of origination of the related Group II
Mortgage Loan plus (y) the principal balance under the Group II Mortgage Loan as
of the Statistical Calculation Date, by the appraised value of such Mortgaged
Property at origination) of the Group II Mortgage Loans was approximately
101.563%. The weighted average remaining term to stated maturity was
approximately 185 months and the latest scheduled maturity of any Group II
Mortgage Loan is May 2024; however the actual date on which any Mortgage Loan is
paid in full may be earlier than the stated maturity date due to unscheduled
payments of principal.
Based on information supplied by the Mortgagors in connection with
their loan applications at origination, 324 of the Mortgaged Properties securing
the Group II Mortgage Loans, which secure approximately 99.81% of the
outstanding principal balance of the Group II Mortgage Loans, will be owner
occupied primary residences and 1 of the Mortgaged Properties securing the Group
II Mortgage Loans, which secure approximately 0.19% of the outstanding principal
balance of the Group II Mortgage Loans, will be non-owner occupied or second
homes.
Approximately 69.64% of the Group I Mortgage Loans and 75.89% of the
Group II Mortgage Loans provide for penalties upon full prepayment during the
first two, three, four or five years after origination thereof. Each of the
Mortgage Loans is subject to a due-on-sale clause. See "Certain Legal Aspects of
the Mortgage Loans - Due-on-Sale Clauses in Mortgage Loans" in the Prospectus.
The monthly payment on each Mortgage Loan includes interest plus an
amount that will amortize the outstanding principal balance of the Mortgage Loan
over its remaining term.
Solicitation Process
By monitoring geographic and economic trends, the Originator attempts
to identify selected real estate markets demonstrating past, present and, the
Originator believes, future economic viability. The assessment of regional
markets is accomplished through the Mortgage Bankers Association ("MBA"),
Mortgage Insurance Companies ("MIC"), SMR Research Co. ("SMR") and other data
sources at the Metropolitan Statistical Area ("MSA") level to study the general
economic climate and performance specific to the real estate and mortgage
S-15
<PAGE>
markets. The regional assessment effort identifies emerging market opportunities
and risk. Among the factors considered in such regional analysis are (i) MBA:
total payroll employment, personal income, population, existing home sales,
existing home prices and housing permits by MSA, (ii) MIC: first mortgage "A"
paper and "B&C" paper delinquency by MSA and (iii) SMR: consumer, real estate
secured, bad debt and bankruptcy filing rates by MSA. Since January 1995, the
Originator has processed over 200,000 responses from a geographic mailing base
that includes areas within 29 states. The Originator expects to originate its
mortgage loan product line through a variety of origination channels in other
states meeting the criteria set forth above.
The Originator uses pre-screening and list processing (response
modeling) techniques in connection with direct-mail methods to contact the most
creditworthy and profitable customer segments within its targeted mail base. The
Originator also uses direct-mail to contact individuals identified in public
records as having a second mortgage.
Underwriting Standards
The Mortgage Loans were underwritten by the Originator in accordance
with underwriting standards of the Originator developed at the direction of IUB.
The following is a brief description of the various underwriting standards and
procedures applicable to the Mortgage Loans. However, there can be no assurance
that the quality or performance of all Mortgage Loans will be equivalent in
every respect under all circumstances.
Each prospective mortgagor completes a mortgage loan application that
includes information with respect to the applicant's liabilities, income, credit
history, employment history and personal information. At least one credit report
on each applicant from national credit reporting companies is required. The
report typically contains information relating to such matters as credit history
with local and national merchants and lenders, installment debt payments and
record of any defaults, bankruptcies, repossessions or judgments. Appraisals and
property valuations range from full appraisals to use of stated value. Title
searches and insurance range from full ALTA policies to property profiles. The
appraisal and title requirements obtained in connection with each loan vary
based on loan amount, lien position and property type and location.
The Originator's underwriting requirements for certain types of home
loans may change from time to time, which in certain instances may result in
less stringent underwriting requirements. Depending on the dates on which
Mortgage Loans are originated, such Mortgage Loans may have been originated by
the Originator pursuant to different underwriting requirements, and accordingly,
certain Mortgage Loans included in the Trust may be of a different credit
quality and have different loan characteristics than other Mortgage Loans. To
the extent that certain Mortgage Loans were originated using less stringent
underwriting requirements, such Mortgage Loans may be more likely to experience
higher rates of delinquencies, defaults and losses than those Mortgage Loans
originated pursuant to more stringent underwriting requirements.
Mortgage Loan Closing Procedures
The Mortgage Loans are closed and the loan files are reviewed, verified
and completed in accordance with procedures developed by the Originator and the
Master Servicer. Closing procedures may vary based upon loan amount and property
location. Following the customer's acceptance of the loan offer, the account
executive responsible for the loan delivers the loan file to the closing area.
The loan documents are drafted after verifying that the file contains a "signing
confirmation request" from the applicable title company; for loans qualifying
for limited title and appraisal, the "signing confirmation request" is not
required. All files are audited for completeness. Once the loan documents are
prepared, the loan file is delivered to the Quality Review area for further
audit. Following Quality Review approval, the loan documents are delivered by
overnight delivery to the closing agent. For loans qualifying for limited title
and appraisal, the documents are forwarded directly to the borrower with
detailed signing and notary instructions. If the loan is closed by a closing
agent, the closing agent reviews each loan file for completeness using a funding
audit checklist prepared by the Originator. At the time of funding, the
individual responsible for closing the loan will fund the appropriate account.
Every loan funded is audited for completeness using post-closing procedures
developed by the Originator.
S-16
<PAGE>
Statistical Information
Set forth below is a description of certain additional characteristics
of the Mortgage Loans as of the Statistical Calculation Date (except as
otherwise indicated). Dollar amounts and percentages may not add up to totals
due to rounding.
LIEN POSITION OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Mortgage Principal Balance of of Group I
Lien Position Loans Group I Mortgage Loans Mortgage Loans
- ------------- ---------------- ----------------------- -----------------
<S> <C> <C> <C>
First Lien............................... 100 10.55% $ 12,858,087.35
Second Lien.............................. 3,037 89.45 108,992,545.46
----- ------- ---------------
Total.................. 3,137 100.00% $121,850,632.81
===== ====== ===============
</TABLE>
MORTGAGE INTEREST RATES OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Mortgage Principal Balance of of Group I
Mortgage Interest Rates (%) Loans Group I Mortgage Loans Mortgage Loans
- --------------------------- ---------------- ----------------------- -----------------
<S> <C> <C> <C>
7.01 to 7.50.................. 6 0.39% $ 469,355.27
7.51 to 8.00.................. 18 1.86 2,264,639.42
8.01 to 8.50.................. 78 4.99 6,080,487.84
8.51 to 9.00.................. 89 4.94 6,017,601.68
9.01 to 9.50.................. 80 3.96 4,827,356.42
9.51 to 10.00.................. 109 3.81 4,639,792.24
10.01 to 10.50.................. 88 3.04 3,700,647.66
10.51 to 11.00.................. 137 4.59 5,596,663.57
11.01 to 11.50.................. 145 4.72 5,751,242.00
11.51 to 12.00.................. 253 8.62 10,504,487.64
12.01 to 12.50.................. 247 7.95 9,686,018.26
12.51 to 13.00.................. 319 10.21 12,438,914.42
13.01 to 13.50.................. 272 8.32 10,135,180.79
13.51 to 14.00.................. 393 11.63 14,171,872.17
14.01 to 14.50.................. 279 7.38 8,991,710.07
14.51 to 15.00.................. 288 6.58 8,022,532.32
15.01 to 15.50.................. 128 2.89 3,525,860.93
15.51 to 16.00.................. 132 2.68 3,269,736.39
16.01 to 16.50.................. 62 1.11 1,352,048.33
16.51 to 17.00.................. 11 0.25 303,385.39
17.01 to 17.50.................. 3 0.08 101,100.00
----- ------ ---------------
Total..................... 3,137 100.00% $121,850,632.81
===== ====== ===============
</TABLE>
The weighted average Mortgage Interest Rate of the Group I Mortgage
Loans is approximately 12.258% per annum.
S-17
<PAGE>
ORIGINAL TERM TO MATURITY OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Original Term to Maturity Mortgage Principal Balance of of Group I
(months) Loans Group I Mortgage Loans Mortgage Loans
------------------------- ---------------- ----------------------- -----------------
<S> <C> <C> <C>
61 to 120 ..................... 212 5.27% $ 6,416,128.79
121 to 180 ..................... 2,637 77.22 94,096,707.71
181 to 240 ..................... 87 2.96 3,607,416.87
241 to 300 ..................... 101 4.00 4,872,292.09
301 to 360 ..................... 100 10.55 12,858,087.35
----- ------ ---------------
Total....................... 3,137 100.00% $121,850,632.81
===== ====== ===============
</TABLE>
The weighted average original term to Maturity is approximately 202
months.
REMAINING TERM TO MATURITY OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Mortgage Principal Balance of of Group I
Remaining Months to Maturity Loans Group I Mortgage Loans Mortgage Loans
- ---------------------------- ---------------- ----------------------- -----------------
<S> <C> <C> <C>
61 to 120........................ 212 5.27% $ 6,416,128.79
121 to 180........................ 2,637 77.22 94,096,707.71
181 to 240........................ 87 2.96 3,607,416.87
241 to 300........................ 101 4.00 4,872,292.09
301 to 360........................ 100 10.55 12,858,087.35
----- ------ ---------------
Total......................... 3,137 100.00% $121,850,632.81
===== ====== ===============
</TABLE>
The calculated weighted average remaining term of the Group I Mortgage
Loans is approximately 199 months.
S-18
<PAGE>
YEAR OF ORIGINATION OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Mortgage Principal Balance of of Group I
Year of Origination Loans Group I Mortgage Loans Mortgage Loans
- ------------------- ---------------- ----------------------- -----------------
<C> <C> <C> <C>
1995..................................... 1 0.02% $ 24,829.96
1996..................................... 2 0.05 56,414.02
1997..................................... 1 0.02 28,199.77
1998..................................... 1,306 43.81 53,381,918.49
1999..................................... 1,827 56.10 68,359,270.57
----- ------- ---------------
Total..................... 3,137 100.00% $121,850,632.81
===== ====== ===============
</TABLE>
The earliest month and year of origination of any Group I Mortgage Loan
is November 1995 and the latest month and year of origination is April 1999.
MORTGAGED PROPERTIES SECURING GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Mortgage Principal Balance of of Group I
Property Type Loans Group I Mortgage Loans Mortgage Loans
- ------------- ---------------- ----------------------- -----------------
<S> <C> <C> <C>
Condominium.............................. 216 6.35% $ 7,738,678.06
Multi-Family............................. 9 0.40 482,032.42
Not Found................................ 1 0.05 64,600.00
Planned Unit Development................. 189 6.85 8,350,552.73
Single-Family Dwelling................... 2,722 86.35 105,214,769.60
----- ------ ---------------
Total.................... 3,137 100.00% $121,850,632.81
===== ====== ===============
</TABLE>
S-19
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Combined Loan-to-Value Mortgage Principal Balance of of Group I
Ratio (%) Loans Group I Mortgage Loans Mortgage Loans
- ---------------------- ---------------- ----------------------- -----------------
<S> <C> <C> <C>
5.0001 to 10.0000............ 1 0.02% $ 21,896.19
15.0001 to 20.0000............ 1 0.02 23,901.43
20.0001 to 25.0000............ 1 0.02 28,344.67
30.0001 to 35.0000............ 1 0.05 59,716.56
35.0001 to 40.0000............ 2 0.07 83,883.94
40.0001 to 45.0000............ 2 0.04 51,912.23
45.0001 to 50.0000............ 5 0.13 152,469.93
50.0001 to 55.0000............ 7 0.23 285,069.81
55.0001 to 60.0000............ 6 0.23 282,699.26
60.0001 to 65.0000............ 12 0.55 676,101.28
65.0001 to 70.0000............ 10 0.50 605,077.61
70.0001 to 75.0000............ 24 1.06 1,289,910.14
75.0001 to 80.0000............ 65 1.98 2,409,273.68
80.0001 to 85.0000............ 80 3.43 4,174,142.34
85.0001 to 90.0000............ 142 5.72 6,973,614.19
90.0001 to 95.0000............ 154 5.59 6,809,964.12
95.0001 to 100.0000............ 383 13.38 16,305,245.41
100.0001 to 105.0000............ 129 3.36 4,093,256.00
105.0001 to 110.0000............ 340 9.31 11,350,214.22
110.0001 to 115.0000............ 424 12.26 14,936,955.81
115.0001 to 120.0000............ 387 11.64 14,183,477.46
120.0001 to 125.0000............ 961 30.41 37,053,506.53
----- ------ ---------------
Total................. 3,137 100.00% $121,850,632.81
===== ====== ===============
</TABLE>
The minimum and maximum Combined Loan-to-Value Ratios of the Group I
Mortgage Loans as of the Statistical Calculation Date are approximately 8.477%
and 125.000%, respectively, and the weighted average Combined Loan-to-Value
Ratio as of the Statistical Calculation Date of the Group I Mortgage Loans is
approximately 108.506%. The "Combined Loan-to-Value Ratio" of a Group I Mortgage
Loan as of the Statistical Calculation Date is the ratio, expressed as a
percentage, equal to the sum of any outstanding first mortgage balance as of the
date of origination of the related Group I Mortgage Loan plus the Principal
Balance of such Group I Mortgage Loan as of the Statistical Calculation Date
divided by the appraised value of the Mortgaged Property.
S-20
<PAGE>
PRINCIPAL BALANCES OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Mortgage Principal Balance of of Group I
Principal Balance Loans Group I Mortgage Loans Mortgage Loans
- -------------------------------- ----- ---------------------- --------------
<S> <C> <C> <C> <C>
$0.01 to $25,000.00...... 843 13.97% $ 17,021,350.06
$25,000.01 to $50,000.00...... 1,800 54.73 66,684,533.80
$50,000.01 to $75,000.00...... 383 19.71 24,022,291.30
$75,000.01 to $100,000.00...... 48 3.40 4,139,305.42
$100,000.01 to $125,000.00...... 18 1.70 2,073,551.13
$125,000.01 to $150,000.00...... 14 1.56 1,905,724.68
$150,000.01 to $175,000.00...... 6 0.81 990,079.09
$175,000.01 to $200,000.00...... 12 1.81 2,209,848.93
$200,000.01 to $225,000.00...... 10 1.74 2,125,656.46
$225,000.01 to $240,000.00...... 3 0.56 678,291.94
----- ------ ---------------
Total....................... 3,137 100.00% $121,850,632.81
===== ====== ===============
</TABLE>
As of the Statistical Calculation Date, the average unpaid principal
balance of the Group I Mortgage Loans is approximately $38,843.05.
S-21
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES SECURING
GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate Unpaid
Number of Percentage of Aggregate Principal Balance
Initial Mortgage Principal Balance of of Group I
State Loans Group I Mortgage Loans Mortgage Loans
- ----- ----- ---------------------- --------------
<S> <C> <C> <C>
Arizona.................................. 135 4.39% $ 5,347,061.48
California............................... 673 24.40 29,733,050.45
Colorado................................. 60 1.64 1,996,964.02
Florida.................................. 411 12.43 15,141,939.25
Georgia.................................. 118 3.41 4,151,151.56
Illinois................................. 176 5.92 7,209,878.55
Kentucky................................. 20 0.60 732,196.19
Louisiana................................ 37 0.93 1,127,695.02
Maine.................................... 2 0.06 73,700.00
Maryland................................. 161 4.73 5,765,932.73
Massachusetts............................ 101 3.08 3,749,661.26
Michigan................................. 149 4.64 5,655,908.15
Minnesota................................ 7 0.28 338,944.37
Missouri................................. 61 1.68 2,046,865.72
New Hampshire............................ 2 0.03 41,000.00
New Jersey............................... 184 6.22 7,581,978.25
North Carolina........................... 56 1.45 1,772,356.59
Ohio..................................... 228 6.60 8,047,754.28
Oregon................................... 40 1.43 1,743,177.35
Pennsylvania............................. 72 2.02 2,456,315.30
Rhode Island............................. 3 0.07 89,188.20
South Carolina........................... 33 0.85 1,038,789.70
Utah..................................... 12 0.34 411,104.75
Virginia................................. 196 5.79 7,053,384.03
Washington............................... 168 5.94 7,241,351.23
Wisconsin................................ 32 1.07 1,303,284.38
----- ------ ---------------
Total.................... 3,137 100.00% $121,850,632.81
===== ====== ===============
</TABLE>
No more than approximately 0.44% of the Group I Mortgage Loans are
secured by Mortgaged Properties located in any one zip code.
S-22
<PAGE>
DEBT-TO-INCOME RATIOS OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid Principal
Initial Percentage of Aggregate Balance
Mortgage Principal Balance of Group of Group I
Debt-to-Income Ratios (%) Loans I Mortgage Loans Mortgage Loans
------------------------- ----- ---------------- --------------
<S> <C> <C> <C>
NA 2 0.05% $ 54,906.14
5.0001 to 10.0000.... 1 0.03 34,203.19
10.0001 to 15.0000.... 1 0.03 31,930.99
15.0001 to 20.0000.... 15 0.40 484,595.75
20.0001 to 25.0000.... 89 2.28 2,773,027.17
25.0001 to 30.0000.... 235 6.45 7,856,041.60
30.0001 to 35.0000.... 475 13.62 16,592,357.36
35.0001 to 40.0000.... 627 18.52 22,569,245.42
40.0001 to 45.0000.... 757 22.81 27,796,959.49
45.0001 to 50.0000.... 667 24.65 30,034,966.46
50.0001 to 55.0000.... 261 10.98 13,383,136.05
55.0001 to 60.0000.... 7 0.20 239,263.19
----- ------ ---------------
Total.......... 3,137 100.00% $121,850,632.81
===== ====== ===============
</TABLE>
The weighted average Debt-to-Income Ratio of the Group I Mortgage Loans is
approximately 41.13%
OCCUPANCY TYPE OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid Principal
Initial Percentage of Aggregate Balance
Mortgage Principal Balance of Group I of Group I
Occupancy Type Loans Mortgage Loans Mortgage Loans
- -------------- ----- -------------- --------------
<S> <C> <C> <C>
Owner Occupied............. 3,114 99.11% $120,760,250.21
Non Owner Occupied......... 23 0.89 1,090,382.60
----- ------ ---------------
Total.......... 3,137 100.00% $121,850,632.81
===== ====== ===============
</TABLE>
S-23
<PAGE>
CREDIT QUALITY OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Mortgage Principal Balance of of Group I
Credit Quality Loans Group I Mortgage Loans Mortgage Loans
- -------------- ----- ---------------------- --------------
<S> <C> <C> <C>
Excellent................... 2,529 83.76% $102,060,161.79
Superior.................... 425 11.85 14,437,879.00
Good........................ 170 4.07 4,960,496.98
Fair........................ 11 0.27 329,587.39
Other....................... 2 0.05 62,507.65
----- ------ ---------------
Total........ 3,137 100.00% $121,850,632.81
===== ====== ===============
</TABLE>
Credit grades run from Excellent to Superior to Good to Fair to Other in
descending order.
S-24
<PAGE>
LIEN POSITION OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate Unpaid
Number of Percentage of Aggregate Principal Balance
Initial Mortgage Principal Balance of of Group II
Lien Position Loans Group II Mortgage Loans Mortgage Loans
- ------------- ----- ----------------------- --------------
<S> <C> <C> <C>
Second Lien................... 325 100% $18,676,279.45
--- ---- --------------
Total.......... 325 100% $18,676,279.45
=== ==== ==============
</TABLE>
MORTGAGE INTEREST RATES OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid Principal
Initial Percentage of Aggregate Balance
Mortgage Principal Balance of of Group II
Mortgage Interest Rates (%) Loans Group II Mortgage Loans Mortgage Loans
- --------------------------- ----- ----------------------- --------------
<S> <C> <C> <C>
7.51 to 8.00........... 2 1.14% $ 212,942.42
8.01 to 8.50........... 9 3.65 680,980.98
8.51 to 9.00........... 15 5.34 996,782.63
9.01 to 9.50........... 11 2.76 515,104.91
9.51 to 10.00.......... 27 8.78 1,640,115.72
10.01 to 10.50.......... 17 5.77 1,078,432.68
10.51 to 11.00.......... 30 9.03 1,686,725.01
11.01 to 11.50.......... 22 5.84 1,091,365.49
11.51 to 12.00.......... 45 14.42 2,692,199.01
12.01 to 12.50.......... 30 10.14 1,893,490.91
12.51 to 13.00.......... 30 8.99 1,679,674.79
13.01 to 13.50.......... 28 7.57 1,414,417.91
13.51 to 14.00.......... 18 5.03 939,369.88
14.01 to 14.50.......... 16 3.98 742,931.27
14.51 to 15.00.......... 14 4.22 788,372.63
15.01 to 15.50.......... 6 1.73 323,131.71
15.51 to 16.00.......... 4 1.43 267,899.68
16.01 to 16.50.......... 1 0.17 32,341.82
--- ------ --------------
Total.............. 325 100.00% $18,676,279.45
=== ====== ==============
</TABLE>
The weighted average Mortgage Interest Rate of the Group II Mortgage Loans
is approximately 11.742% per annum.
S-25
<PAGE>
ORIGINAL TERM TO MATURITY OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Original Term to Maturity Mortgage Principal Balance of of Group II
(months) Loans Group II Mortgage Loans Mortgage Loans
- ------------------------- ----- ----------------------- --------------
<S> <C> <C> <C>
61 to 120............... 16 3.80% $ 709,855.81
121 to 180............... 283 86.65 16,182,419.71
181 to 240............... 11 3.65 680,869.38
241 to 300............... 15 5.91 1,103,134.55
--- ------ --------------
Total...................... 325 100.00% $18,676,279.45
=== ====== ==============
</TABLE>
The weighted average original term to Maturity is approximately
187 months.
REMAINING TERM TO MATURITY OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate Unpaid
Number of Percentage of Aggregate Principal Balance
Initial Mortgage Principal Balance of of Group II
Remaining Months to Maturity Loans Group II Mortgage Loans Mortgage Loans
- ---------------------------- ----- ----------------------- --------------
<S> <C> <C> <C>
61 To 120............ 16 3.80% $ 709,855.81
121 To 180............ 283 86.65 16,182,419.71
181 To 240............ 11 3.65 680,869.38
241 To 300............ 15 5.91 1,103,134.55
--- ------ --------------
Total..................... 325 100.00% $18,676,279.45
=== ====== ==============
</TABLE>
The calculated weighted average remaining term of the Group II Mortgage
Loans is approximately 185 months.
YEAR OF ORIGINATION OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate Unpaid
Number of Percentage of Aggregate Principal Balance
Initial Mortgage Principal Balance of of Group II
Year of Origination Loans Group II Mortgage Loans Mortgage Loans
- ------------------- ----- ----------------------- --------------
<S> <C> <C> <C>
1998.......................... 95 28.27% $ 5,279,056.90
1999.......................... 230 71.73 13,397,222.55
--- ------ ---------------
Total................ 325 100.00% $18,676,279.45
=== ====== ==============
</TABLE>
The earliest month and year of origination of any Group II Mortgage
Loan is April 1998 and the latest month and year of origination is April 1999.
S-26
<PAGE>
MORTGAGED PROPERTIES SECURING GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate Unpaid Principal
Number of Percentage of Aggregate Balance
Initial Mortgage Principal Balance of Group of Group II
Property Type Loans II Mortgage Loans Mortgage Loans
- ------------- ----- ----------------- --------------
<S> <C> <C> <C>
Condominium........................ 7 1.98% $ 369,679.95
Multi-Family....................... 1 0.13 24,810.98
Planned Unit Development........... 50 17.78 3,319,731.62
Single-Family Dwelling............. 267 80.11 14,962,056.90
--- ------ --------------
Total................ 325 100.00% $18,676,279.45
=== ====== ==============
</TABLE>
COMBINED LOAN-TO-VALUE RATIOS OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid
Initial Percentage of Aggregate Principal Balance
Combined Loan-to-Value Ratio Mortgage Principal Balance of of Group II
(%) Loans Group II Mortgage Loans Mortgage Loans
- ---------------------------- ----- ----------------------- --------------
<S> <C> <C> <C>
55.0001 to 60.0000..... 1 0.29% $ 53,956.30
65.0001 to 70.0000..... 1 0.13 24,960.27
70.0001 to 75.0000..... 6 2.00 373,983.41
75.0001 to 80.0000..... 12 4.28 799,102.60
80.0001 to 85.0000..... 15 4.35 813,075.03
85.0001 to 90.0000..... 35 9.63 1,799,165.65
90.0001 to 95.0000..... 28 8.69 1,623,081.15
95.0001 to 100.0000..... 86 27.22 5,083,375.63
100.0001 to 105.0000..... 25 6.33 1,181,929.21
105.0001 to 110.0000..... 34 9.11 1,700,586.10
110.0001 to 115.0000..... 31 10.37 1,936,224.10
115.0001 to 120.0000..... 23 7.44 1,390,053.00
120.0001 to 125.0000..... 28 10.16 1,896,787.00
--- ------ --------------
Total........... 325 100.00% $18,676,279.45
=== ====== ==============
</TABLE>
The minimum and maximum Combined Loan-to-Value Ratios of the Group II
Mortgage Loans as of the Statistical Calculation Date are approximately 57.994%
and 125.000%, respectively, and the weighted average Combined Loan-to-Value
Ratio as of the Statistical Calculation Date of the Group II Mortgage Loans is
approximately 101.563%. The "Combined Loan-to-Value Ratio" of a Group II
Mortgage Loan as of the Statistical Calculation Date is the ratio, expressed as
a percentage, equal to the sum of any outstanding first mortgage balance as of
the date of origination plus the Principal Balance of such Group II Mortgage
Loan as of the Statistical Calculation Date divided by the appraised value of
the Mortgaged Property at origination.
S-27
<PAGE>
PRINCIPAL BALANCES OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate Unpaid
Number of Percentage of Aggregate Principal Balance
Initial Mortgage Principal Balance of Group of Group II
Principal Balance Loans II Mortgage Loans Mortgage Loans
- ----------------- ----- ----------------- --------------
<S> <C> <C> <C>
$0.01 to $25,000.00...... 18 2.21% $ 413,614.23
$25,000.01 to $50,000.00...... 129 28.82 5,381,735.72
$50,000.01 to $75,000.00...... 134 46.97 8,771,895.88
$75,000.01 to $100,000.00..... 40 19.53 3,648,221.54
$100,000.01 to $125,000.00..... 4 2.47 460,812.08
--- ------ --------------
Total..................... 325 100.00% $18,676,279.45
=== ====== ==============
</TABLE>
As of the Statistical Calculation Date, the average unpaid principal
balance of the Group II Mortgage Loans is approximately $57,465.48.
S-28
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES SECURING
GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate Unpaid Principal
Number of Percentage of Aggregate Balance
Initial Mortgage Principal Balance of Group of Group II
State Loans II Mortgage Loans Mortgage Loans
- ----- ----- ----------------- --------------
<S> <C> <C> <C>
Arizona........................... 10 3.28% $ 613,326.92
California........................ 163 49.19 9,187,660.38
Colorado.......................... 4 1.30 243,577.02
Florida........................... 12 4.49 838,772.71
Georgia........................... 10 3.39 633,397.03
Illinois.......................... 9 2.72 507,145.66
Kentucky.......................... 1 0.40 74,229.47
Louisiana......................... 1 0.40 74,106.63
Maryland.......................... 16 4.95 923,992.79
Massachusetts..................... 14 4.02 751,696.55
Michigan.......................... 13 3.59 669,642.07
Minnesota......................... 1 0.40 75,000.00
Missouri.......................... 4 1.28 238,778.32
New Jersey........................ 22 6.97 1,301,402.06
North Carolina.................... 6 1.39 260,474.95
Ohio.............................. 5 1.58 294,578.66
Pennsylvania...................... 2 0.68 126,200.00
South Carolina.................... 2 0.63 117,169.83
Utah.............................. 4 0.74 137,822.53
Virginia.......................... 16 5.56 1,038,065.74
Washington........................ 7 2.15 401,513.63
Wisconsin......................... 3 0.90 167,726.50
--- ------ --------------
Total.............. 325 100.00% $18,676,279.45
=== ====== ==============
</TABLE>
No more than approximately 1.20% of the Group II Mortgage Loans are secured
by Mortgaged Properties located in any one zip code.
S-29
<PAGE>
DEBT-TO-INCOME RATIOS OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of
Initial Percentage of Aggregate Aggregate Unpaid Principal
Mortgage Principal Balance of Group Balance
Debt-to-Income Ratios (%) Loans II Mortgage Loans of Group II Mortgage Loans
- ------------------------- ----- ----------------- --------------------------
<S> <C> <C> <C>
10.0001 to 15.0000....... 1 0.39% $ 73,149.23
20.0001 to 25.0000....... 7 2.00 373,394.62
25.0001 to 30.0000....... 11 3.19 595,935.89
30.0001 to 35.0000....... 33 9.08 1,696,664.10
35.0001 to 40.0000....... 66 21.07 3,935,844.33
40.0001 to 45.0000....... 70 21.39 3,994,493.37
45.0001 to 50.0000....... 72 21.99 4,106,586.51
50.0001 to 55.0000....... 65 20.88 3,900,211.40
--- ------ --------------
Total................. 325 100.00% $18,676,279.45
=== ====== ==============
</TABLE>
The weighted average Debt-to-Income Ratio of the Group II Mortgage Loans is
approximately 43.01%.
OCCUPANCY TYPE OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid Principal
Initial Percentage of Aggregate Balance
Mortgage Principal Balance of of Group II
Occupancy Type Loans Group II Mortgage Loans Mortgage Loans
- -------------- ----- ----------------------- --------------
<S> <C> <C> <C>
Owner Occupied..................... 324 99.81% $18,641,279.45
Non Owner Occupied................. 1 0.19 35,000.00
--- ------ --------------
Total............... 325 100.00% $18,676,279.45
=== ====== ==============
</TABLE>
CREDIT QUALITY OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate Unpaid
Number of Percentage of Aggregate Principal Balance
Initial Mortgage Principal Balance of Group of Group II
Credit Quality Loans II Mortgage Loans Mortgage Loans
- -------------- ----- ----------------- --------------
<S> <C> <C> <C>
Excellent.......................... 296 91.24% $17,039,541.47
Superior........................... 21 6.79 1,267,510.68
Good............................... 8 1.98 369,227.30
Fair............................... 0 0.00 0.00
--- ------ --------------
Total............... 325 100.00% $18,676,279.45
=== ====== ==============
</TABLE>
Credit grades run from Excellent to Superior to Good to Fair to Other in
descending order.
S-30
<PAGE>
The information set forth in the preceding section "Description of the
Mortgage Loans" has been based upon information provided by the Originator and
tabulated by the Depositor. None of the Depositor, the Trustee or the Enhancer
make any representation as to the accuracy or completeness of such information.
Mandatory Repurchase or Substitution of Mortgage Loans
The Transferor is required, with respect to Mortgage Loans that are
found by the Trustee to have defective documentation, or in respect of which the
Transferor has breached a representation or warranty, to repurchase such
Mortgage Loans or substitute such Mortgage Loan with a Qualified Substitute
Mortgage Loan. See "Prepayment and Yield Considerations" and "Description of the
Mortgage Loan Sale Agreement and the Purchase and Sale Agreement -- Assignment
of Mortgage Loans" herein.
Conveyance of Subsequent Mortgage Loans
The Sale and Servicing Agreement permits the Trust to acquire certain
Mortgage Loans (the "Subsequent Mortgage Loans") after the Closing Date and
prior to October 31, 1999. Accordingly, the statistical characteristics of the
Mortgage Loans will vary as of any Cut-Off Date subsequent to the Closing Date
upon the acquisition of Subsequent Mortgage Loans. Each Subsequent Mortgage Loan
will be purchased by the Trust at a purchase price equal to the Principal
Balance thereof as of the related Cut-Off Date. The date of transfer of a
Subsequent Mortgage Loan to the Trust is the "Subsequent Transfer Date."
The obligation of the Trust to purchase Subsequent Mortgage Loans on a
Subsequent Transfer Date is subject to the consent of the Enhancer and to the
following requirements, which are designed to ensure that, following such
purchase, the characteristics of the Mortgage Loans in the aggregate will not
differ materially from the characteristics of the Initial Mortgage Loans: (i)
such Mortgage Loan may not be more than 59 days delinquent; (ii) the remaining
term to stated maturity of such Mortgage Loan may not extend beyond November 15,
2029; (iii) such Mortgage Loan must be secured by a Mortgage in a first or
second lien position; (iv) such Mortgage Loan must not have a Mortgage Interest
Rate less than 7.125%; (v) such Mortgage Loan must be otherwise acceptable to
the Enhancer; (vi) following the purchase of such Mortgage Loan by the Trust,
the Mortgage Loans (a) will have a weighted average Mortgage Interest Rate of at
least 12.190%; (b) will have a weighted average CLTV of not more than 107.583%;
and (c) will have a concentration in any one state not in excess of 28% (based
on the entire pool of Mortgage Loans); (vii) such Mortgage Loan must have a CLTV
not in excess of 125%; and (viii) such Mortgage Loan must comply with the
representations and warranties in the Sale and Servicing Agreement.
IRWIN FUNDING CORP.
Irwin Funding Corp. (the "Transferor"), a Delaware corporation
headquartered in Columbus, Indiana, is a wholly-owned subsidiary of IUB,
incorporated in the State of Delaware on June 10, 1998. Irwin Funding Corp. was
organized for limited purposes, which include purchasing mortgage loans from IUB
and its affiliates, selling and transferring such mortgage loans to third
parties and any activities incidental to and necessary or convenient for the
accomplishment of such purposes. The principal executive offices of Irwin
Funding Corp. are located at 500 Washington Street, Columbus, Indiana 47201. The
telephone number of such offices is (812) 376-1909.
IRWIN HOME EQUITY CORPORATION
General
Irwin Home Equity Corporation (the "Originator") is an Indiana
corporation with a single origination and servicing facility in San Ramon,
California. The Originator will initially be the sole subservicer of the
Mortgage Loans. The Originator is a direct substantially wholly-owned subsidiary
of Irwin Financial Corporation ("IFC"), a specialized financial services company
headquartered in Columbus, Indiana. The Originator originates and services
mortgage loans in selected markets nationwide using a combination of direct mail
and telemarketing. The Originator's home equity line of credit and closed-end,
fixed rate products are marketed primarily as debt consolidation loans for
repeat or frequent borrowers with strong credit ratings. Borrowers with
similarly strong credit ratings are targeted for the Originator's first mortgage
refinance program. As of March 31, 1999, the
S-31
<PAGE>
Originator had over $252.9 million in assets, had originated $955.7 million in
mortgage loans and was a Freddie Mac approved seller-servicer. The Originator
underwrites first and second lien mortgage loans secured by one- to four-family
residences located primarily in selected metropolitan markets in the United
States.
The Originator, in accordance with the underwriting standards of IUB,
underwrote all the Mortgage Loans which IUB will sell to the Transferor pursuant
to a mortgage loan sale agreement and the Transferor will sell to the Depositor
pursuant to a purchase and sale agreement between the Transferor and the
Depositor (together, the "Mortgage Sale Agreements"). On the Issue Date, the
Depositor will acquire the Mortgage Loans from the Transferor and simultaneously
therewith transfer the Mortgage Loans to the Trust.
As Subservicer
The Trust will appoint Irwin Union Bank and Trust Company as Master
Servicer pursuant to the Sale and Servicing Agreement. However, the Originator
will subservice the Mortgage Loans pursuant to a Subservicing Agreement between
Irwin Home Equity Corporation and Irwin Union Bank and Trust Company.
Notwithstanding such subservicing arrangement, Irwin Union Bank and Trust
Company shall remain responsible to the Trust for the servicing of the Mortgage
Loans
The Originator engages in mortgage loan servicing, including servicing
of previously securitized loans, which involves, among other things, the
processing and administration of mortgage loan payments in return for a
servicing fee. At March 31, 1999, the Originator serviced 15,626 mortgage loans
with an outstanding principal balance of approximately $633.8 million.
At March 31, 1999, the Originator had approximately 291 employees. Its
offices are located at 12677 Alcosta Boulevard, Suite 500, San Ramon,
California, 94583 and its telephone number is (925) 277-2001.
The following table sets forth certain information regarding the
principal balance of one- to four-family residential mortgage loans included in
the Originator's servicing portfolio. The Originator's servicing portfolio
includes mortgage loans held for sale and mortgage loans held for investment
that were originated by the Originator's mortgage banking operations.
S-32
<PAGE>
The Originator's Servicing Portfolio
<TABLE>
<CAPTION>
Year ended Year Ended Year Ended Quarter Ended
December 31, 1996 December 31, 1997 December 31, 1998 March 31, 1999
----------------- ----------------- ----------------- --------------
<S> <C> <C> <C> <C>
Beginning servicing
portfolio Add: $ 85,787,401 $ 230,449,915 $ 358,165,795 $581,243,178
Loans originated $ 169,119,113 $ 214,517,880 $ 389,673,129 $ 94,995,110
Deduct: Prepayments (net
of subsequent draws) $ (24,456,600) $ (86,802,000) $(166,595,726) $(42,515,396)
Sale of servicing
rights 0 0 0 0
Loans sold,
servicing released 0 0 0 0
Ending servicing portfolio $ 230,449,915 $ 358,165,795 $ 581,243,178 $ 633,772,892
Number of loans serviced 7,247 10,800 14,578 15,626
Average loan size $ 31,799 $ 33,163 $ 39,871 $ 40,559
</TABLE>
Delinquency and Loss Experience of the Originator's Servicing Portfolio
The following tables summarize the delinquency and loss experience for
closed-end, fixed-rate first and second mortgage loans and adjustable-rate, home
equity lines of credit originated by the Originator. The data presented in the
following tables is for illustrative purposes only, and there is no assurance
that the delinquency and loss experience of the Mortgage Loans will be similar
to that set forth below.
S-33
<PAGE>
Delinquency Experience
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
----------------------------------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Number Number Number Number Number
of Dollar of Dollar of Dollar of Dollar of Dollar
Accounts Managed Loans Amount Loans Amount Loans Amount Loans Amount Loans Amount
------------------ -------- ------------ --------- --------- -------- ----------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2,682 $85,787 7,247 $230,450 10,800 $358,166 14,578 $581,243 15,626 $633,773
Principal
Balance of
Mortgage Loans:
------------------
30--59 Days Past
Due (1).......... 10 $ 354 50 $ 1,427 80 $ 2,516 108 $ 3,590 144 $ 6,822
60-89 Days Past
Due (1).......... 2 $ 94 10 $ 287 12 $ 372 13 $ 352 17 $ 592
90+ Days Past
Due (1).......... 0 $ 0 8 $ 176 28 $ 905 31 $ 991 30 $ 648
Foreclosures..... 0 $ 0 8 $ 371 38 $ 1,546 62 $ 2,151 84 $ 2,560
REO Properties
(2).............. 0 $ 0 5 $ 322 3 $ 50 8 $ 277 7 $ 219
</TABLE>
- ----------------
(1) Contractually past due excluding mortgage loans in the process
of foreclosure.
(2) "Real estate owned" properties - properties relating to
mortgages foreclosed or for which deeds in lieu of foreclosure
have been accepted, and held by the Master Servicer pending
disposition.
Loss Experience
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months
Ended
Year Ended December 31, March 31,
-----------------------------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Aggregate Principal
Balance Outstanding........ $85,787 $230,450 $358,166 $581,243 $633,773
Net Charge-offs (1)........ $ 0 $ 37 $ 1,026 $ 2,141 $ 672
Total Loans in Foreclosure $ 0 $ 693 $ 1,696 $ 2,428 $ 2,779
-----------------------------------------------------------------------------------------------------------------------
Net Charge-offs as a
Percentage of Aggregate
Amount Outstanding at
period-end.......... 0.00% 0.02% 0.29% 0.37% 0.11%
</TABLE>
- ----------------
(1) Net Charge-offs refers to writedowns on properties prior to
liquidation and the actual liquidated loss incurred on a
mortgaged property when sold net of recoveries.
The Originator commenced receiving applications for mortgage loans
under its lending programs only in 1995, and the Originator, through IUB, funded
its first loan in March, 1995. Accordingly, the Originator has insufficient
historical delinquency, bankruptcy, foreclosure or default experience that may
be referred to for
S-34
<PAGE>
purposes of estimating the future delinquency and loss experience of mortgage
loans similar to the Mortgage Loans being sold to the Trust.
The information set forth in this section concerning the Originator has
been provided by Irwin Home Equity Corporation. None of the Depositor, the
Trustee or the Enhancer make any representation as to the accuracy or
completeness of such information.
PREPAYMENT AND YIELD CONSIDERATIONS
General
The yield to maturity and the aggregate amount of payments on the Notes
will depend on the price paid by the related Noteholder for such Note, the
related Note Rate and the rate and timing of principal payments (including
payments in excess of the monthly payment, prepayments in full or terminations,
liquidations and repurchases) on the Mortgage Loans in the related Loan Group.
Approximately 69.64% of the Group I Mortgage Loans and approximately 75.89% of
the Group II Mortgage Loans provide for the payment of a penalty in connection
with prepayment in full during the first two, three, four or five years after
origination thereof.
The rate of principal prepayments on the Mortgage Loans in the related
Loan Group will be influenced by a variety of economic, tax, geographic,
demographic, social, legal and other factors, and has fluctuated considerably in
recent years. In addition, the rate of principal prepayments may differ among
Mortgage Loans at any time because of specific factors relating to such Mortgage
Loans, such as the age of the Mortgage Loans, the geographic location of the
related Mortgaged Properties and the extent of the related Mortgagors' equity in
such Mortgaged Properties, and changes in the Mortgagors' housing needs, job
transfers and employment. In general, if prevailing interest rates fall
significantly below the interest rates at the time of origination, mortgage
loans may be subject to higher prepayment rates than if prevailing interest
rates remain at or above those at the time such mortgage loans were originated.
Conversely, if prevailing interest rates rise appreciably above the interest
rates at the time of origination, mortgage loans may experience a lower
prepayment rate than if prevailing interest rates remained at or below those
existing at the time such mortgage loans were originated. Further, the rate of
prepayments may vary as between Group I Mortgage Loans and Group II Mortgage
Loans. There can be no assurance as to the prepayment rate of the Mortgage Loans
in the related Loan Group, or that the Mortgage Loans in the related Loan Group
will conform to the prepayment experience of other mortgage loans or to any past
prepayment experience or any published prepayment forecast.
In general, if a Note is purchased at a premium over its face amount
and payments of principal of such Note occur at a rate faster than that assumed
at the time of purchase, the purchaser's actual yield to maturity will be lower
than that anticipated at the time of purchase. Conversely, if a Note is
purchased at a discount from its face amount and payments of principal of such
Note occur at a rate that is slower than that assumed at the time of purchase,
the purchaser's actual yield to maturity will be lower than originally
anticipated.
The rate and timing of defaults on the Mortgage Loans in the related
Loan Group will also affect the rate and timing of principal payments on the
Mortgage Loans in the related Loan Group and thus the yield on the Notes. There
can be no assurance as to the rate of losses or delinquencies on any of the
Mortgage Loans. To the extent that any losses are incurred on any of the
Mortgage Loans that are not covered by Excess Spread or an Insured Payment, the
Noteholders will bear the risk of losses resulting from default by Mortgagors.
See "Risk Factors" herein and in the Prospectus.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security to the date of distribution to
the investor thereof of each dollar distributed in reduction of principal of
such security (assuming no losses). The weighted average life of the Notes will
be influenced by, among other factors, the rate of principal payments on the
Mortgage Loans in the related Loan Group.
The primary source of information available to investors concerning the
Notes will be the monthly statements discussed herein under "Description of the
Trust Agreement and Indenture-- Reports to Noteholders" and in the Prospectus
under "Description of the Securities-Reports to Holders", which will include
information as to
S-35
<PAGE>
the outstanding Note Balance. There can be no assurance that any additional
information regarding the Notes will be available through any other source. In
addition, the Depositor is not aware of any source through which price
information about the Notes will be generally available on an ongoing basis. The
limited nature of such information regarding the Notes may adversely affect the
liquidity of the Notes, even if a secondary market for the Notes becomes
available.
Tables
The prepayment model used in this Prospectus Supplement (the
"Prepayment Assumption") represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of mortgage loans.
A 100% Prepayment Assumption for Loan Group I assumes a constant prepayment rate
("CPR") of 1.2% per annum of the then outstanding principal balance of such
mortgage loans in the first month of the life of the mortgage loans and an
additional 1.2% per annum in each month thereafter until the fifteenth month.
Beginning in the fifteenth month and in each month thereafter during the life of
the mortgage loans, a 100% Prepayment Assumption assumes a CPR of 18% per annum
each month. A 100% Prepayment Assumption for Loan Group II assumes a CPR of 4.0%
per annum of the then outstanding principal balance of such mortgage loans in
the first month of the life of the mortgage loans and an additional 1.6364% per
annum in each month thereafter until the twelfth month. Beginning in the twelfth
month and in each month thereafter during the life of the mortgage loans, a 100%
Prepayment Assumption assumes a CPR of 22% per annum each month.
The Mortgage Loans are assumed to consist of sub-pools of Mortgage
Loans with the characteristics set forth below in the table captioned "Assumed
Mortgage Loan Characteristics".
In addition, it was assumed that (i) payments are made in accordance
with the description set forth under "Description of the Notes -- Priority of
Distributions", (ii) no extension past the scheduled maturity date of a Mortgage
Loan is made, (iii) no delinquencies or defaults occur, (iv) the Mortgage Loans
pay on the basis of a 30-day month and a 360-day year, (v) the scheduled due
date for each Mortgage Loan is the fifteenth day of each calendar month, (vi)
the Closing Date is May 27, 1999, (vii) for each Payment Date LIBOR is equal to
4.90% per annum, (vii) the initial Note Balances are as set forth on the cover
page hereof, (viii) unless otherwise noted, the Master Servicer has not
exercised the optional termination as set forth in "Description of the Notes -
Maturity and Optional Redemption" and (ix) the Step-Up Dates and the optional
termination are determined on the basis of the entire pool of Mortgage Loans and
not on the basis of each Loan Group.
The actual characteristics and performance of the Mortgage Loans in the
related Loan Group will likely differ from the assumptions used in constructing
the tables set forth below, which are hypothetical in nature and are provided
only to give a general sense of how the principal cash flows might behave under
varying prepayment scenarios. For example, it is very unlikely that the Mortgage
Loans in the related Loan Group will prepay at a constant rate until maturity or
that all Mortgage Loans in the related Loan Group will prepay at the same rate.
Moreover, the diverse remaining terms to stated maturity of the Mortgage Loans
in the related Loan Group could produce slower or faster principal distributions
than indicated in the tables at the various assumptions specified, even if the
weighted average remaining term to stated maturity of the Mortgage Loans in the
related Loan Group is as assumed. Any difference between such assumptions and
the actual characteristics and performance of the Mortgage Loans in the related
Loan Group, or actual prepayment experience, will affect the percentages of
initial Certificate Balances outstanding over time and the weighted average life
of the Notes. Neither the CPR model nor any other prepayment model or assumption
purports to be an historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the Mortgage Loans. Variations in the actual prepayment experience and
the Principal Balances of the Mortgage Loans that prepay may increase or
decrease each weighted average life shown in the following tables. Such
variations may occur even if the average prepayment experience of all Mortgage
Loans equals the CPR.
S-36
<PAGE>
Assumed Mortgage Loan Characteristics
of Group I Mortgage Loans
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
Remaining Term
Initial Gross Original Term to to Stated
Outstanding Mortgage Stated Maturity Maturity
Sub-Pool Principal Balance Interest Rate Servicing (months) (months)
-------- ----------------- ------------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
1 $81,671,004.00 13.110% 0.75% 184 181
2 $27,542,988.41 11.450% 0.75% 183 182
3 $12,858,087.35 8.530% 0.50% 360 356
4* $17,927,920.24 13.110% 0.75% 184 184
-------------------------------------
Sub-Total $140,000,000.00
---------
<CAPTION>
Assumed Mortgage Loan Characteristics
of Group II Mortgage Loans
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
Remaining Term
Initial Gross Original Term to to Stated
Outstanding Mortgage Stated Maturity Maturity
Sub-Pool Principal Balance Interest Rate Servicing (months) (months)
-------- ----------------- ------------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
1 $ 8,105,579.41 12.670% 0.75% 189 186
2 $10,349,253.09 11.030% 0.75% 185 184
3* $21,545,167.50 11.030% 0.75% 185 185
-------------------------------------
Sub-Total $40,000,000.00
---------
Total $180,000,000.00
-----
</TABLE>
*These Sub-Pools include Subsequent Mortgage Loans acquired from funds
on deposit in the Pre-Funding Account and therefore accrue interest only during
the first month and begin to amortize commencing in the second month.
Subject to the foregoing discussion and assumptions, the following
tables sets forth the percentage of the initial Note Balance of the Notes that
would be outstanding after each of the Payment Dates shown at various
percentages of the Prepayment Assumption, and indicate the weighted average life
of each class of Notes.
S-37
<PAGE>
Percentage of Note Balance (1)
Class A-1
<TABLE>
<CAPTION>
Payment Date Prepayment Assumption
- ------------ ---------------------------------------------------------------------------
0% 50% 75% 100% 125% 150% 175%
------------ ----------- ---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial.............. 100 100 100 100 100 100 100
May 2000........................... 80 67 61 54 47 41 34
May 2001........................... 72 38 22 6 0 0 0
May 2002........................... 65 13 0 0 0 0 0
May 2003........................... 57 0 0 0 0 0 0
May 2004........................... 47 0 0 0 0 0 0
May 2005........................... 36 0 0 0 0 0 0
May 2006........................... 24 0 0 0 0 0 0
May 2007........................... 11 0 0 0 0 0 0
May 2008........................... 0 0 0 0 0 0 0
May 2009........................... 0 0 0 0 0 0 0
May 2010........................... 0 0 0 0 0 0 0
May 2011........................... 0 0 0 0 0 0 0
May 2012........................... 0 0 0 0 0 0 0
May 2013........................... 0 0 0 0 0 0 0
May 2014........................... 0 0 0 0 0 0 0
May 2015........................... 0 0 0 0 0 0 0
May 2016........................... 0 0 0 0 0 0 0
May 2017........................... 0 0 0 0 0 0 0
May 2018........................... 0 0 0 0 0 0 0
May 2019........................... 0 0 0 0 0 0 0
May 2020........................... 0 0 0 0 0 0 0
May 2021........................... 0 0 0 0 0 0 0
May 2022........................... 0 0 0 0 0 0 0
May 2023........................... 0 0 0 0 0 0 0
May 2024........................... 0 0 0 0 0 0 0
May 2025........................... 0 0 0 0 0 0 0
May 2026........................... 0 0 0 0 0 0 0
May 2027........................... 0 0 0 0 0 0 0
May 2028........................... 0 0 0 0 0 0 0
May 2029........................... 0 0 0 0 0 0 0
Weighted Average Life to maturity
(years) (2)........................ 4.4170 1.6630 1.3037 1.0963 0.9610 0.8652 0.7937
</TABLE>
(1) All percentages are rounded to the nearest 1%.
(2) Assumes the Class A-1 Notes pay to maturity.
S-38
<PAGE>
Percentage of Note Balance (1)
Class A-2
<TABLE>
<CAPTION>
Payment Date Prepayment Assumption
------------ --------------------------------------------------------------------------
0% 50% 75% 100% 125% 150% 175%
----------- ----------- --------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial........................... 100 100 100 100 100 100 100
May 2000.......................... 100 100 100 100 100 100 100
May 2001.......................... 100 100 100 100 94 85 76
May 2002.......................... 100 100 94 80 68 57 47
May 2003.......................... 100 94 76 62 51 41 33
May 2004.......................... 100 80 63 49 38 29 22
May 2005.......................... 100 68 52 38 28 20 14
May 2006.......................... 100 59 42 30 21 14 9
May 2007.......................... 100 50 34 23 15 9 6
May 2008.......................... 97 42 27 17 11 6 3
May 2009.......................... 86 34 21 13 7 4 2
May 2010.......................... 73 27 16 9 5 2 1
May 2011.......................... 61 20 11 6 3 1 *
May 2012.......................... 47 14 8 4 1 * 0
May 2013.......................... 31 9 4 2 * 0 0
May 2014.......................... 13 3 1 0 0 0 0
May 2015.......................... 10 2 * 0 0 0 0
May 2016.......................... 9 1 * 0 0 0 0
May 2017.......................... 9 1 0 0 0 0 0
May 2018.......................... 8 1 0 0 0 0 0
May 2019.......................... 8 1 0 0 0 0 0
May 2020.......................... 7 * 0 0 0 0 0
May 2021.......................... 7 * 0 0 0 0 0
May 2022.......................... 6 * 0 0 0 0 0
May 2023.......................... 5 0 0 0 0 0 0
May 2024.......................... 5 0 0 0 0 0 0
May 2025.......................... 4 0 0 0 0 0 0
May 2026.......................... 3 0 0 0 0 0 0
May 2027.......................... 1 0 0 0 0 0 0
May 2028.......................... * 0 0 0 0 0 0
May 2029.......................... 0 0 0 0 0 0 0
Weighted Average Life 10% call
(years) (2)....................... 12.5103 8.2924 6.6817 5.4646 4.5717 3.8926 3.3671
Weighted Average Life to maturity
(years) (3)....................... 13.4014 8.5699 6.9951 5.8278 4.9337 4.2334 3.6758
</TABLE>
(1) All percentages are rounded to the nearest 1%.
(2) Assumes that an optional termination is exercised on the first
Payment Date on which the aggregate outstanding Principal
Balance of the Mortgage Loans is less than 10% of the sum of
(x) the aggregate Principal Balance of the Mortgage Loans as
of the related Cut-Off Date and (y) the amount on deposit in
the Pre-Funding Account on the Closing Date.
(3) Assumes the Class A-2 Notes pay to maturity.
* indicates a number less than 0.5% but greater than 0%.
S-39
<PAGE>
Percentage of Note Balance (1)
Class A-3
<TABLE>
<CAPTION>
Payment Date Prepayment Assumption
- ------------ --------------------------------------------------------------------------
0% 50% 75% 100% 125% 150% 175%
--------- ----------- ---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial................................ 100 100 100 100 100 100 100
May 2000............................... 85 70 63 55 48 40 33
May 2001............................... 74 37 20 3 0 0 0
May 2002............................... 67 12 0 0 0 0 0
May 2003............................... 59 0 0 0 0 0 0
May 2004............................... 50 0 0 0 0 0 0
May 2005............................... 39 0 0 0 0 0 0
May 2006............................... 28 0 0 0 0 0 0
May 2007............................... 15 0 0 0 0 0 0
May 2008............................... 1 0 0 0 0 0 0
May 2009............................... 0 0 0 0 0 0 0
May 2010............................... 0 0 0 0 0 0 0
May 2011............................... 0 0 0 0 0 0 0
May 2012............................... 0 0 0 0 0 0 0
May 2013............................... 0 0 0 0 0 0 0
May 2014............................... 0 0 0 0 0 0 0
May 2015............................... 0 0 0 0 0 0 0
May 2016............................... 0 0 0 0 0 0 0
May 2017............................... 0 0 0 0 0 0 0
May 2018............................... 0 0 0 0 0 0 0
May 2019............................... 0 0 0 0 0 0 0
May 2020............................... 0 0 0 0 0 0 0
May 2021............................... 0 0 0 0 0 0 0
May 2022............................... 0 0 0 0 0 0 0
May 2023............................... 0 0 0 0 0 0 0
May 2024............................... 0 0 0 0 0 0 0
May 2025............................... 0 0 0 0 0 0 0
May 2026............................... 0 0 0 0 0 0 0
May 2027............................... 0 0 0 0 0 0 0
May 2028............................... 0 0 0 0 0 0 0
May 2029............................... 0 0 0 0 0 0 0
Weighted Average Life to maturity
(years) (2)............................ 4.6697 1.6730 1.3030 1.0910 0.9548 0.8596 0.7890
</TABLE>
(1) All percentages are rounded to the nearest 1%.
(2) Assumes the Class A-3 Notes pay to maturity.
S-40
<PAGE>
Percentage of Note Balance (1)
Class A-4
<TABLE>
<CAPTION>
Payment Date Prepayment Assumption
- ------------ --------------------------------------------------------------------------
0% 50% 75% 100% 125% 150% 175%
--------- ----------- ---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial............................. 100 100 100 100 100 100 100
May 2000............................ 100 100 100 100 100 100 100
May 2001............................ 100 100 100 100 90 79 67
May 2002............................ 100 100 91 74 60 46 35
May 2003............................ 100 92 71 56 43 33 24
May 2004............................ 100 76 57 42 30 21 14
May 2005............................ 100 64 45 31 21 13 8
May 2006............................ 100 54 35 23 14 8 5
May 2007............................ 100 44 27 16 9 5 2
May 2008............................ 100 36 21 12 6 3 1
May 2009............................ 88 28 15 8 4 1 *
May 2010............................ 74 22 11 5 2 * 0
May 2011............................ 61 16 8 3 1 0 0
May 2012............................ 46 11 5 1 * 0 0
May 2013............................ 29 6 2 * 0 0 0
May 2014............................ 9 1 0 0 0 0 0
May 2015............................ 0 0 0 0 0 0 0
May 2016............................ 0 0 0 0 0 0 0
May 2017............................ 0 0 0 0 0 0 0
May 2018............................ 0 0 0 0 0 0 0
May 2019............................ 0 0 0 0 0 0 0
May 2020............................ 0 0 0 0 0 0 0
May 2021............................ 0 0 0 0 0 0 0
May 2022............................ 0 0 0 0 0 0 0
May 2023............................ 0 0 0 0 0 0 0
May 2024............................ 0 0 0 0 0 0 0
May 2025............................ 0 0 0 0 0 0 0
May 2026............................ 0 0 0 0 0 0 0
May 2027............................ 0 0 0 0 0 0 0
May 2028............................ 0 0 0 0 0 0 0
May 2029............................ 0 0 0 0 0 0 0
Weighted Average Life to 10% call
(years) (2)......................... 12.5235 7.8654 6.2080 5.0092 4.1410 3.4864 2.9814
Weighted Average Life to maturity
(years) (3)......................... 12.5580 8.0056 6.3970 5.2121 4.3243 3.6456 3.1158
</TABLE>
(1) All percentages are rounded to the nearest 1%.
(2) Assumes that an optional termination is exercised on the first
Payment Date on which the aggregate outstanding Principal Balance
of the Mortgage Loans is less than 10% of the sum of (x) the
aggregate Principal Balance of the Mortgage Loans as of the
related Cut-Off Date and (y) the amount on deposit in the
Pre-Funding Account on the Closing Date.
(3) Assumes the Class A-4 Notes pay to maturity.
* indicates a number that is less than 0.5% but greater than 0%.
S-41
<PAGE>
There is no assurance that prepayments will occur or, if they do occur,
that they will occur at any percentage of the Prepayment Assumption.
None of the Enhancer, the Trust, the Indenture Trustee, the Owner
Trustee, the Depositor or the Master Servicer will be liable to any Noteholder
for any loss or damage incurred by such Noteholder as a result of a reduced rate
of return experienced by such Noteholder relative to the Note Rate, upon
reinvestment of the funds received in connection with any premature repayment of
principal on the Notes, including, without limitation, any such repayment
resulting from prepayments, liquidations, or repurchases of, or substitutions
for, any Mortgage Loan.
THE MASTER SERVICER
Servicing Provisions
The Master Servicer will be responsible for servicing the Mortgage
Loans directly or through one or more subservicers in accordance with the terms
of the Sale and Servicing Agreement. Initially, the Originator will be the sole
subservicer with respect to the Mortgage Loans, and will perform all of the
duties of the Master Servicer under the Sale and Servicing Agreement. As such,
all discussion herein of the Master Servicer's obligations initially apply to
the Originator, as subservicer of the Mortgage Loans on behalf of the Master
Servicer. See "Servicing of Loans" in the Prospectus and "Servicing of the
Mortgage Loans" and "Description of the Sale and Servicing Agreement" herein.
Billing statements will be mailed to Mortgagors monthly by the Master
Servicer. Such statements will detail the monthly activity on the related
Mortgage Loan and specify the monthly payment due thereon.
For information regarding foreclosure procedures, see "Servicing of
Loans--Realization Upon Defaulted Loans" in the Prospectus and "Servicing of the
Mortgage Loans" herein. The Master Servicer's servicing and charge-off policies
and collection practices may change over time in accordance with the Master
Servicer's business judgment, changes in applicable laws and regulations and
other considerations.
Servicing Compensation
The Servicing Fee will be payable out of Interest Collections on the
Mortgage Loans. The Servicing Fee will be, with respect to any Collection
Period, the sum for all outstanding Mortgage Loans of the product of (i) 0.50%
(in the case of Mortgage Loans with an original maturity of 30 years) or 0.75%
(in the case of all other Mortgage Loans) multiplied by a fraction, the
numerator of which is the actual number of days in the related Interest Period
and the denominator of which is 360 and (ii) the Principal Balance of the
related Mortgage Loan as of the first day of such Collection Period. The
Servicing Fee will serve as compensation to the Master Servicer (or any
applicable subservicer) in respect of its servicing activities. In addition to
the Servicing Fee, the Master Servicer will be entitled under the Sale and
Servicing Agreement to retain additional servicing compensation in the form of
prepayment penalties, assumption and other administrative fees, release fees,
bad check charges and certain other servicing-related fees. The Master Servicer
will be obligated to pay certain ongoing expenses incurred by it in connection
with its servicing activities and other responsibilities under the Sale and
Servicing Agreement.
SERVICING OF THE MORTGAGE LOANS
Collection and Other Servicing Procedures
The Master Servicer will be obligated under the Sale and Servicing
Agreement to service and administer the Mortgage Loans on behalf of the Trust,
and will have full power and authority, subject to the provisions of the Sale
and Servicing Agreement, to do any and all things in connection with such
servicing and administration that it may deem necessary. The Master Servicer may
perform any of its obligations under the Sale and Servicing Agreement through
one or more subservicers. Initially, the Originator will be the sole subservicer
of the Mortgage Loans. Notwithstanding any such subservicing arrangement, the
Master Servicer will remain liable for its servicing duties and obligations
under the Sale and Servicing Agreement as if it alone were servicing the
Mortgage Loans.
S-42
<PAGE>
The Master Servicer will be obligated under the Sale and Servicing Agreement to
make reasonable efforts to collect all payments due under the terms and
provisions of the related mortgage documents and will be obligated, subject to
the terms of the Sale and Servicing Agreement, to follow such collection
procedures as it would normally follow with respect to mortgage loans serviced
by it for its own account, and that generally conform to the mortgage servicing
practices of prudent mortgage lending institutions that service mortgage loans
of the same type as the Mortgage Loans for their own accounts in the
jurisdictions in which the related Mortgaged Properties are located. Consistent
with the foregoing, the Master Servicer will be permitted, in its discretion,
to, among other things, (i) waive any late payment charge, prepayment penalty or
other charge in connection with any Mortgage Loan, (ii) arrange a schedule,
running for no more than 180 days after the due date of any payment due under
the related mortgage documents, for the liquidation of delinquent items and
(iii) subject to certain restrictions, modify the Mortgage Interest Rate of a
Mortgage Loan.
Realization Upon or Sale of Defaulted Mortgage Loans
Except as described below, the Master Servicer will be required to
foreclose upon or otherwise comparably convert the ownership of properties
securing such of the Mortgage Loans as come into and continue in default and as
to which no satisfactory arrangements can be made for collection of delinquent
payments thereon. In connection with such foreclosure or other conversion, the
Master Servicer will be required to follow such procedures as it follows with
respect to similar mortgage loans held in its own portfolio. However, the Master
Servicer will not be required to expend its own funds in connection with any
foreclosure or to restore any damaged property relating to any Mortgage Loan
unless it shall determine that such foreclosure and/or restoration will increase
net Liquidation Proceeds.
The Master Servicer will be permitted to foreclose against the
Mortgaged Property securing a defaulted Mortgage Loan either by foreclosure,
sale or strict foreclosure, and in the event a deficiency judgment is available
against the related Mortgagor or any other person, may proceed for the
deficiency.
In the event that title to any Mortgaged Property is acquired in
foreclosure or by deed in lieu of foreclosure, the deed or certificate of sale
will be required to be issued to the Owner Trustee, or to the Master Servicer on
behalf of the Owner Trustee. Notwithstanding any such acquisition of title and
cancellation of the related Mortgage Loan, such Mortgage Loan will be required
to be considered to be a Mortgage Loan held by the Trust until such time as the
related Mortgaged Property is sold and such Mortgage Loan becomes a Liquidated
Mortgage Loan.
In lieu of foreclosing upon any defaulted Mortgage Loan, the Master
Servicer may, in its discretion, permit the assumption of such Mortgage Loan if,
in the Master Servicer's judgment, such default is unlikely to be cured and if
the assuming borrower satisfies the Master Servicer's underwriting guidelines
with respect to mortgage loans owned by the Master Servicer. Any fee collected
by the Master Servicer for entering into an assumption agreement will be
retained by the Master Servicer as servicing compensation. Alternatively, the
Master Servicer may encourage the refinancing of any defaulted Mortgage Loan by
the related Mortgagor.
Notwithstanding the foregoing, prior to the institution of foreclosure
proceedings or the acceptance of a deed-in-lieu of foreclosure with respect to
any Mortgaged Property, the Master Servicer will make, or cause to be made,
inspection of such Mortgaged Property in accordance with accepted servicing
procedures. The Master Servicer will be entitled to rely upon the results of any
such inspection made by others. In cases where such inspection reveals that such
Mortgaged Property is potentially contaminated with or affected by hazardous
wastes or hazardous substances, the Master Servicer will promptly give written
notice of such fact to the Owner Trustee. The Master Servicer will not begin
foreclosure proceedings or accept a deed-in-lieu of foreclosure for any
Mortgaged Property where such inspection reveals potential contamination by
hazardous waste without obtaining the consent of the Owner Trustee.
Enforcement of Due-on-Sale Clauses
When a Mortgaged Property has been or is about to be conveyed by the
related Mortgagor, the Master Servicer will, to the extent that it has knowledge
of such conveyance or prospective conveyance, exercise its right to accelerate
the maturity of the related Mortgage Loan under any due-on-sale clause contained
in the related mortgage documents. The Master Servicer may not, however,
exercise any such right if such due-on-sale clause, in the
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<PAGE>
reasonable judgment of the Master Servicer, is not enforceable under applicable
law. In such event, the Master Servicer may enter into an assumption and
modification agreement with the person to which such property has been or is
about to be conveyed, pursuant to which such person will become liable under the
related mortgage documents and, unless prohibited by applicable law or such
mortgage documents, the related Mortgagor will remain liable thereon. The Master
Servicer is also authorized to enter into a substitution of liability agreement
with such person, pursuant to which the original Mortgagor will be released from
liability and such person will be substituted as Mortgagor and become liable
under the related mortgage documents.
Maintenance of Insurance Policies and Errors and Omissions and Fidelity Coverage
Generally, the underwriting requirements of the Originator require
mortgagors to obtain fire and casualty insurance as a condition to approving the
related mortgage loan, but the existence and/or maintenance of such fire and
casualty insurance is not in all cases monitored by the Originator. Title
insurance is not required on all mortgage loans. The Master Servicer will follow
such practices with respect to the Mortgage Loans. Accordingly, if a Mortgaged
Property suffers any hazard or casualty losses, or if the Mortgagor thereunder
is found not to have clear title to such Mortgaged Property, Noteholders may
bear the risk of loss resulting from a default by the related Mortgagor to the
extent such losses are not covered by foreclosure or liquidation proceeds on
such defaulted Mortgage Loan or by the applicable credit enhancement. To the
extent that the related mortgage documents require the Mortgagor under a
Mortgage Loan to maintain a fire and hazard insurance policy with extended
coverage on the related Mortgaged Property in an amount not less than the lesser
of the full insurable value of such Mortgaged Property or the unpaid Principal
Balance of such Mortgage Loan and any senior liens, the Master Servicer will
monitor the status of such insurance in varying degrees based upon certain
characteristics of the related Mortgage Loans, and will cause such insurance to
be maintained on a case-by-case basis. Further, with respect to each property
acquired by the Trust by foreclosure or by deed in lieu of foreclosure, the
Master Servicer will maintain or cause to be maintained fire and hazard
insurance thereon with extended coverage in an amount at least equal to the
lesser of (i) the full insurable value of the improvements that are a part of
such property and (ii) the Principal Balance owing on the related Mortgage Loan
at the time of such foreclosure or deed in lieu of foreclosure, plus accrued
interest thereon and related liquidation expenses. Such insurance on property
acquired by foreclosure or deed in lieu of foreclosure may not, however, be less
than the minimum amount required to fully compensate for any loss or damage on a
replacement cost basis.
Any cost incurred by the Master Servicer in maintaining any insurance
will not, for the purpose of calculating distributions to the Noteholders, be
added to the unpaid Principal Balance of the related Mortgage Loan,
notwithstanding that the terms of such Mortgage Loan may so permit. No
earthquake or other additional insurance other than flood insurance will be,
under the Sale and Servicing Agreement, required to be maintained by any
Mortgagor or the Master Servicer, other than pursuant to the terms of the
related mortgage documents and such applicable laws and regulations as shall at
any time be in force and as shall require such additional insurance.
The Master Servicer will also be required under the Sale and Servicing
Agreement to maintain in force (i) a policy or policies of insurance covering
errors and omissions in the performance of its obligations as Servicer and (ii)
a fidelity bond in respect of its officers, employees or agents.
No pool insurance policy, title insurance policy, blanket hazard
insurance policy, special hazard insurance policy, bankruptcy bond or repurchase
bond will be required to be maintained with respect to the Mortgage Loans, nor
will any Mortgage Loan be insured by any government or government agency.
Master Servicer Reports
The Master Servicer is required to deliver to the Issuer, the Indenture
Trustee, the Enhancer and each Rating Agency, not later than May 31 of each
year, beginning with 2000, an officer's certificate stating as to each signer
thereof that (i) a review of the activities of the Master Servicer during the
preceding calendar year and of its performance under the Sale and Servicing
Agreement has been made under such officer's supervision and (ii) to the best of
such officer's knowledge, based on such review, the Master Servicer has
fulfilled all of its obligations under the Sale and Servicing Agreement
throughout such year, or if there has been a default in the fulfillment of any
such obligation, specifying each such default known to such officer and the
nature and status thereof.
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Not later than May 31 of each year, beginning with 2000, the Master
Servicer, at its expense, will cause a firm of nationally recognized independent
public accountants to furnish a statement to the Issuer, the Indenture Trustee,
the Enhancer and each Rating Agency to the effect that, on the basis of an
examination of certain documents and records relating to the servicing of
mortgage loans then being serviced by the Master Servicer under servicing
agreements similar to the Sale and Servicing Agreement, which agreements will be
described in a schedule to such statement, such firm is of the opinion that such
servicing has been conducted in compliance with the Uniform Single Attestation
Program for Mortgage Bankers and that such examination has disclosed no
exceptions or errors relating to the servicing activities of the Master
Servicer, including the servicing of the Mortgage Loans, that in the opinion of
such firm are material, except for such exceptions as shall be set forth in such
statement.
Removal of the Master Servicer
The Enhancer, the Issuer or the Indenture Trustee, by notice given in
writing to the Master Servicer, may terminate all rights and obligations of the
Master Servicer under the Sale and Servicing Agreement, other than the Master
Servicer's right to receive servicing compensation and reimbursement of expenses
thereunder during any period prior to the date of such termination, upon the
occurrence and continuation beyond the applicable cure period of an event
described below (each, a "Servicer Default"):
(a) any failure by the Master Servicer to deposit into the Collection
Account or the Trustee Collection Account any deposit required to be made under
the terms of the Sale and Servicing Agreement that continues unremedied for a
period of five Business Days after the date upon which written notice of such
failure shall have been given to the Master Servicer by the Issuer, the Enhancer
or the Indenture Trustee;
(b) any failure on the part of the Master Servicer to duly observe or
perform in any material respect any other covenants or agreements of the Master
Servicer set forth in the Sale and Servicing Agreement, which failure materially
and adversely affects the interests of the Enhancer or any Securityholder, and
which failure continues unremedied for a period of 45 days after the date on
which written notice of such failure, requiring the same to be remedied, shall
have been given to the Master Servicer by the Issuer, the Enhancer or the
Indenture Trustee;
(c) the entry against the Master Servicer of a decree or order by a
court, agency or supervisory authority having jurisdiction in the premises for
the appointment of a trustee, conservator, receiver or liquidator in any
insolvency, conservatorship, receivership, readjustment of debt, marshalling of
assets and liabilities or similar proceedings, or for the winding up or
liquidation of its affairs; and the continuance of any such decree or order
unstayed and in effect for a period of 60 consecutive days; or
(d) the Master Servicer shall voluntarily go into liquidation or
consent to the appointment of a conservator, receiver, liquidator or similar
person in any insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceeding of or relating to the Master Servicer or all
or substantially all of its property, or a decree or order of a court, agency or
supervisory authority having jurisdiction in the premises for the appointment of
a conservator, receiver, liquidator or similar person in any insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceeding, or for the winding-up or liquidation of the Master Servicer's
affairs, shall have been entered against the Master Servicer, and such decree or
order shall have remained in force undischarged, unbonded and unstayed for a
period of 60 days, or the Master Servicer shall admit in writing its inability
to pay its debts generally as they become due, file a petition to take advantage
of any applicable insolvency or reorganization statute, make an assignment for
the benefit of its creditors or voluntarily suspend payment of its obligations;
or
(e) the delinquency or loss experience of the Mortgage Loans exceeds
certain levels specified in the Insurance and Indemnity Agreement, to be dated
as of the Closing Date, among the Enhancer, the Transferor, the Depositor, the
Master Servicer, the Originator, the Trust and the Indenture Trustee.
The Master Servicer may not assign the Sale and Servicing Agreement nor
resign from the obligations and duties imposed on it thereby except by mutual
written consent of the parties thereto and the Enhancer or upon the Master
Servicer's determination that its duties thereunder are no longer permissible
under applicable law and that such incapacity cannot be cured without the
incurrence of unreasonable expense. Any such determination that the Master
Servicer's duties under the Sale and Servicing Agreement are no longer
permissible under applicable law
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will be evidenced by a written Opinion of Counsel, who may be counsel for the
Master Servicer, to such effect delivered to the Issuer, the Indenture Trustee
and the Enhancer. No such resignation will become effective until the Indenture
Trustee or a successor appointed in accordance with the terms of the Sale and
Servicing Agreement has assumed the Master Servicer's responsibilities and
obligations in accordance with the Sale and Servicing Agreement. The Master
Servicer will provide the Issuer, the Indenture Trustee, the Enhancer and each
Rating Agency with 30 days prior written notice of its intention to resign.
Unless the Enhancer selects another eligible servicer to act as
successor Master Servicer within 90 days of such termination, the Indenture
Trustee, as pledgee of the Mortgage Loans, will be the successor in all respects
to the Master Servicer in its capacity as Master Servicer under the Sale and
Servicing Agreement and with respect to the transactions set forth therein, and
shall be subject to all responsibilities, duties and liabilities relating
thereto placed on the Master Servicer by the terms thereof. As compensation
therefor, the Indenture Trustee will be entitled to such compensation as the
Master Servicer would have been entitled to under the Sale and Servicing
Agreement if there had been no such termination. If the Indenture Trustee is
unwilling to act as successor Master Servicer or is legally unable so to act,
then it will be required to appoint or petition a court of competent
jurisdiction to appoint any established mortgage loan servicing institution
having a net worth of not less than $10,000,000 as the successor to the Master
Servicer under the Sale and Servicing Agreement with respect to all or any part
of the Master Servicer's responsibilities, duties or liabilities thereunder;
provided, that the Enhancer shall have consented thereto and that no Rating
Agency, after prior notice thereto, shall have notified the Indenture Trustee in
writing that such appointment would result in a qualification, reduction or
withdrawal of its then-current rating of the Notes, determined without regard to
the Policy. See "The Master Servicer--Servicing Compensation" herein.
Any successor Master Servicer, including the Indenture Trustee, (i)
will be bound by the terms of the Insurance Agreement and (ii) will not be
deemed to be in default or to have breached its duties under the Sale and
Servicing Agreement if the predecessor Master Servicer fails to make any
required deposit into the Collection Account or the Trustee Collection Account
or otherwise cooperate with any required servicing transfer or succession
thereunder.
THE ISSUER
The Issuer is a business trust formed under the laws of the State of
Delaware pursuant to the Trust Agreement for the purposes described in this
Prospectus Supplement. The Trust Agreement constitutes the "governing
instrument" under the laws of the State of Delaware relating to business trusts.
After its formation, the Issuer will not engage in any activity other than (i)
acquiring and holding the Mortgage Loans and the other assets of the Issuer (the
"Trust Estate") and proceeds therefrom, (ii) issuing the Notes and the
Certificates, (iii) making payments on the Notes and the Certificates and (iv)
engaging in other activities that are necessary, suitable or convenient to
accomplish the foregoing or are incidental thereto or connected therewith.
The Issuer's principal offices are in Wilmington, Delaware, in care of
Wilmington Trust Company, as Owner Trustee, at Rodney Square North, 1100 North
Market Street, Wilmington, Delaware 19890-0001.
THE OWNER TRUSTEE
Wilmington Trust Company is the Owner Trustee under the Trust
Agreement. The Owner Trustee is a Delaware banking corporation and its principal
offices are located at Rodney Square North, 1100 North Market Street, in
Wilmington, Delaware 19890-0001.
Neither the Owner Trustee nor any director, officer or employee of the
Owner Trustee will be under any liability to the Issuer or the Securityholders
for any action taken or for refraining from the taking of any action in good
faith pursuant to the Trust Agreement or for errors in judgment; provided,
however, that none of the Owner Trustee and any director, officer or employee
thereof will be protected against any liability which would otherwise be imposed
by reason of willful malfeasance, bad faith or negligence in the performance of
duties or by reason of reckless disregard of obligations and duties under the
Trust Agreement. All persons into which the Owner Trustee
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may be merged or with which it may be consolidated or any person resulting from
such merger or consolidation shall be the successor of the Owner Trustee under
the Trust Agreement.
THE INDENTURE TRUSTEE
Norwest Bank Minnesota, National Association, a national banking
association, is the Indenture Trustee under the Indenture. The principal offices
of the Indenture Trustee are located Norwest Center, Sixth and Marquette,
Minneapolis, Minnesota 55479-0070.
DESCRIPTION OF THE NOTES
General
The Notes will be issued pursuant to the Indenture. The Certificates
will be issued pursuant to the Trust Agreement. The following summaries describe
certain provisions of the Securities, the Indenture and the Trust Agreement. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the applicable agreement. Only
the Notes are being offered hereby.
The Notes will be secured by the assets of the Trust pledged by the
Issuer to the Indenture Trustee pursuant to the Indenture which will consist of:
(i) the Mortgage Loans (including any Subsequent Mortgage Loans); (ii) all funds
on deposit from time to time in the Note Payment Account, the Certificate
Distribution Account, the Pre-Funding Account, the Collection Account, the
Trustee Collection Account and the Capitalized Interest Account (each as defined
herein) and all proceeds thereof; (iii) the Policy; and (iv) all proceeds of the
foregoing.
Book-Entry Notes
The Notes will initially be issued as Book-Entry Notes. Persons
acquiring beneficial ownership interests in the Notes ("Note Owners") may elect
to hold their Notes through the DTC in the United States, or Cedel or Euroclear,
in Europe if they are Participants of such systems, or indirectly through
organizations which are Participants in such systems. The Book-Entry Notes will
be issued in one or more securities which equal the aggregate principal balance
of the Notes and will initially be registered in the name of Cede & Co., the
nominee of DTC. Cedel and Euroclear will hold omnibus positions on behalf of
their Participants through customers' securities accounts in Cedel's and
Euroclear's names on the books of their respective depositaries (in such
capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries") which in turn will hold such positions in customers"
securities accounts in the depositaries" names on the books of DTC. Investors
may hold such beneficial interests in the Book-Entry Notes in minimum
denominations of $1,000 and in integral multiples of $1 in excess thereof.
Except as described below, no Beneficial Owner will be entitled to receive a
physical certificate representing such security (a "Definitive Note"). Unless
and until Definitive Notes are issued, it is anticipated that the only "Holder"
of the Notes will be Cede & Co., as nominee of DTC. Note Owners will not be
Holders as that term is used in the Indenture.
DTC has advised the Depositor that management of DTC is aware that some
computer applications, systems and the like for processing data ("Systems") that
are dependent upon calendar dates, including dates before, on and after January
1, 2000, may encounter "Year 2000" problems. DTC has informed its Participants
and other members of the financial community (the "Industry") that it has
developed and is implementing a program so that its Systems, as they relate to
the timely payment of distributions (including principal and income payments) to
securityholders, book-entry deliveries and settlement of trades with DTC ("DTC
Services") continue to function appropriately. This program includes a technical
assessment and a remediation plan, each of which is complete. Additionally,
DTC's plan includes a testing phase, which, DTC has advised the Industry, is
expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also
dependent upon other parties, including but not limited to issuers and their
agents, as well as DTC's Participants and third party vendors from whom DTC
licenses software and hardware, and third party vendors on whom DTC relies for
information or the provision of
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services, including telecommunication and electrical utility service providers,
among others. DTC has informed the Industry that it is contacting (and will
continue to contact) third party vendors from whom DTC acquires services to (i)
impress upon them the importance of such services being Year 2000 compliant; and
(ii) determine the extent of their efforts for Year 2000 remediation (and, as
appropriate, testing) of their services. In addition, DTC is in the process of
developing such contingency plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has
been provided to the Industry for informational purposes only and is not
intended to serve as a representation, warranty or contract modification of any
kind.
A Beneficial Owner's ownership of a Book-Entry Note will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the Beneficial
Owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Notes will be recorded on the records of DTC (or of
a Participating firm that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC, if the Beneficial
Owner's Financial Intermediary is not a DTC Participant and on the records of
Cedel or Euroclear, as appropriate).
Note Owners will receive all payments of principal and interest on the
Notes from the Indenture Trustee through DTC and DTC Participants. While the
Notes are outstanding (except under the circumstances described below), under
the rules, regulations and procedures creating and affecting DTC and its
operations (the "Rules"), DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Notes and is required
to receive and transmit payments of principal and interest on the Notes.
Participants and Indirect Participants with whom Note Owners have
accounts with respect to Notes are similarly required to make book-entry
transfers and receive and transmit such payments on behalf of their respective
Note Owners. Accordingly, although Note Owners will not possess physical
certificates, the Rules provide a mechanism by which Note Owners will receive
payments and will be able to transfer their interest.
Note Owners will not receive or be entitled to receive Definitive Notes
representing their respective interests in the Notes, except under the limited
circumstances described below. Unless and until Definitive Notes are issued,
Note Owners who are not Participants may transfer ownership of Notes only
through Participants and Indirect Participants by instructing such Participants
and Indirect Participants to transfer the Notes, by book-entry transfer, through
DTC for the account of the purchasers of such Notes, which account is maintained
with their respective Participants. Under the Rules and in accordance with DTC's
normal procedures, transfers of ownership of Notes will be executed through DTC
and the accounts of the respective Participants at DTC will be debited and
credited. Similarly, the Participants and Indirect Participants will make debits
or credits, as the case may be, on their records on behalf of the selling and
purchasing Note Owners.
Under a book-entry format, Beneficial Owners of the Book-Entry Notes
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Indenture Trustee to Cede & Co. Payments with respect to
Notes held through Cedel or Euroclear will be credited to the cash accounts of
Cedel Participants or Euroclear Participants in accordance with the relevant
system's rules and procedures, to the extent received by the Relevant
Depositary. Such payments will be subject to tax reporting in accordance with
relevant United States tax laws and regulations. Because DTC can only act on
behalf of Financial Intermediaries, the ability of a Beneficial Owner to pledge
Book-Entry Notes to persons or entities that do not participate in the
Depositary system, or otherwise take actions in respect of such Book-Entry
Notes, may be limited due to the lack of physical certificates for such
Book-Entry Notes. In addition, issuance of the Book-Entry Notes in book-entry
form may reduce the liquidity of such Notes in the secondary market since
certain potential investors may be unwilling to purchase securities for which
they cannot obtain physical certificates.
DTC has advised the Indenture Trustee that, unless and until Definitive
Notes are issued, DTC will take any action permitted to be taken by the holders
of the Book-Entry Notes under the Indenture only at the direction of one or more
Financial Intermediaries to whose DTC accounts the Book-Entry Notes are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Notes. Cedel or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by Noteholders under the Indenture on behalf of a Cedel Participant or
Euroclear Participant only in accordance with its relevant rules and
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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 Notes which conflict with actions
taken with respect to other Notes.
Definitive Notes will be issued to Beneficial Owners of the Book-Entry
Notes, or their nominees, rather than to DTC, if (a) the Indenture Trustee
determines that the DTC is no longer willing, qualified or able to discharge
properly its responsibilities as nominee and depository with respect to the
Book-Entry Notes and the Indenture Trustee is unable to locate a qualified
successor, (b) the Indenture Trustee elects to terminate a book-entry system
through DTC or (c) after the occurrence of an Event of Default, pursuant to the
Indenture, Beneficial Owners having Percentage Interests aggregating at least a
majority of the Note Balance of the Notes advise the DTC through the Financial
Intermediaries and the DTC Participants in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Indenture Trustee will be required to notify all
Beneficial Owners of the occurrence of such event and the availability through
DTC of Definitive Notes. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Notes and instructions for
re-registration, the Indenture Trustee will issue and authenticate Definitive
Notes, and thereafter the Indenture Trustee will recognize the holders of such
Definitive Notes as Holders under the Indenture.
Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Notes among Participants of DTC,
Cedel and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time. See
"Risk Factors--Book-Entry Registration", "Description of the
Securities--Book-Entry Securities" and "The Agreements--Book-Entry Securities"
in the Prospectus and Annex I hereto.
None of the Depositor, the Master Servicer or the Indenture Trustee
will have any liability for any actions taken by DTC or its nominee, including,
without limitation, actions for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Notes held by
Cede, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
Payments
Payments on the Notes will be made by the Indenture Trustee or the
Paying Agent on the 15th day of each month or, if such day is not a Business
Day, then the next succeeding Business Day, commencing in June 1999 (each, a
"Payment Date"). Payments on the Notes will be made to the persons in whose
names such Notes are registered at the close of business on the day prior to
each Payment Date (or, if the Notes are no longer Book-Entry Notes, at the
related Record Date). See "The Agreements--Book-Entry Securities" in the
Prospectus. Payments will be made by check or money order mailed (or upon the
request of a Holder owning Notes having denominations aggregating at least
$1,000,000, by wire transfer or otherwise) to the address of the person entitled
thereto (which, in the case of Book-Entry Notes, will be DTC or its nominee) as
it appears on the Note Register in amounts calculated as described herein on the
Determination Date. However, the final payment in respect of the Notes (if the
Notes are no longer Book-Entry Notes) will be made only upon presentation and
surrender thereof at the office or the agency of the Indenture Trustee specified
in the notice to Holders of such final payment. A "Business Day" is any day
other than (i) a Saturday or Sunday or (ii) a day on which banking institutions
in the State of California, Minnesota, Maryland, New York, Indiana or Delaware
are required or authorized by law to be closed.
Interest Payments on the Notes
Interest payments will accrue on each class of Notes on each Payment
Date at the related Note Rate, subject to the limitations set forth below, which
may result in Interest Carry-Forward Amounts. The "Note Rate" for the Class A-1
Notes will equal the least of (i) LIBOR plus 0.10% per annum, (ii) the weighted
average net Mortgage Interest Rate of the Mortgage Loans in Loan Group I, and
(iii) 14.50% per annum. The Note Rate for the Class A-3 Notes will equal the
least of (i) LIBOR plus 0.18% per annum, (ii) the weighted average net Mortgage
Interest Rate of the Mortgage Loans in Loan Group II, and (iii) 14.50% per
annum. The Note Rate for the Class A-2 Notes, and Class A-4 Notes will be 6.830%
and 6.890% per annum, respectively; provided, however, that the Note Rate on the
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Class A-2 Notes and the Class A-4 Notes will increase to 7.580% and 7.640% per
annum, respectively, commencing on the first Payment Date on which the aggregate
outstanding Principal Balance of the Mortgage Loans in the related Loan Group is
less than 10% of the sum of (x) the aggregate Principal Balance of the Mortgage
Loans in such Loan Group as of the related Cut-Off Date and (y) the amount on
deposit in the Pre-Funding Account on the Closing Date that is available to be
used to purchase Mortgage Loans for the related Loan Group. See "Maturity and
Optional Redemption" below.
However, on any Payment Date for which the Note Rate for the Class A-1
and Class A-3 Notes has been determined pursuant to clause (ii) of the related
definition above, the excess of (a) the amount of interest that would have
accrued on the Notes during the related Interest Period had such amount been
determined pursuant to clause (i) above over (b) the interest actually accrued
on the Notes during such Interest Period (such excess, an "Interest
Carry-Forward Amount") will accrue interest at the Note Rate (as adjusted from
time to time) and will be paid on subsequent Payment Dates to the extent funds
are available therefor. Interest Carry-Forward Amounts will not be covered by
the Policy and may remain unpaid on the Final Payment Date.
Interest on each class of Notes in respect of any Payment Date will
accrue for the related Interest Period on the related Note Balance (as defined
herein). The "Interest Period" with respect to the Class A-1 Notes and Class A-3
Notes shall be (i) with respect to the Payment Date in June 1999, the period
commencing on the Closing Date and ending on the day preceding the Payment Date
in June 1999, and (ii) with respect to any Payment Date after the Payment Date
in June 1999, the period commencing on the Payment Date in the month immediately
preceding the month in which such Payment Date occurs and ending on the day
preceding such Payment Date. The Interest Period with respect to any Payment
Date and the Class A-2 Notes and Class A-4 Notes will be the calendar month
preceding the month in which the related Payment Date occurs. Interest for the
Class A-1 Notes and Class A-3 Notes will be calculated on the basis of the
actual number of days in the related Interest Period and a 360-day year.
Interest for the Class A-2 Notes and Class A-4 Notes will be based on a 30-day
month and a 360-day year. Interest payments on the Notes will be funded from
payments on the Mortgage Loans and, if necessary, from draws on the Policy as
described herein.
Determination of LIBOR
On each Payment Date, LIBOR will be established by the Indenture
Trustee. As to any Interest Period, LIBOR will equal, for any Interest Period
other than the first Interest Period, the rate for United States dollar deposits
for one month that appears on the Telerate Screen Page 3750 as of 11:00 a.m.,
London, England time, on the second LIBOR Business Day prior to the first day of
such Interest Period. With respect to the first Interest Period, the rate for
United States dollar deposits for one month that appears on the Telerate Screen
Page 3750 as of 11:00 a.m., London, England time, two LIBOR Business Days prior
to the Closing Date. If such rate does not appear on such page (or such other
page as may replace such page on such service, or if such service is no longer
offered, such other service for displaying LIBOR or comparable rates as may be
reasonably selected by the Indenture Trustee after consultation with the Master
Servicer), the rate will be the Reference Bank Rate. If no such quotations can
be obtained and no Reference Bank Rate is available, LIBOR will be LIBOR
applicable to the preceding Payment Date.
"Telerate Page 3750" means the display page so designated on the Bridge
Information Systems Telerate Service (or such other page as may replace page
3750 on such service for the purpose of displaying London interbank offered
rates of major banks). If such rate does not appear on such page (or such other
page as may replace such page on such service, or if such service is no longer
offered, such other service for displaying LIBOR or comparable rates as may be
selected by the Issuer after consultation with the Indenture Trustee), the rate
will be the Reference Bank Rate.
The "Reference Bank Rate" will be, with respect to any Interest Period,
as follows: the arithmetic mean (rounded upwards, if necessary, to the nearest
one sixteenth of one percent) of the offered rates for United States dollar
deposits for one month which are offered by the Reference Banks as of 11:00
a.m., London, England time, on the second LIBOR Business Day prior to the first
day of such Interest Period to prime banks in the London interbank market for a
period of one month in amounts approximately equal to the sum of the outstanding
Note Balance of the Notes; provided, that at least two such Reference Banks
provide such rate. If fewer than two offered rates appear, the Reference Bank
Rate will be the arithmetic mean of the rates quoted by one or more major banks
in
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New York City, selected by the Indenture Trustee after consultation with the
Master Servicer, as of 11:00 a.m., New York time, on such date for loans in U.S.
Dollars to leading European Banks for a period of one month in amounts
approximately equal to the aggregate Note Balance of the Notes. If no such
quotations can be obtained, the Reference Bank Rate will be the Reference Bank
Rate applicable to the preceding Interest Period.
"LIBOR Business Day" means any day other than (i) a Saturday or a
Sunday or (ii) a day on which banking institutions in the city of London,
England are required or authorized by law to be closed.
The establishment of LIBOR as to each Interest Period by the Indenture
Trustee and the Indenture Trustee's calculation of the rate of interest
applicable to the Notes for the related Interest Period will, in the absence of
manifest error, be final and binding.
Priority of Distributions
On each Payment Date, from amounts on deposit in the Trustee Collection
Account (including any draw on the Policy deposited therein for such Payment
Date), the Indenture Trustee will make the following payments in the following
order of priority:
(i) any prepayment penalties collected during the immediately preceding
Collection Period to the Certificateholders;
(ii) to the Enhancer, the amount of the premium for the Policy, with
interest thereon as provided in the Insurance Agreement and to the
Indenture Trustee, the Indenture Trustee Fee payable thereto in respect
of such Collection Period (to the extent sufficient funds remain
available from Interest Collections and Principal Collections from
Mortgage Loans assigned to Loan Group I and Loan Group II, then such
payments shall be allocated among Loan Group I and Loan Group II in
proportion to the sum of the Class A-1 and Class A-2 Note Balance, and
the sum of the Class A-3 and Class A-4 Note Balance, respectively);
(iii) interest for the related Interest Period at the related Note Rate on
the related Note Balances of the Notes immediately prior to such
Payment Date, pro rata, to the Holders of the Notes;
(iv) the Base Principal Distribution Amount for Loan Group I, to the Holders
of the Class A-1 Notes and Class A-2 Notes, in that order, until the
respective Note Balance thereof has been reduced to zero; and the Base
Principal Distribution Amount for Loan Group II, to the Holders of the
Class A-3 Notes and Class A-4 Notes, in that order, until the
respective Note Balance thereof has been reduced to zero;
(v) to the Enhancer, to reimburse it for prior draws made on the Policy,
with interest thereon as provided in the Insurance Agreement (such
payment shall be allocated first to Interest Collections and Principal
Collections from Mortgage Loans assigned to Loan Group I if the draw in
question was made for the benefit of the Class A-1 Notes or the Class
A-2 Notes; or first to Interest Collections and Principal Collections
from Mortgage Loans assigned to Loan Group II if the draw in question
was made for the benefit of the Class A-3 Notes or the Class A-4
Notes);
(vi) to the extent of the Group I Excess Spread, any Overcollateralization
Deficiency Amount for Loan Group I, to the Holders of the Class A-1
Notes and Class A-2 Notes, in that order, until the respective Note
Balance thereof has been reduced to zero; and to the extent of the
Group II Excess Spread, any Overcollateralization Deficiency Amount for
Loan Group II, to the Holders of the Class A-3 Notes and Class A-4
Notes, in that order, until the respective Note Balance thereof has
been reduced to zero;
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(vii) to the extent of any remaining Group I Excess Spread, the Additional
Principal Distribution Amount for Loan Group II, to the Holders of the
Class A-3 Notes and Class A-4 Notes, in that order, until the
respective Note Balance thereof has been reduced to zero; and to the
extent of any remaining Group II Excess Spread, the Additional
Principal Distribution Amount for Loan Group I, to the Holders of the
Class A-1 Notes and Class A-2 Notes, in that order, until the
respective Note Balance thereof has been reduced to zero;
(viii) to the Enhancer, any other amounts owed to the Enhancer pursuant to the
Insurance Agreement;
(ix) to the Indenture Trustee, any amounts owing to the Indenture Trustee to
the extent remaining unpaid; provided, that to the extent the amount
available pursuant to this clause is insufficient to cover the entire
amount payable to the Indenture Trustee in respect of such Collection
Period, the remaining amount shall be paid as agreed on the Closing
Date between the Master Servicer and the Indenture Trustee;
(x) to the Holders of the Class A-1 and Class A-3 Notes, any Interest
Carry-Forward Amounts not previously paid, together with interest
thereon at the related Note Rate (as adjusted from time to time), based
on the amount remaining unpaid with respect thereto; and
(xi) any remaining amount, to the Certificateholders;
Notwithstanding the foregoing, (x) on the Final Insured Payment Date the
aggregate of amounts to be paid pursuant to clauses (iv), (vi) and (vii) above
shall be equal to the aggregate of the Note Balances immediately prior to such
Payment Date, and (y) any draw on the Policy included in the amount on deposit
in the Trustee Collection Account shall be applied only to the payment of
clauses (iii), (iv), (vi) and (vii) above.
For purposes of the foregoing, to the extent that Subordination
Deficits are not otherwise covered by Excess Spread or a draw on the Policy on a
Payment Date, payments of principal to Holders of the Notes on such Payment Date
will be reduced by the pro rata portion allocable to the related Class or
Classes Notes of all Subordination Deficits for such Payment Date.
"Additional Principal Distribution Amount" means for any Payment Date
and Loan Group, the lesser of (i) the Excess Spread for the other Loan Group
remaining after payment of amounts referenced in clause (vi) above and (ii) any
Overcollateralization Deficiency Amount for such Payment Date and Loan Group.
"Base Principal Distribution Amount" means for any Payment Date and
Loan Group, the greater of (i) Principal Collections for the related Mortgage
Loans plus losses on Liquidated Mortgage Loans in such Loan Group for the
related Collection Period less any Overcollateralization Release Amount for such
Payment Date and Loan Group, and (ii) the Subordination Deficit for such Loan
Group and the immediately preceding Payment Date.
"Excess Spread" means, with respect to Loan Group I, the Group I Excess
Spread and, with respect to Loan Group II, the Group II Excess Spread.
"Group I Excess Spread" means with respect to any Payment Date and
without taking into account any draw on the Policy for such Payment Date, the
excess, if any, of Interest Collections and Principal Collections for Mortgage
Loans assigned to Loan Group I over the sum of (i) prepayment penalties
collected on Mortgage Loans assigned to Loan Group I, (ii) the portion of the
premium for the Policy and the Indenture Trustee Fee allocable to Loan Group I,
(iii) interest accrued on the outstanding Class A-1 Note Balance and Class A-2
Note Balance at the applicable Note Rate for the related Interest Period, (iv)
the Base Principal Distribution Amount for Loan Group I, and (v) the portion of
any reimbursement amount, together with any interest thereon, payable to the
Enhancer that is allocable to Loan Group I.
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"Group II Excess Spread" means with respect to any Payment Date and
without taking into account any draw on the Policy for such Payment Date, the
excess, if any, of Interest Collections and Principal Collections for Mortgage
Loans assigned to Group II over the sum of (i) prepayment penalties collected on
Mortgage Loans assigned to Loan Group II, (ii) the portion of the premium for
the Policy and the Indenture Trustee Fee allocable to Loan Group II, (iii)
interest accrued on the outstanding Class A-3 Note Balance and Class A-4 Note
Balance at the applicable Note Rate for the related Interest Period, (iv) the
Base Principal Distribution Amount for Loan Group II, and (v) the portion of any
reimbursement amount, together with any interest thereon, payable to the
Enhancer that is allocable to Loan Group II.
"Interest Collections" means, with respect to any Payment Date and Loan
Group, the sum of all payments by or on behalf of Mortgagors and any other
amounts constituting interest (including such portion of Insurance Proceeds,
Liquidation Proceeds and Repurchase Prices as is allocable to interest on the
applicable Mortgage Loan as are paid by the Transferor or the Master Servicer in
respect of Mortgage Loans in the applicable Loan Group or is collected by the
Master Servicer under the Mortgage Loans in such Loan Group, reduced by the
Servicing Fee for the related Collection Period and by any fees (including
annual fees), prepayment penalties or late charges or similar administrative
fees paid by Mortgagors with respect to Mortgage Loans in such Loan Group during
such Collection Period). The terms of the related mortgage documents shall
determine the portion of each payment in respect of such Mortgage Loan that
constitutes principal and interest, respectively.
"Liquidated Mortgage Loan" means a defaulted Mortgage Loan as to which
the Master Servicer has determined that all amounts that it expects to recover
on such Mortgage Loan have been recovered (exclusive of any possibility of a
deficiency judgment).
"Overcollateralization Amount" shall mean, with respect to any Payment
Date and Loan Group, the excess, if any, of (i) the aggregate Principal Balance
of all Mortgage Loans assigned to such Loan Group as of the close of business on
the last day of the related Collection Period over (ii) the aggregate of the
Note Balances of the Class A-1 Notes and the Class A-2 Notes, in the case of
Loan Group I, or the aggregate of the Note Balances of the Class A-3 Notes and
the Class A-4 Notes, in the case of Loan Group II, in each case after taking
into account the payment of the Base Principal Distribution Amount for such
Payment Date.
"Overcollateralization Deficiency Amount" shall mean, with respect to
any date of determination and Loan Group, the excess, if any, of the
Overcollateralization Target Amount for such Loan Group over the
Overcollateralization Amount for such Loan Group.
"Overcollateralization Release Amount" shall mean, with respect to any
date of determination and Loan Group, the excess, if any, of the
Overcollateralization Amount for such Loan Group over the Overcollateralization
Target Amount for such Loan Group.
"Overcollateralization Target Amount" with respect to each Loan Group,
shall have the meaning assigned thereto in the Insurance Agreement.
"Principal Collections" means, with respect to any Payment Date and any
Mortgage Loan, the aggregate of the following amounts:
(i) the total amount of payments made by or on behalf of the related
Mortgagor, received and applied as payments of principal on such
Mortgage Loan during the related Collection Period, as reported by the
Master Servicer or the related Subservicer;
(ii) any Liquidation Proceeds allocable as a recovery of principal received
in connection with such Mortgage Loan during the related Collection
Period;
(iii) if such Mortgage Loan was purchased by the Transferor pursuant to the
Mortgage Loan Sale Agreement during the related Collection Period, 100%
of the Principal Balance thereof as of the date of such purchase; and
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(iv) other amounts received as payments on or proceeds of such Mortgage Loan
during the Collection Period, to the extent applied in reduction of the
Principal Balance thereof.
"Subordination Deficit" shall mean, with respect to any Payment Date
and Loan Group, the excess, if any, of (i) the aggregate of the Class A-1 Note
Balance and the Class A-2 Note Balance, in the case of Loan Group I or the
aggregate of the Class A-3 Note Balance and the Class A-4 Note Balance, in the
case of Loan Group II on such Payment Date, after taking into account the
payment of the Base Principal Distribution Amount and Additional Principal
Distribution Amount on such Payment Date (without taking into account any
amounts payable under the Policy on such Payment Date) over (ii) the aggregate
Principal Balance of all Mortgage Loans assigned to such Loan Group as of the
close of business on the last day of the related Collection Period.
The Paying Agent
The Paying Agent shall initially be the Indenture Trustee, together
with any successor thereto. The Paying Agent shall have the revocable power to
withdraw funds from the Note Payment Account for the purpose of making payments
to the Noteholders.
The Pre-Funding Account
The Master Servicer will cause an account (the "Pre-Funding Account")
to be established in the name of the Indenture Trustee, and will deposit the
Pre-Funded Amount therein on the Closing Date from the net proceeds of the sale
of the Notes. The "Pre-Funded Amount" will be an amount equal to the excess of
the aggregate initial Note Balance plus $1,800,000 over the sum of the aggregate
Principal Balance of the Initial Mortgage Loans and the aggregate Principal
Balance of the Additional Mortgage Loans acquired by the Trust on the Closing
Date. Monies in the Pre-Funding Account will be applied during the Pre-Funding
Period to purchase Subsequent Mortgage Loans from the Transferor. The
"Pre-Funding Period" will be the period from the Closing Date until the earliest
of (i) the date on which the amount on deposit in the Pre-Funding Account is
less than $100,000, (ii) October 31, 1999, and (iii) the occurrence, if any, of
a servicer default under the Sale and Servicing Agreement. The Pre-Funding
Account will be part of the Trust, but monies on deposit therein will not be
available to cover losses on or in respect of the Mortgage Loans. Any portion of
the Pre-Funded Amount remaining on deposit in the Pre-Funding Account at the end
of the Pre-Funding Period will be applied to prepay the Notes. Monies on deposit
in the Pre-Funding Account may be invested in Permitted Investments as provided
in the Indenture. Net income on investment of funds in the Pre-Funding Account
will be deposited into or credited to the Trustee Collection Account. There can
be no assurance that a sufficient number of Subsequent Mortgage Loans for either
or both Loan Groups will be available for application of the entire Pre-Funded
Amount.
Capitalized Interest Account
On the Closing Date, if required by the Enhancer, a cash deposit will
be made by the Transferor into an account in the name of the Indenture Trustee
on behalf of the Trust (the "Capitalized Interest Account") from the proceeds of
the sale of the Notes. In lieu of such deposit, a letter of credit in form and
substance, and from a provider, acceptable to the Enhancer evidencing the
availability of such amount may be delivered to the Owner Trustee on the Closing
Date. On each Payment Date during the Pre-Funding Period, the Indenture Trustee
will transfer from the Capitalized Interest Account (or make a drawing under
such letter of credit and transfer) to the Trustee Collection Account an amount
equal to the Capitalized Interest Requirement, if any, for such Payment Date.
The "Capitalized Interest Requirement" will be, with respect to each
Payment Date during the Pre-Funding Period, the excess, if any of (i) the sum of
(A) the amount of interest accrued at the weighted average Note Rate on the
amount on deposit in the Pre-Funding Account as of the preceding Payment Date
(or as of the Closing Date, in the case of the first Payment Date) and (B) the
amount of fees paid to the Enhancer, the Owner Trustee and the Indenture
Trustee, over (ii) the amount of reinvestment earnings on funds on deposit in
the Pre-Funding Account.
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On the Payment Date following the end of the Pre-Funding Period, the
Indenture Trustee will distribute to the Transferor any amounts remaining in the
Capitalized Interest Account after taking into account withdrawals therefrom on
such Payment Date. The Capitalized Interest Account will be closed following
such payment.
Maturity and Optional Redemption
Each class of Notes will be payable in full on August 15, 2030 (the
"Final Insured Payment Date"), in each case to the extent of any accrued and
unpaid interest and the outstanding related Note Balance on such date, if any.
In addition, with respect to each Loan Group and the related Notes, the
Master Servicer may, at its option and at its sole expense, repurchase all but
not less than all of the Mortgage Loans in a Loan Group, and thereby cause a
full redemption of the aggregate outstanding Note Balance of the related Class
or Classes of Notes, on any Payment Date on which the aggregate Principal
Balance of the Mortgage Loans in such Loan Group (after applying payments
received in the related Collection Period) is reduced to an amount less than or
equal to 10% of the sum of (x) the aggregate Principal Balance of the Mortgage
Loans in such Loan Group as of the related Cut-Off Date and (y) the amount on
deposit in the Pre-Funding Account on the Closing Date that is available to be
used to purchase Mortgage Loans for such Loan Group. In the event that all of
the Mortgage Loans in a Loan Group are purchased by the Master Servicer, the
purchase price will be equal to the sum of the aggregate Principal Balances of
the Mortgage Loans so repurchased and accrued and unpaid interest thereon at the
weighted average of the related Mortgage Interest Rates on such Mortgage Loans
through the day preceding the Payment Date on which such purchase occurs,
together with all amounts due and owing to the Enhancer. No such optional
repurchase will be permitted without the prior written consent of the Enhancer
if it would result in a draw on the Policy.
DESCRIPTION OF THE MORTGAGE LOAN SALE AGREEMENT AND
THE PURCHASE AND SALE AGREEMENT
Assignment of Mortgage Loans
Pursuant to the Mortgage Loan Sale Agreement between Irwin Union Bank
and Trust Company, as seller (in such capacity, "IUB") and the Transferor, IUB
will sell, transfer, assign, set over and otherwise convey the Mortgage Loans
without recourse to the Transferor on the Closing Date or Subsequent Transfer
Date, as applicable. Pursuant to the Purchase and Sale Agreement between the
Transferor and the Depositor, the Transferor will sell, transfer, assign, set
over and otherwise convey the Mortgage Loans without recourse to the Depositor
on the Closing Date or Subsequent Transfer Date, applicable. Pursuant to the
Sale and Servicing Agreement, the Depositor will sell, transfer, assign, set
over and otherwise convey without recourse to the Trust in trust for the benefit
of the Securityholders and the Enhancer all right, title and interest in and to
each Mortgage Loan. Each such transfer will convey all right, title and interest
in and to (a) principal due to the extent of the Principal Balance and (b)
interest accrued after the Cut-Off Date; provided, however, that the Transferor
will not convey, and the Transferor reserves and retains all its right, title
and interest in and to principal (including principal prepayments in full and
curtailments (i.e., partial prepayments)) received on each such Mortgage Loan on
or prior to the Cut-Off Date.
In connection with such transfer and assignment, the Depositor will
cause to be delivered to the Indenture Trustee on the Closing Date the following
documents (collectively, with respect to each Mortgage Loan, the "Trustee's
Mortgage File") with respect to each Mortgage Loan:
(a) The original Mortgage Note, endorsed by the holder of record
without recourse in the following form: "Pay to the order of
__________________________ without recourse" and signed in the name of the
holder of record, and if by the Transferor, by an authorized officer;
(b) The original Mortgage with evidence of recording indicated thereon;
provided, however, that if such Mortgage has not been returned from the
applicable recording office, then such recorded Mortgage shall be delivered when
so returned;
(c) An assignment of the original Mortgage, in suitable form for
recordation in the jurisdiction in which the related Mortgaged Property is
located, in the name of the holder of record of the Mortgage Loan by an
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authorized officer (with evidence of submission for recordation of such
assignment in the appropriate real estate recording office for such Mortgaged
Property to be received by the Indenture Trustee within 60 days of the Closing
Date); provided, however, that assignments of mortgages shall not be required to
be submitted for recording with respect to any Mortgage Loan which relates to
the Trustee's Mortgage File if the Indenture Trustee, each of the Rating
Agencies and the Enhancer shall have received an opinion of counsel satisfactory
to the Indenture Trustee, each of the Rating Agencies and the Enhancer stating
that, in such counsel's opinion, the failure to record such assignment shall not
have a materially adverse effect on the security interest of the Indenture
Trustee in the Mortgage Loan; provided, further, that any assignment not
submitted for recordation within 60 days of the Closing Date shall be recorded
upon the earlier to occur of (i) receipt by the Indenture Trustee of the
Enhancer's written direction to record such assignment, (ii) the occurrence of
any Event of Default, as such term is defined in the Sale and Servicing
Agreement, or (iii) a bankruptcy or insolvency proceeding involving the
Mortgagor is initiated or foreclosure proceedings are initiated against the
Mortgaged Property as a consequence of an event of default under the Mortgage
Loan; provided, further, that if the related Mortgage has not been returned from
the applicable recording office, then such assignment shall be delivered when so
returned (and a blanket assignment with respect to such Mortgage shall be
delivered on the Closing Date);
(d) Any intervening assignments of the Mortgage with evidence of
recording thereon; and
(e) Any assumption, modification, consolidation or extension
agreements.
Pursuant to the Sale and Servicing Agreement, the Indenture Trustee
agrees to execute and deliver on or prior to the Closing Date an acknowledgment
of receipt of the Policy and, for each Mortgage Loan, the original Mortgage
Note, item (a) above, with respect to the Mortgage Loans (with any exceptions
noted). The Indenture Trustee agrees, for the benefit of the Securityholders and
the Enhancer, to review (or cause to be reviewed) each Trustee's Mortgage File
within 90 days after the Closing Date (or, with respect to any Qualified
Substitute Mortgage Loan, within 90 days after the receipt by the Indenture
Trustee thereof) and to deliver a certification generally to the effect that, as
to each Mortgage Loan listed in the Mortgage Loan Schedule, (a) all documents
required to be delivered to it pursuant to the Mortgage Loan Sale Agreement are
in its possession, (b) each such document has been reviewed by it and has not
been mutilated, damaged, torn or otherwise physically altered, appears regular
on its face and relates to such Mortgage Loan, and (c) based on its examination
and only as to the foregoing documents, certain information set forth on the
Mortgage Loan Schedule accurately reflects the information set forth in the
Trustee's Mortgage File delivered on such date.
If the Indenture Trustee or the Enhancer during the process of
reviewing the Trustee's Mortgage Files finds any document constituting a part of
a Trustee's Mortgage File which is not executed, has not been received or is
unrelated to the Mortgage Loans, or that any Mortgage Loan does not conform to
the requirements above or to the description thereof as set forth in the
Mortgage Loan Schedule, the Indenture Trustee or the Enhancer, as applicable,
shall promptly so notify the Indenture Trustee, the Master Servicer, the
Transferor and the Enhancer. The Transferor agrees to use reasonable efforts to
cause to be remedied a material defect in a document constituting part of a
Trustee's Mortgage File of which it is so notified by the Indenture Trustee. If,
however, within 120 days after the Indenture Trustee's notice to it respecting
such defect the Transferor has not caused to be remedied the defect and the
defect materially and adversely affects the interest of the Holders in the
Principal Balance of the Mortgage Loan or the interests of the Enhancer, the
Transferor will either (i) substitute in lieu of such Mortgage Loan a Qualified
Substitute Mortgage Loan and, if the then outstanding principal balance of such
Qualified Substitute Mortgage Loan is less than the applicable Principal Balance
of such Mortgage Loan as of the date of such substitution plus accrued and
unpaid interest thereon, deliver to the Master Servicer as part of the related
monthly remittance remitted by the Master Servicer the amount of any such
shortfall (the "Substitution Adjustment") or (ii) purchase such Mortgage Loan at
a price equal to the outstanding Principal Balance of such Mortgage Loan as of
the date of purchase, plus the greater of (x) all accrued and unpaid interest
thereon or (y) 30 days' interest thereon, computed at the related Mortgage
Interest Rate, plus the amount of any unreimbursed servicing advances made by
the Master Servicer, which purchase price shall be deposited in the Collection
Account or Trustee Collection Account on the next succeeding Determination Date
after deducting therefrom any amounts received in respect of such repurchased
Mortgage Loan or Mortgage Loans and being held in the Collection Account or
Trustee Collection Account for future distribution to the extent such amounts
have not yet been applied to principal or interest on such Mortgage Loan or
Mortgage Loans (see "Description of the Notes--Priority of Distributions"
above).
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A "Qualified Substitute Mortgage Loan" is defined in the Sale and
Servicing Agreement as any mortgage loan or mortgage loans which will be
assigned to the same Loan Group as the deleted Mortgage Loan which (i) relates
or relate to a detached one-family residence or to the same type of residential
dwelling as the deleted Mortgage Loan and in each case has or have the same or a
better lien priority as the deleted Mortgage Loan with a Borrower having the
same or better traditionally ranked credit status and is an owner-occupied
Mortgaged Property, (ii) matures or mature no later than (and not more than one
year earlier than) the deleted Mortgage Loan, (iii) has or have a Combined
Loan-to-Value Ratio or Combined Loan-to-Value Ratios at the time of such
substitution no higher than the Combined Loan-to-Value Ratio of the deleted
Mortgage Loan, (iv) has or have a principal balance or principal balances (after
application of all payments received on or prior to the date of
substitution)(which shall be the Principal Balance or Principal Balances
thereof) not substantially less and not more than the Principal Balance of the
deleted Mortgage Loan as of such date, and (v) complies or comply as of the date
of substitution with each representation and warranty set forth in the Purchase
and Sale Agreement.
Representations and Warranties of IUB and the Transferor
IUB and the Transferor will represent, among other things, with respect
to each Mortgage Loan, as of the Closing Date, the following:
(a) The information set forth in the Mortgage Loan Schedule with
respect to each Mortgage Loan is true and correct;
(b) Immediately prior to the sale of the Mortgage Loans to the
Depositor, the Transferor was the sole owner and holder thereof free and clear
of any and all liens and security interests; and
(c) The Mortgage Loan Sale Agreement constitutes a legal, valid and
binding obligation of IUB and the Transferor and the Purchase and Sale Agreement
constitutes a valid transfer and assignment to the Depositor of all right, title
and interest of the Transferor in and to the Mortgage Loans and the proceeds
thereof.
The benefit of the representations and warranties assigned or made to
the Depositor by the Transferor in the Purchase and Sale Agreement will be
assigned by the Depositor to the Trust pursuant to the Sale and Servicing
Agreement.
Pursuant to the Sale and Servicing Agreement, upon the discovery by any
of the Securityholders, the Master Servicer, the Transferor, the Enhancer or the
Indenture Trustee that any of the representations and warranties contained in
the Mortgage Loan Sale Agreement or the Purchase and Sale Agreement have been
breached in any material respect as of the Closing Date, with the result that
the interests of the Securityholders in the related Mortgage Loan or the
interests of the Enhancer were materially and adversely affected
(notwithstanding that such representation and warranty was made to the
Transferor's best knowledge), the party discovering such breach is required to
give prompt written notice to the others of such breach. Subject to certain
provisions of the Mortgage Loan Sale Agreement and the Purchase and Sale
Agreement, within 120 days of the earlier to occur of the Transferor's or IUB's
discovery or its receipt of written notice of any such breach, the Transferor or
IUB will (a) promptly cure such breach in all material respects, (b) remove each
Mortgage Loan which has given rise to the requirement for action by the
Transferor or IUB to substitute one or more Qualified Substitute Mortgage Loans
and, if the outstanding principal amount of such Qualified Substitute Mortgage
Loans as of the date of such substitution is less than the outstanding Principal
Balance, plus accrued and unpaid interest thereon of the replaced Mortgage Loans
as of the date of substitution, deliver to the Trust as part of the amounts
remitted by the Master Servicer on such Payment Date the amount of such
shortfall, or (c) purchase such Mortgage Loan at a price equal to the Principal
Balance of such Mortgage Loan as of the date of purchase plus the greater of (i)
all accrued and unpaid interest thereon and (ii) 30 days' interest thereon
computed at the Mortgage Interest Rate, plus the amount of any unreimbursed
servicing advances made by the Master Servicer, and deposit such purchase price
into the Trustee Collection Account on the next succeeding Determination Date
after deducting therefrom any amounts received in respect of such repurchased
Mortgage Loan or Loans and being held in the Trustee Collection Account or the
Collection Account for future distribution to the extent such amounts have not
yet been applied to principal or interest on such Mortgage Loan. The obligation
of the Transferor to cure such breach or to substitute or purchase any Mortgage
Loan constitutes the sole remedy respecting a material breach of any such
representation or warranty to the Securityholders, the Indenture Trustee and the
Enhancer.
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DESCRIPTION OF THE SALE AND SERVICING AGREEMENT
The following summary describes certain terms of the sale and servicing
agreement dated as of April 30, 1999 (the "Sale and Servicing Agreement"), among
the Trust, the Depositor, the Transferor, the Indenture Trustee and the Master
Servicer. Such summary does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the provisions of the Sale and
Servicing Agreement. See "Servicing of the Mortgage Loans" herein and "Servicing
of Loans" and "The Agreements" in the Prospectus.
The Master Servicer
Irwin Union Bank and Trust Company, an affiliate of the Originator,
will be Master Servicer of the Mortgage Loans; provided, that the Mortgage Loans
may be serviced by one or more subservicers designated by the Master Servicer
pursuant to subservicing agreements between the Master Servicer and such
subservicers. Initially, the Originator will act as sole subservicer of the
Mortgage Loans on behalf of the Master Servicer. For a general description of
the Master Servicer and its activities, see "The Master Servicer" and "Servicing
of the Mortgage Loans" herein.
Collections
The Master Servicer will establish an account (the "Collection
Account") into which the Master Servicer will deposit or cause to be deposited
any amounts representing payments on and any collections received on or in
respect of the Mortgage Loans received by it subsequent to the initial Cut-Off
Date. On the 10th day of each month or, if such day is not a Business Day, the
immediately succeeding Business Day (each, a "Determination Date"), the Master
Servicer will notify the Paying Agent and the Indenture Trustee of the amounts
required to be withdrawn from the Collection Account and deposited into an
Eligible Account established with and maintained by the Indenture Trustee (the
"Trustee Collection Account") prior to the close of business on the last
Business Day that is at least three days prior to the related Payment Date. On
each Payment Date, the Indenture Trustee will deposit such amounts into the Note
Payment Account or the Certificate Distribution Account, as applicable, for
payment to the related Securityholders in accordance with the priorities set
forth in the Indenture.
All Collections will generally be allocated in accordance with the
related mortgage documents between amounts collected in respect of interest and
principal, respectively.
"Collection Period" means, with respect to any Mortgage Loan and
Payment Date, the calendar month preceding any such Payment Date.
"Liquidation Proceeds" means the proceeds, including Insurance
Proceeds, but not including amounts drawn under the Policy, if any, received in
connection with the liquidation of any Mortgage Loan or any related Mortgaged
Property or REO Property, whether through trustee's sale, foreclosure sale or
otherwise, net of related Liquidation Expenses (but not including the portion,
if any, of such amount that exceeds the Principal Balance of the related
Mortgage Loan at the end of the Collection Period immediately preceding the
Collection Period in which such Mortgage Loan became a Liquidated Mortgage
Loan).
"Principal Balance" means, with respect to any Mortgage Loan (other
than a Liquidated Mortgage Loan) and as of any day, the related Cut-Off Date
principal balance minus all collections credited as principal in respect of any
such Mortgage Loan in accordance with the related mortgage documents and applied
in reduction of the Principal Balance thereof. A Liquidated Mortgage Loan will
be deemed to have a Principal Balance equal to the Principal Balance of the
related Mortgage Loan immediately prior to the final recovery of substantially
all related Liquidation Proceeds, and a Principal Balance of zero thereafter.
DESCRIPTION OF THE TRUST AGREEMENT AND INDENTURE
The following summary describes certain terms of the Trust Agreement
and the Indenture. Such summary does not purport to be complete and is subject
to, and qualified in its entirety by reference to, the respective provisions of
the Trust Agreement and the Indenture. See "The Agreements" in the Prospectus.
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The Trust Estate. Simultaneously with the issuance of the Notes, the
Issuer will pledge the Trust Estate to the Indenture Trustee as collateral for
the Notes. As pledgee of the Mortgage Loans, the Indenture Trustee will be
entitled to direct the Issuer in the exercise of all rights and remedies of the
Trust against the Transferor under the Mortgage Sale Agreement and against the
Master Servicer under the Sale and Servicing Agreement.
Reports To Noteholders. The Indenture Trustee will, to the extent such
information is provided to it by the Master Servicer pursuant to the terms of
the Sale and Servicing Agreement, mail to each Noteholder, at its address listed
on the Note Register maintained with the Indenture Trustee, and each Rating
Agency, the Enhancer and the Depositor, a report setting forth certain amounts
relating to the Notes for each Payment Date, including, without limitation, the
amount of the payment on such Payment Date, the amount of such distribution
allocable to principal and allocable to interest, the aggregate outstanding
principal amount of each Note as of such Payment Date, the amount of any Insured
Payment included in such distributions on such Payment Date and such other
information as required by the Sale and Servicing Agreement.
Certain Covenants. The Indenture will provide that the Issuer may not
consolidate or merge with or into any other Person, unless:
(a) the Person (if other than the Issuer) formed by or surviving such
consolidation or merger will be a Person organized and existing under the laws
of the United States of America or any state, and will expressly assume, by an
indenture supplemental hereto, executed and delivered to the Indenture Trustee,
in form reasonably satisfactory to the Indenture Trustee, the due and punctual
payment of the principal of and interest on all Notes, and to the Certificate
Paying Agent, on behalf of the Noteholders, and the performance or observance of
every agreement and covenant of the Indenture on the part of the Issuer to be
performed or observed;
(b) immediately after giving effect to such transaction, no event of
default under the Indenture or the Trust Agreement (each, an "Event of Default")
shall have occurred and be continuing;
(c) no Rating Agency, after prior notice thereto, shall have notified
the Issuer that such transaction would cause such Rating Agency's then-current
rating of the Notes to be qualified, reduced or withdrawn, or to be considered
by either Rating Agency to be below investment grade, determined without regard
to the Policy;
(d) the Issuer shall have received an Opinion of Counsel (and will have
delivered a copy thereof to the Indenture Trustee) to the effect that such
transaction will not have any material adverse tax consequence to the Issuer or
any Noteholder;
(e) any action necessary to maintain the lien and security interest
created by the Indenture shall have been taken; and
(f) the Issuer shall have delivered to the Indenture Trustee an
officer's certificate and an opinion of counsel each stating that such
consolidation or merger and such supplemental indenture comply with certain
provisions of the Indenture and that all conditions precedent therein provided
for relating to such transaction have been complied with (including any filing
required by the Securities Exchange Act of 1934, as amended).
Modification of Indenture. The Indenture provides that, without the
consent of the Holders of any Notes, but with prior notice to the Enhancer, the
Issuer and the Indenture Trustee, when authorized by a request of the Issuer
pursuant to the Indenture, at any time and from time to time, may enter into one
or more supplemental indentures (which will conform to the provisions of the
Trust Indenture Act of 1939, as amended (the "TIA"), as in force at the date of
the execution thereof), in form satisfactory to the Indenture Trustee, for any
of the following purposes:
(1) to correct or amplify the description of any property at any time
subject to the lien of the Indenture, or better to assure, convey and confirm
unto the Indenture Trustee any property subject or required to be subjected to
the lien of the Indenture, or to subject to the lien of the Indenture additional
property;
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(2) to evidence the succession, in compliance with the applicable
provisions of the Indenture, of another entity to the Issuer, and the assumption
by any such successor of the covenants of the Issuer contained in the Notes or
the Indenture;
(3) to add to the covenants of the Issuer for the benefit of the
Holders of the Notes, or to surrender any right or power conferred upon the
Issuer in the Indenture;
(4) to convey, transfer, assign, mortgage or pledge any property to or
with the Indenture Trustee;
(5) to cure any ambiguity, to correct or supplement any provision in
the Indenture or in any supplemental indenture that may be inconsistent with any
other provision in the Indenture or in any supplemental indenture;
(6) to make any other provisions with respect to matters or questions
arising under the Indenture or in any supplemental indenture; provided, that
such action will not materially and adversely affect the interests of the
Noteholders or the Enhancer;
(7) to evidence and provide for the acceptance of the appointment under
the Indenture by a successor trustee with respect to the Notes and to add to or
change any of the provisions of the Indenture as will be necessary to facilitate
the administration of the trusts thereunder by more than one trustee, pursuant
to the requirements of the Indenture; or
(8) to modify, eliminate or add to the provisions of the Indenture to
such extent as will be necessary to effect the qualification of the Indenture
under the TIA or under any similar federal statute enacted after the date of the
Indenture and to add to the Indenture such other provisions as may be expressly
required by the TIA;
provided, however, that no such supplemental indentures will be entered into
unless the Indenture Trustee and the Enhancer shall have received an Opinion of
Counsel to the effect that entering into such supplemental indenture will not
have any material adverse tax consequences to the Noteholders.
The Indenture also provides that the Issuer and the Indenture Trustee,
when authorized by an Issuer Request, also may, with prior notice to the
Enhancer and each Rating Agency and with the consent of the Enhancer and the
Holders of Notes affected thereby representing not less than a majority of the
aggregate Note Balance thereof, enter into a supplemental indenture for the
purpose of adding any provisions to, or changing in any manner or eliminating
any of the provisions of, the Indenture or of modifying in any manner the rights
of the Noteholders thereunder; provided, that no such supplemental indenture
may, without the consent of the Holder of each Note affected thereby:
(i) change the date of payment of any installment of principal of or
interest on any Note, or reduce the principal amount thereof or the interest
rate thereon, change the provisions of the Indenture relating to the application
of collections on, or the proceeds of the sale of, the Trust Estate to payment
of principal of or interest on the Notes, or change any place of payment where,
or the coin or currency in which, any Note or the interest thereon is payable,
or impair the right to institute suit for the enforcement of the provisions of
the Indenture requiring the application of funds available therefor to the
payment of any such amount due on the Notes on or after the respective dates
such amounts become due;
(ii) reduce the percentage of the Note Balances of the Notes, the
consent of the Holders of which is required for any such supplemental indenture,
or the consent of the Holders of which is required for any waiver of compliance
with certain provisions of the Indenture or certain defaults thereunder and
their consequences provided for in the Indenture;
(iii) modify or alter the provisions of the proviso to the definition
of the term "Outstanding" in the Indenture or modify or alter the exception in
the definition of the term "Holder" therein;
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(iv) reduce the percentage of the Note Balances of the Notes required
to direct the Indenture Trustee to direct the Issuer to sell or liquidate the
Trust Estate pursuant to the Indenture;
(v) modify any provision of the amendment provisions of the Indenture
except to increase any percentage specified in the Indenture or to provide that
certain additional provisions of the Indenture cannot be modified or waived
without the consent of the Holder of each Note affected thereby;
(vi) modify any of the provisions of the Indenture in such manner as to
affect the calculation of the amount of any payment of interest or principal due
on any Note on any Payment Date (including the calculation of any of the
individual components of such calculation); or
(vii) permit the creation of any lien ranking prior to or on a parity
with the lien of the Indenture with respect to any part of the Trust Estate or,
except as otherwise permitted or contemplated in the Indenture, terminate the
lien of the Indenture on any property at any time subject thereto or deprive the
Holder of any Note of the security provided by the lien of the Indenture; and
provided, further, that such action will not, as evidenced by an opinion of
counsel, cause the Issuer to be subject to an entity level tax.
Certain Matters Regarding the Indenture Trustee and the Issuer. Neither
the Indenture Trustee nor any director, officer or employee of the Indenture
Trustee will be under any liability to the Issuer or the Noteholders for taking
any action or for refraining from the taking of any action in good faith
pursuant to the Indenture, or for errors in judgment; provided, that none of the
Indenture Trustee or any director, officer or employee thereof will be protected
against any liability that would otherwise be imposed on it by reason of its
willful malfeasance, bad faith or negligence in the performance of its duties or
by reason of its reckless disregard of its obligations and duties under the
Indenture. Subject to certain limitations set forth in the Indenture, the
Indenture Trustee and any director, officer, employee or agent thereof will be
indemnified by the Issuer and held harmless against any loss, liability or
expense incurred in connection with investigating, preparing to defend or
defending any legal action, commenced or threatened, relating to the Indenture,
other than any loss, liability or expense incurred by reason of its willful
malfeasance, bad faith or negligence in the performance of its duties under the
Indenture, or by reason of its reckless disregard of its obligations and duties
under the Indenture. All persons into which the Indenture Trustee may be merged
or with which it may be consolidated, or any person resulting from such merger
or consolidation, will be the successor to the Indenture Trustee under the
Indenture.
DESCRIPTION OF THE POLICY
The following summary of the terms of the Policy does not purport to be
complete and is qualified in its entirety by reference to the Policy. The
information in this section regarding the Policy has been supplied by the
Enhancer for inclusion herein. Only the Notes will be entitled to the benefit of
the Policy to be issued by the Enhancer.
On the date of issuance of the Notes the Enhancer will issue the Policy
in favor of the Owner Trustee. The Policy will unconditionally and irrevocably
guarantee Insured Payments on the Notes.
The Enhancer's obligation under the Policy will be discharged to the
extent that funds are received by the Indenture Trustee for distribution to the
Holders, whether or not such finds are properly distributed by the Indenture
Trustee.
For purposes of the Policy, "Holder" as to a particular Note does not
and may not include the Master Servicer, the Originator, the Transferor or the
Depositor.
"Insured Payment" means (x) with respect to any Loan Group and for any
Payment Date (other than the Final Insured Payment Date), the excess, if any, of
(i) the sum (a) the amount of interest accrued on the Note Balances of the
related Class or Classes of Notes, at the applicable Note Rates during the
related Interest Period (excluding any Interest Carry-Forward Amounts and Relief
Act Shortfalls), and (b) the related Subordination Deficit minus an amount equal
to the Overcollateralization Amount, if any, for the other Loan Group (to the
extent not in excess of such Subordination Deficit) over (ii) the related Total
Available Funds for such Loan Group for such
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Payment Date, and (y) on the Final Insured Payment Date, the outstanding Note
Balance of all Classes of Notes then outstanding, to the extent not otherwise
paid on such date, together with the amount of interest accrued on the Note
Balances of such Notes, at the applicable Note Rates during the related Interest
Period (excluding any Interest Carry-Forward Amounts and Relief Act Shortfalls).
The Policy expires and terminates without any action on the part of the Enhancer
or any other person on the date that is one year and one day following the date
on which the Notes have been paid in full.
"Note Balance" means as of any date of determination and with respect
to each Class of Notes, the principal balance of such Class of Notes on the
Closing Date less any amounts actually distributed as principal thereon on all
prior Payment Dates.
"Total Available Funds" with respect to each Loan Group and for any
Payment Date is the sum of (i) the Interest Collections and Principal
Collections (excluding prepayment penalties, the premium for the Policy and the
Indenture Trustee Fee) for the related Classes of Notes and (ii) any Excess
Spread available from the other Loan Group.
"Relief Act Shortfalls" are interest shortfalls resulting from the
application of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended.
See "Certain Legal Aspects of the Loans--Soldiers' and Sailors" Civil Relief Act
of 1940" in the Prospectus.
The Policy will be issued pursuant to, and shall be construed under,
the laws of the State of New York, without giving effect to the conflict of laws
principles thereof.
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY
FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
THE CREDIT ENHANCER
The following information has been supplied by Ambac Assurance
Corporation (the "Enhancer") for inclusion in this Prospectus Supplement. No
representation is made by the Depositor, the Master Servicer, the Underwriter or
any of their affiliates as to the accuracy or completeness of such information.
The Enhancer is a Wisconsin-domiciled stock insurance corporation
regulated by the Office of the Commissioner of Insurance of the State of
Wisconsin and licensed to do business in 50 states, the District of Columbia,
the Commonwealth of Puerto Rico and the Territory of Guam. The Enhancer
primarily insures newly issued municipal and structured finance obligations. The
Enhancer is a wholly owned subsidiary of Ambac Financial Group, Inc. (formerly,
AMBAC, Inc.) a 100% publicly-held company. Moody's, Standard & Poor's and Fitch
IBCA, Inc., have each assigned a triple-A financial strength rating to the
Enhancer.
The consolidated financial statements of the Enhancer and subsidiaries
as of December 31, 1998 and December 31, 1997, and for each of the years in the
three-year period ended December 31, 1998, prepared in accordance with generally
accepted accounting principles, included in the Annual Report on Form 10-K of
Ambac Financial Group, Inc. (which was filed with the Commission on March 30,
1999; Commission File Number 1-10777) and the unaudited consolidated financial
statements of the Enhancer and subsidiaries as of March 31, 1999 and for the
periods ending March 31, 1999 and March 31, 1998 included in the Quarterly
Report on Form 10-Q of Ambac Financial Group, Inc. for the period ended March
31, 1999 (which was filed with the Commission on May 12, 1999), are hereby
incorporated by reference into this Prospectus Supplement and shall be deemed to
be a part hereof. Any statement contained in a document incorporated herein by
reference shall be modified or superseded for the purposes of this Prospectus
Supplement to the extent that a statement contained herein by reference herein
also modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus Supplement.
All financial statements of the Enhancer and subsidiaries included in
documents filed by Ambac Financial Group, Inc. with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering
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of the Notes shall be deemed to be incorporated by reference into this
Prospectus Supplement and to be a part hereof from the respective dates of
filing such documents.
The following table sets forth the Enhancer's capitalization as of
December 31, 1996, December 31, 1997, December 31, 1998 and March 31, 1999,
respectively, in conformity with generally accepted accounting principles.
Ambac Assurance Corporation
Consolidated Capitalization Table
(Dollars in Millions)
<TABLE>
<CAPTION>
December 31, December 31, December 31, March 31,
1996 1997 1998 1999
---- ---- ---- ----
(unaudited)
-----------
<S> <C> <C> <C> <C>
Unearned premiums.............................. $ 995 $1,184 $1,303 $1,324
Other liabilities.............................. 259 562 548 544
------ ------ ------ ------
Total liabilities.............................. $1,254 $1,746 $1,851 $1,868
------ ------ ------ ------
Stockholder's equity:(1)
Common Stock................................ $ 82 $ 82 $ 82 $ 82
Additional paid-in capital.................. 515 521 541 541
Accumulated other comprehensive income...... 66 118 138 112
Retained earnings........................... 992 1,180 1,405 1,467
------ ------ ------ ------
Total stockholder's equity..................... $1,655 $1,901 $2,166 $2,202
------ ------ ------ ------
Total liabilities and Stockholder's equity..... $2,909 $3,647 $4,017 $4,070
====== ====== ====== ======
</TABLE>
- ----------------
(1) Components of stockholder's equity have been restated for all
periods presented to reflect "Accumulated other comprehensive income" in
accordance with the Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" adopted by the Enhancer effective January 1,
1998. As this new standard only requires additional information on the financial
statements, it does not affect the Enhancer's financial position or results of
operations.
For additional financial information concerning the Enhancer, see the
audited and unaudited financial statements of the Enhancer incorporated by
reference herein. Copies of the financial statements of the Enhancer
incorporated herein by reference and copies of the Enhancer's annual statement
for the year ended December 31, 1998 prepared in accordance with statutory
accounting standards are available, without charge, from the Enhancer. The
address of the Enhancer's administrative offices and its telephone number are
One State Street Plaza, 17th Floor, New York, New York 10004 and (212) 668-0340.
The Enhancer makes no representation regarding the Notes or the
advisability of investing in the Notes and makes no representation regarding,
nor has it participated in the preparation of, this Prospectus Supplement other
than the information supplied by the Enhancer and presented under the headings
"The Credit Enhancer" and "Description of the Policy" and in the financial
statements incorporated herein by reference.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Brown & Wood LLP, counsel to the Depositor, for
federal income tax purposes, the Notes will be characterized as indebtedness and
the Issuer, as created pursuant to the terms and conditions of the Trust
Agreement, will not be characterized as an association (or publicly traded
partnership within the meaning of section 7704 of the Code) taxable as a
corporation or as a taxable mortgage pool within the meaning of section 7701(i)
of the Code.
A taxable mortgage pool generally is treated as a separate taxable
corporation for federal income tax purposes. The Issuer will not be treated as a
taxable mortgage pool if less than 50% of its assets are treated as
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"principally secured by an interest in real property." Based on the expected
composition of Loan Group I and Loan Group II as of the Closing Date and the
Subsequent Mortgage Loans that the Issuer will acquire using funds in the
Pre-Funding Account, Brown & Wood LLP is of the opinion that neither the Issuer
nor any portion of the Issuer will be treated as a taxable mortgage pool because
each Loan Group will have less than 50% of its assets treated as principally
secured by an interest in real property.
For federal income tax purposes, the Notes will not be treated as
having been issued with "original issue discount" (as defined in the
Prospectus). See "Certain Federal Income Tax Considerations" in the Prospectus.
The Notes will not be treated as assets described in Section
7701(a)(19)(C) of the Code and will not be treated as "real estate assets" under
Section 856(c)(4)(A) of the Code. In addition, interest on the Notes will not be
treated as "interest on obligations secured by mortgages on real property" under
Section 856(c)(3)(B) of the Code. The Notes also will not be treated as
"qualified mortgages" under Section 860G(a)(3)(C) of the Code.
Prospective investors in the Notes should see "Certain Federal Income
Tax Considerations" and "State Tax Considerations" in the Prospectus for a
discussion of the application of certain federal income and state and local tax
laws to the Issuer and purchasers of the Notes.
ERISA CONSIDERATIONS
Any fiduciary or other investor of Plan assets that proposes to acquire
or hold the Notes on behalf of or with Plan assets of any Plan should consult
with its counsel with respect to the application of the fiduciary responsibility
provisions of ERISA and the prohibited transaction provisions of ERISA and the
Code to the proposed investment. See "ERISA Considerations" in the Prospectus.
Each purchaser of a Note, by its acceptance of such Note, shall be
deemed to have represented that a class or individual exemption under section
406 of ERISA or section 4975 of the Code is applicable to the acquisition of the
Note by such purchaser or the acquisition of the Note by such purchaser does not
constitute or give rise to a prohibited transaction under section 406 of ERISA
or section 4975 of the Code, for which no statutory, regulatory or
administrative exemption is available. See "ERISA Considerations" in the
Prospectus.
Insurance companies contemplating the investment of general account
assets in the Notes should consult with their legal advisors with respect to the
applicability of section 401(c) of ERISA, as described under "ERISA
Considerations" in the Prospectus. The DOL issued proposed regulations under
section 401(c) on December 22, 1997, but the required final regulations have not
been issued as of the date hereof.
The Notes may not be purchased with the assets of a Plan if the
Underwriter, Depositor, the Master Servicer, the Indenture Trustee, the Owner
Trustee, the Enhancer or any of their affiliates (a) has investment or
administrative discretion with respect to such Plan assets; (b) has authority or
responsibility to give, or regularly gives, investment advice with respect to
such Plan assets, for a fee and pursuant to an agreement or understanding that
such advice (i) will serve as a primary basis for investment decisions with
respect to such Plan assets and (ii) will be based on the particular investment
needs for such Plan; or (c) is an employer maintaining or contributing to such
Plan.
The sale of any of the Notes to a Plan is in no respect a
representation by the Issuer or the Underwriter 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.
LEGAL INVESTMENT
The Notes will not constitute "mortgage related securities" for
purposes of SMMEA. Accordingly, many institutions with legal authority to invest
in mortgage related securities may not be legally authorized to invest in the
Notes. No representation is made herein as to whether the Notes constitute legal
investments for any entity under
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any applicable statute, law, rule, regulation or order. Prospective purchasers
are urged to consult with their counsel concerning the status of the Notes as
legal investments for such purchasers prior to investing in Notes.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting
Agreement, dated May 6, 1999 (the "Underwriting Agreement"), Bear, Stearns & Co.
Inc. (the "Underwriter") has agreed to purchase and the Depositor has agreed to
sell to the Underwriter the Notes.
The Transferor has been advised by the Underwriter that it proposes
initially to offer the Notes to the public at the prices set forth herein, and
to certain dealers at such prices less the initial concession set forth below
for each Class. The Underwriter may allow, and such dealers may reallow, a
concession not in excess of that set forth below for each Class. After the
initial public offering of the Notes, the public offering price and such
concessions and reallowances may be changed.
<TABLE>
<CAPTION>
Class A-1 Class A-2 Class A-3 Class A-4
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Concession...................... 0.180% 0.180% 0.180% 0.180%
Reallowances.................... 0.125% 0.125% 0.125% 0.125%
</TABLE>
Until the distribution of the Notes is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriter and
certain selling group members to bid for and purchase the Notes. As an exception
to these rules, the Underwriter is permitted to engage in certain transactions
that stabilize the price of the Notes. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Notes.
If the Underwriter creates a short position in the Notes in connection
with the offering, i.e., if it sells more Notes than are set forth on the cover
page of this Prospectus Supplement, the Underwriter may reduce that short
position by purchasing Notes in the open market.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases.
Neither the Transferor nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Notes. In addition, neither the
Transferor nor any of the Underwriter makes any representation that the
Underwriter will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
It is expected that delivery of the Notes will be made only in
book-entry form through DTC, Cedel and Euroclear as discussed herein, on or
about May 27, 1999, against payment therefor in immediately available funds.
The Underwriting Agreement provides that the obligation of the
Underwriter to pay for and accept delivery of the Notes is subject to, among
other things, the receipt of certain legal opinions and to the conditions, among
others, that no stop order suspending the effectiveness of the Depositor's
Registration Statement shall be in effect, and that no proceedings for such
purpose shall be pending before or threatened by the Securities and Exchange
Commission.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriter, and that under limited circumstances the Underwriter will
indemnify the Depositor, against certain civil liabilities under the Securities
Act of 1933, as amended, or contribute to payments required to be made in
respect thereof.
There can be no assurance that a secondary market for the Notes will
develop or, if it does develop, that it will continue. The primary source of
information available to investors concerning the Notes will be the monthly
statements discussed herein under "Description of the Trust Agreement and
Indenture , Reports to Noteholders" and in the Prospectus under "Reports to
Holders," which will include information as to the outstanding principal balance
of the Notes. There can be no assurance that any additional information
regarding the Notes will be available
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through any other source. In addition, the Depositor is not aware of any source
through which price information about the Notes will be generally available on
an ongoing basis. The limited nature of such information regarding the Notes may
adversely affect the liquidity of the Notes, even if a secondary market for the
Notes becomes available.
EXPERTS
The consolidated financial statements of Ambac Assurance Corporation
and subsidiaries, as of December 31, 1998 and 1997 and for each of the years in
the three-year period ended December 31, 1998 are incorporated by reference
herein and in the registration statement in reliance upon the report of KPMG
LLP, independent certified public accountants, incorporated by reference herein,
and upon the authority of that firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters with respect to the Notes will be passed upon for
Irwin Union Bank and Trust Company, Irwin Funding Corp. and Irwin Home Equity
Corporation by Troop Steuber Pasich Reddick & Tobey, LLP, Los Angeles,
California and by Ellen Mufson, Esq., and for the Depositor and the Underwriter
by Brown & Wood LLP, New York, New York.
RATINGS
It is a condition to issuance that the Notes be rated "Aaa" by Moody's
and "AAA" by Standard & Poor's. The Depositor has not requested a rating on the
Notes by any rating agency other than Moody's and Standard & Poor's. However,
there can be no assurance as to whether any other rating agency will rate the
Notes, or, if it does, what rating would be assigned by any such other rating
agency. A rating on the Notes by another rating agency, if assigned at all, may
be lower than the ratings assigned to the Notes by Moody's and Standard &
Poor's. A securities rating addresses the likelihood of the receipt by holders
of Notes of distributions on the Mortgage Loans. The rating takes into
consideration the structural and legal aspects associated with the Notes. The
ratings on the Notes do not, however, constitute statements regarding the
possibility that Holders might realize a lower than anticipated yield. A
securities rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
organization. Each securities rating should be evaluated independently of
similar ratings on different securities.
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INDEX OF DEFINED TERMS
Additional Mortgage Loans...................................................S-14
Additional Principal Distribution Amount....................................S-52
Base Principal Distribution Amount..........................................S-52
Business Day................................................................S-49
Capitalized Interest Account................................................S-54
Capitalized Interest Requirement............................................S-54
Certificates................................................................S-14
Closing Date.................................................................S-3
Collection Account..........................................................S-58
Collection Period...........................................................S-58
Combined Loan-to-Value Ratio................................................S-15
CPR.........................................................................S-36
Cut-Off Date.................................................................S-3
Definitive Note.............................................................S-47
Depositor..............................................................S-3, S-14
Determination Date..........................................................S-58
DTC Services................................................................S-47
Enhancer.................................................................S-3, 62
European Depositaries.......................................................S-47
Event of Default............................................................S-59
Excess Spread...............................................................S-52
Final Insured Payment Date..................................................S-54
Financial Intermediary......................................................S-48
Global Securities..........................................................A-I-1
governing instrument........................................................S-46
Group I Excess Spread.......................................................S-52
Group I Mortgage Loans......................................................S-14
Group II Excess Spread......................................................S-52
IFC.........................................................................S-31
Indenture...................................................................S-14
Indenture Trustee............................................................S-3
Industry....................................................................S-47
Initial Mortgage Loans......................................................S-14
Insured Payment.............................................................S-61
Interest Carry-Forward Amount...............................................S-50
Interest Collections........................................................S-52
Interest Period.............................................................S-50
Issuer.................................................................S-3, S-14
IUB.........................................................................S-55
LIBOR Business Day..........................................................S-51
Liquidated Mortgage Loan....................................................S-53
Liquidation Proceeds........................................................S-58
Loan Group..................................................................S-14
Loan Group I Restrictions...................................................S-14
Master Servicer..............................................................S-3
Mortgage Interest Rate......................................................S-15
Mortgage Loan................................................................S-3
Mortgage Note...............................................................S-14
Mortgage Sale Agreements....................................................S-32
Mortgaged Properties........................................................S-14
Mortgages...................................................................S-14
Non-U.S. Person............................................................A-I-3
Note Balance................................................................S-61
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Note Owners.................................................................S-47
Note Rate...................................................................S-49
Notes.......................................................................S-14
Originator.............................................................S-3, S-31
Overcollateralization Amount................................................S-53
Overcollateralization Deficiency Amount.....................................S-53
Overcollateralization Release Amount........................................S-53
Overcollateralization Target Amount.........................................S-53
Owner Trustee................................................................S-3
Payment Date...........................................................S-3, S-49
Pre-Funded Amount...........................................................S-54
Pre-Funding Account.........................................................S-54
Pre-Funding Period..........................................................S-54
Prepayment Assumption.......................................................S-36
Principal Balance...........................................................S-58
Principal Collections.......................................................S-53
Qualified Substitute Mortgage Loan..........................................S-56
Real estate owned...........................................................S-34
Reference Bank Rate.........................................................S-50
Relevant Depositary.........................................................S-47
Relief Act Shortfalls.......................................................S-62
Rules.......................................................................S-48
Sale and Servicing Agreement................................................S-57
Securities..................................................................S-14
Servicer Default............................................................S-45
Statistical Calculation Date.................................................S-3
Step-Up Date.................................................................S-4
Subordination Deficit.......................................................S-53
Subsequent Mortgage Loans...................................................S-31
Subsequent Transfer Date....................................................S-31
Substitution Adjustment.....................................................S-56
Systems.....................................................................S-47
Telerate Page 3750..........................................................S-50
TIA.........................................................................S-59
Total Available Funds.......................................................S-61
Transferor...............................................................S-3, 31
Trust.......................................................................S-14
Trust Agreement.............................................................S-14
Trust Estate................................................................S-46
Trustee Collection Account..................................................S-58
Trustee's Mortgage File.....................................................S-55
U.S. Person................................................................A-I-3
Underwriter.................................................................S-65
Underwriting Agreement......................................................S-65
Weighted average life.......................................................S-35
S-68
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Bear
Stearns Asset Backed Securities, Inc., Home Equity Loan-Backed Notes, Series
1999-2 (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 Notes will be effected on a delivery-against-payment basis
through the respective Depositaries of Cedel and Euroclear (in such capacity)
and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors" interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Cedel and
Euroclear will hold positions on behalf of their participants through their
Relevant Depositary which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset-backed notes issues in same-day funds. Trading between Cedel and/or
Euroclear Participants. Secondary market trading between Cedel Participants or
Euroclear Participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds. Trading between DTC, Transferor and
Cedel or Euroclear Participants. When Global Securities are to be transferred
from the account of a DTC Participant to the account of a Cedel Participant or a
Euroclear Participant, the purchaser will send instructions to Cedel or
Euroclear through a Cedel Participant or Euroclear Participant at least one
business day prior
A-1-1
<PAGE>
to settlement. Cedel or Euroclear will instruct the Relevant Depositary, as the
case may be, to receive the Global Securities against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment date to and excluding the settlement date, on the basis of the
actual number of days in such accrual period and a year assumed to consist of
360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
Payment will then be made by the Relevant Depositary to the DTC Participant's
account against delivery of the Global Securities. After settlement has been
completed, the Global Securities will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the Cedel Participant's or Euroclear Participant's account. The securities
credit will appear the next day (European time) and the cash debt will be
back-valued to, and the interest on the Global Securities will accrue from, the
value date (which would be the preceding day when settlement occurred in New
York). If settlement is not completed on the intended value date (i.e., the
trade fails), the Cedel or Euroclear cash debt will be valued instead as of the
actual settlement date.
Cedel Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedel or Euroclear. Under this
approach, they may take on credit exposure to Cedel or Euroclear until the
Global Securities are credited to their account one day later. As an
alternative, if Cedel or Euroclear has extended a line of credit to them, Cedel
Participants or Euroclear Participants can elect not to preposition funds and
allow that credit line to be drawn upon to finance settlement. Under this
procedure, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although the result will depend on each Cedel Participant's or
Euroclear Participant's particular cost of funds. Since the settlement is taking
place during New York business hours, DTC Participants can employ their usual
procedures for crediting Global Securities to the respective European Depositary
for the benefit of Cedel Participants or Euroclear Participants. The sale
proceeds will be available to the DTC seller on the settlement date. Thus, to
the DTC Participants a cross-market transaction will settle no differently than
a trade between two DTC Participants.
Trading between Cedel or Euroclear Transferor and DTC Purchaser. Due to
time zone differences in their favor, Cedel Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. In these cases Cedel
or Euroclear will instruct the respective Depositary, as appropriate, to credit
the Global Securities to the DTC Participant's account against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment to and excluding the settlement date on the basis of the
actual number of days in such accrual period and a year assumed to consist to
360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
The payment will then be reflected in the account of Cedel Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
Cedel Participant's or Euroclear Participant's account would be back-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedel Participants or
Euroclear Participants should 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;
A-1-2
<PAGE>
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give
the Global Securities sufficient time to be reflected in their Cedel or
Euroclear account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of
the trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for the sale to
the Cedel Participant or Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Cedel or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (i) each clearing system, bank
or other financial institution that holds customers" securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate: Exemption for
Non-U.S. Persons (Form W-8). Beneficial Holders of Global Securities that are
Non-U.S. Persons (as defined below) can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
Exemption or reduced rate for Non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Holdership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by Note Holders or their agent. Exemption
for U.S. Persons (Form W-9). U.S. Persons can obtain a complete exemption from
the withholding tax by filing Form W-9 (Payer's Request for Taxpayer
Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Holder of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds the
security (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year. The term "U.S.
Person" means (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity (treated as a corporation or a
partnership for federal income tax purposes) organized in or under the laws of
the United States, any state thereof or the District of Columbia (unless, in the
case of a partnership, future Treasury regulations provide otherwise), (iii) an
estate that is subject to U.S. federal income tax regardless of the source of
its income, or (iv) a trust if a court within the United States is able to
exercise primary supervision of the administration of the trust and one or more
United States persons have the authority to control all substantial decisions of
the trust. Certain trusts not described in clause (iv) above in existence on
August 20, 1996 that elect to be treated as a United States Person will also be
a U.S. Person. The term "Non-U.S. Person" means any person who is not a U.S.
Person. This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global Securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Securities.
Final regulations dealing with withholding tax on income paid to
foreign persons, backup withholding and related matters (the "New Withholding
Regulations") were issued by the Treasury Department on October 6, 1997. The New
Withholding Regulations generally attempt to unify certification requirements
and modify reliance
A-1-3
<PAGE>
standards. The New Withholding Regulations generally will be effective for
payments made after December 31, 2000, subject to certain transition rules.
Prospective investors are strongly urged to consult their own tax
advisors with respect to the New Withholding Regulations.
A-1-4
<PAGE>
PROSPECTUS
Asset-Backed Certificates
Asset-Backed Notes
(Issuable in Series)
Bear Stearns Asset Backed Securities, Inc.
(Depositor)
Bear Stearns Asset Backed Securities, Inc. (the "Depositor") may offer from
time to time under this Prospectus and related Prospectus Supplements the
Asset-Backed Certificates (the "Certificates") and the Asset-Backed Notes (the
"Notes" and, together with the Certificates, the "Securities"), which may be
sold from time to time in one or more series (each, a "Series").
As specified in the related Prospectus Supplement, the Certificates of a
Series will evidence undivided interests in certain assets deposited into a
trust (each, a "Trust Fund") by the Depositor pursuant to a Pooling and
Servicing Agreement or a Trust Agreement, as described herein. As specified in
the related Prospectus Supplement, the Notes of a Series will be issued and
secured pursuant to an Indenture and will represent indebtedness of the related
Trust Fund. The Trust Fund for a Series of Securities will include assets
purchased from the seller or sellers specified in the related Prospectus
Supplement (collectively, the "Seller") composed of (a) Primary Assets, which
may include one or more pools of (i) closed-end and/or revolving home equity
loans (the "Mortgage Loans"), secured generally by subordinate liens on one- to
four-family residential or mixed-use properties, (ii) home improvement
installment sales contracts and installment loan agreements (the "Home
Improvement Contracts"), which are either unsecured or secured generally by
subordinate liens on one- to four-family residential or mixed-use properties, or
by purchase money security interests in the home improvements financed thereby
(the "Home Improvements") and (iii) securities backed or secured by Mortgage
Loans and/or Home Improvement Contracts, (b) all monies due thereunder net, if
and as provided in the related Prospectus Supplement, of certain amounts payable
to the servicer of the Mortgage Loans and/or Home Improvement Contracts
(collectively, the "Loans"), which servicer may also be the Seller, specified in
the related Prospectus Supplement (the "Servicer"), (c) if specified in the
related Prospectus Supplement, funds on deposit in one or more pre-funding
accounts and/or capitalized interest accounts and (d) reserve funds, letters of
credit, surety bonds, insurance policies or other forms of credit support as
described herein and in the related Prospectus Supplement.
(cover continued on next page)
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF, AND CERTIFICATES OF A GIVEN
SERIES EVIDENCE BENEFICIAL INTERESTS IN, THE RELATED TRUST FUND ONLY AND ARE
NOT GUARANTEED BY ANY GOVERNMENTAL AGENCY OR BY THE DEPOSITOR, THE SEL-
LER, THE TRUSTEES,THE SERVICER OR BY ANY OF THEIR RESPECTIVE AFFILIATES
OR, UNLESS OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT,
BY ANY OTHER PERSON OR ENTITY. THE DEPOSITOR'S ONLY OBLIGATIONS
WITH RESPECT TO ANY SERIES OF SECURITIES WILL BE PURSUANT TO
CERTAIN REPRESENTATIONS AND WARRANTIES SET FORTH IN
THE RELATED AGREEMENT AS DESCRIBED HEREIN
OR IN THE RELATED PROSPECTUS SUPPLEMENT.
------------------------
See "Risk Factors" beginning on page 9 for certain factors to be
considered in purchasing the securities.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE PROSPECTUS SUPPLEMENT. ANY REPRE-
SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The Securities offered by this Prospectus and by the related Prospectus
Supplement are offered by Bear, Stearns & Co. Inc. and the other underwriters
set forth in the related Prospectus Supplement, if any, subject to prior sale,
to withdrawal, cancellation or modification of the offer without notice, to
delivery to and acceptance by Bear, Stearns & Co. Inc. and the other
underwriters, if any, and certain further conditions. Retain this Prospectus for
future reference. This Prospectus may not be used to consummate sales of the
Securities offered hereby unless accompanied by a Prospectus Supplement.
------------------------
Bear, Stearns & Co. Inc.
December 4, 1998
<PAGE>
(continued from previous page)
Each Series of Securities will be issued in one or more classes (each, a
"Class"). Interest on and principal of the Securities of a Series will be
payable on each Distribution Date specified in the related Prospectus Supplement
at the times, at the rates, in the amounts and in the order of priority set
forth in the related Prospectus Supplement.
If a Series includes multiple Classes, such Classes may vary with respect
to the amount, percentage and timing of distributions of principal, interest or
both and one or more Classes may be subordinated to other Classes with respect
to distributions of principal, interest or both as described herein and in the
related Prospectus Supplement. If so specified in the related Prospectus
Supplement, the Primary Assets and other assets comprising the Trust Fund may be
divided into one or more Asset Groups and each Class of the related Series will
evidence beneficial ownership of the corresponding Asset Group, as applicable.
The rate of reduction of the aggregate principal balance of each Class of a
Series may depend upon the rate of payment (including prepayments) with respect
to the Loans or, in the case of Private Securities, Underlying Loans, as
applicable. In such a case, a rate of prepayment lower or higher than
anticipated will affect the yield on the Securities of a Series in the manner
described herein and in the related Prospectus Supplement. Under certain limited
circumstances described herein and in the related Prospectus Supplement, a
Series of Securities may be subject to termination or redemption under the
circumstances described herein and in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, an election may be made
to treat certain assets comprising the Trust Fund for a Series as a "real estate
mortgage investment conduit" (a "REMIC") for federal income tax purposes. See
"Certain Federal Income Tax Considerations" herein.
2
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Securities to be offered
hereunder will, among other things, set forth with respect to such Series of
Securities: (i) the aggregate principal amount, interest rate and authorized
denominations of each Class of such Securities; (ii) certain information
concerning the Primary Assets, the Seller and any Servicer; (iii) the terms of
any Enhancement with respect to such Series; (iv) the terms of any insurance
related to the Primary Assets; (v) information concerning any other assets in
the related Trust Fund, including any Reserve Fund; (vi) the Final Scheduled
Distribution Date of each Class of such Securities; (vii) the method to be used
to calculate the amount of principal required to be applied to the Securities of
each Class of such Series on each Distribution Date, the timing of the
application of principal and the order of priority of the application of such
principal to the respective Classes and the allocation of principal to be so
applied; (viii) the Distribution Dates and any Assumed Reinvestment Rate; (ix)
additional information with respect to the plan of distribution of such
Securities; and (x) whether a REMIC election will be made with respect to some
or all of the assets included in the Trust Fund for such Series.
REPORTS TO HOLDERS
Periodic and annual reports concerning the related Trust Fund for a Series
of Securities are required under the related Agreement to be forwarded to
Holders. Unless otherwise specified in the related Prospectus Supplement, such
reports will not be examined and reported on by an independent public
accountant. If so specified in the Prospectus Supplement for a Series of
Securities, such Series or one or more Classes of such Series will be issued in
book-entry form. In such event, (i) owners of beneficial interests in such
Securities will not be considered "Holders" under the related Agreements and
will not receive such reports directly with respect to the related Trust Fund;
rather, such reports will be furnished to such owners through the participants
and indirect participants of the applicable book-entry system, and (ii)
references herein to the rights of "Holders" shall refer to the rights of such
owners as they may be exercised indirectly through such participants. See "The
Agreements--Reports to Holders" herein.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the Securities. This Prospectus,
which forms a part of the Registration Statement, and the Prospectus Supplement
relating to each Series of Securities contain summaries of the material terms of
the documents referred to herein and therein, but do not contain all of the
information set forth in the Registration Statement pursuant to the Rules and
Regulations of the Commission. For further information, reference is made to
such Registration Statement and the exhibits thereto. Such Registration
Statement and exhibits can be inspected and copied at prescribed rates at the
public reference facilities maintained by the Commission at its Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional
Office located as follows: Midwest Regional Office, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and Northeast Regional
Office, 7 World Trade Center, Suite 1300, New York, New York 10048. The
Commission also maintains a Web site at http://www.sec.gov from which such
Registration Statement and exhibits may be obtained.
Each Trust Fund will be required to file certain reports with the
Commission pursuant to the requirements of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). The Depositor intends to cause each Trust Fund
to suspend filing such reports if and when such reports are no longer required
under the Exchange Act.
3
<PAGE>
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Securities offered
hereby and thereby nor an offer of the Securities to any person in any state or
other jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus at any time does not imply that information herein is correct as of
any time subsequent to its date.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the Trust Fund referred
to in the accompanying Prospectus Supplement with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of any offering of the Securities issued
by such Trust Fund shall be deemed to be incorporated by reference in this
Prospectus and to be a part of this Prospectus from the date of the filing of
such documents. Any statement contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for all purposes of this Prospectus to the extent that a statement contained
herein or in the accompanying Prospectus Supplement or in any other subsequently
filed document that also is or is deemed to be incorporated by reference
modifies or replaces such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Depositor on behalf of any Trust Fund will provide without charge to
each person to whom this Prospectus is delivered, on the written or oral request
of such person, a copy of any or all of the documents referred to above that
have been or may be incorporated by reference in this Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
this Prospectus incorporates). Such requests should be directed to the Depositor
at 245 Park Avenue, New York, New York 10167.
4
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each Series of Securities contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of Securities of such Series. Capitalized terms used and not otherwise
defined herein or in the related Prospectus Supplement shall have the meanings
set forth in the "Glossary of Terms" herein.
Securities Offered.....................Asset-Backed Certificates (the
"Certificates") and/or Asset-Backed Notes
(the "Notes"). Certificates are issuable
from time to time in Series pursuant to a
Pooling and Servicing Agreement or Trust
Agreement, as the case may be. Each
Certificate of a Series will evidence an
interest in the Trust Fund for such
Series, or in an Asset Group specified in
the related Prospectus Supplement. Notes
are issuable from time to time in Series
pursuant to an Indenture. Each Series of
Securities will consist of one or more
Classes, one or more of which may be
Classes of Compound Interest Securities,
Planned Amortization Class ("PAC")
Securities, Variable Interest Securities,
Zero Coupon Securities, Principal Only
Securities, Interest Only Securities,
Participating Securities, Senior
Securities or Subordinated Securities.
Each Class may differ in, among other
things, the amounts allocated to and the
priority of principal and interest
payments, Final Scheduled Distribution
Dates, Distribution Dates and interest
rates. The Securities of each Class will
be issued in fully registered form in the
denominations specified in the related
Prospectus Supplement. If so specified in
the related Prospectus Supplement, the
Securities or certain Classes of such
Securities offered thereby may be
available in book-entry form only.
Depositor..............................Bear Stearns Asset Backed Securities,
Inc. (the "Depositor") was incorporated
in the State of Delaware in June 1995,
and is a wholly-owned, special purpose
subsidiary of The Bear Stearns Companies
Inc. None of The Bear Stearns Companies
Inc., the Depositor, the Servicer, any
Trustee, the Seller or any affiliate of
the foregoing has guaranteed or is
otherwise obligated with respect to the
Securities of any Series. See "The
Depositor."
Interest Payments......................Interest payments on the Securities of a
Series entitled by their terms to receive
interest will be made on each
Distribution Date, to the extent set
forth in, and at the applicable rate
specified in (or determined in the manner
set forth in), the related Prospectus
Supplement. The interest rate on
Securities of a Series may be variable or
change with changes in the rates of
interest on the related Loans or
Underlying Loans relating to the Private
Securities, as
5
<PAGE>
applicable, and/or as prepayments occur
with respect to such Loans or Underlying
Loans, as applicable. Interest Only
Securities may be assigned a Notional
Amount set forth in the related
Prospectus Supplement, which is used
solely for convenience in expressing the
calculation of interest and for certain
other purposes and does not represent the
right to receive any distributions
allocable to principal. Principal Only
Securities may not be entitled to receive
any interest payments or may be entitled
to receive only nominal interest
payments. Interest payable on the
Securities of a Series on a Distribution
Date will include all interest accrued
during the period specified in the
related Prospectus Supplement. See
"Description of the Securities--Payments
of Interest."
Principal Payments.....................All payments of principal of a Series of
Securities will be made in an aggregate
amount determined as set forth in the
related Prospectus Supplement, and will
be paid at the times, allocated among the
Classes of such Series in the order and
amounts and applied either on a pro rata
or a random lot basis among all
Securities of any such Class, all as
specified in the related Prospectus
Supplement.
Final Scheduled
Distribution Date
of the Securities....................The Final Scheduled Distribution Date
with respect to (i) each Class of Notes
is the date not later than which
principal of the Notes will be fully paid
and (ii) each Class of Certificates is
the date after which no Certificates of
such Class are expected to remain
outstanding, in each case calculated on
the basis of the assumptions applicable
to such Series described in the related
Prospectus Supplement. The Final
Scheduled Distribution Date of a Class
may equal the maturity date of the
Primary Asset in the related Trust Fund
that has the latest stated maturity, or
will be determined as described herein
and in the related Prospectus Supplement.
The actual final Distribution Date of the
Securities of a Series will, to the
extent described in the related
Prospectus Supplement, depend upon the
rate of payment (including prepayments,
liquidations due to default, the receipt
of proceeds from casualty Insurance
Policies and repurchases) of the Loans or
Underlying Loans relating to the Private
Securities, as applicable, in the related
Trust Fund. Unless otherwise specified in
the related Prospectus Supplement, the
actual final Distribution Date of any
Security is likely to occur earlier and
may occur substantially earlier or may
occur later than its Final Scheduled
Distribution Date as a result of the
application of prepayments to the
reduction of the principal balances of
the Securities and as a result of
6
<PAGE>
defaults on the Primary Assets. The rate
of payments on the Loans or Underlying
Loans relating to the Private Securities,
as applicable, in the Trust Fund for a
Series will depend on a variety of
factors, including certain
characteristics of such Loans or
Underlying Loans, as applicable, and the
prevailing level of interest rates from
time to time, as well as on a variety of
economic, demographic, tax, legal, social
and other factors. No assurance can be
given as to the actual prepayment
experience with respect to a Series. See
"Risk Factors--Yield May Vary" and
"Description of the Securities--Weighted
Average Life of the Securities" herein.
Optional Termination...................One or more Classes of Securities of any
Series may be redeemed or repurchased in
whole or in part, at the Depositor's or
the Servicer's option, at such time and
under the circumstances specified in the
related Prospectus Supplement, at the
price set forth therein. If so specified
in the related Prospectus Supplement for
a Series of Securities, the Depositor,
the Servicer or such other entity that is
specified in the related Prospectus
Supplement may, at its option, cause an
early termination of the related Trust
Fund by repurchasing all of the Primary
Assets remaining in the Trust Fund on or
after a specified date, or on or after
such time as the aggregate principal
balance of the Securities of the Series
or the Primary Assets relating to such
Series, as specified in the related
Prospectus Supplement, is less than the
amount or percentage specified in the
related Prospectus Supplement. See
"Description of the Securities--Optional
Redemption, Purchase or Termination."
In addition, the related Prospectus
Supplement may provide other
circumstances under which Holders of
Securities of a Series could be fully
paid significantly earlier than would
otherwise be the case if payments or
distributions were solely based on the
activity of the related Primary Assets.
The Trust Fund.........................The Trust Fund for a Series of Securities
will consist of one or more of the assets
described below, as described in the
related Prospectus Supplement.
A. Primary Assets...................The Primary Assets for a Series may
consist of any combination of the
following assets, to the extent and as
specified in the related Prospectus
Supplement. The Primary Assets will be
purchased from the Seller or may be
purchased by the Depositor in the open
market or in privately negotiated
transactions, including transactions with
entities affiliated with the Depositor.
(1) Loans........................Primary Assets for a Series will consist,
in whole or in part, of Loans. Some Loans
may be delinquent as specified in
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the related Prospectus Supplement. Loans
may be originated by or acquired from an
affiliate of the Depositor, and an
affiliate of the Depositor may be an
obligor with respect to any such Loan.
The Loans will be conventional contracts
or contracts insured by the Federal
Housing Administration (the "FHA") or
partially guaranteed by the Veterans
Administration (the "VA"). See "The Trust
Funds--The Loans" for a discussion of
such guarantees. To the extent provided
in the related Prospectus Supplement,
additional Loans may be periodically
added to the Trust Fund, or may be
removed from time to time if certain
asset value tests are met, as described
in the related Prospectus Supplement.
The "Loans" for a Series will consist of
(i) closed-end home equity loans (the
"Closed-End Loans") and/or revolving home
equity loans or certain balances therein
(the "Revolving Credit Line Loans" and,
together with the Closed-End Loans, the
"Mortgage Loans") and (ii) home
improvement installment sales contracts
and installment loan agreements (the
"Home Improvement Contracts"). The
Mortgage Loans and the Home Improvement
Contracts are collectively referred to
herein as the "Loans." The Loans may, as
specified in the related Prospectus
Supplement, have various payment
characteristics, including balloon or
other irregular payment features, and may
accrue interest at a fixed rate or an
adjustable rate.
As specified in the related Prospectus
Supplement, the Mortgage Loans will, and
the Home Improvement Contracts may, be
secured by mortgages and deeds of trust
or other similar security instruments
creating a lien on the related Mortgaged
Property, which may be subordinated to
one or more senior liens on the Mortgaged
Property as described in the related
Prospectus Supplement. As specified in
the related Prospectus Supplement, Home
Improvement Contracts may be unsecured or
secured by purchase money security
interests in the Home Improvements
financed thereby. The Mortgaged
Properties and the Home Improvements are
collectively referred to herein as the
"Properties."
The related Prospectus Supplement will
describe certain characteristics of the
Loans for a Series including, without
limitation and to the extent relevant:
(i) the aggregate unpaid Principal
Balance of the Loans (or the aggregate
unpaid Principal Balance included in the
Trust Fund for the related Series); (ii)
the range and weighted average Loan Rate
on the Loans and in the case of
adjustable rate Loans, the range and
weighted average of the Current Loan
Rates and the Lifetime Rate Caps, if any;
(iii) the range and the
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<PAGE>
average outstanding Principal Balance of
the Loans; (iv) the weighted average
original and remaining term-to-stated
maturity of the Loans and the range of
original and remaining terms-to-stated
maturity, if applicable; (v) the range
and Combined Loan-to-Value Ratios or
Loan-to-Value Ratios, as applicable, of
the Loans, computed in the manner
described in the related Prospectus
Supplement; (vi) the percentage (by
Principal Balance as of the Cut-off Date)
of Loans that accrue interest at
adjustable or fixed interest rates; (vii)
any enhancement relating to the Loans;
(viii) the percentage (by Principal
Balance as of the Cut-off Date) of Loans
that are secured by Mortgaged Properties
or Home Improvements, or that are
unsecured; (ix) the geographic
distribution of any Mortgaged Properties
securing the Loans; (x) the use and type
of each Property securing a Loan; (xi)
the lien priority of the Loans; (xii) the
delinquency status and year of
origination of the Loans; (xiii) whether
such Loans are Closed-End Loans and/or
Revolving Credit Line Loans; and (xiv) in
the case of Revolving Credit Line Loans,
the general payment and credit line
features of such Loans and other
pertinent features thereof.
(2) Private Securities............Primary Assets for a Series may consist,
in whole or in part, of Private
Securities, which include (i)
pass-through certificates representing
beneficial interests in loans of the type
that would otherwise be eligible to be
Loans (the "Underlying Loans") or (ii)
collateralized obligations secured by
Underlying Loans. Such pass-through
certificates or collateralized
obligations will have previously been (i)
offered and distributed to the public
pursuant to an effective registration
statement or (ii) purchased in a
transaction not involving any public
offering from a person who is not an
affiliate of the issuer of such
securities at the time of sale (nor an
affiliate thereof at any time during the
three preceding months); provided, that a
period of three years has elapsed since
the later of the date such securities
were acquired from the related issuer or
an affiliate thereof. Although individual
Underlying Loans may be insured or
guaranteed by the United States or an
agency or instrumentality thereof, they
need not be, and the Private Securities
themselves will not be, so insured or
guaranteed. See "The Trust Funds--Private
Securities." Unless otherwise specified
in the Prospectus Supplement relating to
a Series of Securities, payments on the
Private Securities will be distributed
directly to the related PS Trustee as
registered owner of such Private
Securities.
The related Prospectus Supplement for a
Series will specify (on an approximate
basis, as described above, and as of the
date specified in the related Prospectus
Supplement), to the
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<PAGE>
extent relevant and to the extent such
information is reasonably available to
the Depositor and the Depositor
reasonably believes such information to
be reliable: (i) the aggregate
approximate principal amount and type of
any Private Securities to be included in
the Trust Fund for such Series; (ii)
certain characteristics of the Underlying
Loans, including (a) the payment features
of such Underlying Loans (i.e., whether
they are Closed-End Loans and/or
Revolving Credit Line Loans, whether they
are fixed rate or adjustable rate and
whether they provide for fixed level
payments, negative amortization or other
payment features), (b) the approximate
aggregate principal amount of such
Underlying Loans that are insured or
guaranteed by a governmental entity, (c)
the servicing fee or range of servicing
fees with respect to such Underlying
Loans (d) the minimum and maximum stated
maturities of such Underlying Loans at
origination, (e) the lien priority of
such Underlying Loans and (f) the
delinquency status and year of
origination of such Underlying Loans;
(iii) the maximum original term-to-stated
maturity of the Private Securities; (iv)
the weighted average term-to-stated
maturity of the Private Securities; (v)
the pass-through or certificate rate or
ranges thereof for the Private
Securities; (vi) the sponsor or depositor
of the Private Securities (the "PS
Sponsor"), the servicer of the Private
Securities (the "PS Servicer") and the
trustee of the Private Securities (the
"PS Trustee"); (vii) certain
characteristics of enhancement, if any,
such as reserve funds, insurance
policies, letters of credit or
guarantees, relating to the Loans
underlying the Private Securities, or to
such Private Securities themselves;
(viii) the terms on which the Underlying
Loans may or are required to be
repurchased prior to stated maturity; and
(ix) the terms on which substitute
Underlying Loans may be delivered to
replace those initially deposited with
the PS Trustee. See "The Trust
Funds--Additional Information" herein.
B. Collection and
Distribution Accounts............Unless otherwise provided in the related
Prospectus Supplement, all payments on or
in respect of the Primary Assets for a
Series will be remitted directly to an
account (each, a "Collection Account") to
be established for such Series with the
Trustee or the Servicer, in the name of
the Trustee. Unless otherwise provided in
the related Prospectus Supplement, the
applicable Trustee shall be required to
apply a portion of the amount in the
Collection Account, together with
reinvestment earnings from eligible
investments specified in the related
Prospectus Supplement, to the payment of
certain amounts payable to the Servicer
under the related Agreement and any other
person specified in the Prospectus
Supplement, and to deposit a portion of
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<PAGE>
the amount in the Collection Account into
a separate account (each, a "Distribution
Account") to be established for such
Series, each in the manner and at the
times specified in the related Prospectus
Supplement. All amounts deposited into
such Distribution Account(s) will be
available, unless otherwise specified in
the related Prospectus Supplement, for
(i) application to the payment of
principal of and interest on such Series
of Securities on the next Distribution
Date, (ii) the making of adequate
provision for future payments on certain
Classes of Securities and (iii) any other
purpose specified in the related
Prospectus Supplement. After applying the
funds in the Collection Account as
described above, any funds remaining in
the Collection Account may be paid over
to the Servicer, the Depositor, any
provider of Enhancement with respect to
such Series (an "Enhancer") or any other
person entitled thereto in the manner and
at the times specified in the related
Prospectus Supplement.
C. Pre-Funding and
Capitalized Interest
Accounts........................If specified in the related Prospectus
Supplement, a Trust Fund will include one
or more segregated trust accounts (each,
a "Pre-Funding Account") established and
maintained with the Trustee of the Trust
Fund for the related Series (the
"Trustee"). If so specified, on the
Closing Date for such Series, a portion
of the proceeds of the sale of the
Securities of such Series (such amount,
the "Pre-Funded Amount") will be
deposited into the Pre-Funding Account
and may be used to purchase additional
Primary Assets during the period of time
specified in the related Prospectus
Supplement (the "Pre-Funding Period").
The Primary Assets to be so purchased
generally will be selected on the basis
of the same criteria as those used to
select the initial Primary Assets, and
the same representations and warranties
will be made with respect thereto. If any
Pre-Funded Amount remains on deposit in
the Pre-Funding Account at the end of the
Pre-Funding Period, such amount will be
applied in the manner specified in the
related Prospectus Supplement to prepay
the Notes and/or the Certificates of the
applicable Series.
If a Pre-Funding Account is established,
one or more segregated trust accounts
(each, a "Capitalized Interest Account")
may be established and maintained with
the Trustee for the related Series. On
the related Closing Date, a portion of
the proceeds of the sale of the
Securities of such Series will be
deposited into the Capitalized Interest
Account and used to fund the excess, if
any, of (i) the sum of (a) the amount of
interest accrued on the Securities of
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<PAGE>
such Series and (b) if specified in the
related Prospectus Supplement, certain
fees or expenses during the Pre-Funding
Period such as trustee fees and credit
enhancement fees, over (ii) the amount of
interest available therefor from the
Primary Assets in the Trust Fund. Any
amounts on deposit in the Capitalized
Interest Account at the end of the
Pre-Funding Period that are not necessary
for such purposes will be distributed as
specified in the related Prospectus
Supplement.
Enhancement............................If stated in the Prospectus Supplement
relating to a Series, the Depositor will
obtain an irrevocable letter of credit,
surety bond, insurance policy (each, a
"Security Policy") or other form of
credit support (collectively,
"Enhancement") in favor of the applicable
Trustee on behalf of the Holders of such
Series and any other person specified in
such Prospectus Supplement from an
institution acceptable to the rating
agency or agencies identified in the
related Prospectus Supplement as rating
such Series of Securities (each, a
"Rating Agency") for the purposes
specified in such Prospectus Supplement.
The Enhancement will support the payments
on the Securities and may be used for
other purposes, to the extent and under
the conditions specified in such
Prospectus Supplement. See "Enhancement."
Enhancement for a Series may include one
or more of the following types of
Enhancement, or such other type of
Enhancement specified in the related
Prospectus Supplement.
A. Subordinate
Securities.....................If stated in the related Prospectus
Supplement, Enhancement for a Series may
consist of one or more Classes of
Subordinated Securities. The rights of
the related Subordinated Securityholders
to receive distributions on any
Distribution Date will be subordinate in
right and priority to the rights of
Holders of Senior Securities of the
Series, but only to the extent described
in the related Prospectus Supplement.
B. Insurance......................If stated in the related Prospectus
Supplement, Enhancement for a Series may
consist of special hazard Insurance
Policies, bankruptcy bonds and other
types of insurance supporting payments on
the Securities.
C. Reserve Funds..................If stated in the Prospectus Supplement,
the Depositor may deposit cash, a letter
or letters of credit, short-term
investments, or other instruments
acceptable to the Rating Agencies in one
or more reserve funds to be established
in the name of the applicable Trustee
(each, a "Reserve
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<PAGE>
Fund"), which will be used, as specified
in such Prospectus Supplement, by such
Trustee to make required payments of
principal of or interest on the
Securities of such Series, to make
adequate provision for future payments on
such Securities, or for any other purpose
specified in the Agreement with respect
to such Series, to the extent that funds
are not otherwise available. In the
alternative or in addition to such
deposit, a Reserve Fund for a Series may
be funded through application of all or a
portion of the excess cash flow from the
Primary Assets for such Series, to the
extent described in the related
Prospectus Supplement.
D. Minimum Principal
Payment Agreement..............If stated in the Prospectus Supplement
relating to a Series of Securities, the
Depositor will enter into a minimum
principal payment agreement (the "Minimum
Principal Payment Agreement") with an
entity meeting the criteria of the Rating
Agencies, pursuant to which such entity
will provide funds in the event that
aggregate principal payments on the
Primary Assets for such Series are not
sufficient to make certain payments, as
provided in the related Prospectus
Supplement. See "Enhancement--Minimum
Principal Payment Agreement."
E. Deposit Agreement..............If stated in the related Prospectus
Supplement, the Depositor and the
applicable Trustee will enter into a
guaranteed investment contract or an
investment agreement (the "Deposit
Agreement") pursuant to which all or a
portion of the amounts held in the
Collection Account, the Distribution
Account(s) or in any Reserve Fund will be
invested with the entity specified in
such Prospectus Supplement. Such Trustee
will be entitled to withdraw amounts so
invested, plus interest at a rate equal
to the Assumed Reinvestment Rate, in the
manner specified in such Prospectus
Supplement. See "Enhancement--Deposit
Agreement."
Servicing..............................The Servicer will be responsible for
servicing, managing and making
collections on the Loans for a Series. In
addition, the Servicer, if so specified
in the related Prospectus Supplement,
will act as custodian and will be
responsible for maintaining custody of
the Loans and related documentation on
behalf of the Trustee. Advances with
respect to delinquent payments of
principal of or interest on a Loan will
be made by the Servicer only to the
extent described in the related
Prospectus Supplement. Such advances will
be intended to provide liquidity only
and, unless otherwise specified in the
related Prospectus Supplement, will be
reimbursable to the Servicer from
scheduled payments of principal and
interest, late
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<PAGE>
collections, the proceeds of liquidation
of the related Loans or other recoveries
relating to such Loans (including any
Insurance Proceeds or payments from other
credit support). In performing these
functions, the Servicer will exercise the
same degree of skill and care that it
customarily exercises with respect to
similar receivables or Loans owned or
serviced by it. Under certain limited
circumstances, the Servicer may resign or
be removed, in which event either the
Trustee or a third-party servicer will be
appointed as successor servicer. The
Servicer will receive a periodic fee as
servicing compensation (the "Servicing
Fee") and may, as specified herein and in
the related Prospectus Supplement,
receive certain additional compensation.
See "Servicing of Loans--Servicing
Compensation and Payment of Expenses"
herein.
Federal Income
Tax Considerations
A. Debt Securities and
REMIC Residual
Securities.....................If (i) an election is made to treat all
or a portion of a Trust Fund for a Series
as a "real estate mortgage investment
conduit" (a "REMIC") or (ii) so provided
in the related Prospectus Supplement, a
Series of Securities will include one or
more Classes of taxable debt obligations
under the Internal Revenue Code of 1986,
as amended (the "Code"). Stated interest
with respect to such Classes of
Securities will be reported by the
related Holder in accordance with such
Holder's method of accounting except
that, in the case of Securities
constituting "regular interests" in a
REMIC ("Regular Interests"), such
interest will be required to be reported
on the accrual methods regardless of such
Holder's usual method of accounting.
Securities that are Compound Interest
Securities, Zero Coupon Securities or
Interest Only Securities will, and
certain other Classes of Securities may,
be issued with original issue discount
that is not de minimis. In such cases,
the related Holder will be required to
include original issue discount in gross
income as it accrues, which may be prior
to the receipt of cash attributable to
such income. If a Security is issued at a
premium, such Holder may be entitled to
make an election to amortize such premium
on a constant yield method.
In the case of a REMIC election, a Class
of Securities may be treated as a REMIC
"residual interest" (each, a "Residual
Interest"). A Holder of a Residual
Interest will be required to include in
its income its pro rata share of the
taxable income of the REMIC. In certain
circumstances, the Holder of a Residual
Interest may have REMIC taxable
14
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income or tax liability attributable to
REMIC taxable income for a particular
period in excess of cash distributions
for such period or have an after-tax
return that is less than the after-tax
return on comparable debt instruments. In
addition, a portion (or, in some cases,
all) of the income from a Residual
Interest (i) may not be subject to offset
by losses from other activities or
investments, (ii) for a Holder that is
subject to tax under the Code on
unrelated business taxable income, may be
treated as unrelated business taxable
income and (iii) for a foreign Holder,
may not qualify for exemption from or
reduction of withholding. In addition,
(i) Residual Interests are subject to
transfer restrictions and (ii) certain
transfers of Residual Interests will not
be recognized for federal income tax
purposes. Further, individual Holders are
subject to limitations on the
deductibility of expenses of the REMIC.
See "Certain Federal Income Tax
Considerations."
B. Non-REMIC
Pass-Through
Securities.....................If so specified in the related Prospectus
Supplement, the Trust Fund for a Series
will be treated as a grantor trust and
will not be classified as an association
taxable as a corporation for federal
income tax purposes, and Holders of
Securities of such Series ("Pass-Through
Securities") will be treated as owning
directly rights to receive certain
payments of interest or principal, or
both, on the Primary Assets held in the
Trust Fund for such Series. All income
with respect to a Stripped Security will
be accounted for as original issue
discount and, unless otherwise specified
in the related Prospectus Supplement,
will be reported by the applicable
Trustee on an accrual basis, which may be
prior to the receipt of cash associated
with such income.
C. Owner Trust
Securities.....................If so specified in the Prospectus
Supplement, the Trust Fund will be
treated as a partnership for purposes of
federal and state income tax. Each
Noteholder, by the acceptance of a Note
of a given Series, will agree to treat
such Note as indebtedness; and each
Certificateholder, by the acceptance of a
Certificate of a given Series, will agree
to treat the related Trust Fund as a
partnership in which such
Certificateholder is a partner for
federal income and state tax purposes.
Alternative characterizations of such
Trust Fund and such Certificates are
possible, but would not result in
materially adverse tax consequences to
Certificateholders. See "Certain Federal
Income Tax Considerations."
ERISA Considerations...................A fiduciary of any employee benefit plan
or other retirement plan or arrangement
subject to the Employee Retirement Income
Security Act of 1974, as amended
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<PAGE>
("ERISA"), or the Code should carefully
review with its own legal advisors
whether the purchase or holding of
Securities could give rise to a
transaction prohibited or otherwise
impermissible under ERISA or the Code.
Certain Classes of Securities may not be
transferred unless the applicable Trustee
and the Depositor are furnished with a
letter of representation or an opinion of
counsel to the effect that such transfer
will not result in a violation of the
prohibited transaction provisions of
ERISA and the Code and will not subject
the applicable Trustee, the Depositor or
the Servicer to additional obligations.
See "Description of the
Securities--General" and "ERISA
Considerations."
Legal Investment.......................Unless otherwise specified in the related
Prospectus Supplement, Securities of each
Series offered by this Prospectus and the
related Prospectus Supplement will not
constitute "mortgage related securities"
under the Secondary Mortgage Market
Enhancement Act of 1984, as amended
("SMMEA"). Investors whose investment
authority is subject to legal
restrictions should consult their own
legal advisors to determine whether and
to what extent the Securities constitute
legal investments for them. See "Legal
Investment."
Use of Proceeds........................The Depositor will use the net proceeds
from the sale of each Series for one or
more of the following purposes: (i) to
purchase the related Primary Assets, (ii)
to repay indebtedness incurred to obtain
funds to acquire such Primary Assets,
(iii) to establish any Reserve Funds
described in the related Prospectus
Supplement and (iv) to pay costs of
structuring and issuing such Securities,
including the costs of obtaining
Enhancement, if any. If so specified in
the related Prospectus Supplement, the
purchase of the Primary Assets for a
Series will be effected by an exchange of
Securities with the Seller of such
Primary Assets. See "Use of Proceeds."
Ratings................................It will be a requirement for issuance of
any Series that the Securities offered by
this Prospectus and the related
Prospectus Supplement be rated by at
least one Rating Agency in one of its
four highest applicable rating
categories. The rating or ratings
applicable to Securities of each Series
offered hereby and by the related
Prospectus Supplement will be as set
forth in the related Prospectus
Supplement. A securities rating should be
evaluated independently of similar
ratings on different types of securities.
A securities rating is not a
recommendation to buy, hold or sell
securities, and does not address the
effect that the rate of prepayments on
Loans or Underlying Loans relating to
Private Securities, as applicable, for a
Series may have on the yield to investors
in the Securities of such
16
<PAGE>
Series. See "Risk Factors--Ratings Are
Not Recommendations."
17
<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
No Secondary Market. There will be no market for the Securities of any
Series prior to the issuance thereof, and there can be no assurance that a
secondary market will develop or, if it does develop, that it will provide
Holders with liquidity of investment or will continue for the life of the
Securities of such Series. The underwriter(s) specified in the related
Prospectus Supplement (the "Underwriters") expect to make a secondary market in
the related Securities, but will have no obligation to do so.
Primary Assets Are Only Source of Repayment. The Depositor does not have,
nor is it expected to have, any significant assets. The Securities of a Series
will be payable solely from the assets of the Trust Fund for such Securities.
There will be no recourse to the Depositor or any other person for any default
on or any failure to receive distributions on the Securities. Further, unless
otherwise stated in the related Prospectus Supplement, at the times set forth in
such Prospectus Supplement, certain Primary Assets and/or any balance remaining
in the Collection Account or Distribution Account(s) immediately after making
all payments due on the Securities of such Series and other payments specified
in Securities Prospectus Supplement, may be promptly released or remitted to the
Depositor, the Servicer, the Enhancer or any other person entitled thereto, and
will no longer be available for making payments to Holders. Consequently,
Holders of Securities of each Series must rely solely upon payments with respect
to the Primary Assets and the other assets constituting the Trust Fund for a
Series of Securities, including, if applicable, any amounts available pursuant
to any Enhancement for such Series, for the payment of principal of and interest
on the Securities of such Series.
Holders of Notes will be required under the Indenture to proceed only
against the Primary Assets and other assets constituting the related Trust Fund
in the case of a default with respect to such Notes and may not proceed against
any assets of the Depositor. There is no assurance that the market value of the
Primary Assets or any other assets for a Series will at any time be equal to or
greater than the aggregate principal amount of the Securities of such Series
then outstanding, plus accrued interest thereon. Moreover, upon an Event of
Default under the Indenture for a Series of Notes and a sale of the assets in
the Trust Fund or upon a sale of the assets of a Trust Fund for a Series of
Certificates, the Trustee under the related Indenture (the "Indenture Trustee"),
the Servicer, if any, the Enhancer and any other service provider specified in
the related Prospectus Supplement generally will be entitled to receive the
proceeds of any such sale to the extent of unpaid fees and other amounts owing
to such persons under the related Agreement prior to distributions to Holders of
Securities. Upon any such sale, the proceeds thereof may be insufficient to pay
in full the principal of and interest on the Securities of such Series.
The only obligations, if any, of the Depositor with respect to the
Securities of any Series will be pursuant to certain representations and
warranties. See "The Agreements--Assignment of Primary Assets" herein. The
Depositor does not have, and is not expected in the future to have, any
significant assets with which to meet any obligation to repurchase Primary
Assets with respect to which there has been a breach of any representation or
warranty. If, for example, the Depositor were required to repurchase a Primary
Asset, its only source of funds from which to make such repurchase would be from
funds obtained from the enforcement of a corresponding obligation, if any, on
the part of the originator of the Primary Assets, the Servicer or the Seller, as
the case may be, or from a Reserve Fund established to provide funds for such
repurchases.
Limited Protection Against Losses. Although any Enhancement is intended to
reduce the risk of delinquent payments or losses to Holders of Securities
entitled to the benefit thereof, the amount of such Enhancement will be limited,
as set forth in the related Prospectus Supplement, and will decline and could
18
<PAGE>
be depleted under certain circumstances prior to the payment in full of the
related Series of Securities, and as a result, Holders may suffer losses. See
"Enhancement."
Yield May Vary; Subordination. The yield to maturity experienced by a
Holder of Securities may be affected by the rate of payment of principal of the
Loans or Underlying Loans relating to the Private Securities, as applicable. The
timing of principal payments on the Securities of a Series will be affected by a
number of factors, including the following: (i) the extent of prepayments of the
Loans or Underlying Loans relating to the Private Securities, as applicable,
which prepayments may be influenced by a variety of factors; (ii) the manner of
allocating principal payments among the Classes of Securities of a Series as
specified in the related Prospectus Supplement; (iii) the exercise by the party
entitled thereto of any right of optional termination; and (iv) in the case of
Trust Funds comprised of Revolving Credit Line Loans, any provisions in the
related Agreement described in the applicable Prospectus Supplement respecting
any non-amortization, early amortization or scheduled amortization period. See
"Description of the Securities--Weighted Average Life of Securities."
Prepayments may also result from repurchases of Loans or Underlying Loans, as
applicable, due to material breaches of the Seller's or the Depositor's
warranties.
Interest payable on the Securities of a Series on a Distribution Date will
include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues during the calendar month
prior to a Distribution Date, the effective yield to Holders will be reduced
from the yield that would otherwise be obtainable if interest payable on the
Security were to accrue through the day immediately preceding each Distribution
Date, and the effective yield (at par) to Holders will be less than the
indicated coupon rate. See "Description of the Securities--Payments of
Interest."
The rights of Subordinated Securityholders to receive distributions to
which they would otherwise be entitled with respect to the Trust Fund will be
subordinate to the rights of the Servicer and the Holders of Senior Securities,
to the extent described in the related Prospectus Supplement. As a result of the
foregoing, investors must be prepared to bear the risk that they may be subject
to delays in payment and may not recover their initial investments in the
Subordinated Securities.
Balloon Payments. Certain of the Loans as of the related Cut-off Date may
not be fully amortizing over their terms to maturity, and thus will require
substantial principal payments (i.e., balloon payments) at their stated
maturity. Loans with balloon payments involve a greater degree of risk because
the ability of a borrower to make a balloon payment typically will depend upon
such borrower's ability either to timely refinance the related Loan or to timely
sell the related Property. The ability of a borrower to accomplish either of
these goals will be affected by a number of factors, including the level of
available mortgage rates at the time of sale or refinancing, the borrower's
equity in the related Property, the financial condition of the borrower and tax
laws. Losses on such Loans that are not otherwise covered by the credit
enhancement described in the applicable Prospectus Supplement will be borne by
the Holders of one or more Classes of Securities of the related Series.
Property Values May Be Insufficient. If the Mortgage Loans in a Trust Fund
are primarily junior liens subordinate to the rights of the mortgagee under the
related senior mortgage or mortgages, the proceeds from any liquidation,
insurance or condemnation proceedings will be available to satisfy the
outstanding balance of such junior mortgage only to the extent that the claims
of such senior mortgagees have been satisfied in full, including any related
foreclosure costs. In addition, a junior mortgagee may not foreclose on the
Property securing a junior mortgage unless it forecloses subject to the senior
mortgages, in which case it must either pay the entire amount due on the senior
mortgages to the senior mortgagees at or prior to the foreclosure sale or
undertake the obligation to make payments on the senior mortgages in the event
the mortgagor is in default thereunder. The Trust Fund will not have any source
of funds to satisfy the senior mortgages or make payments due to the senior
mortgagees.
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There are several factors that could adversely affect the value of
Properties such that the outstanding balance of the related Loan, together with
any senior financing on the Properties, would equal or exceed the value of the
Properties. Among the factors that could adversely affect the value of the
Properties are an overall decline in the residential real estate market in the
areas in which the Properties are located or a decline in the general condition
of the Properties as a result of failure of borrowers to maintain adequately the
Properties or of natural disasters that are not necessarily covered by
insurance, such as earthquakes and floods. Any such decline could extinguish the
value of a junior interest in a Property before having any effect on the related
senior interest therein. If such a decline occurs, the actual rates of
delinquencies, foreclosure and losses on the junior Loans could be higher than
those currently experienced in the mortgage lending industry in general.
Risks relating to Certain Geographic Regions where Mortgage Loans may be
Concentrated. Certain geographic regions of the United States from time to time
will experience weaker regional economic conditions and housing markets, and,
consequently, will experience higher rates of loss and delinquency than will be
experienced on mortgage loans generally. The Mortgage Loans underlying certain
Series of Securities may be concentrated in these regions, and such
concentration may present risk considerations in addition to those generally
present for similar mortgage-backed securities without such concentration.
Book-Entry Registration. If Securities are issued in book-entry form, such
registration may reduce the liquidity of such Securities in the secondary
trading market, since investors may be unwilling to purchase Securities for
which they cannot obtain physical certificates. Since transactions in book-entry
Securities can be effected only through the Depository Trust Company ("DTC"),
participating organizations, Financial Intermediaries and certain banks, the
ability of a Holder to pledge a book-entry Security to persons or entities that
do not participate in the DTC system may be limited due to lack of a physical
certificate representing such Securities. Security Owners will not be recognized
as Holders as such term is used in the related Agreement, and Security Owners
will be permitted to exercise the rights of Holders only indirectly through DTC
and its Participants.
In addition, Holders may experience some delay in their receipt of
distributions of principal of and interest on book-entry Securities, since
distributions are required to be forwarded by the applicable Trustee to DTC and
DTC will then be required to credit such distributions to the accounts of
Depository participants, which thereafter will be required to credit them to the
accounts of Holders either directly or indirectly through Financial
Intermediaries.
Pre-Funding May Adversely Affect Investment. If a Trust Fund includes a
Pre-Funding Account and the Principal Balance of additional Loans delivered to
the Trust Fund during the Pre-Funding Period is less than the original
Pre-Funded Amount, the Holders of the Securities of the related Series will
receive a prepayment of principal as and to the extent described in the related
Prospectus Supplement. Any such principal prepayment may adversely affect the
yield to maturity of the applicable Securities. Since prevailing interest rates
are subject to fluctuation, there can be no assurance that investors will be
able to reinvest such a prepayment at yields equaling or exceeding the yields on
the related Securities. It is possible that the yield on any such reinvestment
will be lower, and may be significantly lower, than the yield on the related
Securities.
The ability of a Trust Fund to invest in subsequent Loans during the
related Pre-Funding Period will be dependant on the ability of the Seller to
originate or acquire Loans that satisfy the requirements for transfer to the
Trust Fund. The ability of the Seller to originate or acquire such Loans will be
affected by a variety of social and economic factors, including the prevailing
level of market interest rates, unemployment levels and consumer perceptions of
general economic conditions.
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Although subsequent Loans must satisfy the characteristics described in the
related Prospectus Supplement and generally must be selected on the basis of the
same criteria as those used to select the initial Loans, such Loans may have
been originated more recently than the Loans originally transferred to the Trust
Fund and may be of a lesser credit quality. As a result, the addition of
subsequent Loans may adversely affect the performance of the related Securities.
Bankruptcy Risks. Federal and state statutory provisions, including the
federal bankruptcy laws and state laws affording relief to debtors, may
interfere with or affect the ability of the secured mortgage lender to realize
upon its security. For example, in a proceeding under the federal Bankruptcy
Code, a lender may not foreclose on a mortgaged property without the permission
of the bankruptcy court. The rehabilitation plan proposed by the related debtor
may provide, if the mortgaged property is not the debtor's principal residence
and the court determines that the value of the mortgaged property is less than
the principal balance of the related mortgage loan, for the reduction of the
secured indebtedness to the value of the mortgaged property as of the date of
the commencement of the bankruptcy, rendering the lender a general unsecured
creditor for the difference, and also may reduce the monthly payments due under
such mortgage loan, change the rate of interest and alter the mortgage loan
repayment schedule. The effect of any such proceedings under the federal
Bankruptcy Code, including but not limited to any automatic stay, could result
in delays in receiving payments on the Loans underlying a Series of Securities
and possible reductions in the aggregate amount of such payments.
Consequences of Owning Original Issue Discount Securities. Debt Securities
that are Compound Interest Securities will be, and certain of the Debt
Securities may be, issued with original issue discount for federal income tax
purposes. A Holder of Debt Securities issued with original issue discount will
be required to include original issue discount in ordinary gross income for
federal income tax purposes as it accrues, in advance of receipt of the cash
attributable to such income. Accrued but unpaid interest on the Debt Securities
that are Compound Interest Securities generally will be treated as having
original issue discount for this purpose. See "Certain Federal Income Tax
Considerations--Interest and Acquisition Discount" herein.
REMIC-Related Risks. Holders of Residual Interest Securities will be
required to report on their federal income tax returns as ordinary income their
pro rata share of the taxable income of the REMIC, regardless of the amount or
timing of their receipt of cash payments, as described in "Certain Federal
Income Tax Considerations." Accordingly, under certain circumstances, Holders of
Securities that constitute Residual Interest Securities may have taxable income
and tax liabilities arising from such investment during a taxable year in excess
of the cash received during such period. Individual Holders of Residual Interest
Securities may be limited in their ability to deduct servicing fees and other
expenses of the REMIC. In addition, Residual Interest Securities are subject to
certain restrictions on transfer. Because of the special tax treatment of
Residual Interest Securities, the taxable income arising in a given year on a
Residual Security will not be equal to the taxable income associated with
investment in a corporate bond or stripped instrument having similar cash flow
characteristics and pre-tax yield. Therefore, the after-tax yield on the
Residual Interest Security may be significantly less than that of a corporate
bond or stripped instrument having similar cash flow characteristics.
Additionally, prospective purchasers of a REMIC Residual Interest Security
should be aware that the IRS recently finalized regulations that provide that a
REMIC Residual Interest Security acquired after January 3, 1995 cannot be
marked-to-market. Prospective purchasers of a REMIC Residual Interest Security
should consult their tax advisors regarding the possible application of such
regulations. See "Certain Federal Income Tax Considerations--Taxation of Holders
of Residual Interest Securities--Mark to Market Rules."
Unsecured Home Improvement and Other Loans. The Trust Fund for any Series
may include Home Improvement Contracts that are not secured by an interest in
real estate or otherwise. The Trust Fund for any Series may also include home
equity contracts that were originated with Loan-to-Value Ratios or
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Combined Loan-to-Value Ratios in excess of the value of the related Mortgaged
Property pledged as security therefor. Under such circumstances, the Trust Fund
for the related Series could be treated as a general unsecured creditor as to
any unsecured portion of any such Loan. In the event of a default under a Loan
that is unsecured in whole or in part, the related Trust Fund will have recourse
only against the borrower's assets generally for the unsecured portion of the
Loan, along with all other general unsecured creditors of the borrower. In a
bankruptcy or insolvency proceeding relating to a borrower on any such Loan, the
unsecured obligations of the borrower with respect to such Loan may be
discharged, even though the value of the borrower's assets made available to the
related Trust Fund as a general unsecured creditor is insufficient to pay
amounts due and owning under the related Loan.
Risk of Losses Associated with Adjustable Rate Loans. Adjustable rate Loans
may be underwritten on the basis of an assessment that Mortgagors will have the
ability to make payments in higher amounts after relatively short periods of
time. In some instances, Mortgagors' income may not be sufficient to enable them
to continue to make their loan payments as such payments increase and thus the
likelihood of default will increase.
Potential Liability For Environmental Conditions. Real property pledged as
security to a lender may be subject to certain environmental risks. Federal,
state and local laws and regulations impose a wide range of requirements on
activities that may affect the environment, health and safety. In certain
circumstances, these laws and regulations impose obligations on owners or
operators of residential properties such as those subject to the Loans. The
failure to comply with such laws and regulations may result in fines and
penalties.
In particular, under various federal, state and local laws and regulations,
an owner or operator of real estate may be liable for the costs of addressing
hazardous substances on, in or beneath such property and related costs. Such
liability could exceed the value of the property and the aggregate assets of the
owner or operator. In addition, persons who transport or dispose of hazardous
substances, or arrange for the transportation, disposal or treatment of
hazardous substances, at off-site locations may also be held liable if there are
releases or threatened releases of hazardous substances at such off-site
locations.
In addition, under the laws of some states and under the Federal
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
contamination of property may give rise to a lien on the property to assure the
payment of the costs of clean-up. In several states, such a lien has priority
over the lien of an existing mortgage against such property.
Under the laws of some states, and under CERCLA and the Federal Solid Waste
Disposal Act, there is a possibility that a lender may be held liable as an
"owner" or "operator" for costs of addressing releases or threatened releases of
hazardous substances at a property, or releases of petroleum from an underground
storage tank, under certain circumstances. See "Certain Legal Aspects of the
Loans--Environmental Risks."
Consumer Protection Laws May Affect Loans. Applicable state laws generally
regulate interest rates and other charges and require certain disclosures. In
addition, other state laws, public policy and general principles of equity
relating to the protection of consumers, unfair and deceptive practices and debt
collection practices may apply to the origination, servicing and collection of
the Loans. Depending on the provisions of the applicable law and the specific
facts and circumstances involved, violations of these laws, policies and
principles may limit the ability of the Servicer to collect all or part of the
principal of or interest on the Loans, may entitle the borrower to a refund of
amounts previously paid and, in addition, could subject the owner of the Loan to
damages and administrative enforcement.
The Loans are also subject to federal laws, including:
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(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding
the terms of the Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit;
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience; and
(iv) for loans that were originated or closed after November 7, 1989,
the Home Equity Loan Consumer Protection Act of 1988, which requires
additional application disclosures, limits changes that may be made to the
loan documents without the borrower's consent and restricts a lender's
ability to declare a default or to suspend or reduce a borrower's credit
limit to certain enumerated events.
The Riegle Act. Certain mortgage loans are subject to the Riegle Community
Development and Regulatory Improvement Act of 1994 (the "Riegle Act"), which
incorporates the Home Ownership and Equity Protection Act of 1994. These
provisions impose additional disclosure and other requirements on creditors with
respect to non-purchase money mortgage loans with high interest rates or high
up-front fees and charges. The provisions of the Riegle Act apply on a mandatory
basis to all mortgage loans originated on or after October 1, 1995. These
provisions can impose specified statutory liabilities upon creditors who fail to
comply with their provisions and may affect the enforceability of the related
loans. In addition, any assignee of the creditor would generally be subject to
all claims and defenses that the consumer could assert against the creditor,
including, without limitation, the right to rescind the mortgage loan.
The Home Improvement Contracts are also subject to the Preservation of
Consumers' Claims and Defenses regulations of the Federal Trade Commission and
other similar federal and state statutes and regulations (collectively, the
"Holder in Due Course Rules"), which protect the homeowner from defective
craftsmanship or incomplete work by a contractor. These laws permit the obligor
to withhold payment if the work does not meet the quality and durability
standards agreed to by the homeowner and the contractor. The Holder in Due
Course Rules have the effect of subjecting any assignee of the seller in a
consumer credit transaction to all claims and defenses the obligor in the credit
sale transaction could assert against the seller of the goods.
Violations of certain provisions of these federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Loans and in addition, could subject the Trust Fund to damages and
administrative enforcement. See "Certain Legal Aspects of the Loans."
Contracts Will Not Be Stamped. In order to give notice of the right, title
and interest of Holders to the Home Improvement Contracts, the Depositor will
cause a UCC-1 financing statement to be executed by the Depositor or the Seller
identifying the applicable Trustee as the secured party and identifying all Home
Improvement Contracts as collateral. Unless otherwise specified in the related
Prospectus Supplement, the Home Improvement Contracts will not be stamped or
otherwise marked to reflect their assignment to the Trust Fund. Therefore, if,
through negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the Home Improvement Contracts without notice of such
assignment, the interest of Holders in the Home Improvement Contracts could be
defeated. See "Certain Legal Aspects of the Loans--The Home Improvement
Contracts."
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Ratings Are Not Recommendations. It will be a condition to the issuance of
a Series of Securities that they be rated in one of the four highest rating
categories by the Rating Agencies identified in the related Prospectus
Supplement. Any such rating would be based on, among other things, the adequacy
of the value of the Primary Assets and any Enhancement with respect to such
Series. Such rating should not be deemed a recommendation to purchase, hold or
sell Securities, inasmuch as it does not address market price or suitability for
a particular investor. There is also no assurance that any such rating will
remain in effect for any given period of time or may not be lowered or withdrawn
entirely by the Rating Agencies if in their judgment circumstances in the future
so warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Primary Assets, such rating might also be lowered
or withdrawn, among other reasons, because of an adverse change in the financial
or other condition of an Enhancer or a change in the rating of such Enhancer's
long term debt.
DESCRIPTION OF THE SECURITIES
General
Each Series of Notes will be issued pursuant to an indenture (each, an
"Indenture") between the related Trust Fund and the entity named in the related
Prospectus Supplement as Indenture Trustee with respect to such Series. A form
of Indenture has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part. The Certificates will also be issued in Series
pursuant to separate agreements (each, a "Pooling and Servicing Agreement" or a
"Trust Agreement") among the Depositor, the Servicer, if the Series relates to
Loans, and the Trustee. A form of Pooling and Servicing Agreement has been filed
as an exhibit to the Registration Statement of which this Prospectus forms a
part. A Series may consist of both Notes and Certificates.
The Seller may agree to reimburse the Depositor for certain fees and
expenses of the Depositor incurred in connection with the offering of the
Securities.
The following summaries describe certain provisions in the Agreements
common to each Series of Securities. The summaries do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, the
provisions of the Agreements and the Prospectus Supplement relating to each
Series of Securities. Where particular provisions or terms used in the
Agreements are referred to, the actual provisions (including definitions of
terms) are incorporated herein by reference as part of such summaries.
Each Series of Securities will consist of one or more Classes of
Securities, one or more of which may be Compound Interest Securities, Variable
Interest Securities, PAC Securities, Zero Coupon Securities, Principal Only
Securities, Interest Only Securities or Participating Securities. A Series may
also include one or more Classes of Subordinated Securities. The Securities of
each Series will be issued only in fully registered form, without coupons, in
the authorized denominations for each Class specified in the related Prospectus
Supplement. Upon satisfaction of the conditions, if any, applicable to a Class
of a Series, as described in the related Prospectus Supplement, the transfer of
the Securities may be registered and the Securities may be exchanged at the
office of the applicable Trustee specified in the Prospectus Supplement without
the payment of any service charge other than any tax or governmental charge
payable in connection with such registration of transfer or exchange. If
specified in the related Prospectus Supplement, one or more Classes of a Series
may be available in book-entry form only.
Unless otherwise provided in the related Prospectus Supplement, payments of
principal of and interest on a Series of Securities will be made on the
Distribution Dates specified in the Prospectus Supplement relating to such
Series by check mailed to Holders of such Series, registered as such at the
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close of business on the record date specified in the related Prospectus
Supplement applicable to such Distribution Dates at their addresses appearing on
the security register, except that (a) payments may be made by wire transfer (at
the expense of the Holder requesting payment by wire transfer) in certain
circumstances described in the related Prospectus Supplement and (b) final
payments of principal in retirement of each Security will be made only upon
presentation and surrender of such Security at the office of the applicable
Trustee specified in the Prospectus Supplement. Notice of the final payment on a
Security will be mailed to the Holder of such Security before the Distribution
Date on which the final principal payment on any Security is expected to be made
to the Holder of such Security.
Payments of principal of and interest on the Securities will be made by the
applicable Trustee, or a paying agent on behalf of such Trustee, as specified in
the related Prospectus Supplement. Unless otherwise provided in the related
Prospectus Supplement, all payments with respect to the Primary Assets for a
Series, together with reinvestment income thereon, amounts withdrawn from any
Reserve Fund, and amounts available pursuant to any other Enhancement will be
deposited directly into the Collection Account. If provided in the related
Prospectus Supplement, such deposits may be net of certain amounts payable to
the related Servicer and any other person specified in such Prospectus
Supplement. Such amounts thereafter will be deposited into the Distribution
Account(s) and will be available to make payments on the Securities of such
Series on the next Distribution Date. See "The Trust Funds--Collection and
Distribution Accounts."
Valuation of the Primary Assets
If specified in the related Prospectus Supplement for a Series of Notes,
each Primary Asset included in the related Trust Fund for a Series will be
assigned an initial "Asset Value." Unless otherwise specified in the related
Prospectus Supplement, at any time the Asset Value of the Primary Assets will be
equal to the product of the Asset Value Percentage as set forth in the Indenture
and the lesser of (a) the stream of remaining regularly scheduled payments on
the Primary Assets, net, unless otherwise provided in the related Prospectus
Supplement, of certain amounts payable as expenses, together with income earned
on each such scheduled payment received through the day preceding the next
Distribution Date at the Assumed Reinvestment Rate, if any, discounted to
present value at the highest interest rate on the Notes of such Series over
periods equal to the interval between payments on the Notes, and (b) the
then-outstanding Principal Balance of the Primary Assets. Unless otherwise
specified in the related Prospectus Supplement, the initial Asset Value of the
Primary Assets will be at least equal to the principal amount of the Notes of
the related Series at the date of issuance thereof.
The "Assumed Reinvestment Rate," if any, for a Series will be the highest
rate permitted by the Rating Agencies or a rate insured by means of a surety
bond, guaranteed investment contract, Deposit Agreement or other arrangement
satisfactory to the Rating Agencies. If the Assumed Reinvestment Rate is so
insured, the related Prospectus Supplement will set forth the terms of such
arrangement.
Payments of Interest
The Securities of each Class by their terms entitled to receive interest
will bear interest (calculated, unless otherwise specified in the related
Prospectus Supplement, on the basis of a 360-day year of twelve 30-day months)
from the date and at the per annum rate specified, or calculated in the method
described, in the related Prospectus Supplement. Interest on such Securities of
a Series will be payable on the Distribution Date specified in the related
Prospectus Supplement. The rate of interest on Securities of a Series may be
variable or may change with changes in the annual percentage rates of the Loans
or Underlying Loans relating to the Private Securities, as applicable, included
in the related Trust Fund and/or as prepayments occur with respect to such Loans
or Underlying Loans, as applicable. Principal Only Securities may not be
entitled to receive any interest distributions or may be entitled to receive
only
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nominal interest distributions. Any interest on Zero Coupon Securities that is
not paid on the related Distribution Date will accrue and be added to the
principal thereof on such Distribution Date.
Interest payable on the Securities on a Distribution Date will include all
interest accrued during the period specified in the related Prospectus
Supplement. In the event interest accrues during the calendar month preceding a
Distribution Date, the effective yield to Holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the Securities were to
accrue through the day immediately preceding such Distribution Date.
Payments of Principal
On each Distribution Date for a Series, principal payments will be made to
the Holders of the Securities of such Series on which principal is then payable,
to the extent set forth in the related Prospectus Supplement. Such payments will
be made in an aggregate amount determined as specified in the related Prospectus
Supplement and will be allocated among the respective Classes of a Series in the
manner, at the times and in the priority (which may, in certain cases, include
allocation by random lot) set forth in the related Prospectus Supplement.
Final Scheduled Distribution Date
The Final Scheduled Distribution Date with respect to each Class of a
Series of Notes is the date no later than which the principal thereof will be
fully paid and with respect to each Class of a Series of Certificates will be
the date on which the entire aggregate principal balance of such Class is
expected to be reduced to zero, in each case calculated on the basis of the
assumptions applicable to such Series described in the related Prospectus
Supplement. The Final Scheduled Distribution Date for each Class of a Series
will be specified in the related Prospectus Supplement. Since payments on the
Primary Assets will be used to make distributions in reduction of the
outstanding principal amount of the Securities, it is likely that the actual
final Distribution Date of any such Class will occur earlier, and may occur
substantially earlier, than its Final Scheduled Distribution Date. Furthermore,
with respect to a Series of Certificates, unless otherwise specified in the
related Prospectus Supplement, as a result of delinquencies, defaults and
liquidations of the Primary Assets in the Trust Fund, the actual final
Distribution Date of any Certificate may occur later than its Final Scheduled
Distribution Date. No assurance can be given as to the actual prepayment
experience with respect to a Series. See "Weighted Average Life of the
Securities" below.
Special Redemption
If so specified in the Prospectus Supplement relating to a Series of
Securities having other than monthly Distribution Dates, one or more Classes of
Securities of such Series may be subject to special redemption, in whole or in
part, on the day specified in the related Prospectus Supplement (the "Special
Redemption Date") if, as a consequence of prepayments on the Loans or Underlying
Loans, as applicable, relating to such Securities, or low yields then available
for reinvestment, the entity specified in the related Prospectus Supplement
determines, based on assumptions specified in the applicable Agreement, that the
amount available for the payment of interest that will have accrued on such
Securities (the "Available Interest Amount") through the designated interest
accrual date specified in the related Prospectus Supplement is less than the
amount of interest that will have accrued on such Securities to such date. In
such event and as further described in the related Prospectus Supplement, the
applicable Trustee will redeem a principal amount of outstanding Securities of
such Series as will cause the Available Interest Amount to equal the amount of
interest that will have accrued through such designated interest accrual date
for such Series of Securities outstanding immediately after such redemption.
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Optional Redemption, Purchase or Termination
The Depositor or the Servicer may, at its option, redeem, in whole or in
part, one or more Classes of Notes or purchase one or more Classes of
Certificates of any Series, on any Distribution Date under the circumstances, if
any, specified in the Prospectus Supplement relating to such Series.
Alternatively, if so specified in the related Prospectus Supplement for a Series
of Certificates, the Depositor, the Servicer, or another entity designated in
the related Prospectus Supplement may, at its option, cause an early termination
of a Trust Fund by repurchasing all of the Primary Assets from such Trust Fund
on or after a date specified in the related Prospectus Supplement, or on or
after such time as the aggregate outstanding principal amount of the
Certificates or Primary Assets, as specified in the related Prospectus
Supplement, is equal to or less than the amount or percentage specified in the
related Prospectus Supplement. Notice of such redemption, purchase or
termination must be given by the Depositor or the Trustee prior to the related
date. The redemption, purchase or repurchase price will be set forth in the
related Prospectus Supplement. If specified in the related Prospectus
Supplement, in the event that a REMIC election has been made, the Trustee shall
receive a satisfactory opinion of counsel that the optional redemption, purchase
or termination will be conducted so as to constitute a "qualified liquidation"
under Section 860F of the Code.
In addition, the Prospectus Supplement may provide other circumstances
under which Holders of Securities of a Series could be fully paid significantly
earlier than would otherwise be the case if payments or distributions were
solely based on the activity of the related Primary Assets.
Weighted Average Life of the Securities
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of such
security will be repaid to the investor. Unless otherwise specified in the
related Prospectus Supplement, the weighted average life of the Securities of a
Class will be influenced by the rate at which the amount financed under the
Loans or Underlying Loans relating to the Private Securities, as applicable,
included in the Trust Fund for a Series is paid, which may be in the form of
scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to a
prepayment standard or model. The Prospectus Supplement for a Series of
Securities will describe the prepayment standard or model, if any, used and may
contain tables setting forth the projected weighted average life of each Class
of Securities of such Series and the percentage of the original principal amount
of each Class of Securities of such Series that would be outstanding on
specified Distribution Dates for such Series based on the assumptions stated in
such Prospectus Supplement, including assumptions that prepayments on the Loans
or Underlying Loans relating to the Private Securities, as applicable, included
in the related Trust Fund are made at rates corresponding to various percentages
of the prepayment standard or model specified in such Prospectus Supplement.
There is, however, no assurance that prepayment of the Loans or Underlying
Loans relating to the Private Securities, as applicable, included in the related
Trust Fund will conform to any level of any prepayment standard or model
specified in the related Prospectus Supplement. The rate of principal
prepayments on pools of loans may be influenced by a variety of factors,
including job related factors such as transfers, layoffs or promotions and
personal factors such as divorce, disability or prolonged illness. Economic
conditions, either generally or within a particular geographic area or industry,
also may affect the rate of principal prepayments. Demographic and social
factors may influence the rate of principal prepayments in that some borrowers
have greater financial flexibility to move or refinance than do other borrowers.
The deductibility of mortgage interest payments, servicing decisions and other
factors also affect the rate of principal prepayments. As a result, there can be
no assurance as to the rate
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or timing of principal prepayments of the Loans or Underlying Loans either from
time to time or over the lives of such Loans or Underlying Loans.
The rate of prepayments of conventional housing loans and other receivables
has fluctuated significantly in recent years. In general, however, if prevailing
interest rates fall significantly below the interest rates on the Loans or
Underlying Loans relating to the Private Securities, as applicable, for a
Series, such loans are likely to prepay at rates higher than if prevailing
interest rates remain at or above the interest rates borne by such loans. In
this regard, it should be noted that the Loans or Underlying Loans, as
applicable, for a Series may have different interest rates. In addition, the
weighted average life of the Securities may be affected by the varying
maturities of the Loans or Underlying Loans relating to the Private Securities,
as applicable. If any Loans or Underlying Loans relating to the Private
Securities, as applicable, for a Series have actual terms-to-stated maturity of
less than those assumed in calculating the Final Scheduled Distribution Date of
the related Securities, one or more Classes of the Series may be fully paid
prior to their respective Final Scheduled Distribution Date, even in the absence
of prepayments and a reinvestment return higher than the Assumed Reinvestment
Rate.
THE TRUST FUNDS
General
The Notes of each Series will be secured by the pledge of the assets of the
related Trust Fund, and the Certificates of each Series will represent interests
in the assets of the related Trust Fund. The Trust Fund of each Series will
include assets purchased from the Seller composed of (i) the Primary Assets,
(ii) amounts available from the reinvestment of payments on such Primary Assets
at the Assumed Reinvestment Rate, if any, specified in the related Prospectus
Supplement, (iii) any Enhancement, (iv) any Property that secured a Loan but
which is acquired by foreclosure or deed in lieu of foreclosure or repossession
and (v) the amount, if any, initially deposited into the Collection Account or
Distribution Account(s) for a Series as specified in the related Prospectus
Supplement.
The Securities will be non-recourse obligations of the related Trust Fund.
The assets of the Trust Fund specified in the related Prospectus Supplement for
a Series of Securities, unless otherwise specified in the related Prospectus
Supplement, will serve as collateral only for that Series of Securities. Holders
of a Series of Notes may only proceed against such collateral securing such
Series of Notes in the case of a default with respect to such Series of Notes
and may not proceed against any assets of the Depositor or the related Trust
Fund not pledged to secure such Notes.
The Primary Assets for a Series will be sold by the Seller to the Depositor
or purchased by the Depositor in the open market or in privately negotiated
transactions, which may include transactions with affiliates and will be
transferred by the Depositor to the Trust Fund. Loans relating to a Series will
be serviced by the Servicer, which may be the Seller, specified in the related
Prospectus Supplement, pursuant to a Pooling and Servicing Agreement, with
respect to a Series of Certificates or a servicing agreement (each, a "Servicing
Agreement") between the Trust Fund and Servicer, with respect to a Series of
Notes.
If so specified in the related Prospectus Supplement, a Trust Fund relating
to a Series of Securities may be a business trust formed under the laws of the
state specified in the related Prospectus Supplement pursuant to a trust
agreement (each, a "Trust Agreement") between the Depositor and the Trustee of
such Trust Fund specified in the related Prospectus Supplement.
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With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or liabilities.
No Trust Fund is expected to engage in any activities other than acquiring,
managing and holding the related Primary Assets and other assets contemplated
herein and in the related Prospectus Supplement and the proceeds thereof,
issuing Securities and making payments and distributions thereon and certain
related activities. No Trust Fund is expected to have any source of capital
other than its assets and any related Enhancement.
Primary Assets included in the Trust Fund for a Series may consist of any
combination of Loans and Private Securities, to the extent and as specified in
the related Prospectus Supplement.
The Loans
Mortgage Loans. The Primary Assets for a Series may consist, in whole or in
part, of closed-end home equity loans (the "Closed-End Loans") and/or revolving
home equity loans or certain balances therein (the "Revolving Credit Line Loans"
and, together with the Closed-End Loans, the "Mortgage Loans") secured by
mortgages primarily on Single Family Properties that may be subordinated to
other mortgages on the same Mortgaged Property. The Mortgage Loans may have
fixed interest rates or adjustable interest rates and may provide for other
payment characteristics as described below and in the related Prospectus
Supplement.
The full principal amount of a Closed-End Loan is advanced at origination
of the loan and generally is repayable in equal (or substantially equal)
installments of an amount sufficient to fully amortize such loan at its stated
maturity. Unless otherwise described in the related Prospectus Supplement, the
original terms to stated maturity of Closed-End Loans will not exceed 360
months. Principal amounts on a Revolving Credit Line Loan may be drawn down (up
to a maximum amount as set forth in the related Prospectus Supplement) or repaid
under each Revolving Credit Line Loan from time to time, but may be subject to a
minimum periodic payment. Except to the extent provided in the related
Prospectus Supplement, the Trust Fund will not include any amounts borrowed
under a Revolving Credit Line Loan after the Cut-off Date. As more fully
described in the related Prospectus Supplement, interest on each Revolving
Credit Line Loan, excluding introductory rates offered from time to time during
promotional periods, is computed and payable monthly on the average daily
Principal Balance of such Loan. Under certain circumstances, under either a
Revolving Credit Line Loan or a Closed-End Loan, a borrower may choose an
interest only payment option and is obligated to pay only the amount of interest
that accrues on the loan during the billing cycle. An interest only payment
option may be available for a specified period before the borrower must begin
paying at least the minimum monthly payment of a specified percentage of the
average outstanding balance of the loan.
The rate of prepayment on the Mortgage Loans cannot be predicted. Home
equity loans have been originated in significant volume only during the past few
years and the Depositor is not aware of any publicly available studies or
statistics on the rate of prepayment of such loans. Generally, home equity loans
are not viewed by borrowers as permanent financing. Accordingly, the Mortgage
Loans may experience a higher rate of prepayment than traditional first mortgage
loans. On the other hand, because home equity loans such as the Revolving Credit
Line Loans generally are not fully amortizing, the absence of voluntary borrower
prepayments could cause rates of principal payments lower than, or similar to,
those of traditional fully-amortizing first mortgages. The prepayment experience
of the related Trust Fund may be affected by a wide variety of factors,
including general economic conditions, prevailing interest rate levels, the
availability of alternative financing and homeowner mobility and the frequency
and amount of any future draws on any Revolving Credit Line Loans. Other factors
that might be expected to affect the prepayment rate of a pool of home equity
mortgage loans or home improvement contracts include the amounts of, and
interest rates on, the underlying first mortgage loans, and the use of first
mortgage loans as long-term financing for home purchase and subordinate mortgage
loans as
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shorter-term financing for a variety of purposes, including home improvement,
education expenses and purchases of consumer durables such as automobiles.
Accordingly, the Mortgage Loans may experience a higher rate of prepayment than
traditional fixed-rate mortgage loans. In addition, any future limitations on
the right of borrowers to deduct interest payments on home equity loans for
federal income tax purposes may further increase the rate of prepayments of the
Loans. Moreover, the enforcement of a "due-on-sale" provision (as described
below) will have the same effect as a prepayment of the related Loan. See
"Certain Legal Aspects of the Loans--Due-on-Sale Clauses in Mortgage Loans."
Collections on Revolving Credit Line Loans may vary because, among other
things, borrowers may (i) make payments during any month as low as the minimum
monthly payment for such month or, during the interest-only period for certain
Revolving Credit Line Loans and, in more limited circumstances, Closed-End Loans
with respect to which an interest-only payment option has been selected, the
interest and the fees and charges for such month or (ii) make payments as high
as the entire Principal Balance plus accrued interest and the fees and charges
thereon. It is possible that borrowers may fail to make the required periodic
payments. In addition, collections on the Mortgage Loans may vary due to
seasonal purchasing and the payment habits of borrowers.
The Mortgaged Properties will include Single Family Property (i.e., one- to
four-family residential housing, including Condominium Units and Cooperative
Dwellings) and mixed-use property. Mixed-use properties will consist of
structures of no more than three stories that include one- to four-residential
dwelling units and space used for retail, professional or other commercial uses.
Such uses, which will not involve more than 50% of the space in the structure,
may include doctor, dentist or law offices, real estate agencies, boutiques,
newsstands, convenience stores or other similar types of uses intended to cater
to individual customers as specified in the related Prospectus Supplement. The
properties may be located in suburban or metropolitan districts. Any such
non-residential use will be in compliance with local zoning laws and
regulations. The Mortgaged Properties may consist of detached individual
dwellings, individual condominiums, townhouses, duplexes, row houses, individual
units in planned unit developments and other attached dwelling units. Each
Single Family Property will be located on land owned in fee simple by the
borrower or on land leased by the borrower for a term at least ten years (unless
otherwise provided in the related Prospectus Supplement) greater than the term
of the related Loan. Attached dwellings may include owner-occupied structures
where each borrower owns the land upon which the unit is built, with the
remaining adjacent land owned in common or dwelling units subject to a
proprietary lease or occupancy agreement in a cooperatively owned apartment
building.
Unless otherwise specified in the related Prospectus Supplement, Mortgages
on Cooperative Dwellings consist of a lien on the shares issued by such
Cooperative Dwelling and the proprietary lease or occupancy agreement relating
to such Cooperative Dwelling.
The aggregate Principal Balance of Loans secured by Properties that are
owner-occupied will be disclosed in the related Prospectus Supplement. Unless
otherwise specified in the Prospectus Supplement, the sole basis for a
representation that a given percentage of the Loans are secured by Single Family
Property that is owner-occupied will be either (i) the making of a
representation by the Mortgagor at origination of the Mortgage Loan either that
the underlying Mortgaged Property will be used by the Mortgagor for a period of
at least six months every year or that the Mortgagor intends to use the
Mortgaged Property as a primary residence, or (ii) a finding that the address of
the underlying Mortgaged Property is the Mortgagor's mailing address as
reflected in the Servicer's records. To the extent specified in the related
Prospectus Supplement, the Mortgaged Properties may include non-owner occupied
investment properties and vacation and second homes.
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Unless otherwise specified in the related Prospectus Supplement, the
initial Combined Loan-to-Value Ratio of a Loan is computed in the manner
described in the related Prospectus Supplement, taking into account the amounts
of any related senior mortgage loans.
Home Improvement Contracts. The Primary Assets for a Series may consist, in
whole or in part, of home improvement installment sales contracts and
installment loan agreements (the "Home Improvement Contracts") originated by a
home improvement contractor in the ordinary course of business. As specified in
the related Prospectus Supplement, the Home Improvement Contracts will either be
unsecured or secured by the Mortgages primarily on Single Family Properties,
which are generally subordinated to other mortgages on the same Mortgaged
Property or by purchase money security interests in the Home Improvements
financed thereby. Unless otherwise specified in the applicable Prospectus
Supplement, the Home Improvement Contracts will be fully amortizing and may have
fixed interest rates or adjustable interest rates and may provide for other
payment characteristics as described below and in the related Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement, the home
improvements (the "Home Improvements") securing the Home Improvement Contracts
include, but are not limited to, replacement windows, house siding, new roofs,
swimming pools, satellite dishes, kitchen and bathroom remodeling goods and
solar heating panels. The initial Loan-to-Value Ratio of a Home Improvement
Contract will be computed in the manner described in the related Prospectus
Supplement.
Additional Information. The selection criteria that will apply with respect
to the Loans, including, but not limited to, the Combined Loan-to-Value Ratios
or Loan-to-Value Ratios, as applicable, original terms to maturity and
delinquency information, will be specified in the related Prospectus Supplement.
The Loans for a Series may include Loans that do not amortize their entire
Principal Balance by their stated maturity in accordance with their terms and
require a balloon payment of the remaining Principal Balance at maturity, as
specified in the related Prospectus Supplement. As further described in the
related Prospectus Supplement, the Loans for a Series may include Loans that do
not have a specified stated maturity.
The Loans will be conventional contracts or contracts insured by the
Federal Housing Administration (the "FHA") or partially guaranteed by the
Veterans Administration (the "VA"). Loans designated in the related Prospectus
Supplement as insured by the FHA will be insured by the FHA as authorized under
the United States Housing Act of 1937, as amended. Such Loans will be insured
under various FHA programs. These programs generally limit the principal amount
and interest rates of the mortgage loans insured. Loans insured by the FHA
generally require a minimum down payment of approximately 5% of the original
principal amount of the loan. No FHA-insured Loans relating to a Series may have
an interest rate or original principal amount exceeding the applicable FHA
limits at the time or origination of such loan.
The insurance premiums for Loans insured by the FHA are collected by
lenders approved by the Department of Housing and Urban Development ("HUD") and
are paid to the FHA. The regulations governing FHA single-family mortgage
insurance programs provide that insurance benefits are payable either upon
foreclosure (or other acquisition of possession) and conveyance of the mortgaged
premises to HUD or upon assignment of the defaulted Loan to HUD. With respect to
a defaulted FHA-insured Loan, the Servicer is limited in its ability to initiate
foreclosure proceedings. When it is determined, either by the Servicer or HUD,
that default was caused by circumstances beyond the mortgagor's control, the
Servicer is expected to make an effort to avoid foreclosure by entering, if
feasible, into one of a number of available forms of forbearance plans with the
mortgagor. Such plans may involve the reduction or suspension of regular
mortgage payments for a specified period, with such payments to be made upon or
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before the maturity date of the mortgage, or the recasting of payments due under
the mortgage up to or beyond the maturity date. In addition, when a default
caused by such circumstances is accompanied by certain other criteria, HUD may
provide relief by making payments to the Servicer in partial or full
satisfaction of amounts due under the Loan (which payments are to be repaid by
the mortgagor to HUD) or by accepting assignment of the loan from the Servicer.
With certain exceptions, at least three full monthly installments must be due
and unpaid under the Loan and HUD must have rejected any request for relief from
the mortgagor before the Servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The Servicer of each FHA-insured Loan will be obligated
to purchase any such debenture issued in satisfaction of such Loan upon default
for an amount equal to the principal amount of any such debenture.
The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal amount of the defaulted Loan adjusted to reimburse the
Servicer for certain costs and expenses and to deduct certain amounts received
or retained by the Servicer after default. When entitlement to insurance
benefits results from foreclosure (or other acquisition of possession) and
conveyance to HUD, the Servicer is compensated for no more than two-thirds of
its foreclosure costs, and is compensated for interest accrued and unpaid prior
to such date but in general only to the extent it was allowed pursuant to a
forbearance plan approved by HUD. When entitlement to insurance benefits results
from assignment of the Loan to HUD, the insurance payment includes full
compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA-insured Loan, bears
interest from a date 30 days after the mortgagor's first uncorrected failure to
perform any obligation to make any payment due under the Loan and, upon
assignment, from the date of assignment to the date of payment of the claim, in
each case at the same interest rate as the applicable HUD debenture interest
rate as described above.
Loans designated in the related Prospectus Supplement as guaranteed by the
VA will be partially guaranteed by the VA under the Serviceman's Readjustment
Act of 1944, as amended (the "VA Guaranty"). The Serviceman's Readjustment Act
of 1944, as amended, permits a veteran (or in certain instances, the spouse of a
veteran) to obtain a mortgage loan guaranty by the VA covering mortgage
financing of the purchase of a one- to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires no
down payment from the purchaser and permits the guarantee of mortgage loans of
up to 30 years' duration.
The maximum guaranty that may be issued by the VA under a VA guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 1803(a), as amended. The
liability on the guaranty is reduced or increased pro rata with any reduction or
increase in the amount of indebtedness, but in no event will the amount payable
on the guaranty exceed the amount of the original guaranty. The VA may, at its
option and without regard to the guaranty, make full payment to a mortgage
holder of unsatisfied indebtedness on a mortgage upon its assignment to the VA.
With respect to a defaulted VA guaranteed Loan, the Servicer is, absent
exceptional circumstances, authorized to announce its intention to foreclose
only when the default has continued for three months. Generally, a claim for the
guaranty is submitted after liquidation of the Mortgaged Property.
The amount payable under the guaranty will be the percentage of the
VA-insured Loan originally guaranteed applied to indebtedness outstanding as of
the applicable date of computation specified in the
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VA regulations. Payments under the guaranty will be equal to the unpaid
principal amount of the loan, interest accrued on the unpaid balance of the loan
to the appropriate date of computation and limited expenses of the mortgagee,
but in each case only to the extent that such amounts have not been recovered
through liquidation of the Mortgaged Property. The amount payable under the
guaranty may in no event exceed the amount of the original guaranty.
The related Prospectus Supplement for each Series will provide information
with respect to the Loans that are Primary Assets as of the Cut-off Date,
including, among other things, and to the extent relevant: (a) the aggregate
unpaid Principal Balance of the Loans; (b) the range and weighted average Loan
Rate on the Loans, and, in the case of adjustable rate Loans, the range and
weighted average of the current Loan Rates and the Lifetime Rate Caps, if any;
(c) the range and average Principal Balance of the Loans; (d) the weighted
average original and remaining term-to-stated maturity of the Loans and the
range of original and remaining terms-to-stated maturity, if applicable; (e) the
range and weighted average of Combined Loan-to-Value Ratios or Loan-to-Value
Ratios for the Loans, as applicable; (f) the percentage (by Principal Balance as
of the Cut-off Date) of Loans that accrue interest at adjustable or fixed
interest rates; (g) any special hazard Insurance Policy or bankruptcy bond or
other enhancement relating to the Loans; (h) the percentage (by Principal
Balance as of the Cut-off Date) of Loans that are secured by Mortgaged
Properties or Home Improvements or that are unsecured; (i) the geographic
distribution of any Mortgaged Properties securing the Loans; (j) the percentage
of Loans (by Principal Balance as of the Cut-off Date) that are secured by
Single Family Properties, shares relating to Cooperative Dwellings, Condominium
Units, investment property and vacation or second homes; (k) the lien priority
of the Loans; (l) the delinquency status and year of origination of the Loans;
(m) whether such Loans are Closed-End Loans and/or Revolving Credit Line Loans;
and (n) in the case of Revolving Credit Line Loans, the general payments and
credit line terms of such Loans and other pertinent features thereof. The
related Prospectus Supplement will also specify any other limitations on the
types or characteristics of Loans for a Series.
If information of the nature described above respecting the Loans is not
known to the Depositor at the time the Securities are initially offered,
approximate or more general information of the nature described above will be
provided in the Prospectus Supplement and additional information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related Series and to be filed with the Commission within 15
days after the initial issuance of such Securities.
Private Securities
General. Primary Assets for a Series may consist, in whole or in part, of
Private Securities that include pass-through certificates representing
beneficial interests in loans of the type that would otherwise be eligible to be
Loans (the "Underlying Loans") or (b) collateralized obligations secured by
Underlying Loans. Such pass-through certificates or collateralized obligations
will have previously been (a) offered and distributed to the public pursuant to
an effective registration statement or (b) purchased in a transaction not
involving any public offering from a person who is not an affiliate of the
issuer of such securities at the time of sale (nor an affiliate thereof at any
time during the three preceding months); provided a period of three years
elapsed since the later of the date the securities were acquired from the issuer
or an affiliate thereof. Although individual Underlying Loans may be insured or
guaranteed by the United States or an agency or instrumentality thereof, they
need not be, and Private Securities themselves will not be so insured or
guaranteed.
Private Securities will have been issued pursuant to a pooling and
servicing agreement, a trust agreement or similar agreement (a "PS Agreement").
The seller/servicer of the Underlying Loans will have entered into the PS
Agreement with the trustee under such PS Agreement (the "PS Trustee"). The PS
Trustee or its agent, or a custodian, will possess the Underlying Loans.
Underlying Loans will be
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serviced by a servicer (the "PS Servicer") directly or by one or more
sub-servicers who may be subject to the supervision of the PS Servicer.
The sponsor of the Private Securities (the "PS Sponsor") will be a
financial institution or other entity engaged generally in the business of
lending; a public agency or instrumentality of a state, local or federal
government; or a limited purpose corporation organized for the purpose of, among
other things, establishing trusts and acquiring and selling loans to such
trusts, and selling beneficial interests in such trusts. If so specified in the
Prospectus Supplement, the PS Sponsor may be an affiliate of the Depositor. The
obligations of the PS Sponsor will generally be limited to certain
representations and warranties with respect to the assets conveyed by it to the
related trust. Unless otherwise specified in the related Prospectus Supplement,
the PS Sponsor will not have guaranteed any of the assets conveyed to the
related trust or any of the Private Securities issued under the PS Agreement.
Additionally, although the Underlying Loans may be guaranteed by an agency or
instrumentality of the United States, the Private Securities themselves will not
be so guaranteed.
Distributions of principal and interest will be made on the Private
Securities on the dates specified in the related Prospectus Supplement. The
Private Securities may be entitled to receive nominal or no principal
distributions or nominal or no interest distributions. Principal and interest
distributions will be made on the Private Securities by the PS Trustee or the PS
Servicer. The PS Sponsor or the PS Servicer may have the right to repurchase the
Underlying Loans after a certain date or under other circumstances specified in
the related Prospectus Supplement.
The Underlying Loans may be fixed rate, level payment, fully amortizing
loans or adjustable rate loans or loans having balloon or other irregular
payment features. Such Underlying Loans will be secured by mortgages on
Mortgaged Properties.
Credit Support Relating to Private Securities. Credit support in the form
of Reserve Funds, subordination of other private securities issued under the PS
Agreement, guarantees, cash collateral accounts, Security Policies or other
types of credit support may be provided with respect to the Underlying Loans or
with respect to the Private Securities themselves. The type, characteristics and
amount of credit support will be a function of certain characteristics of the
Underlying Loans and other factors and will have been established for the
Private Securities on the basis of requirements of the nationally recognized
statistical rating organization that rated the Private Securities.
Additional Information. The Prospectus Supplement for a Series for which
the Primary Assets include Private Securities will specify (such disclosure may
be on an approximate basis and will be as of the date specified in the related
Prospectus Supplement), to the extent relevant and to the extent such
information is reasonably available to the Depositor and the Depositor
reasonably believes such information to be reliable: (i) the aggregate
approximate principal amount and type of the Private Securities to be included
in the Trust Fund for such Series; (ii) certain characteristics of the
Underlying Loans, including (a) the payment features of such Underlying Loans
(i.e., whether they are Closed-End Loans and/or Revolving Credit Line Loans,
whether they are fixed rate or adjustable rate and whether they provide for
fixed level payments or other payment features), (b) the approximate aggregate
Principal Balance, if known, of such Underlying Loans insured or guaranteed by a
governmental entity, (c) the servicing fee or range of servicing fees with
respect to the Underlying Loans, (d) the minimum and maximum stated maturities
of such Underlying Loans at origination, (e) the lien priority of such
Underlying Loans and (f) the delinquency status and year of origination of such
Underlying Loans; (iii) the maximum original term-to-stated maturity of the
Private Securities; (iv) the weighted average term-to-stated maturity of the
Private Securities; (v) the pass-through or certificate rate or ranges thereof
for the Private Securities; (vi) the PS Sponsor, the PS Servicer (if other than
the PS Sponsor) and the PS Trustee for such Private Securities; (vii) certain
characteristics of credit support if any, such as Reserve
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Funds, Security Policies or guarantees relating to such Loans underlying the
Private Securities or to such Private Securities themselves; (viii) the terms on
which Underlying Loans may, or are required to, be purchased prior to their
stated maturity or the stated maturity of the Private Securities; and (ix) the
terms on which Underlying Loans may be substituted for those originally
underlying the Private Securities.
If information of the nature described above representing the Private
Securities is not known to the Depositor at the time the Securities are
initially offered, approximate or more general information of the nature
described above will be provided in the Prospectus Supplement and the additional
information, if available, will be set forth in a Current Report on Form 8-K to
be available to investors on the date of issuance of the related Series and to
be filed with the Commission within 15 days of the initial issuance of such
Securities.
Collection and Distribution Accounts
A separate Collection Account will be established by the Trustee or the
Servicer, in the name of the Trustee, for each Series of Securities for receipt
of the amount of cash, if any, specified in the related Prospectus Supplement to
be initially deposited therein by the Depositor, all amounts received on or with
respect to the Primary Assets and, unless otherwise specified in the related
Prospectus Supplement, income earned thereon. Certain amounts on deposit in such
Collection Account and certain amounts available pursuant to any Enhancement, as
provided in the related Prospectus Supplement, will be deposited into the
applicable Distribution Account, which will also be established by the
applicable Trustee for each such Series of Securities, for distribution to the
related Holders. Unless otherwise specified in the related Prospectus
Supplement, the applicable Trustee will invest the funds in the Collection
Account and the Distribution Account(s) in Eligible Investments maturing, with
certain exceptions, not later, in the case of funds in the Collection Account,
than the day preceding the date such funds are due to be deposited into the
Distribution Account(s) or otherwise distributed and, in the case of funds in
the Distribution Account(s), than the day preceding the next Distribution Date
for the related Series of Securities. Eligible Investments include, among other
investments, obligations of the United States and certain agencies thereof,
federal funds, certificates of deposit, commercial paper, demand and time
deposits and banker's acceptances, certain repurchase agreements of United
States government securities and certain guaranteed investment contracts, in
each case acceptable to the Rating Agencies.
Notwithstanding any of the foregoing, amounts may be deposited and
withdrawn pursuant to any Deposit Agreement or Minimum Principal Payment
Agreement as specified in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, a Trust Fund will
include one or more segregated trust accounts (each, a "Pre-Funding Account")
established and maintained with the Trustee for the related Series. If so
specified, on the Closing Date for such Series, a portion of the proceeds of the
sale of the Securities of such Series (such amount, the "Pre-Funded Amount")
will be deposited into the Pre-Funding Account and may be used to purchase
additional Primary Assets during the period of time specified in the related
Prospectus Supplement (the "Pre-Funding Period"). In no case will the Pre-Funded
Amount exceed 50% of the aggregate principal amount of the related Securities,
and in no case will the Pre-Funding Period exceed one year. The Primary Assets
to be so purchased generally will be selected on the basis of the same criteria
as those used to select the initial Primary Assets, and the same representations
and warranties will be made with respect thereto. If any Pre-Funded Amount
remains on deposit in the Pre-Funding Account at the end of the Pre-Funding
Period, such amount will be applied in the manner specified in the related
Prospectus Supplement to prepay the Notes and/or the Certificates of the
applicable Series.
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If a Pre-Funding Account is established, one or more segregated trust
accounts (each, a "Capitalized Interest Account") may be established and
maintained with the Trustee for the related Series. On the Closing Date for such
Series, a portion of the proceeds of the sale of the Securities of such Series
will be deposited into the Capitalized Interest Account and used to fund the
excess, if any, of the sum of (i) the amount of interest accrued on the
Securities of such Series and (ii) if specified in the related Prospectus
Supplement, certain fees or expenses during the Pre-Funding Period, over the
amount of interest available therefor from the Primary Assets in the Trust Fund.
Any amounts on deposit in the Capitalized Interest Account at the end of the
Pre-Funding Period that are not necessary for such purposes will be distributed
to the person specified in the related Prospectus Supplement.
ENHANCEMENT
If stated in the Prospectus Supplement relating to a Series of Securities,
simultaneously with the Depositor's assignment of the Primary Assets to the
Trustee, the Depositor will obtain a Security Policy, issue Subordinated
Securities or obtain any other form of enhancement or combination thereof
(collectively, "Enhancement") in favor of the Trustee on behalf of the Holders
of the related Series or designated Classes of such Series from an institution
or by other means acceptable to the Rating Agencies. The Enhancement will
support the payment of principal of and interest on the Securities, and may be
applied for certain other purposes to the extent and under the conditions set
forth in such Prospectus Supplement. Enhancement for a Series may include one or
more of the following forms, or such other form as may be specified in the
related Prospectus Supplement. If so specified in the related Prospectus
Supplement, any of such Enhancement may be structured so as to protect against
losses relating to more than one Trust Fund, in the manner described therein.
Subordinated Securities
If specified in the related Prospectus Supplement, Enhancement for a Series
may consist of one or more Classes of Subordinated Securities. The rights of the
related Subordinated Securityholders to receive distributions on any
Distribution Date will be subordinate in right and priority to the rights of
Holders of Senior Securities of the Series, but only to the extent described in
the related Prospectus Supplement.
Insurance
If stated in the related Prospectus Supplement, Enhancement for a Series
may consist of special hazard Insurance Policies, bankruptcy bonds and other
types of insurance relating to the Primary Assets, as described below and in the
related Prospectus Supplement.
Pool Insurance Policy. If so specified in the Prospectus Supplement
relating to a Series of Securities, the Depositor will obtain a pool insurance
policy (the "Pool Insurance Policy") for the Loans in the related Trust Fund.
The Pool Insurance Policy will cover any loss (subject to the limitations
described in a related Prospectus Supplement) by reason of default. but will not
cover the portion of the Principal Balance of any Loan that is required to be
covered by any primary mortgage Insurance Policy. The amount and terms of any
such coverage will be set forth in the related Prospectus Supplement.
Special Hazard Insurance Policy. Although the terms of such policies vary
to some degree, a special hazard Insurance Policy typically provides that, where
there has been damage to Property securing a defaulted or foreclosed Loan (title
to which has been acquired by the insured) and to the extent such damage is not
covered by the standard hazard Insurance Policy or any flood Insurance Policy,
if applicable, required to be maintained with respect to such Property, or in
connection with partial loss
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resulting from the application of the coinsurance clause in a standard hazard
Insurance Policy, the special hazard insurer will pay the lesser of (i) the cost
of repair or replacement of such Property or (ii) upon transfer of such Property
to the special hazard insurer, the unpaid Principal Balance of such Loan at the
time of acquisition of such Property by foreclosure or deed in lieu of
foreclosure, plus accrued interest to the date of claim settlement and certain
expenses incurred by the Servicer with respect to such Property. If the unpaid
Principal Balance plus accrued interest and certain expenses is paid by the
special hazard insurer, the amount of further coverage under the special hazard
Insurance Policy will be reduced by such amount less any net proceeds from the
sale of such Property. Any amount paid as the cost of repair of such Property
will reduce coverage by such amount. Special hazard Insurance Policies typically
do not cover losses occasioned by war, civil insurrection, certain governmental
actions, errors in design, faulty workmanship or materials (except under certain
circumstances), nuclear reaction, flood (if the mortgaged property is in a
federally designated flood area), chemical contamination and certain other
risks.
Restoration of the Property with the proceeds described under (i) above is
expected to satisfy the condition under any Pool Insurance Policy that such
Property be restored before a claim under such Pool Insurance Policy may be
validly presented with respect to the defaulted Loan secured by such Property.
The payment described under (ii) above will render unnecessary presentation of a
claim in respect of such Loan under any Pool Insurance Policy. Therefore, so
long as such Pool Insurance Policy remains in effect, the payment by the special
hazard insurer of the cost of repair or of the unpaid Principal Balance of the
related Loan plus accrued interest and certain expenses will not affect the
total amount in respect of insurance proceeds paid to Holders of the Securities,
but will affect the relative amounts of coverage remaining under the special
hazard Insurance Policy and Pool Insurance Policy.
Bankruptcy Bond. In the event of a bankruptcy of a borrower, the bankruptcy
court may establish the value of the Property securing the related Loan at an
amount less than the then-outstanding Principal Balance of such Loan. The amount
of the secured debt could be reduced to such value, and the holder of such Loan
thus would become an unsecured creditor to the extent the Principal Balance of
such Loan exceeds the value so assigned to the Property by the bankruptcy court.
In addition, certain other modifications of the terms of a Loan can result from
a bankruptcy proceeding. See "Certain Legal Aspects of the Loans." If so
provided in the related Prospectus Supplement, the Depositor or other entity
specified in the related Prospectus Supplement will obtain a bankruptcy bond or
similar insurance contract (the "bankruptcy bond") covering losses resulting
from proceedings with respect to borrowers under the Bankruptcy Code. The
bankruptcy bond will cover certain losses resulting from a reduction by a
bankruptcy court of scheduled payments of principal of and interest on a Loan or
a reduction by such court of the principal amount of a Loan and will cover
certain unpaid interest on the amount of such a principal reduction from the
date of the filing of a bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount specified
in the related Prospectus Supplement for all Loans in the Trust Fund for such
Series. Such amount will be reduced by payments made under such bankruptcy bond
in respect of such Loans, unless otherwise specified in the related Prospectus
Supplement, and will not be restored.
Reserve Funds
If so specified in the Prospectus Supplement relating to a Series of
Securities, the Depositor will deposit into one or more funds to be established
with the applicable Trustee as part of the Trust Fund for such Series or for the
benefit of any Enhancer with respect to such Series (each, a "Reserve Fund")
cash, a letter or letters of credit, cash collateral accounts, Eligible
Investments, or other instruments meeting the criteria of the Rating Agencies
rating any Series of the Securities in the amount specified in such Prospectus
Supplement. In the alternative or in addition to such deposit, a Reserve Fund
for a Series may be funded over time through application of all or a portion of
the excess cash flow from the Primary
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Assets for such Series, to the extent described in the related Prospectus
Supplement. If applicable, the initial amount of the Reserve Fund and the
Reserve Fund maintenance requirements for a Series of Securities will be
described in the related Prospectus Supplement.
Amounts withdrawn from any Reserve Fund will be applied by the applicable
Trustee to make payments on the Securities of a Series, to pay expenses, to
reimburse any Enhancer or for any other purpose, in the manner and to the extent
specified in the related Prospectus Supplement.
Amounts deposited into a Reserve Fund will be invested by the applicable
Trustee in Eligible Investments maturing no later than the day specified in the
related Prospectus Supplement.
Minimum Principal Payment Agreement
If stated in the Prospectus Supplement relating to a Series of Securities,
the Depositor will enter into a Minimum Principal Payment Agreement with an
entity meeting the criteria of the Rating Agencies pursuant to which such entity
will provide certain payments on the Securities of such Series in the event that
aggregate scheduled principal payments and/or prepayments on the Primary Assets
for such Series are not sufficient to make certain payments on the Securities of
such Series, as provided in the Prospectus Supplement.
Deposit Agreement
If specified in a Prospectus Supplement, the Depositor and the applicable
Trustee for such Series of Securities will enter into a Deposit Agreement with
the entity specified in such Prospectus Supplement on or before the sale of such
Series of Securities. The purpose of a Deposit Agreement would be to accumulate
available cash for investment so that such cash, together with income thereon,
can be applied to future distributions on one or more Classes of Securities. The
Prospectus Supplement for a Series of Securities pursuant to which a Deposit
Agreement is used will contain a description of the terms of such Deposit
Agreement.
SERVICING OF LOANS
General
Customary servicing functions with respect to Loans comprising the Primary
Assets in the Trust Fund will be provided by the Servicer directly pursuant to
the related Servicing Agreement or Pooling and Servicing Agreement, as the case
may be, with respect to a Series of Securities.
Collection Procedures; Escrow Accounts
The Servicer will make reasonable efforts to collect all payments required
to be made under the Loans and will, consistent with the terms of the related
Agreement for a Series and any applicable Enhancement, follow such collection
procedures as it follows with respect to comparable loans held in its own
portfolio. Consistent with the above, the Servicer may, in its discretion, (i)
waive any assumption fee, late payment charge, or other charge in connection
with a Loan and (ii) to the extent provided in the related Agreement, arrange
with an obligor a schedule for the liquidation of delinquencies by extending the
Due Dates for Scheduled Payments on such Loan.
If specified in the related Prospectus Supplement, the Servicer, to the
extent permitted by law, will establish and maintain escrow or impound accounts
(each, an "Escrow Account") with respect to Loans in
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which payments by obligors to pay taxes, assessments, mortgage and hazard
Insurance Policy premiums, and other comparable items will be deposited. Loans
may not require such payments under the loan related documents, in which case
the Servicer would not be required to establish any Escrow Account with respect
to such Loans. Withdrawals from the Escrow Accounts are to be made to effect
timely payment of taxes, assessments and mortgage and hazard insurance, to
refund to obligors amounts determined to be overages, to pay interest to
obligors on balances in the Escrow Account to the extent required by law, to
repair or otherwise protect the property securing the related Loan and to clear
and terminate such Escrow Account. The Servicer will be responsible for the
administration of the Escrow Accounts and generally will make advances to such
accounts when a deficiency exists therein.
Deposits to and Withdrawals from the Collection Account
Unless otherwise specified in the related Prospectus Supplement, the
Trustee or the Servicer will establish a separate account (the "Collection
Account") in the name of the Trustee. Unless otherwise indicated in the related
Prospectus Supplement, the Collection Account will be an account maintained (i)
at a depository institution, the long-term unsecured debt obligations of which
at the time of any deposit therein are rated by each Rating Agency rating the
Securities of such Series at levels satisfactory to each Rating Agency or (ii)
in an account or accounts the deposits in which are insured to the maximum
extent available by the Federal Deposit Insurance Corporation or that are
secured in a manner meeting requirements established by each Rating Agency.
Unless otherwise specified in the related Prospectus Supplement, the funds
held in the Collection Account may be invested in Eligible Investments. If so
specified in the related Prospectus Supplement, the Servicer will be entitled to
receive as additional compensation any interest or other income earned on funds
in the Collection Account.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer, the Depositor, the Trustee or the Seller, as appropriate, will deposit
into the Collection Account for each Series on the Business Day following the
Closing Date, any amounts representing Scheduled Payments due after the related
Cut-off Date but received by the Servicer on or before the Closing Date, and
thereafter, within two business days after the date of receipt thereof, the
following payments and collections received or made by it (other than, unless
otherwise provided in the related Prospectus Supplement, in respect of principal
of and interest on the related Primary Assets due on or before such Cut-off
Date):
(i) All payments in respect of principal, including prepayments, on
such Primary Assets;
(ii) All payments in respect of interest on such Primary Assets after
deducting therefrom, at the discretion of the Servicer but only to the
extent of the amount permitted to be withdrawn or withheld from the
Collection Account in accordance with the related Agreement, the Servicing
Fee in respect of such Primary Assets;
(iii) All amounts received by the Servicer in connection with the
liquidation of Primary Assets or property acquired in respect thereof,
whether through foreclosure sale, repossession or otherwise, including
payments in connection with such Primary Assets received from the obligor,
other than amounts required to be paid or refunded to the obligor pursuant
to the terms of the applicable loan documents or otherwise pursuant to law,
net of related liquidation expenses ("Liquidation Proceeds"), exclusive of,
in the discretion of the Servicer, but only to the extent of the amount
permitted to be withdrawn from the Collection Account in accordance with
the related Agreement, the Servicing Fee, if any, in respect of the related
Primary Asset;
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(iv) All proceeds under any title insurance, hazard Insurance Policy or
other Insurance Policy covering any such Primary Asset, other than proceeds
to be applied to the restoration or repair of the related Property or
released to the obligor in accordance with the related Agreement;
(v) All amounts required to be deposited therein from any Reserve Fund
for such Series pursuant to the related Agreement;
(vi) All Advances made by the Servicer required pursuant to the related
Agreement; and
(vii) All repurchase prices of any such Primary Assets repurchased by
the Depositor, the Servicer or the Seller pursuant to the related
Agreement.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer is permitted, from time to time, to make withdrawals from the
Collection Account for each Series for the following purposes:
(i) to reimburse itself for Advances for such Series made by it
pursuant to the related Agreement; provided, that the Servicer's right to
reimburse itself is limited to amounts received on or in respect of
particular Loans (including, for this purpose, Liquidation Proceeds and
Insurance Proceeds) that represent late recoveries of Scheduled Payments
with respect to which any such Advance was made;
(ii) to the extent provided in the related Agreement, to reimburse
itself for any Advances for such Series that the Servicer determines in
good faith it will be unable to recover from amounts representing late
recoveries of Scheduled Payments respecting which such Advance was made or
from Liquidation Proceeds or Insurance Proceeds;
(iii) to reimburse itself from Liquidation Proceeds for liquidation
expenses and for amounts expended by it in good faith in connection with
the restoration of damaged Property and, in the event deposited into the
Collection Account and not previously withheld, and to the extent that
Liquidation Proceeds after such reimbursement exceed the Principal Balance
of the related Loan, together with accrued and unpaid interest thereon to
the Due Date for such Loan next succeeding the date of its receipt of such
Liquidation Proceeds, to pay to itself out of such excess the amount of any
unpaid Servicing Fee and any assumption fees, late payment charges, or
other charges on the related Loan;
(iv) in the event it has elected not to pay itself the Servicing Fee
out of the interest component of any Scheduled Payment, late payment or
other recovery with respect to a particular Loan prior to the deposit of
such Scheduled Payment, late payment or recovery into the Collection
Account, to pay to itself the Servicing Fee, as adjusted pursuant to the
related Agreement, from any such Scheduled Payment, late payment or such
other recovery, to the extent permitted by the related Agreement;
(v) to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it pursuant to the related Agreement;
(vi) to pay to the applicable person with respect to each Primary Asset
or REO Property acquired in respect thereof that has been repurchased or
removed from the Trust Fund by the Depositor, the Servicer or the Seller
pursuant to the related Agreement, all amounts received thereon and not
distributed as of the date on which the related repurchase price was
determined;
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(vii) to make payments to the applicable Trustee of such Series for
deposit into the related Distribution Account, if any, or for remittance to
the Holders of such Series in the amounts and in the manner provided for in
the related Agreement; and
(viii) to clear and terminate the Collection Account pursuant to the
related Agreement.
In addition, if the Servicer deposits into the Collection Account for a
Series any amount not required to be deposited therein, it may, at any time,
withdraw such amount from such Collection Account.
Advances and Limitations Thereon
The related Prospectus Supplement will describe the circumstances, if any,
under which the Servicer will make Advances with respect to delinquent payments
on Loans. If specified in the related Prospectus Supplement, the Servicer will
be obligated to make Advances, and such obligation may be limited in amount, or
may not be activated until a certain portion of a specified Reserve Fund is
depleted. Advances are intended to provide liquidity and, except to the extent
specified in the related Prospectus Supplement, not to guarantee or insure
against losses. Accordingly, any funds advanced are recoverable by the Servicer
out of amounts received on particular Loans that represent late recoveries of
principal or interest, Insurance Proceeds or Liquidation Proceeds respecting
which any such Advance was made. If an Advance is made and subsequently
determined to be nonrecoverable from late collections, Insurance Proceeds or
Liquidation Proceeds from the related Loan, the Servicer may be entitled to
reimbursement from other funds in the Collection Account or Distribution
Account(s), as the case may be, or from a specified Reserve Fund, as applicable,
to the extent specified in the related Prospectus Supplement.
Maintenance of Insurance Policies and Other Servicing Procedures
Standard Hazard Insurance; Flood Insurance. Except as otherwise specified
in the related Prospectus Supplement, the Servicer will be required to maintain
or to cause the obligor on each Loan to maintain a standard hazard Insurance
Policy providing coverage of the standard form of fire insurance with extended
coverage for certain other hazards as is customary in the state in which the
related Property is located. The standard hazard Insurance Policies will provide
for coverage at least equal to the applicable state standard form of fire
Insurance Policy with extended coverage for property of the type securing the
related Loans. In general, the standard form of fire and extended coverage
policy will cover physical damage to or destruction of, the related Property
caused by fire, lightning, explosion, smoke, windstorm, hail, riot, strike and
civil commotion, subject to the conditions and exclusions particularized in each
policy. Because the standard hazard Insurance Policies relating to the Loans
will be underwritten by different hazard insurers and will cover Properties
located in various states, such policies will not contain identical terms and
conditions. The basic terms, however, generally will be determined by state law
and generally will be similar. Most such policies typically will not cover any
physical damage resulting from war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides
and mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all inclusive. Uninsured risks not covered by a special hazard Insurance Policy
or other form of Enhancement will adversely affect distributions to Holders.
When a Property securing a Loan is located in a flood area identified by HUD
pursuant to the Flood Disaster Protection Act of 1973, as amended, the Servicer
will be required to cause flood insurance to be maintained with respect to such
Property, to the extent available.
The standard hazard Insurance Policies covering Properties securing Loans
typically will contain a "coinsurance" clause, which in effect will require the
insured at all times to carry hazard insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the Property, including
any
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improvements on the Property, in order to recover the full amount of any partial
loss. If the insured's coverage falls below this specified percentage, such
clause will provide that the hazard insurer's liability in the event of partial
loss will not exceed the greater of (i) the actual cash value (the replacement
cost less physical depreciation) of the Property, including the improvements, if
any, damaged or destroyed or (ii) such proportion of the loss, without deduction
for depreciation, as the amount of insurance carried bears to the specified
percentage of the full replacement cost of such Property and improvements. Since
the amount of hazard insurance to be maintained on the improvements securing the
Loans declines as the Principal Balances owing thereon decrease, and since the
value of the Properties will fluctuate over time, the effect of this requirement
in the event of partial loss may be that hazard Insurance Proceeds will be
insufficient to restore fully the damage to the affected Property.
Unless otherwise specified in the related Prospectus Supplement, coverage
will be in an amount at least equal to the greater of (i) the amount necessary
to avoid the enforcement of any co-insurance clause contained in the policy or
(ii) the outstanding Principal Balance of the related Loan. Unless otherwise
specified in the related Prospectus Supplement, the Servicer will also maintain
on REO Property that secured a defaulted Loan and that has been acquired upon
foreclosure, deed in lieu of foreclosure or repossession, a standard hazard
Insurance Policy in an amount that is at least equal to the maximum insurable
value of such REO Property. No earthquake or other additional insurance will be
required of any obligor or will be maintained on REO Property acquired in
respect of a defaulted Loan, other than pursuant to such applicable laws and
regulations as shall at any time be in force and shall require such additional
insurance.
Any amounts collected by the Servicer under any such Insurance Policies
(other than amounts to be applied to the restoration or repair of the Property,
released to the obligor in accordance with normal servicing procedures or used
to reimburse the Servicer for amounts to which it is entitled to reimbursement)
will be deposited into the Collection Account. In the event that the Servicer
obtains and maintains a blanket policy insuring against hazard losses on all of
the Loans, written by an insurer then acceptable to each Rating Agency that
assigns a rating to such Series, it will conclusively be deemed to have
satisfied its obligations to cause to be maintained a standard hazard Insurance
Policy for each Loan or related REO Property. This blanket policy may contain a
deductible clause, in which case the Servicer will be required, in the event
that there has been a loss that would have been covered by such policy absent
such deductible clause, to deposit into the Collection Account the amount not
otherwise payable under the blanket policy because of the application of such
deductible clause.
Realization Upon Defaulted Loans
The Servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the Properties
securing the related Loans as come into and continue in default and as to which
no satisfactory arrangements can be made for collection of delinquent payments.
In connection with such foreclosure or other conversion, the Servicer will
follow such practices and procedures as it deems necessary or advisable and as
are normal and usual in its servicing activities with respect to comparable
loans serviced by it. However, the Servicer will not be required to expend its
own funds in connection with any foreclosure or towards the restoration of the
Property unless it determines that (i) such restoration or foreclosure will
increase the Liquidation Proceeds in respect of the related Loan available to
the Holders after reimbursement to itself for such expenses and (ii) such
expenses will be recoverable by it either through Liquidation Proceeds or
Insurance Proceeds. Notwithstanding anything to the contrary herein, in the case
of a Trust Fund for which a REMIC election has been made, the Servicer will be
required to liquidate any Property acquired through foreclosure within two years
after the acquisition of the beneficial ownership of such Property. While the
holder of a Property acquired through foreclosure can often maximize its
recovery by providing financing to a new purchaser, the Trust
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Fund, if applicable, will have no ability to do so and neither the Servicer nor
the Depositor will be required to do so.
The Servicer may arrange with the obligor on a defaulted Loan a change in
the terms of such Loan (a "Modification") to the extent provided in the related
Prospectus Supplement. Such Modifications may only be entered into if they meet
the underwriting policies and procedures employed by the Servicer in servicing
receivables for its own account and meet the other conditions set forth in the
related Prospectus Supplement.
Enforcement of Due-On-Sale Clauses
Unless otherwise specified in the related Prospectus Supplement for a
Series, when any Property is about to be conveyed by the obligor, the Servicer
will, to the extent it has knowledge of such prospective conveyance and prior to
the time of the consummation of such conveyance, exercise its rights to
accelerate the maturity of the related Loan under the applicable "due-on-sale"
clause, if any, unless it reasonably believes that such clause is not
enforceable under applicable law or if the enforcement of such clause would
result in loss of coverage under any primary mortgage Insurance Policy. In such
event, the Servicer is authorized to accept from or enter into an assumption
agreement with the person to whom such property has been or is about to be
conveyed, pursuant to which such person becomes liable under the Loan and
pursuant to which the original obligor is released from liability and such
person is substituted as the obligor and becomes liable under the Loan. Any fee
collected in connection with an assumption will be retained by the Servicer as
additional servicing compensation. The terms of a Loan may not be changed in
connection with an assumption.
Servicing Compensation and Payment of Expenses
Except as otherwise provided in the related Prospectus Supplement, the
Servicer will be entitled to a periodic fee as servicing compensation (the
"Servicing Fee") in an amount to be determined as specified in the related
Prospectus Supplement. The Servicing Fee may be fixed or variable, as specified
in the related Prospectus Supplement. In addition, unless otherwise specified in
the related Prospectus Supplement, the Servicer will be entitled to servicing
compensation in the form of assumption fees, late payment charges and similar
items, or excess proceeds following disposition of Property in connection with
defaulted Loans.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will pay certain expenses incurred in connection with the servicing of
the Loans, including, without limitation, the payment of the fees and expenses
of each applicable Trustee and independent accountants, payment of Security
Policy and Insurance Policy premiums, if applicable, and the cost of credit
support, if any, and payment of expenses incurred in preparation of reports to
Holders.
When an obligor makes a principal prepayment in full between Due Dates on
the related Loan, the obligor will generally be required to pay interest on the
amount prepaid only to the date of prepayment. If and to the extent provided in
the related Prospectus Supplement, in order that one or more Classes of the
Holders of a Series will not be adversely affected by any resulting shortfall in
interest, the amount of the Servicing Fee may be reduced to the extent necessary
to include in the Servicer's remittance to the applicable Trustee for deposit
into the related Distribution Account an amount equal to one month's interest on
the related Loan (less the Servicing Fee). If the aggregate amount of such
shortfalls in a month exceeds the Servicing Fee for such month, a shortfall to
Holders may occur.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will be entitled to reimbursement for certain expenses incurred by it
in connection with the liquidation of defaulted Loans.
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The related Holders will suffer no loss by reason of such expenses to the extent
expenses are covered under related Insurance Policies or from excess Liquidation
Proceeds. If claims are either not made or paid under the applicable Insurance
Policies or if coverage thereunder has been exhausted, the related Holders will
suffer a loss to the extent that Liquidation Proceeds, after reimbursement of
the Servicer's expenses, are less than the Principal Balance of and unpaid
interest on the related Loan that would be distributable to Holders. In
addition, the Servicer will be entitled to reimbursement of expenditures
incurred by it in connection with the restoration of property securing a
defaulted Loan, such right of reimbursement being prior to the rights of the
Holders to receive any related Insurance Proceeds, Liquidation Proceeds or
amounts derived from other Enhancement. The Servicer is generally also entitled
to reimbursement from the Collection Account for Advances.
Unless otherwise specified in the related Prospectus Supplement, the rights
of the Servicer to receive funds from the Collection Account for a Series,
whether as the Servicing Fee or other compensation, or for the reimbursement of
Advances, expenses or otherwise, are not subordinate to the rights of Holders of
such Series.
Evidence as to Compliance
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will provide that each year, a firm of independent
public accountants will furnish a statement to the applicable Trustee to the
effect that such firm has examined certain documents and records relating to the
servicing of the Loans by the Servicer and that, on the basis of such
examination, such firm is of the opinion that the servicing has been conducted
in compliance with such Agreement, except for (i) such exceptions as such firm
believes to be immaterial and (ii) such other exceptions as are set forth in
such statement.
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will also provide for delivery to the applicable
Trustee for such Series of an annual statement signed by an officer of the
Servicer to the effect that the Servicer has fulfilled its obligations under
such Agreement throughout the preceding calendar year.
Certain Matters Regarding the Servicer
The Servicer for each Series will be identified in the related Prospectus
Supplement. The Servicer may be an affiliate of the Depositor and may have other
business relationships with the Depositor and its affiliates.
If an Event of Default occurs under either a Servicing Agreement or a
Pooling and Servicing Agreement, the Servicer may be replaced by the Trustee or
a successor Servicer. Unless otherwise specified in the related Prospectus
Supplement, such Events of Default and the rights of a Trustee upon such a
default under the Agreement for the related Series will be substantially similar
to those described under "The Agreements--Events of Default; Rights Upon Events
of Default--Pooling and Servicing Agreement; Servicing Agreement" herein.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer does not have the right to assign its rights and delegate its duties
and obligations under the related Agreement for each Series unless the successor
Servicer accepting such assignment or delegation (i) services similar loans in
the ordinary course of its business, (ii) is reasonably satisfactory to the
Trustee for the related Series, (iii) has a net worth of not less than the
amount specified in the related Prospectus Supplement, (iv) would not cause any
Rating Agency's rating of the Securities for such Series in effect immediately
prior to such assignment, sale or transfer to be qualified, downgraded or
withdrawn as a result of such assignment, sale or transfer and (v) executes and
delivers to the Trustee an agreement, in form and substance reasonably
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satisfactory to the Trustee, that contains an assumption by such Servicer of the
due and punctual performance and observance of each covenant and condition to be
performed or observed by the Servicer under the related Agreement from and after
the date of such agreement. No such assignment will become effective until the
Trustee or a successor Servicer has assumed the servicer's obligations and
duties under the related Agreement. To the extent that the Servicer transfers
its obligations to a wholly-owned subsidiary or affiliate, such subsidiary or
affiliate need not satisfy the criteria set forth above; however, in such
instance, the assigning Servicer will remain liable for the servicing
obligations under the related Agreement. Any entity into which the Servicer is
merged or consolidated or any successor corporation resulting from any merger,
conversion or consolidation will succeed to the Servicer's obligations under the
related Agreement; provided, that such successor or surviving entity meets the
requirements for a successor Servicer set forth above.
Except to the extent otherwise provided therein, each Agreement will
provide that neither the Servicer, nor any director, officer, employee or agent
of the Servicer, will be under any liability to the related Trust Fund, the
Depositor or the Holders for any action taken or for failing to take any action
in good faith pursuant to the related Agreement, or for errors in judgment;
provided, however, that neither the Servicer nor any such person will be
protected against any breach of warranty or representations made under such
Agreement or the failure to perform its obligations in compliance with any
standard of care set forth in such Agreement, or liability that would otherwise
be imposed by reason of willful misfeasance, bad faith or negligence in the
performance of their duties or by reason of reckless disregard of their
obligations and duties thereunder. Each Agreement will further provide that the
Servicer and any director, officer, employee or agent of the Servicer is
entitled to indemnification from the related Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the Securities, other than any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
negligence in the performance of duties thereunder or by reason of reckless
disregard of obligations and duties thereunder. In addition, the related
Agreement will provide that the Servicer is not under any obligation to appear
in, prosecute or defend any legal action that is not incidental to its servicing
responsibilities under such Agreement that, in its opinion, may involve it in
any expense or liability. The Servicer may, in its discretion, undertake any
such action that it may deem necessary or desirable with respect to the related
Agreement and the rights and duties of the parties thereto and the interests of
the Holders thereunder. In such event the legal expenses and costs of such
action and any liability resulting therefrom may be expenses, costs, and
liabilities of the Trust Fund and the Servicer may be entitled to be reimbursed
therefor out of the Collection Account.
THE AGREEMENTS
The following summaries describe certain provisions of the Agreements. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Agreements. Where
particular provisions or terms used in the Agreements are referred to, such
provisions or terms are as specified in the related Agreements.
Assignment of Primary Assets
General. At the time of issuance of the Securities of a Series, the
Depositor will transfer, convey and assign to the Trust Fund all right, title
and interest of the Depositor in the Primary Assets and other property to be
transferred to the Trust Fund for a Series. Such assignment will include all
principal and interest due on or with respect to the Primary Assets after the
Cut-off Date specified in the related Prospectus Supplement (except for any
Retained Interests). The Trustee will, concurrently with such assignment,
execute and deliver the Securities.
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Assignment of Contracts. Unless otherwise specified in the related
Prospectus Supplement, the Depositor will, as to each Loan, deliver or cause to
be delivered to the Trustee, or, as specified in the related Prospectus
Supplement, a custodian on behalf of the Trustee (the "Custodian"), the Mortgage
Note endorsed without recourse to the order of the Trustee or in blank, the
original Mortgage with evidence of recording indicated thereon (except for any
Mortgage not returned from the public recording office, in which case a copy of
such Mortgage will be delivered, together with a certificate that the original
of such Mortgage was delivered to such recording office) and an assignment of
the Mortgage in recordable form. The Trustee, or, if so specified in the related
Prospectus Supplement, the Custodian, will hold such documents in trust for the
benefit of the Holders.
Unless otherwise specified in the related Prospectus Supplement, the
Depositor will as to each Home Improvement Contract deliver or cause to be
delivered to the Trustee (or the Custodian) the original Home Improvement
Contract and copies of documents and instruments related to each Home
Improvement Contract and, other than in the case of unsecured Home Improvement
Contracts, the security interest in the property securing such Home Improvement
Contract. In order to give notice of the right, title and interest of Holders to
the Home Improvement Contracts, the Depositor will cause a UCC-1 financing
statement to be executed by the Depositor or the Seller identifying the Trustee
as the secured party and identifying all Home Improvement Contracts as
collateral. Unless otherwise specified in the related Prospectus Supplement, the
Home Improvement Contracts will not be stamped or otherwise marked to reflect
their assignment to the Trust. Therefore, if, through negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
Home Improvement Contracts without notice of such assignment, the interest of
Holders in the Home Improvement Contracts could be defeated. See "Certain Legal
Aspects of the Loans--The Home Improvement Contracts."
With respect to Loans secured by Mortgages, if so specified in the related
Prospectus Supplement, the Depositor will, at the time of issuance of the
Securities, cause assignments to the Trustee of the Mortgages relating to the
Loans for a Series to be recorded in the appropriate public office for real
property records, except in states where, in the opinion of counsel acceptable
to the Trustee, such recording is not required to protect the Trustee's interest
in the related Loans. If specified in the related Prospectus Supplement, the
Depositor will cause such assignments to be so recorded within the time after
issuance of the Securities as is specified in the related Prospectus Supplement,
in which event, the Agreement may, as specified in the related Prospectus
Supplement, require the Depositor to repurchase from the Trustee any Loan the
related Mortgage of which is not recorded within such time, at the price
described below with respect to repurchases by reason of defective
documentation. Unless otherwise provided in the related Prospectus Supplement,
the enforcement of the repurchase obligation would constitute the sole remedy
available to the Holders or the Trustee for the failure of a Mortgage to be
recorded.
Each Loan will be identified in a schedule appearing as an exhibit to the
related Agreement (the "Loan Schedule"). Such Loan Schedule will specify with
respect to each Loan: the original principal amount and unpaid Principal Balance
as of the Cut-off Date; the current Loan Rate; the current Scheduled Payment of
principal and interest; the maturity date, if any, of the related Mortgage Note;
if the Loan is an adjustable rate Loan, the Lifetime Rate Cap, if any, and the
current index.
Assignment of Private Securities. The Depositor will cause Private
Securities to be registered in the name of the PS Trustee (or its nominee or
correspondent). The PS Trustee (or its nominee or correspondent) will have
possession of any certificated Private Securities. Unless otherwise specified in
the related Prospectus Supplement, the PS Trustee will not be in possession of
or be assignee of record of any underlying assets for a Private Security. See
"The Trust Funds--Private Securities" herein. Each Private Security will be
identified in a schedule appearing as an exhibit to the related Agreement (the
"Certificate Schedule"), which will specify the original principal amount,
Principal Balance as of the
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Cut-off Date, annual pass-through rate or interest rate and maturity date for
each Private Security conveyed to the Trust Fund. In the Agreement, the
Depositor will represent and warrant to the PS Trustee regarding the Private
Securities: (i) that the information contained in the Certificate Schedule is
true and correct in all material respects; (ii) that, immediately prior to the
conveyance of the Private Securities, the Depositor had good title thereto, and
was the sole owner thereof (subject to any Retained Interest); (iii) that there
has been no other sale by it of such Private Securities; and (iv) that there is
no existing lien, charge, security interest or other encumbrance (other than any
Retained Interest) on such Private Securities.
Repurchase and Substitution of Non-Conforming Primary Assets. Unless
otherwise provided in the related Prospectus Supplement, if any document in the
file relating to the Primary Assets delivered by the Depositor to the Trustee
(or Custodian) is found by the Trustee within 90 days of the execution of the
related Agreement (or promptly after the Trustee's receipt of any document
permitted to be delivered after the Closing Date) to be defective in any
material respect and the Depositor or Seller does not cure such defect within 90
days, or within such other period specified in the related Prospectus
Supplement, the Depositor or Seller will, not later than 90 days or within such
other period specified in the related Prospectus Supplement, after the Trustee's
notice to the Depositor or the Seller, as the case may be, of the defect,
repurchase the related Primary Asset or any property acquired in respect thereof
from the Trustee at a price equal to, unless otherwise specified in the related
Prospectus Supplement, (a) the lesser of (i) the Principal Balance of such
Primary Asset and (ii) the Trust Fund's federal income tax basis in the Primary
Asset and (b) accrued and unpaid interest to the date of the next scheduled
payment on such Primary Asset at the rate set forth in the related Agreement,
provided, however, the purchase price shall not be limited in (i) above to the
Trust Fund's federal income tax basis if the repurchase at a price equal to the
Principal Balance of such Primary Asset will not result in any prohibited
transaction tax under Section 860F(a) of the Code.
If provided in the related Prospectus Supplement, the Depositor or Seller,
as the case may be, may, rather than repurchase the Primary Asset as described
above, remove such Primary Asset from the Trust Fund (the "Deleted Primary
Asset") and substitute in its place one or more other Primary Assets (each, a
"Qualifying Substitute Primary Asset"); provided, however, that (i) with respect
to a Trust Fund for which no REMIC election is made, such substitution must be
effected within 120 days of the date of initial issuance of the Securities and
(ii) with respect to a Trust Fund for which a REMIC election is made, after a
specified time period, the Trustee must have received a satisfactory opinion of
counsel that such substitution will not cause the Trust Fund to lose its status
as a REMIC or otherwise subject the Trust Fund to a prohibited transaction tax.
Unless otherwise specified in the related Prospectus Supplement, any
Qualifying Substitute Primary Asset will have, on the date of substitution, (i)
a Principal Balance, after deduction of all Scheduled Payments due in the month
of substitution, not in excess of the Principal Balance of the Deleted Primary
Asset (the amount of any shortfall to be deposited to the Collection Account in
the month of substitution for distribution to Holders), (ii) an interest rate
not less than (and not more than 2% greater than) the interest rate of the
Deleted Primary Asset, (iii) a remaining term-to-stated maturity not greater
than (and not more than two years less than) that of the Deleted Primary Asset,
and will comply with all of the representations and warranties set forth in the
applicable Agreement as of the date of substitution.
Unless otherwise provided in the related Prospectus Supplement, the
above-described cure, repurchase or substitution obligations constitute the sole
remedies available to the Holders or the Trustee for a material defect in a
document for a Primary Asset.
The Depositor or another entity will make representations and warranties
with respect to Primary Assets for a Series. If the Depositor or such entity
cannot cure a breach of any such representations and
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warranties in all material respects within the time period specified in the
related Prospectus Supplement after notification by the Trustee of such breach,
and if such breach is of a nature that materially and adversely affects the
value of such Primary Asset, the Depositor or such entity will be obligated to
repurchase the affected Primary Asset or, if provided in the related Prospectus
Supplement, provide a Qualifying Substitute Primary Asset therefor, subject to
the same conditions and limitations on purchases and substitutions as described
above.
The Depositor's only source of funds to effect any cure, repurchase or
substitution will be through the enforcement of the corresponding obligations,
if any, of the responsible originator or seller of such Primary Assets. See
"Special Considerations--Limited Assets."
No Holder of Securities of a Series, solely by virtue of such Holder's
status as a Holder, will have any right under the applicable Agreement for such
Series to institute any proceeding with respect to such Agreement, unless such
Holder previously has given to the applicable Trustee for such Series written
notice of default and unless the Holders of Securities evidencing not less than
51% of the aggregate voting rights of the Securities for such Series have made
written request upon the applicable Trustee to institute such proceeding in its
own name as Trustee thereunder and have offered to such Trustee reasonable
indemnity, and such Trustee for 60 days has neglected or refused to institute
any such proceeding.
Reports to Holders
The applicable Trustee or other entity specified in the related Prospectus
Supplement will prepare and forward to each Holder on each Distribution Date, or
as soon thereafter as is practicable, a statement setting forth, to the extent
applicable to any Series, among other things:
(i) the amount of principal distributed to Holders of the related
Securities and the outstanding principal balance of such Securities
following such distribution;
(ii) the amount of interest distributed to Holders of the related
Securities and the current interest on such Securities;
(iii) the amount of (a) any overdue accrued interest included in such
distribution, (b) any remaining overdue accrued interest with respect to
such Securities or (c) any current shortfall in amounts to be distributed
as accrued interest to Holders of such Securities;
(iv) the amount of (a) any overdue payments of scheduled principal
included in such distribution, (b) any remaining overdue principal amounts
with respect to such Securities, (c) any current shortfall in receipt of
scheduled principal payments on the related Primary Assets or (d) any
realized losses or Liquidation Proceeds to be allocated as reductions in
the outstanding principal balances of such Securities;
(v) the amount received under any related Enhancement, and the
remaining amount available under such Enhancement;
(vi) the amount of any delinquencies with respect to payments on the
related Primary Assets;
(vii) the book value of any REO Property acquired by the related Trust
Fund; and
(viii) such other information as specified in the related Agreement.
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In addition, within a reasonable period of time after the end of each
calendar year, the applicable Trustee, unless otherwise specified in the related
Prospectus Supplement, will furnish to each Holder of record at any time during
such calendar year (a) the aggregate of amounts reported pursuant to (i), (ii)
and (iv)(d) above for such calendar year and (b) such information specified in
the related Agreement to enable Holders to prepare their tax returns including,
without limitation, the amount of original issue discount accrued on the
Securities, if applicable. Information in the Distribution Date and annual
statements provided to the Holders will not have been examined and reported upon
by an independent public accountant. However, the Servicer will provide to each
applicable Trustee a report by independent public accountants with respect to
the Servicer's servicing of the Loans. See "Servicing of Loans--Evidence as to
Compliance" herein.
If so specified in the Prospectus Supplement for a Series of Securities,
such Series or one or more Classes of such Series will be issued in book-entry
form. In such event, owners of beneficial interests in such Securities will not
be considered Holders and will not receive such reports directly from the
applicable Trustee. The applicable Trustee will forward such reports only to the
entity or its nominee that is the registered holder of the global certificate
that evidences such book-entry securities. Beneficial owners will receive such
reports from the participants and indirect participants of the applicable
book-entry system in accordance with the policies and procedures of such
entities.
Events of Default; Rights Upon Event of Default
Pooling and Servicing Agreement; Servicing Agreement. Unless otherwise
specified in the related Prospectus Supplement, Events of Default under the
Pooling and Servicing Agreement for each Series of Certificates relating to
Loans include (i) any failure by the Servicer to deposit amounts in the
Collection Account and Distribution Account(s) to enable the applicable Trustee
to distribute to Holders of such Series any required payment, which failure
continues unremedied for the number of days specified in the related Prospectus
Supplement after the giving of written notice of such failure to the Servicer by
the applicable Trustee for such Series, or to the Servicer and such Trustee by
the Holders of such Series evidencing not less than 25% of the aggregate voting
rights of the Securities for such Series, (ii) any failure by the Servicer duly
to observe or perform in any material respect any other of its covenants or
agreements in the applicable Agreement that continues unremedied for the number
of days specified in the related Prospectus Supplement after the giving of
written notice of such failure to the Servicer by the applicable Trustee, or to
the Servicer and such Trustee by the Holders of such Series evidencing not less
than 25% of the aggregate voting rights of the Securities for such Series, and
(iii) certain events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings and certain actions by the Servicer
indicating its insolvency, reorganization or inability to pay its obligations.
So long as an Event of Default remains unremedied under the applicable
Agreement for a Series of Securities relating to the servicing of Loans, unless
otherwise specified in the related Prospectus Supplement, the Trustee for such
Series or Holders of Securities of such Series evidencing not less than 51% of
the aggregate voting rights of the Securities for such Series may terminate all
of the rights and obligations of the Servicer as servicer under the applicable
Agreement (other than its right to recovery of other expenses and amounts
advanced pursuant to the terms of such Agreement, which rights the Servicer will
retain under all circumstances), whereupon the Trustee will succeed to all the
responsibilities, duties and liabilities of the Servicer under such Agreement
and will be entitled to reasonable servicing compensation not to exceed the
applicable servicing fee, together with other servicing compensation in the form
of assumption fees, late payment charges or otherwise as provided in such
Agreement.
In the event that the Trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a finance
institution, bank or loan servicing institution with a net worth specified in
the related Prospectus Supplement to act as successor Servicer under the
provisions of the
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applicable Agreement. The successor Servicer would be entitled to reasonable
servicing compensation in an amount not to exceed the Servicing Fee as set forth
in the related Prospectus Supplement, together with other servicing compensation
in the form of assumption fees, late payment charges or otherwise, as provided
in such Agreement.
During the continuance of any Event of Default of a Servicer under an
Agreement for a Series of Securities, the applicable Trustee for such Series
will have the right to take action to enforce its rights and remedies and to
protect and enforce the rights and remedies of the Holders of such Series, and,
unless otherwise specified in the related Prospectus Supplement, Holders of
Securities evidencing not less than 51% of the aggregate voting rights of the
Securities for such Series may direct the time, method and place of conducting
any proceeding for any remedy available to the applicable Trustee or exercising
any trust or power conferred upon such Trustee. However, the applicable Trustee
will not be under any obligation to pursue any such remedy or to exercise any of
such trusts or powers unless such Holders have offered such Trustee reasonable
security or indemnity against the cost, expenses and liabilities that may be
incurred by such Trustee therein or thereby. The applicable Trustee may decline
to follow any such direction if such Trustee determines that the action or
proceeding so directed may not lawfully be taken or would involve it in personal
liability or be unjustly prejudicial to the non-assenting Holders.
Indenture. Unless otherwise specified in the related Prospectus Supplement,
Events of Default under the Indenture for each Series of Notes include: (i) a
default for thirty (30) days or more in the payment of any principal of or
interest on any Note of such Series; (ii) failure to perform any other covenant
of the Depositor or the Trust Fund in the Indenture that continues for a period
of sixty (60) days after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement; (iii) any
representation or warranty made by the Depositor or the Trust Fund in the
Indenture or in any certificate or other writing delivered pursuant thereto or
in connection therewith with respect to or affecting such Series having been
incorrect in a material respect as of the time made, and such breach is not
cured within sixty (60) days after notice thereof is given in accordance with
the procedures described in the related Prospectus Supplement; (iv) certain
events of bankruptcy, insolvency, receivership or liquidation of the Depositor
or the Trust Fund; or (v) any other Event of Default provided with respect to
Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, either the Indenture Trustee or the
Holders of a majority of the then-aggregate outstanding amount of the Notes of
such Series may declare the principal amount (or, if the Notes of that Series
are Zero Coupon Securities, such portion of the principal amount as may be
specified in the terms of that Series, as provided in the related Prospectus
Supplement) of all the Notes of such Series to be due and payable immediately.
Such declaration may, under certain circumstances, be rescinded and annulled by
the Holders of a majority in aggregate outstanding amount of the Notes of such
Series.
If, following an Event of Default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Indenture
Trustee may, in its discretion, notwithstanding such acceleration, elect to
maintain possession of the collateral securing the Notes of such Series and to
continue to apply distributions on such collateral as if there had been no
declaration of acceleration if such collateral continues to provide sufficient
funds for the payment of principal of and interest on the Notes of such Series
as they would have become due if there had not been such a declaration. In
addition, the Indenture Trustee may not sell or otherwise liquidate the
collateral securing the Notes of a Series following an Event of Default other
than a default in the payment of any principal of or interest on any Note of
such Series for thirty (30) days or more, unless (a) the Holders of 100% of the
then-aggregate outstanding amount of the Notes of such Series consent to such
sale, (b) the proceeds of such sale or liquidation are sufficient to pay in full
the principal of and accrued interest due and unpaid on the outstanding Notes of
such Series at the date of such sale or (c) the Indenture Trustee determines
that such
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collateral would not be sufficient on an ongoing basis to make all payments on
such Notes as such payments would have become due if such Notes had not been
declared due and payable, and the Indenture Trustee obtains the consent of the
Holders of 66 2/3% of the then-aggregate outstanding amount of the Notes of such
Series.
In the event that the Indenture Trustee liquidates the collateral in
connection with an Event of Default involving a default for thirty (30) days or
more in the payment of principal of or interest on the Notes of a Series, the
Indenture provides that the Indenture Trustee will have a prior lien on the
proceeds of any such liquidation for unpaid fees and expenses. As a result, upon
the occurrence of such an Event of Default, the amount available for
distribution to the Noteholders may be less than would otherwise be the case.
However, the Indenture Trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the Indenture for the benefit of the Noteholders
after the occurrence of such an Event of Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a Series is declared due and payable, as
described above, the Holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount that is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, in case an Event of Default shall occur and be continuing
with respect to a Series of Notes, the Indenture Trustee will be under no
obligation to exercise any of the rights or powers under the Indenture at the
request or direction of any of the Holders of Notes of such Series, unless such
Holders offered to the Indenture Trustee security or indemnity satisfactory to
it against the costs, expenses and liabilities that might be incurred by it in
complying with such request or direction. Subject to such provisions for
indemnification and certain limitations contained in the Indenture, the Holders
of a majority of the then-aggregate outstanding amount of the Notes of such
Series shall have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Indenture Trustee or exercising
any trust or power conferred on the Indenture Trustee with respect to the Notes
of such Series, and the Holders of a majority of the then-aggregate outstanding
amount of the Notes of such Series may, in certain cases, waive any default with
respect thereto, except a default in the payment of principal or interest or a
default in respect of a covenant or provision of the Indenture that cannot be
modified without the waiver or consent of all the Holders of the outstanding
Notes of such Series affected thereby.
The Trustees
The identity of the commercial bank, savings and loan association or trust
company named as the Trustee or Indenture Trustee, as the case may be, for each
Series of Securities will be set forth in the related Prospectus Supplement.
Entities serving as Trustee may have normal banking relationships with the
Depositor or the Servicer. In addition, for the purpose of meeting the legal
requirements of certain local jurisdictions, each Trustee will have the power to
appoint co-trustees or separate trustees. In the event of such appointment, all
rights, powers, duties and obligations conferred or imposed upon the applicable
Trustee by the Agreement relating to such Series will be conferred or imposed
upon such Trustee and each such separate trustee or co-trustee jointly, or, in
any jurisdiction in which such Trustee shall be incompetent or unqualified to
perform certain acts, singly upon such separate trustee or co-trustee who will
exercise and perform such rights, powers, duties and obligations solely at the
direction of the applicable Trustee. The applicable Trustee may also appoint
agents to perform any of the responsibilities of such Trustee, which agents will
have any or all of the rights, powers, duties and obligations of such Trustee
conferred on them by such appointment; provided, that the applicable Trustee
will continue to be responsible for its duties and obligations under the
Agreement.
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Duties of Trustees
No Trustee will make any representations as to the validity or sufficiency
of the related Agreement, the Securities or of any Primary Asset or related
documents. If no Event of Default (as defined in the related Agreement) has
occurred, the applicable Trustee will be required to perform only those duties
specifically required of it under such Agreement. Upon receipt of the various
certificates, statements, reports or other instruments required to be furnished
to it, the applicable Trustee will be required to examine them to determine
whether they are in the form required by the related Agreement. However, such
Trustee will not be responsible for the accuracy or content of any such
documents furnished to it by the Holders or the Servicer under the related
Agreement.
Each Trustee may be held liable for its own negligent action or failure to
act, or for its own misconduct; provided, however, that no Trustee will be
personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the related
Holders in an Event of Default. No Trustee will be required to expend or risk
its own funds or otherwise incur any financial liability in the performance of
any of its duties under the related Agreement, or in the exercise of any of its
rights or powers, if it has reasonable grounds for believing that repayment of
such funds or adequate indemnity against such risk or liability is not
reasonably assured to it.
Resignation of Trustees
Each Trustee may, upon written notice to the Depositor, resign at any time,
in which event the Depositor will be obligated to use its best efforts to
appoint a successor Trustee. If no successor Trustee has been appointed and has
accepted such appointment within 30 days after the giving of such notice of
resignation, the resigning Trustee may petition any court of competent
jurisdiction for appointment of a successor Trustee. Each Trustee may also be
removed at any time (i) if such Trustee ceases to be eligible to continue as
such under the related Agreement, (ii) if such Trustee becomes insolvent or
(iii) by the Holders of Securities evidencing over 50% of the aggregate voting
rights of the Securities in the Trust Fund upon written notice to the applicable
Trustee and to the Depositor. Any resignation or removal of a Trustee and
appointment of a successor Trustee will not become effective until acceptance of
the appointment by the successor Trustee.
Amendment of Agreement
Unless otherwise specified in the Prospectus Supplement, the Agreement for
each Series of Securities may be amended by the Depositor, the Servicer (with
respect to a Series relating to Loans), and the applicable Trustee with respect
to such Series, without notice to or consent of the Holders (i) to cure any
ambiguity, (ii) to correct any defective provisions or to correct or supplement
any provision therein, (iii) to add to the duties of the Depositor, the
applicable Trustee or the Servicer, (iv) to add any other provisions with
respect to matters or questions arising under such Agreement or related
Enhancement, (v) to add or amend any provisions of such Agreement as required by
a Rating Agency in order to maintain or improve the rating of the Securities (it
being understood that none of the Depositor, the Seller, the Servicer or any
Trustee is obligated to maintain or improve such rating), or (vi) to comply with
any requirements imposed by the Code; provided, that any such amendment except
pursuant to clause (vi) above will not adversely affect in any material respect
the interests of any Holders of such Series, as evidenced by an opinion of
counsel delivered to the applicable Trustee. Any such amendment except pursuant
to clause (vi) above shall be deemed not to adversely affect in any material
respect the interests of any Holder if the applicable Trustee receives written
confirmation from each Rating Agency rating such Securities that such amendment
will not cause such Rating Agency to reduce the then-current rating thereof.
Unless otherwise specified in the Prospectus Supplement, each Agreement for each
Series may also be amended by the applicable Trustee, the Servicer, if
applicable, and the Depositor with respect to
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such Series with the consent of the Holders possessing not less than 66 2/3% of
the aggregate outstanding principal amount of the Securities of such Series or,
if only certain Classes of such Series are affected by such amendment, 66 2/3%
of the aggregate outstanding principal amount of the Securities of each Class of
such Series affected thereby, for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of such Agreement or
modifying in any manner the rights of Holders of such Series; provided, however,
that no such amendment may (a) reduce the amount or delay the timing of payments
on any Security without the consent of the Holder of such Security; or (b)
reduce the aforesaid percentage of the aggregate outstanding principal amount of
Securities of each Class, the Holders of which are required to consent to any
such amendment, without the consent of the Holders of 100% of the aggregate
outstanding principal amount of each Class of Securities affected thereby.
Voting Rights
The related Prospectus Supplement will set forth the method of determining
allocation of voting rights with respect to a Series.
List of Holders
Upon written request of three or more Holders of record of a Series for
purposes of communicating with other Holders with respect to their rights under
the Agreement, which request is accompanied by a copy of the communication such
Holders propose to transmit, the applicable Trustee will afford such Holders
access during business hours to the most recent list of Holders of that Series
held by such Trustee.
No Agreement will provide for the holding of any annual or other meeting of
Holders.
Book-Entry Securities
If specified in the Prospectus Supplement for a Series of Securities, such
Series or one or more Classes of such Series may be issued in book-entry form.
In such event, beneficial owners of such Securities will not be considered
"Holders" under the Agreements and may exercise the rights of Holders only
indirectly through the participants in the applicable book-entry system.
REMIC Administrator
For any Series with respect to which a REMIC election is made, preparation
of certain reports and certain other administrative duties with respect to the
Trust Fund may be performed by a REMIC administrator, who may be an affiliate of
the Depositor.
Termination
Pooling and Servicing Agreement; Trust Agreement. The obligations created
by the Pooling and Servicing Agreement or Trust Agreement for a Series will
terminate upon the distribution to Holders of all amounts distributable to them
pursuant to such Agreement under the circumstances described in the related
Prospectus Supplement. See "Description of the Securities--Optional Redemption,
Purchase or Termination" herein.
Indenture. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Indenture Trustee for cancellation of all
the Notes of such Series or, with certain limitations, upon deposit with the
Indenture Trustee of funds sufficient for the payment in full of all of the
Notes of such Series.
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In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Indenture Trustee, in trust, of money and/or direct obligations
of or obligations guaranteed by the United States of America that, through the
payment of interest and principal in respect thereof in accordance with their
terms, will provide money in an amount sufficient to pay the principal of and
each installment of interest on the Notes of such Series on the Final Scheduled
Distribution Date for such Notes and any installment of interest on such Notes
in accordance with the terms of the Indenture and the Notes of such Series. In
the event of any such defeasance and discharge of Notes of such Series, Holders
of Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal of and interest on, if any, their Notes
until maturity.
CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans, home improvement installment sales contracts and home
improvement installment loan agreements that are general in nature. Because
certain of such legal aspects are governed by applicable state law (which laws
may differ substantially), the summaries do not purport to be complete nor
reflect the laws of any particular state, nor encompass the laws of all states
in which the properties securing the Loans are situated.
Mortgages
The Loans for a Series will, and certain Home Improvement Contracts for a
Series may, be secured by either mortgages or deeds of trust or deeds to secure
debt (such Mortgage Loans and Home Improvement Contracts are hereinafter
referred to in this section as "mortgage loans"), depending upon the prevailing
practice in the state in which the property subject to a mortgage loan is
located. The filing of a mortgage, deed of trust or deed to secure debt creates
a lien or title interest upon the real property covered by such instrument and
represents the security for the repayment of an obligation that is customarily
evidenced by a promissory note. It is not prior to the lien for real estate
taxes and assessments or other charges imposed under governmental police powers
and may also be subject to other liens pursuant to the laws of the jurisdiction
in which the Mortgaged Property is located. Priority with respect to such
instruments depends on their terms, the knowledge of the parties to the mortgage
and generally on the order of recording with the applicable state, county or
municipal office. There are two parties to a mortgage, the mortgagor, who is the
borrower/property owner or the land trustee (as described below), and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the borrower/property owner is the
beneficiary; at origination of a mortgage loan, the borrower executes a separate
undertaking to make payments on the mortgage note. A deed of trust transaction
normally has three parties: the trustor, who is the borrower/property owner; the
beneficiary, who is the lender; and the trustee, a third-party grantee. Under a
deed of trust, the trustor grants the property, irrevocably until the debt is
paid, in trust, generally with a power of sale, to the trustee to secure payment
of the obligation. The mortgagee's authority under a mortgage and the trustee's
authority under a deed of trust are governed by the law of the state in which
the real property is located, the express provisions of the mortgage or deed of
trust, and, in some cases, in deed of trust transactions, the directions of the
beneficiary.
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Foreclosure on Mortgages
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming and expensive. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a receiver
or other officer to conduct the sale of the property. In some states, mortgages
may also be foreclosed by advertisement, pursuant to a power of sale provided in
the mortgage. Foreclosure of a mortgage by advertisement is essentially similar
to foreclosure of a deed of trust by nonjudicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a nonjudicial
trustee's sale under a specific provision in the deed of trust that authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In certain states, such foreclosure also may
be accomplished by judicial action in the manner provided for foreclosure of
mortgages. In some states, the trustee must record a notice of default and send
a copy to the borrower-trustor and to any person who has recorded a request for
a copy of a notice of default and notice of sale. In addition, the trustee in
some states must provide notice to any other individual having an interest in
the real property, including any junior lienholders. If the deed of trust is not
reinstated within any applicable cure period, a notice of sale must be posted in
a public place and, in most states, published for a specified period of time in
one or more newspapers. In addition, some state laws require that a copy of the
notice of sale be posted on the property and sent to all parties having an
interest of record in the property. The trustor, borrower, or any person having
a junior encumbrance on the real estate, may, during a reinstatement period,
cure the default by paying the entire amount in arrears plus the costs and
expenses incurred in enforcing the obligation. Generally, state law controls the
amount of foreclosure expenses and costs, including attorney's fees, which may
be recovered by a lender. If the deed of trust is not reinstated, a notice of
sale must be posted in a public place and, in most states, published for a
specified period of time in one or more newspapers. In addition, some state laws
require that a copy of the notice of sale be posted on the property, recorded
and sent to all parties having an interest in the real property.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith,
or oppressive or unconscionable conduct such as to warrant a court of equity to
refuse affirmative relief to the mortgagee. Under certain circumstances a court
of equity may relieve the mortgagor from an entirely technical default where
such default was not willful.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses or counterclaims are interposed, sometimes requiring up to
several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and such sale occurred while the mortgagor was insolvent and
within one year (or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law) of the
filing of bankruptcy. Similarly, a suit against the debtor on the related
mortgage note may take several
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years and, generally, is a remedy alternative to foreclosure, the mortgagee
being precluded from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty potential third party purchasers at the
sale have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for an amount that may be equal to the unpaid
principal amount of the mortgage note secured by the mortgage or deed of trust
plus accrued and unpaid interest and the expenses of foreclosure, in which event
the mortgagor's debt will be extinguished or the lender may purchase for a
lesser amount in order to preserve its right against a borrower to seek a
deficiency judgment in states where such a judgment is available. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burdens of ownership,
including obtaining hazard insurance, paying taxes and making such repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Any loss may be reduced by the
receipt of any mortgage guaranty Insurance Proceeds.
Environmental Risks
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and safety.
These include laws and regulations governing air pollutant emissions, hazardous
and toxic substances, impacts to wetlands, leaks from underground storage tanks
and the management, removal and disposal of lead- and asbestos-containing
materials. In certain circumstances, these laws and regulations impose
obligations on the owners or operators of residential properties such as those
subject to the Loans. The failure to comply with such laws and regulations may
result in fines and penalties.
Moreover, under various federal, state and local laws and regulations, an
owner or operator of real estate may be liable for the costs of addressing
hazardous substances on, in or beneath such property and related costs. Such
liability may be imposed without regard to whether the owner or operator knew
of, or was responsible for, the presence of such substances, and could exceed
the value of the property and the aggregate assets of the owner or operator. In
addition, persons who transport or dispose of hazardous substances, or arrange
for the transportation, disposal or treatment of hazardous substances, at
off-site locations may also be held liable if there are releases or threatened
releases of hazardous substances at such off-site locations.
In addition, under the laws of some states and under the Federal
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
contamination of property may give rise to a lien on the property to assure the
payment of the costs of clean-up. In several states, such a lien has priority
over the lien of an existing mortgage against such property. Under CERCLA, such
a lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, there is a possibility
that a lender may be held liable as an "owner or operator" for costs of
addressing releases or threatened releases of hazardous substances at a
property, regardless of whether or not the environmental damage or threat was
caused by a current or prior owner or operator. CERCLA and some state laws
provide an exemption from the definition of "owner or operator" for a secured
creditor who, without "participating in the management"
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of a facility, holds indicia of ownership primarily to protect its security
interest in the facility. The Solid Waste Disposal Act (the "SWDA") provides
similar protection to secured creditors in connection with liability for
releases of petroleum from certain underground storage tanks. However, if a
lender "participates in the management" of the facility in question or is found
not to have held its interest primarily to protect a security interest, the
lender may forfeit its secured creditor exemption status.
A regulation promulgated by the U.S. Environmental Protection Agency (the
"EPA") in April 1992 attempted to clarify the activities in which lenders could
engage both prior to and subsequent to foreclosure of a security interest
without forfeiting the secured creditor exemption under CERCLA. The rule was
struck down in 1994 by the United States Court of Appeals for the District of
Columbia Circuit in Kelley ex rel State of Michigan v. Environmental Protection
Agency, 15 F.3d 1100 (D.C Cir. 1994), reh'g denied, 25 F.3d 1088, cert. denied
sub nom. Am. Bankers Ass'n v. Kelley, 115 S.Ct. 900 (1995). Another EPA
regulation promulgated in 1995 clarifies the activities in which lenders may
engage without forfeiting the secured creditor exemption under the underground
storage tank provisions of the SWDA. That regulation has not been struck down.
On September 30, 1996, Congress amended both CERCLA and the SWDA to provide
additional clarification regarding the scope of the lender liability exemptions
under the two statutes. Among other things, the 1996 amendments specify the
circumstances under which a lender will be protected by the CERCLA and SWDA
exemptions, both while the borrower is still in possession of the secured
property and following foreclosure on the secured property.
Generally, the amendments state that a lender who holds indicia of
ownership primarily to protect a security interest in a facility will be
considered to participate in management only if, while the borrower is still in
possession of the facility encumbered by the security interest, the lender (i)
exercises decision-making control over environmental compliance related to the
facility such that the lender has undertaken responsibility for hazardous
substance handling or disposal practices related to the facility or (ii)
exercises control at a level comparable to that of a manager of the facility
such that the lender has assumed or manifested responsibility for (a) overall
management of the facility encompassing daily decision-making with respect to
environmental compliance or (b) overall or substantially all of the operational
functions (as distinguished from financial or administrative functions) of the
facility other than the function of environmental compliance. The amendments
also specify certain activities that are not considered to be "participation in
management," including monitoring or enforcing the terms of the extension of
credit or security interest, inspecting the facility, and requiring a lawful
means of addressing the release or threatened release of a hazardous substance.
The 1996 amendments also specify that a lender who did not participate in
management of a facility prior to foreclosure will not be considered an "owner
or operator," even if the lender forecloses on the facility and after
foreclosure sells or liquidates the facility, maintains business activities,
winds up operations, undertakes an appropriate response action, or takes any
other measure to preserve, protect, or prepare the facility prior to sale or
disposition, if the lender seeks to sell or otherwise divest the facility at the
earliest practicable, commercially reasonable time, on commercially reasonable
terms, taking into account market conditions and legal and regulatory
requirements.
The CERCLA and SWDA lender liability amendments specifically address the
potential liability of lenders who hold mortgages or similar conventional
security interests in real property, such as the Trust Fund does in connection
with the Mortgage Loans and the Home Improvement Contracts.
If a lender is or becomes liable under CERCLA, it may be authorized to
bring a statutory action for contribution against any other "responsible
parties," including a previous owner or operator. However, such persons or
entities may be bankrupt or otherwise judgment proof, and the costs associated
with
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environmental cleanup and related actions may be substantial. Moreover, some
state laws imposing liability for addressing hazardous substances do not contain
exemptions from liability for lenders. Whether the costs of addressing a release
or threatened release at a property pledged as collateral for one of the Loans
would be imposed on the Trust Fund, and thus occasion a loss to the Holders,
therefore depends on the specific factual and legal circumstances at issue.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. The
right of redemption should be distinguished from the equity of redemption, which
is a non-statutory right that must be exercised prior to the foreclosure sale.
In some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a portion
of the sums due. The effect of a statutory right of redemption is to diminish
the ability of the lender to sell the foreclosed property. The exercise of a
right of redemption would defeat the title of any purchaser at a foreclosure
sale, or of any purchaser from the lender subsequent to foreclosure or sale
under a deed of trust. Consequently, the practical effect of a right of
redemption is to force the lender to retain the property and pay the expenses of
ownership until the redemption period has run. In some states, there is no right
to redeem property after a trustee's sale under a deed of trust.
Junior Mortgages; Rights of Senior Mortgages
The Mortgage Loans comprising or underlying the Primary Assets included in
the Trust Fund for a Series will be secured by Mortgages or deeds of trust,
which may be second or more junior mortgages to other mortgages held by other
lenders or institutional investors. The rights of the Trust Fund (and therefore
the Holders), as mortgagee under a junior mortgage, are subordinate to those of
the mortgagee under the senior mortgage, including the prior rights of the
senior mortgagee to receive hazard insurance and condemnation proceeds and to
cause the property securing the mortgage loan to be sold upon default of the
mortgagor, thereby extinguishing the junior mortgagee's lien unless the junior
mortgagee asserts its subordinate interest in the property in foreclosure
litigation and, possibly, satisfies the defaulted senior mortgage. A junior
mortgagee may satisfy a defaulted senior loan in full and, in some states, may
cure such default and bring the senior loan current, in either event adding the
amounts expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard Insurance Policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under underlying senior mortgages will have the prior right to
collect any Insurance Proceeds payable under a hazard Insurance Policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property that appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and
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not to commit or permit any waste thereof, and to appear in and defend any
action or proceeding purporting to affect the property or the rights of the
mortgagee under the mortgage. Upon a failure of the mortgagor to perform any of
these obligations, the mortgagee is given the right under certain mortgages to
perform the obligation itself, at its election, with the mortgagor agreeing to
reimburse the mortgagee for any sums expended by the mortgagee on behalf of the
mortgagor. All sums so expended by the mortgagee become part of the indebtedness
secured by the mortgage.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory prohibitions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower. In
certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower following a foreclosure sale to
the excess of the outstanding debt over the fair market value of the property at
the time of the public sale. The purpose of these statutes is generally to
prevent a beneficiary or a mortgagee from obtaining a large deficiency judgment
against the former borrower as a result of low or no bids at the foreclosure
sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws, the Federal
Soldiers' and Sailors' Relief Act and state laws affording relief to debtors,
may interfere with or affect the ability of the secured lender to realize upon
collateral and/or enforce a deficiency judgment. For example, with respect to
federal bankruptcy law, the filing of a petition acts as a stay against the
enforcement of remedies for collection of a debt. Moreover, a court with federal
bankruptcy jurisdiction may permit a debtor through a Chapter 13 Bankruptcy Code
rehabilitative plan to cure a monetary default with respect to a loan on a
debtor's residence by paying arrearages within a reasonable time period and
reinstating the original loan payment schedule even though the lender
accelerated the loan and the lender has taken all steps to realize upon his
security (provided no sale of the property has yet occurred) prior to the filing
of the debtor's Chapter 13 petition. Some courts with federal bankruptcy
jurisdiction have approved plans, based on the particular facts of the
reorganization case, that effected the curing of a loan default by permitting
the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan may be modified if the borrower has filed a petition
under Chapter 13. These courts have suggested that such modifications may
include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Federal bankruptcy law and limited case law
indicate that the foregoing modifications could not be applied to the terms of a
loan secured by property that is the principal residence of the debtor. In all
cases, the secured creditor is entitled to the value of its security
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plus post-petition interest, attorney's fees and costs to the extent the value
of the security exceeds the debt.
In a Chapter 11 case under the Bankruptcy Code, the lender is precluded
from foreclosing without authorization from the bankruptcy court. The lender's
lien may be transferred to other collateral and/or be limited in amount to the
value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate
due-on-sale clauses through confirmed Chapter 11 plans of reorganization.
The Bankruptcy Code provides priority to certain tax liens over the
lender's security. This may delay or interfere with the enforcement of rights in
respect of a defaulted mortgage loan. In addition, substantive requirements are
imposed upon lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws. The
laws include the federal Truth-in-Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act and related statutes and regulations. These federal laws impose
specific statutory liabilities upon lenders who originate loans and who fail to
comply with the provisions of the law. In some cases, this liability may affect
assignees of the loans.
Due-on-Sale Clauses in Mortgage Loans
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases, typically involving
single family residential mortgage transactions, their enforceability has been
limited or denied. In any event, the Garn-St. Germain Depository Institutions
Act of 1982 (the "Garn-St. Germain Act") preempts state constitutional,
statutory and case law that prohibits the enforcement of due-on-sale clauses and
permits lenders to enforce these clauses in accordance with their terms, subject
to certain exceptions. As a result, due-on-sale clauses have become generally
enforceable except in those states whose legislatures exercised their authority
to regulate the enforceability of such clauses with respect to mortgage loans
that were (i) originated or assumed during the "window period" under the
Garn-St. Germain Act, which ended in all cases not later than October 15, 1982,
and (ii) originated by lenders other than national banks, federal savings
institutions and federal credit unions. FHLMC has taken the position in its
published mortgage servicing standards that, out of a total of eleven "window
period states," five states (Arizona, Michigan, Minnesota, New Mexico and Utah)
have enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of window period loans. Also, the Garn-St. Germain Act does
"encourage" lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from such bankruptcy proceeding.
Enforceability of Prepayment and Late Payment Fees
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations, upon the late charges a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional
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charge if the loan is prepaid. Late charges and prepayment fees are typically
retained by servicers as additional servicing compensation.
Equitable Limitations on Remedies
In connection with lenders' attempts to realize upon their security, courts
have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his defaults
under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon his
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in cases involving the
sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full or in
part without penalty. The regulations of the Office of Thrift Supervision (the
"OTS") prohibit the imposition of a prepayment penalty or equivalent fee for or
in connection with the acceleration of a loan by exercise of a due-on-sale
clause. A mortgagee to whom a prepayment in full has been tendered may be
compelled to give either a release of the mortgage or an instrument assigning
the existing mortgage. The absence of a restraint on prepayment, particularly
with respect to mortgage loans having higher mortgage rates, may increase the
likelihood of refinancing or other early retirements of such mortgage loans.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. Similar federal statutes
were in effect with respect to mortgage loans made during the first three months
of 1980. The OTS, as successor to the Federal Home Loan Bank Board, is
authorized to issue rules and regulations and to publish interpretations
governing implementation of Title V. Title V authorizes any state to reimpose
interest rate limits by adopting, before April 1, 1983, a state law, or by
certifying that the voters of such state have voted in favor of any provision,
constitutional or otherwise, which expressly rejects an application of the
federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V.
The Home Improvement Contracts
General
The Home Improvement Contracts, other than those Home Improvement Contracts
that are unsecured or secured by mortgages on real estate (such Home Improvement
Contracts are hereinafter referred to in this section as "contracts") generally
are "chattel paper" or constitute "purchase money security interests,"
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each as defined in the Uniform Commercial Code in effect in the applicable
jurisdiction (the "UCC"). Pursuant to the UCC, the sale of chattel paper is
treated in a manner similar to perfection of a security interest in chattel
paper. Under the related Agreement, the Depositor will transfer physical
possession of the contracts to the Trustee or a designated custodian or may
retain possession of the contracts as custodian for the Trustee. In addition,
the Depositor will make an appropriate filing of a UCC-1 financing statement in
the appropriate states to give notice of the Trustee's ownership of the
contracts. Unless otherwise specified in the related Prospectus Supplement, the
contracts will not be stamped or otherwise marked to reflect their assignment
from the Depositor to the Trustee. Therefore, if through negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
contracts without notice of such assignment, the Trustee's interest in the
contracts could be defeated.
Security Interests in Home Improvements
The contracts that are secured by the Home Improvements financed thereby
grant to the originator of such contracts a purchase money security interest in
such Home Improvements to secure all or part of the purchase price of such Home
Improvements and related services. A financing statement generally is not
required to be filed to perfect a purchase money security interest in consumer
goods. Such purchase money security interests are assignable. In general, a
purchase money security interest grants to the holder a security interest that
has priority over a conflicting security interest in the same collateral and the
proceeds of such collateral. However, to the extent that the collateral subject
to a purchase money security interest becomes a fixture, in order for the
related purchase money security interest to take priority over a conflicting
interest in the fixture, the holder's interest in such Home Improvement must
generally be perfected by a timely fixture filing. In general, under the UCC, a
security interest does not exist under the UCC in ordinary building material
incorporated into an improvement on land. Home Improvement Contracts that
finance lumber, bricks, other types of ordinary building material or other goods
that are deemed to lose such characterization, upon incorporation of such
materials into the related property, will not be secured by a purchase money
security interest in the Home Improvement being financed.
Enforcement of Security Interest in Home Improvements
So long as the Home Improvement has not become subject to the real estate
law, a creditor can repossess a Home Improvement securing a contract by
voluntary surrender, by "self-help" repossession that is "peaceful" (i.e.,
without breach of the peace) or, in the absence of voluntary surrender and the
ability to repossess without breach of the peace, by judicial process. The
holder of a contract must give the debtor a number of days' notice, which varies
from 10 to 30 days depending on the state, prior to commencement of any
repossession. The UCC and consumer protection laws in most states place
restrictions on repossession sales, including requiring prior notice to the
debtor and commercial reasonableness in effecting such a sale. The law in most
states also requires that the debtor be given notice of any sale prior to resale
of the unit that the debtor may redeem it at or before such resale.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgement from a debtor for any deficiency on repossession and
resale of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgements, and in many cases the
defaulting borrower would have no assets with which to pay a judgement.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgement.
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Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract that is the seller of goods that gave rise to the transaction (and
certain related lenders and assignees) to transfer such contract free of notice
of claims by the debtor thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses the debtor could assert
against the seller of goods. Liability under this rule is limited to amounts
paid under a contract; however, the obligor also may be able to assert the rule
to set off remaining amounts due as a defense against a claim brought by the
Trustee against such obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the related
contract.
Applicability of Usury Laws
Title V provides that, subject to the following conditions, state usury
limitations shall not apply to any contract that is secured by a first lien on
certain kinds of consumer goods. The contracts would be covered if they satisfy
certain conditions, among other things, governing the terms of any prepayments,
late charges and deferral fees and requiring a 30-day notice period prior to
instituting any action leading to repossession of the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision that expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
Installment Sales Contracts
The Loans may also consist of installment sales contracts. Under an
installment sales contract (each, an "Installment Sales Contract") the seller
(hereinafter referred to in this section as the "lender") retains legal title to
the property and enters into an agreement with the purchaser (hereinafter
referred to in this section as the "borrower") for the payment of the purchase
price, plus interest, over the term of such contract. Only after full
performance by the borrower of the contract is the lender obligated to convey
title to the property to the purchaser. As with mortgage or deed of trust
financing, during the effective period of the Installment Sales Contract, the
borrower is generally responsible for maintaining the property in good condition
and for paying real estate taxes, assessments and hazard Insurance Policy
premiums associated with the property.
The method of enforcing the rights of the lender under an Installment Sales
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to the terms. The terms of Installment Sales
Contracts generally provide that upon a default by the borrower, the borrower
loses his or her right to occupy the property, the entire indebtedness is
accelerated, and the buyer's equitable interest in the property is forfeited.
The lender in such a situation does not have to foreclose in order to obtain
title to the property, although in some cases a quiet title action is in order
if the borrower has filed the Installment Sales Contract in local land records
and an ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
Installment Sales Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However,
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most state legislatures have enacted provisions by analogy to mortgage law
protecting borrowers under Installment Sales Contracts from the harsh
consequences of forfeiture. Under such statutes, a judicial or nonjudicial
foreclosure may be required, the lender may be required to give notice of
default and the borrower may be granted some grace period during which the
Installment Sales Contract may be reinstated upon full payment of the default
amount and the borrower may have a post-foreclosure statutory redemption right.
In other states, courts in equity may permit a borrower with significant
investment in the property under an Installment Sales Contract for the sale of
real estate to share in the proceeds of sale of the property after the
indebtedness is repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, generally speaking, the lender's procedures for obtaining
possession and clear title under an Installment Sales Contract in a given state
are simpler and less time-consuming and costly than are the procedures for
foreclosing and obtaining clear title to a property subject to one or more
liens.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service, (i) are entitled to have interest rates reduced and capped at
6% per annum, on obligations (including Loans) incurred prior to the
commencement of military service for the duration of military service, (ii) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on such obligations entered into prior to
military service for the duration of military service and (iii) may have the
maturity of such obligations incurred prior to military service extended, the
payments lowered and the payment schedule readjusted for a period of time after
the completion of military service. However, the benefits of (i), (ii), or (iii)
above are subject to challenge by creditors and if, in the opinion of the court,
the ability of a person to comply with such obligations is not materially
impaired by military service, the court may apply equitable principles
accordingly. If a borrower's obligation to repay amounts otherwise due on a Loan
included in a Trust Fund for a Series is relieved pursuant to the Soldiers' and
Sailors' Civil Relief Act of 1940, none of the Trust Fund, the Servicer, the
Depositor nor any Trustee will be required to advance such amounts, and any loss
in respect thereof may reduce the amounts available to be paid to the Holders of
the Securities of such Series. Unless otherwise specified in the related
Prospectus Supplement, any shortfalls in interest collections on Loans or
Underlying Loans relating to the Private Securities, as applicable, included in
a Trust Fund for a Series resulting from application of the Soldiers' and
Sailors' Civil Relief Act of 1940 will be allocated to each Class of Securities
of such Series that is entitled to receive interest in respect of such Loans or
Underlying Loans in proportion to the interest that each such Class of
Securities would have otherwise been entitled to receive in respect of such
Loans or Underlying Loans had such interest shortfall not occurred.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware in June 1995, and
is a wholly-owned subsidiary of The Bear Stearns Companies Inc. The Depositor's
principal executive offices are located at 245 Park Avenue, New York, New York
10167. Its telephone number is (212) 272-4095.
The Depositor will not engage in any activities other than to authorize,
issue, sell, deliver, purchase and invest in (and enter into agreements in
connection with), and/or to engage in the establishment of one or more trusts,
which will issue and sell, bonds, notes, debt or equity securities, obligations
and other securities and instruments ("Depositor Securities") collateralized or
otherwise secured or backed by, or otherwise representing an interest in, among
other things, receivables or pass-through certificates, or participations or
certificates of participation or beneficial ownership in one or more pools of
receivables, and the proceeds of the foregoing, that arise in connection with
loans secured by certain first or junior
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mortgages on real estate or manufactured housing and any and all other
commercial transactions and commercial, sovereign, student or consumer loans or
indebtedness and, in connection therewith or otherwise, purchasing, acquiring,
owning, holding, transferring, conveying, servicing, selling, pledging,
assigning, financing and otherwise dealing with such receivables, pass-through
certificates, or participations or certificates of participation or beneficial
ownership. Article Third of the Depositor's Certificate of Incorporation limits
the Depositor's activities to the above activities and certain related
activities, such as credit enhancement with respect to such Depositor
Securities, and to any activities incidental to and necessary or convenient for
the accomplishment of such purposes.
USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds from
the sale of each Series of Securities for one or more of the following purposes:
(i) to purchase the related Primary Assets, (ii) to repay indebtedness incurred
to obtain funds to acquire such Primary Assets, (iii) to establish any Reserve
Funds described in the related Prospectus Supplement and (iv) to pay costs of
structuring and issuing such Securities, including the costs of obtaining
Enhancement, if any. If so specified in the related Prospectus Supplement, the
purchase of the Primary Assets for a Series may be effected by an exchange of
Securities with the Seller of such Primary Assets.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
General
The following is a summary of certain anticipated material federal income
tax consequences of the purchase, ownership, and disposition of the Securities
and is based on the opinion of Brown & Wood LLP, special counsel to the
Depositor (in such capacity, "Tax Counsel"). The summary is based upon the
provisions of the Code, the regulations promulgated thereunder, including, where
applicable, proposed regulations, and the judicial and administrative rulings
and decisions now in effect, all of which are subject to change or possible
differing interpretations. The statutory provisions, regulations, and
interpretations on which this interpretation is based are subject to change, and
such a change could apply retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances. This summary focuses primarily upon investors who will hold
Securities as "capital assets" (generally, property held for investment) within
the meaning of Section 1221 of the Code. Prospective investors may wish to
consult their own tax advisers concerning the federal, state, local and any
other tax consequences as relates specifically to such investors in connection
with the purchase, ownership and disposition of the Securities.
The federal income tax consequences to Holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness; (ii) an
election is made to treat the Trust Fund relating to a particular Series of
Securities as a real estate mortgage investment conduit (a "REMIC") under the
Internal Revenue Code of 1986, as amended (the "Code"); (iii) the Securities
represent an ownership interest in some or all of the assets included in the
Trust Fund for a Series; or (iv) an election is made to treat the Trust Fund
relating to a particular Series of Certificates as a partnership; or (v) an
election is made to treat the Trust Fund relating to a particular Series of
Securities as a Financial Asset Securitization Investment Trust ("FASIT") under
the Code. The Prospectus Supplement for each Series of Securities will specify
how the Securities will be treated for federal income tax purposes and will
discuss whether a REMIC election, if any, will be made with respect to such
Series.
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As used herein, the term "U.S. Person" means a citizen or resident of the
United States, a corporation, partnership or other entity created or organized
in or under the laws of the United States, any state thereof or the District of
Columbia (other than a partnership that is not treated as a United States person
under any applicable Treasury regulations), an estate whose income is subject to
U.S. federal income tax regardless of its source of income, or a trust if a
court within the United States is able to exercise primary supervision of the
trust and one or more United States persons have the authority to control all
substantial decisions of the trust. Notwithstanding the preceding sentence, to
the extent provided in regulations, certain trusts in existence on August 20,
1996 and treated as United States persons prior to such date that elect to
continue to be treated as United States persons shall be considered U.S. Persons
as well.
Taxation of Debt Securities
Status as Real Property Loans. Except to the extent otherwise provided in
the related Prospectus Supplement, if the Securities are regular interests in a
REMIC ("Regular Interest Securities") or represent interests in a grantor trust,
Tax Counsel is of the opinion that: (i) Securities held by a domestic building
and loan association will constitute "loans... secured by an interest in real
property" within the meaning of Code section 7701(a)(19)(C)(v); and (ii)
Securities held by a real estate investment trust will constitute "real estate
assets" within the meaning of Code section 856(c)(4)(A) and interest on
Securities will be considered "interest on obligations secured by mortgages on
real property or on interests in real property" within the meaning of Code
section 856(c)(3)(B).
Interest and Acquisition Discount. In the opinion of Tax Counsel, Regular
Interest Securities are generally taxable to Holders in the same manner as
evidences of indebtedness issued by the REMIC. Stated interest on the Regular
Interest Securities will be taxable as ordinary income and taken into account
using the accrual method of accounting, regardless of the Holder's normal
accounting method. Interest (other than original issue discount) on Securities
(other than Regular Interest Securities) that are characterized as indebtedness
for federal income tax purposes will be includible in income by Holders thereof
in accordance with their usual methods of accounting. Securities characterized
as debt for federal income tax purposes and Regular Interest Securities will be
referred to hereinafter collectively as "Debt Securities."
Tax Counsel is of the opinion that Debt Securities that are Compound
Interest Securities will, and certain of the other Debt Securities issued at a
discount may, be issued with "original issue discount" ("OID"). The following
discussion is based in part on the rules governing OID, which are set forth in
Sections 1271-1275 of the Code and the Treasury regulations issued thereunder on
February 2, 1994 and amended on June 11, 1996 (the "OID Regulations"). A Holder
should be aware, however, that the OID Regulations do not adequately address
certain issues relevant to prepayable securities, such as the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. In the
opinion of Tax Counsel, a Holder of a Debt Security must include such OID in
gross income as ordinary interest income as it accrues under a method taking
into account an economic accrual of the discount. In general, OID must be
included in income in advance of the receipt of the cash representing that
income. The amount of OID on a Debt Security will be considered to be zero if it
is less than a de minimis amount determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that Class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular Class of Debt Securities is sold for cash on
or prior to the Closing Date, the issue price for such Class will be treated as
the fair market value of such Class on the Closing Date. The issue price of a
Debt Security also includes the amount paid by an initial Debt Security
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Holder for accrued interest that relates to a period prior to the issue date of
the Debt Security. The stated redemption price at maturity of a Debt Security
includes the original principal amount of the Debt Security, but generally will
not include distributions of interest if such distributions constitute
"qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as described
below); provided, that such interest payments are unconditionally payable at
intervals of one year or less during the entire term of the Debt Security. The
OID Regulations state that interest payments are unconditionally payable only if
a late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Certain Debt Securities may provide for default
remedies in the event of late payment or nonpayment of interest. In the opinion
of Tax Counsel, the interest on such Debt Securities will be unconditionally
payable and constitute qualified stated interest, not OID. However, absent
clarification of the OID Regulations, where Debt Securities do not provide for
default remedies, the interest payments will be included in the Debt Security's
stated redemption price at maturity and taxed as OID. Interest is payable at a
single fixed rate only if the rate appropriately takes into account the length
of the interval between payments. Distributions of interest on Debt Securities
with respect to which deferred interest will accrue, will not constitute
qualified stated interest payments, in which case the stated redemption price at
maturity of such Debt Securities includes all distributions of interest as well
as principal thereon. Where the interval between the issue date and the first
Distribution Date on a Debt Security is either longer or shorter than the
interval between subsequent Distribution Dates, all or part of the interest
foregone, in the case of the longer interval, and all of the additional
interest, in the case of the shorter interval, will be included in the stated
redemption price at maturity and tested under the de minimis rule described
below. In the case of a Debt Security with a long first period that has non-de
minimis OID, all stated interest in excess of interest payable at the effective
interest rate for the long first period will be included in the stated
redemption price at maturity and the Debt Security will generally have OID.
Holders of Debt Securities should consult their own tax advisors to determine
the issue price and stated redemption price at maturity of a Debt Security.
Under the de minimis rule, OID on a Debt Security will be considered to be
zero if such OID is less than 0.25% of the stated redemption price at maturity
of the Debt Security multiplied by the weighted average maturity of the Debt
Security. For this purpose, the weighted average maturity of the Debt Security
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the Debt Security and the
denominator of which is the stated redemption price at maturity of the Debt
Security. Holders generally must report de minimis OID pro rata as principal
payments are received, and such income will be capital gain if the Debt Security
is held as a capital asset. However, accrual method Holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a qualified
variable rate and not as contingent interest if, generally, (i) such interest is
unconditionally payable at least annually, (ii) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and (iii)
interest is based on a "qualified floating rate," an "objective rate," or a
combination of "qualified floating rates" that do not operate in a manner that
significantly accelerates or defers interest payments on such Debt Security. In
the case of Compound Interest Securities, certain Interest Weighted Securities,
and certain of the other Debt Securities, none of the payments under the
instrument will be considered qualified stated interest, and thus the aggregate
amount of all payments will be included in the stated redemption price.
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The Internal Revenue Service (the "IRS") recently issued final regulations
(the "Contingent Payment Regulations") governing the calculation of OID on
instruments having contingent interest payments. The Contingent Payment
Regulations, represent the only guidance regarding the views of the IRS with
respect to contingent interest instruments and specifically do not apply for
purposes of calculating OID on debt instruments subject to Code Section
1272(a)(6), such as the Debt Security. Additionally, the OID Regulations do not
contain provisions specifically interpreting Code Section 1272(a)(6). Until the
Treasury issues guidance to the contrary, the applicable Trustee intends to base
its computation on Code Section 1272(a)(6) and the OID Regulations as described
in this Prospectus. However, because no regulatory guidance currently exists
under Code Section 1272(a)(6), there can be no assurance that such methodology
represents the correct manner of calculating OID.
The Holder of a Debt Security issued with OID must include in gross income,
for all days during its taxable year on which it holds such Debt Security, the
sum of the "daily portions" of such original issue discount. The amount of OID
includible in income by a Holder will be computed by allocating to each day
during a taxable year a pro rata portion of the original issue discount that
accrued during the relevant accrual period. In the case of a Debt Security that
is not a Regular Interest Security and the principal payments on which are not
subject to acceleration resulting from prepayments on the Loans, the amount of
OID includible in income of a Holder for an accrual period (generally the period
over which interest accrues on the debt instrument) will equal the product of
the yield to maturity of the Debt Security and the adjusted issue price of the
Debt Security, reduced by any payments of qualified stated interest. The
adjusted issue price is the sum of its issue price plus prior accruals or OID,
reduced by the total payments made with respect to such Debt Security in all
prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a Holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a "Pay-Through Security"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments is
to be determined on the basis of three factors: (i) the original yield to
maturity of the Pay-Through Security (determined on the basis of compounding at
the end of each accrual period and properly adjusted for the length of the
accrual period), (ii) events that have occurred before the end of the accrual
period and (iii) the assumption that the remaining payments will be made in
accordance with the original Prepayment Assumption. The effect of this method is
to increase the portions of OID required to be included in income by a Holder to
take into account prepayments with respect to the Loans at a rate that exceeds
the Prepayment Assumption, and to decrease (but not below zero for any period)
the portions of OID required to be included in income by a Holder of a
Pay-Through Security to take into account prepayments with respect to the Loans
at a rate that is slower than the Prepayment Assumption. Although OID will be
reported to Holders of Pay-Through Securities based on the Prepayment
Assumption, no representation is made to Holders that Loans will be prepaid at
that rate or at any other rate.
The Depositor may adjust the accrual of OID on a Class of Regular Interest
Securities (or other regular interests in a REMIC) in a manner that it believes
to be appropriate, to take account of realized losses on the Loans, although the
OID Regulations do not provide for such adjustments. If the IRS were to require
that OID be accrued without such adjustments, the rate of accrual of OID for a
Class of Regular Interest Securities could increase.
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Certain Classes of Regular Interest Securities may represent more than one
Class of REMIC regular interests. Unless otherwise provided in the related
Prospectus Supplement, the applicable Trustee intends, based on the OID
Regulations, to calculate OID on such Securities as if, solely for the purposes
of computing OID, the separate regular interests were a single debt instrument.
A subsequent Holder of a Debt Security will also be required to include OID
in gross income, but such a Holder who purchases such Debt Security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial Holder who pays more than a Debt Security's issue price) to offset such
OID by comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. In the opinion of Tax Counsel,
Holders will be required to report income with respect to the related Securities
under an accrual method without giving effect to delays and reductions in
distributions attributable to a default or delinquency on the Loans, except
possibly to the extent that it can be established that such amounts are
uncollectible. As a result, the amount of income (including OID) reported by a
Holder of such a Security in any period could significantly exceed the amount of
cash distributed to such Holder in that period. The Holder will eventually be
allowed a loss (or will be allowed to report a lesser amount of income) to the
extent that the aggregate amount of distributions on the Securities is reduced
as a result of a Loan default. However, the timing and character of such losses
or reductions in income are uncertain and, accordingly, Holders of Securities
should consult their own tax advisors on this point.
Interest Weighted Securities. It is not clear how income should be accrued
with respect to Regular Interest Securities or Stripped Securities (as defined
under "--Tax Status as a Grantor Trust; General" herein) the payments on which
consist solely or primarily of a specified portion of the interest payments on
qualified mortgages held by the REMIC or on Loans underlying Pass-Through
Securities ("Interest Weighted Securities"). The Trustee intends to take the
position that all of the income derived from an Interest Weighted Security
should be treated as OID and that the amount and rate of accrual of such OID
should be calculated by treating the Interest Weighted Security as a Compound
Interest Security. However, in the case of Interest Weighted Securities that are
entitled to some payments of principal and that are Regular Interest Securities
the Internal Revenue Service could assert that income derived from an Interest
Weighted Security should be calculated as if the Security were a security
purchased at a premium equal to the excess of the price paid by such Holder for
such Security over its stated principal amount, if any. Under this approach, a
Holder would be entitled to amortize such premium only if it has in effect an
election under Section 171 of the Code with respect to all taxable debt
instruments held by such Holder, as described below. Alternatively, the IRS
could assert that an Interest Weighted Security should be taxable under the
rules governing bonds issued with contingent payments. Such treatment may be
more likely in the case of Interest Weighted Securities that are Stripped
Securities as described below. See "--Tax Status as a Grantor Trust--Discount or
Premium on Pass-Through Securities."
Variable Rate Debt Securities. In the opinion of Tax Counsel, in the case
of Debt Securities bearing interest at a rate that varies directly, according to
a fixed formula, with an objective index, it appears that (i) the yield to
maturity of such Debt Securities and (ii) in the case of Pay-Through Securities,
the present value of all payments remaining to be made on such Debt Securities,
should be calculated as if the interest index remained at its value as of the
issue date of such Securities. Because the proper method of adjusting accruals
of OID on a variable rate Debt Security is uncertain, Holders of variable rate
Debt Securities should consult their own tax advisers regarding the appropriate
treatment of such Securities for federal income tax purposes.
Market Discount. In the opinion of Tax Counsel, a purchaser of a Security
may be subject to the market discount rules of Sections 1276-1278 of the Code. A
Holder that acquires a Debt Security with more than a prescribed de minimis
amount of "market discount" (generally, the excess of the principal
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amount of the Debt Security over the purchaser's purchase price) will be
required to include accrued market discount in income as ordinary income in each
month, but limited to an amount not exceeding the principal payments on the Debt
Security received in that month and, if the Securities are sold, the gain
realized. Such market discount would accrue in a manner to be provided in
Treasury regulations but, until such regulations are issued, such market
discount would in general accrue either (i) on the basis of a constant yield (in
the case of a Pay-Through Security, taking into account a prepayment assumption)
or (ii) in the ratio of (a) in the case of Securities (or in the case of a
Pass-Through Security, as set forth below, the Loans underlying such Security)
not originally issued with original issue discount, stated interest payable in
the relevant period to total stated interest remaining to be paid at the
beginning of the period or (b) in the case of Securities (or, in the case of a
Pass-Through Security, as described below, the Loans underlying such Security)
originally issued at a discount, OID in the relevant period to total OID
remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the Debt Security (or, in the case of a Pass-Through Security, the Loans),
the excess of interest paid or accrued to purchase or carry a Security (or, in
the case of a Pass-Through Security, as described below, the underlying Loans)
with market discount over interest received on such Security is allowed as a
current deduction only to the extent such excess is greater than the market
discount that accrued during the taxable year in which such interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon the
sale, disposition, or repayment of the Security (or in the case of a
Pass-Through Security, an underlying Loan). A Holder may elect to include market
discount in income currently as it accrues, on all market discount obligations
acquired by such Holder during the taxable year such election is made and
thereafter, in which case the interest deferral rule will not apply.
Premium. In the opinion of Tax Counsel, a Holder who purchases a Debt
Security (other than an Interest Weighted Security to the extent described
above) at a cost greater than its stated redemption price at maturity, generally
will be considered to have purchased the Security at a premium, which it may
elect to amortize as an offset to interest income on such Security (and not as a
separate deduction item) on a constant yield method. Although no regulations
addressing the computation of premium accrual on securities similar to the
Securities have been issued, the legislative history of the 1986 Act indicates
that premium is to be accrued in the same manner as market discount.
Accordingly, it appears that the accrual of premium on a Class of Pay-Through
Securities will be calculated using the prepayment assumption used in pricing
such Class. If a Holder makes an election to amortize premium on a Debt
Security, such election will apply to all taxable debt instruments (including
all REMIC regular interests and all pass-through certificates representing
ownership interests in a trust holding debt obligations) held by the Holder at
the beginning of the taxable year in which the election is made, and to all
taxable debt instruments acquired thereafter by such Holder, and will be
irrevocable without the consent of the IRS. Purchasers who pay a premium for the
Securities should consult their tax advisers regarding the election to amortize
premium and the method to be employed.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a Holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method for Debt Securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a Debt Security with market discount, the Holder of the Debt Security
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount that
such Holder of the Debt Security acquires during the year of the election or
thereafter. Similarly, a Holder of a Debt Security that makes this election for
a Debt Security that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt
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instruments having amortizable bond premium that such Holder owns or acquires.
The election to accrue interest, discount and premium on a constant yield method
with respect to a Debt Security is irrevocable.
Taxation of the REMIC and its Holders
General. In the opinion of Tax Counsel, if a REMIC election is made with
respect to a Series of Securities, then the arrangement by which the Securities
of that Series are issued will be treated as a REMIC as long as all of the
provisions of the applicable Agreement are complied with and the statutory and
regulatory requirements are satisfied. Securities will be designated as "Regular
Interests" or "Residual Interests" in a REMIC, as specified in the related
Prospectus Supplement.
Except to the extent specified otherwise in a Prospectus Supplement, if a
REMIC election is made with respect to a Series of Securities, in the opinion of
Tax Counsel (i) Securities held by a domestic building and loan association will
constitute "a regular or a residual interest in a REMIC" within the meaning of
Code Section 7701(a)(19)(C)(xi) (assuming that at least 95% of the REMIC's
assets consist of cash, government securities, "loans secured by an interest in
real property," and other types of assets described in Code Section
7701(a)(19)(C)); and (ii) Securities held by a real estate investment trust will
constitute "real estate assets" within the meaning of Code Section 856(c)(4)(A),
and income with respect to the Securities will be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Code Section 856(c)(3)(B) (assuming, for both
purposes, that at least 95% of the REMIC's assets are qualifying assets). If
less than 95% of the REMIC's assets consist of assets described in (i) or (ii)
above, then a Security will qualify for the tax treatment described in (i) or
(ii) in the proportion that such REMIC assets are qualifying assets.
REMIC Expenses; Single Class REMICs
As a general rule, in the opinion of Tax Counsel, all of the expenses of a
REMIC will be taken into account by Holders of the Residual Interest Securities.
In the case of a "single class REMIC," however, the expenses will be allocated,
under Treasury regulations, among the Holders of the Regular Interest Securities
and the Holders of the Residual Interest Securities on a daily basis in
proportion to the relative amounts of income accruing to each Holder on that
day. In the case of a Holder of a Regular Interest Security who is an individual
or a "pass-through interest holder" (including certain pass-through entities but
not including real estate investment trusts), such expenses will be deductible
only to the extent that such expenses, plus other "miscellaneous itemized
deductions" of the Holder, exceed 2% of such Holder's adjusted gross income. In
addition, for taxable years beginning after December 31, 1990, the amount of
itemized deductions otherwise allowable for the taxable year for an individual
whose adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation for taxable years beginning after 1990) will be reduced
by the lesser of (i) 3% of the excess of adjusted gross income over the
applicable amount, or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. The reduction or disallowance of this deduction
may have a significant impact on the yield of the Regular Interest Security to
such a Holder. In general terms, a single class REMIC is one that either (i)
would qualify, under existing Treasury regulations, as a grantor trust if it
were not a REMIC (treating all interests as ownership interests, even if they
would be classified as debt for federal income tax purposes) or (ii) is similar
to such a trust and that is structured with the principal purpose of avoiding
the single class REMIC rules. Unless otherwise specified in the related
Prospectus Supplement, the expenses of the REMIC will be allocated to Holders of
the related residual interest securities.
Taxation of the REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, in the opinion of Tax Counsel, a REMIC is not generally subject to
entity-level tax. Rather, the taxable income or net loss
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of a REMIC is taken into account by the Holders of residual interests. As
described above, the regular interests are generally taxable as debt of the
REMIC.
Calculation of REMIC Income. In the opinion of Tax Counsel, the taxable
income or net loss of a REMIC is determined under an accrual method of
accounting and in the same manner as in the case of an individual, with certain
adjustments. In general, the taxable income or net loss will be the difference
between (i) the gross income produced by the REMIC's assets, including stated
interest and any original issue discount or market discount on loans and other
assets, and (ii) deductions, including stated interest and original issue
discount accrued on Regular Interest Securities, amortization of any premium
with respect to Loans, and servicing fees and other expenses of the REMIC. A
Holder of a Residual Interest Security that is an individual or a "pass-through
interest holder" (including certain pass-through entities, but not including
real estate investment trusts) will be unable to deduct servicing fees payable
on the loans or other administrative expenses of the REMIC for a given taxable
year, to the extent that such expenses, when aggregated with such Holder's other
miscellaneous itemized deductions for that year, do not exceed two percent of
such Holder's adjusted gross income.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the Startup
Day (generally, the day that the interests are issued). That aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which Holders of Pay-Through Securities
accrue original issue discount (i.e., under the constant yield method taking
into account the Prepayment Assumption). The REMIC will deduct OID on the
Regular Interest Securities in the same manner that the Holders of the Regular
Interest Securities include such discount in income, but without regard to the
de minimis rules. See "Taxation of Debt Securities" above. However, a REMIC that
acquires loans at a market discount must include such market discount in income
currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before such date, it is possible that
such premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be subject to
a 100% tax on any net income derived from a "prohibited transaction." For this
purpose, net income will be calculated without taking into account any losses
from prohibited transactions or any deductions attributable to any prohibited
transaction that resulted in a loss. In general, prohibited transactions
include: (i) subject to limited exceptions, the sale or other disposition of any
qualified mortgage transferred to the REMIC; (ii) subject to a limited
exception, the sale or other disposition of a cash flow investment; (iii) the
receipt of any income from assets not permitted to be held by the REMIC pursuant
to the Code; or (iv) the receipt of any fees or other compensation for services
rendered by the REMIC. It is anticipated that a REMIC will not engage in any
prohibited transactions in which it would recognize a material amount of net
income. In addition, subject to a number of exceptions, a tax is imposed at the
rate of 100% on amounts contributed to a REMIC after the close of the
three-month period beginning on the Startup Day. The Holders of Residual
Interest Securities will generally be responsible for the payment of any such
taxes imposed on the REMIC. To the extent not paid by such Holders or otherwise,
however, such taxes will
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be paid out of the Trust Fund and will be allocated pro rata to all outstanding
Classes of Securities of such REMIC.
Taxation of Holders of Residual Interest Securities
In the opinion of Tax Counsel, the Holder of a Certificate representing a
residual interest (a "Residual Interest Security") will take into account the
"daily portion" of the taxable income or net loss of the REMIC for each day
during the taxable year on which such Holder held the Residual Interest
Security. The daily portion is determined by allocating to each day in any
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC for such quarter, and by allocating that amount among the Holders (on such
day) of the Residual Interest Securities in proportion to their respective
holdings on such day.
In the opinion of Tax Counsel, the Holder of a Residual Interest Security
must report its proportionate share of the taxable income of the REMIC whether
or not it receives cash distributions from the REMIC attributable to such income
or loss. The reporting of taxable income without corresponding distributions
could occur, for example, in certain REMIC issues in which the loans held by the
REMIC were issued or acquired at a discount, since mortgage prepayments cause
recognition of discount income, while the corresponding portion of the
prepayment could be used in whole or in part to make principal payments on REMIC
Regular Interests issued without any discount or at an insubstantial discount
(if this occurs, it is likely that cash distributions will exceed taxable income
in later years). Taxable income may also be greater in earlier years of certain
REMIC issues as a result of the fact that interest expense deductions, as a
percentage of outstanding principal on REMIC Regular Interest Securities, will
typically increase over time as lower yielding Securities are paid, whereas
interest income with respect to loans will generally remain constant over time
as a percentage of loan principal.
In any event, because the Holder of a residual interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
Limitation on Losses. In the opinion of Tax Counsel, the amount of the
REMIC's net loss that a Holder may take into account currently is limited to the
Holder's adjusted basis at the end of the calendar quarter in which such loss
arises. A Holder's basis in a Residual Interest Security will initially equal
such Holder's purchase price, and will subsequently be increased by the amount
of the REMIC's taxable income allocated to the Holder, and decreased (but not
below zero) by the amount of distributions made and the amount of the REMIC's
net loss allocated to the Holder. Any disallowed loss may be carried forward
indefinitely, but may be used only to offset income of the REMIC generated by
the same REMIC. The ability of Holders of Residual Interest Securities to deduct
net losses may be subject to additional limitations under the Code, as to which
such Holders should consult their tax advisers.
Distributions. In the opinion of Tax Counsel, distributions on a Residual
Interest Security (whether at their scheduled times or as a result of
prepayments) will generally not result in any additional taxable income or loss
to a Holder of a Residual Interest Security. If the amount of such payment
exceeds a Holder's adjusted basis in the Residual Interest Security, however,
the Holder will recognize gain (treated as gain from the sale of the Residual
Interest Security) to the extent of such excess.
Sale or Exchange. In the opinion of Tax Counsel, a Holder of a Residual
Interest Security will recognize gain or loss on the sale or exchange of a
Residual Interest Security equal to the difference, if any, between the amount
realized and such Holder's adjusted basis in the Residual Interest Security at
the
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time of such sale or exchange. Except to the extent provided in regulations,
which have not yet been issued, any loss upon disposition of a Residual Interest
Security will be disallowed if the selling Holder acquires any residual interest
in a REMIC or similar mortgage pool within six months before or after such
disposition.
Excess Inclusions. In the opinion of Tax Counsel, the portion of the REMIC
taxable income of a Holder of a Residual Interest Security consisting of "excess
inclusion" income may not be offset by other deductions or losses, including net
operating losses, on such Holder's federal income tax return. Further, if the
Holder of a Residual Interest Security is an organization subject to the tax on
unrelated business income imposed by Code Section 511, such Holder's excess
inclusion income will be treated as unrelated business taxable income of such
Holder. In addition, under Treasury regulations yet to be issued, if a real
estate investment trust, a regulated investment company, a common trust fund, or
certain cooperatives were to own a Residual Interest Security, a portion of
dividends (or other distributions) paid by the real estate investment trust (or
other entity) would be treated as excess inclusion income. If a Residual
Security is owned by a foreign person, excess inclusion income is subject to tax
at a rate of 30%, which may not be reduced by treaty, is not eligible for
treatment as "portfolio interest" and is subject to certain additional
limitations. See "Tax Treatment of Foreign Investors." The Small Business Job
Protection Act of 1996 has eliminated the special rule permitting Section 593
institutions ("thrift institutions") to use net operating losses and other
allowable deductions to offset their excess inclusion income from Residual
Interest Securities that have "significant value" within the meaning of the
REMIC Regulations, effective for taxable years beginning after December 31,
1995, except with respect to Residual Interest Securities continuously held by a
thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect on excess inclusions on the alternative minimum
taxable income of a residual Holder. First, alternative minimum taxable income
for such residual Holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions. Second, a residual
Holder's alternative minimum taxable income for a tax year cannot be less than
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December 31,
1986, unless a residual Holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Security, over the daily accruals for such quarterly period of
(i) 120% of the long term applicable federal rate on the Startup Day multiplied
by (ii) the adjusted issue price of such Residual Interest Security at the
beginning of such quarterly period. The adjusted issue price of a Residual
Interest at the beginning of each calendar quarter will equal its issue price
(calculated in a manner analogous to the determination of the issue price of a
Regular Interest), increased by the aggregate of the daily accruals for prior
calendar quarters, and decreased (but not below zero) by the amount of loss
allocated to a Holder and the amount of distributions made on the Residual
Interest Security before the beginning of the quarter. The long-term federal
rate, which is announced monthly by the Treasury Department, is an interest rate
that is based on the average market yield of outstanding marketable obligations
of the United States government having remaining maturities in excess of nine
years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Securities may be disregarded. See "--Restrictions on Ownership and
Transfer of Residual Interest Securities" and "--Tax Treatment of Foreign
Investors" below.
Restrictions on Ownership and Transfer of Residual Interest Securities. As
a condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a REMIC
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residual interest by any "Disqualified Organization." Disqualified Organizations
include the United States, any State or political subdivision thereof, any
foreign government, any international organization, or any agency or
instrumentality of any of the foregoing, a rural electric or telephone
cooperative described in Section 1381(a)(2)(C) of the Code, or any entity exempt
from the tax imposed by Sections 1-1399 of the Code, if such entity is not
subject to tax on its unrelated business income. Accordingly, the applicable
Pooling and Servicing Agreement will prohibit Disqualified Organizations from
owning a Residual Interest Security. In addition, no transfer of a Residual
Interest Security will be permitted unless the proposed transferee shall have
furnished to the Trustee an affidavit representing and warranting that it is
neither a Disqualified Organization nor an agent or nominee acting on behalf of
a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
Interest Security at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
Residual Interest Security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all federal
tax purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. A Residual Interest Security is a "noneconomic
residual interest" unless, at the time of the transfer (i) the present value of
the expected future distributions on the Residual Interest Security at least
equals the product of the present value of the anticipated excess inclusions and
the highest rate of tax for the year in which the transfer occurs and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes. If a
transfer of a Residual Interest is disregarded, the transferor would be liable
for any federal income tax imposed upon taxable income derived by the transferee
from the REMIC. The REMIC Regulations provide no guidance as to how to determine
if a significant purpose of a transfer is to impede the assessment or collection
of tax. A similar type of limitation exists with respect to certain transfers of
residual interests by foreign persons to United States persons.
See "--Tax Treatment of Foreign Investors."
Mark to Market Rules. Prospective purchasers of a REMIC Residual Interest
Security should be aware that the IRS recently finalized regulations (the "Final
Mark-to-Market Regulations"), which provide that a REMIC Residual Interest
Security acquired after January 3, 1995 cannot be marked-to-market. Prospective
purchasers of a REMIC Residual Interest Security should consult their tax
advisors regarding the possible application of the Mark to Market Regulations.
Administrative Matters
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction, or credit, by the IRS in a unified
administrative proceeding.
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Tax Status as a Grantor Trust
General. As further specified in the related Prospectus Supplement, if a
REMIC election is not made and the Trust Fund is not structured as a
partnership, then, in the opinion of Tax Counsel, the Trust Fund relating to a
Series of Securities will be classified for federal income tax purposes as a
grantor trust under Subpart E, Part 1 of Subchapter J of the Code and not as an
association taxable as a corporation (the Securities of such Series,
"Pass-Through Securities"). In some Series there will be no separation of the
principal and interest payments on the Loans. In such circumstances, a Holder
will be considered to have purchased a pro rata undivided interest in each of
the Loans. In other cases ("Stripped Securities"), sale of the Securities will
produce a separation in the ownership of all or a portion of the principal
payments from all or a portion of the interest payments on the Loans.
In the opinion of Tax Counsel, each Holder must report on its federal
income tax return its share of the gross income derived from the Loans (not
reduced by the amount payable as fees to the applicable Trustee and the Servicer
and similar fees (collectively, the "Servicing Fee")), at the same time and in
the same manner as such items would have been reported under the Holder's tax
accounting method had it held its interest in the Loans directly, received
directly its share of the amounts received with respect to the Loans, and paid
directly its share of the Servicing Fees. In the case of Pass-Through Securities
other than Stripped Securities, such income will consist of a pro rata share of
all of the income derived from all of the Loans and, in the case of Stripped
Securities, such income will consist of a pro rata share of the income derived
from each stripped bond or stripped coupon in which the Holder owns an interest.
The Holder of a Security will generally be entitled to deduct such Servicing
Fees under Section 162 or Section 212 of the Code to the extent that such
Servicing Fees represent "reasonable" compensation for the services rendered by
the applicable Trustee and the Servicer (or third parties that are compensated
for the performance of services). In the case of a noncorporate Holder, however,
Servicing Fees (to the extent not otherwise disallowed, e.g., because they
exceed reasonable compensation) will be deductible in computing such Holder's
regular tax liability only to the extent that such fees, when added to other
miscellaneous itemized deductions, exceed 2% of adjusted gross income and may
not be deductible to any extent in computing such Holder's alternative minimum
tax liability. In addition, for taxable years beginning after December 31, 1990,
the amount of itemized deductions otherwise allowable for the taxable year for
an individual whose adjusted gross income exceeds the applicable amount (which
amount will be adjusted for inflation in taxable years beginning after 1990)
will be reduced by the lesser of (i) 3% of the excess of adjusted gross income
over the applicable amount or (ii) 80% of the amount of itemized deductions
otherwise allowable for such taxable year.
Discount or Premium on Pass-Through Securities. In the opinion of Tax
Counsel, the Holder's purchase price of a Pass-Through Security is to be
allocated among the Loans in proportion to their fair market values, determined
as of the time of purchase of the Securities. In the typical case, the Trustee
(to the extent necessary to fulfill its reporting obligations) will treat each
Loan as having a fair market value proportional to the share of the aggregate
Principal Balances of all of the Loans that it represents, since the Securities,
unless otherwise specified in the related Prospectus Supplement, will have a
relatively uniform interest rate and other common characteristics. To the extent
that the portion of the purchase price of a Pass-Through Security allocated to a
Loan (other than to a right to receive any accrued interest thereon and any
undistributed principal payments) is less than or greater than the portion of
the Principal Balance of the Loan allocable to the Security, the interest in the
Loan allocable to the Pass-Through Security will be deemed to have been acquired
at a discount or premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Loan with OID in excess of a
prescribed de minimis amount or a Stripped Security, a Holder of a Security will
be required to report as interest income in each taxable year its share of the
amount of OID that accrues during that year in the manner described above. OID
with respect to a
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Loan could arise, for example, by virtue of the financing of points by the
originator of the Loan, or by virtue of the charging of points by the originator
of the Loan in an amount greater than a statutory de minimis exception, in
circumstances under which the points are not currently deductible pursuant to
applicable Code provisions. Any market discount or premium on a Loan will be
includible in income, generally in the manner described above, except that in
the case of Pass-Through Securities, market discount is calculated with respect
to the Loans underlying the Certificate, rather than with respect to the
Security. A Holder that acquires an interest in a Loan originated after July 18,
1984 with more than a de minimis amount of market discount (generally, the
excess of the principal amount of the Loan over the purchaser's allocable
purchase price) will be required to include accrued market discount in income in
the manner set forth above. See "--Taxation of Debt Securities; Market Discount"
and "--Premium" above.
In the case of market discount on a Pass-Through Security attributable to
Loans originated on or before July 18, 1984, the Holder generally will be
required to allocate the portion of such discount that is allocable to a loan
among the principal payments on the Loan and to include the discount allocable
to each principal payment in ordinary income at the time such principal payment
is made. Such treatment would generally result in discount being included in
income at a slower rate than discount would be required to be included in income
using the method described in the preceding paragraph.
Stripped Securities. A Stripped Security may represent a right to receive
only a portion of the interest payments on the Loans, a right to receive only
principal payments on the Loans, or a right to receive certain payments of both
interest and principal. Certain Stripped Securities ("Ratio Strip Securities")
may represent a right to receive differing percentages of both the interest and
principal on each Loan. Pursuant to Section 1286 of the Code, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from ownership of the right to receive some or all of the principal
payments results in the creation of "stripped bonds" with respect to principal
payments and "stripped coupons" with respect to interest payments. Section 1286
of the Code applies the OID rules to stripped bonds and stripped coupons. For
purposes of computing original issue discount, a stripped bond or a stripped
coupon is treated as a debt instrument issued on the date that such stripped
interest is purchased with an issue price equal to its purchase price or, if
more than one stripped interest is purchased, the ratable share of the purchase
price allocable to such stripped interest.
Servicing fees in excess of reasonable servicing fees (the "excess
servicing fee") will be treated under the stripped bond rules. If the excess
servicing fee is less than 100 basis points (i.e., 1% interest on the Loan's
Principal Balance) or the Securities are initially sold with a de minimis
discount (assuming no prepayment assumption is required), any non-de minimis
discount arising from a subsequent transfer of the Securities should be treated
as market discount. The IRS appears to require that reasonable servicing fees be
calculated on a Loan by Loan basis, which could result in some Loans being
treated as having more than 100 basis points of interest stripped off.
The Code, OID Regulations and judicial decisions provide no direct guidance
as to how the interest and original issue discount rules are to apply to
Stripped Securities and other Pass-Through Securities. Under the method
described above for Pay-Through Securities (the "Cash Flow Bond Method"), a
prepayment assumption is used and periodic recalculations are made that take
into account with respect to each accrual period the effect of prepayments
during such period. However, the 1986 Act does not, absent Treasury regulations,
appear specifically to cover instruments such as the Stripped Securities, which
technically represent ownership interests in the underlying Loans, rather than
being debt instruments "secured by" those loans. Nevertheless, it is believed
that the Cash Flow Bond Method is a reasonable method of reporting income for
such Securities, and it is expected that OID will be reported on that basis
unless otherwise specified in the related Prospectus Supplement. In applying the
calculation to Pass-Through Securities, the Trustee will treat all payments to
be received by a Holder with respect to the
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underlying Loans as payments on a single installment obligation. The IRS could,
however, assert that original issue discount must be calculated separately for
each Loan underlying a Security.
Under certain circumstances, if the Loans prepay at a rate faster than the
Prepayment Assumption, the use of the Cash Flow Bond Method may accelerate a
Holder's recognition of income. If, however, the Loans prepay at a rate slower
than the Prepayment Assumption, in some circumstances the use of this method may
decelerate a Holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted Security,
the applicable Trustee intends, absent contrary authority, to report income to
Holders as OID, in the manner described above for Interest Weighted Securities.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the Internal Revenue
Service could contend that (i) in certain Series, each non-Interest Weighted
Security is composed of an unstripped undivided ownership interest in Loans and
an installment obligation consisting of stripped principal payments; (ii) the
non-Interest Weighted Securities are subject to the contingent payment
provisions of the Proposed Regulations; or (iii) each Interest Weighted Stripped
Security is composed of an unstripped undivided ownership interest in Loans and
an installment obligation consisting of stripped interest payments.
Given the variety of alternatives for treatment of the Stripped Securities
and the different federal income tax consequences that result from each
alternative, potential purchasers are urged to consult their own tax advisers
regarding the proper treatment of the Securities for federal income tax
purposes.
Character as Qualifying Loans. In the case of Stripped Securities, there is
no specific legal authority existing regarding whether the character of the
Securities, for federal income tax purposes, will be the same as the Loans. The
IRS could take the position that the Loans character is not carried over to the
Securities in such circumstances. Pass-Through Securities will be, and, although
the matter is not free from doubt, Stripped Securities should be considered to
represent "real estate assets" within the meaning of Section 856(c)(4)(A) of the
Code, and "loans secured by an interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code; and interest income attributable to the
Securities should be considered to represent "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of Section 856(c)(3)(B) of the Code. Reserves or funds underlying the Securities
may cause a proportionate reduction in the above-described qualifying status
categories of Securities.
Sale or Exchange
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, in the opinion of Tax Counsel, a Holder's tax
basis in its Security is the price such Holder pays for a Security, plus amounts
of original issue or market discount included in income and reduced by any
payments received (other than qualified stated interest payments) and any
amortized premium. Gain or loss recognized on a sale, exchange, or redemption of
a Security, measured by the difference between the amount realized and the
Security's basis as so adjusted, will generally be capital gain or loss,
assuming that the Security is held as a capital asset and will generally be
long-term capital gain or loss if the holding period of the Security is one year
or more and short-term capital gain or loss if the holding period of the
Security is less than one year. Non-corporate taxpayers are subject to reduced
maximum rates on long-term capital gains and are generally subject to tax at
ordinary income rates on short-term capital gains. The deductibility of capital
losses is subject to certain limitations. Prospective investors should consult
their own tax advisors concerning these tax law provisions.
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In the case of a Security held by a bank, thrift, or similar institution
described in Section 582 of the Code, however, gain or loss realized on the sale
or exchange of a Regular Interest Security will be taxable as ordinary income or
loss. In addition, gain from the disposition of a Regular Interest Security that
might otherwise be capital gain will be treated as ordinary income to the extent
of the excess, if any, of (i) the amount that would have been includible in the
Holder's income if the yield on such Regular Interest Security had equaled 110%
of the applicable federal rate as of the beginning of such Holder's holding
period, over the amount of ordinary income actually recognized by the Holder
with respect to such Regular Interest Security.
Miscellaneous Tax Aspects
Backup Withholding. Subject to the discussion below with respect to Trust
Funds as to which a partnership election is made, a Holder, other than a Holder
of a REMIC Residual Security, may, under certain circumstances, be subject to
"backup withholding" at a rate of 31% with respect to distributions or the
proceeds of a sale of certificates to or through brokers that represent interest
or original issue discount on the Securities. This withholding generally applies
if the Holder of a Security (i) fails to furnish the applicable Trustee with its
taxpayer identification number (the "TIN"); (ii) furnishes the applicable
Trustee an incorrect TIN; (iii) fails to report properly interest, dividends or
other "reportable payments" as defined in the Code; or (iv) under certain
circumstances, fails to provide the applicable Trustee or such Holder's
securities broker with a certified statement, signed under penalty of perjury,
that the TIN provided is its correct number and that the Holder is not subject
to backup withholding. Backup withholding will not apply, however, with respect
to certain payments made to Holders, including payments to certain exempt
recipients (such as exempt organizations) and to certain Nonresidents (as
defined below). Holders should consult their tax advisers as to their
qualification for exemption from backup withholding and the procedure for
obtaining the exemption.
The applicable Trustee will report to the Holders and to the Servicer for
each calendar year the amount of any "reportable payments" during such year and
the amount of tax withheld, if any, with respect to payments on the Securities.
New Withholding Regulations
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations"), which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New Regulations
attempt to unify certification requirements and modify reliance standards. The
New Regulations will generally be effective for payments made after December 31,
1999, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
Tax Treatment of Foreign Investors
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, under the Code, unless interest (including OID)
paid on a Security (other than a Residual Interest Security) is considered to be
"effectively connected" with a trade or business conducted in the United States
by a nonresident alien individual, foreign partnership or foreign corporation
("Nonresidents"), in the opinion of Tax Counsel, such interest will normally
qualify as portfolio interest (except where (i) the recipient is a holder,
directly or by attribution, of 10% or more of the capital or profits interest in
the issuer, or (ii) the recipient is a controlled foreign corporation to which
the issuer is a related person) and will be exempt from federal income tax. Upon
receipt of appropriate ownership statements, the issuer normally will be
relieved of obligations to withhold tax from such interest payments. These
provisions supersede the generally applicable provisions of United States law
that would otherwise require the issuer
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to withhold at a 30% rate (unless such rate were reduced or eliminated by an
applicable tax treaty) on, among other things, interest and other fixed or
determinable, annual or periodic income paid to Nonresidents. Holders of
Pass-Through Securities and Stripped Securities, including Ratio Strip
Securities, however, may be subject to withholding to the extent that the Loans
were originated on or before July 18, 1984.
Interest and OID of Holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the Holder. They will, however, generally be subject to the regular
United States income tax.
Payments to Holders of Residual Interest Securities who are foreign persons
will generally be treated as interest for purposes of the 30% (or lower treaty
rate) United States withholding tax. Holders should assume that such income does
not qualify for exemption from United States withholding tax as "portfolio
interest." It is clear that, to the extent that a payment represents a portion
of REMIC taxable income that constitutes excess inclusion income, a Holder of a
Residual Interest Security will not be entitled to an exemption from or
reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed
(or when the Residual Interest Security is disposed of). The Treasury has
statutory authority, however, to promulgate regulations that would require such
amounts to be taken into account at an earlier time in order to prevent the
avoidance of tax. Such regulations could, for example, require withholding prior
to the distribution of cash in the case of Residual Interest Securities that do
not have significant value. Under the REMIC Regulations, if a Residual Interest
Security has tax avoidance potential, a transfer of a Residual Interest Security
to a Nonresident will be disregarded for all federal tax purposes. A Residual
Interest Security has tax avoidance potential unless, at the time of the
transfer the transferor reasonably expects that the REMIC will distribute to the
transferee residual interest Holder amounts that will equal at least 30% of each
excess inclusion, and that such amounts will be distributed at or after the time
at which the excess inclusions accrue and not later than the calendar year
following the calendar year of accrual. If a Nonresident transfers a Residual
Interest Security to a United States person, and if the transfer has the effect
of allowing the transferor to avoid tax on accrued excess inclusions, then the
transfer is disregarded and the transferor continues to be treated as the owner
of the Residual Interest Security for purposes of the withholding tax provisions
of the Code. See "--Excess Inclusions."
Tax Characterization of the Trust Fund as a Partnership
Tax Counsel is of the opinion that a Trust Fund structured as a partnership
will not be an association (or publicly traded partnership) taxable as a
corporation for federal income tax purposes. This opinion is based on the
assumption that the terms of the Trust Agreement and related documents will be
complied with, and on counsel's conclusions that the nature of the income of the
Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the Certificates has
been structured as a private placement under an IRS safe harbor, so that the
Trust Fund will not be characterized as a publicly traded partnership taxable as
a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, in the opinion of Tax Counsel, the Trust Fund would be subject to
corporate income tax on its taxable income. The Trust Fund's taxable income
would include all its income, possibly reduced by its interest expense on the
Notes. Any such corporate income tax could materially reduce cash available to
make payments on the Notes and distributions on the Certificates, and
Certificateholders could be liable for any such tax that is unpaid by the Trust
Fund.
Tax Consequences to Holders of the Notes
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Treatment of the Notes as Indebtedness. The Trust Fund will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. In such a circumstance, Tax Counsel is, except
as otherwise provided in the related Prospectus Supplement, of the opinion that
the Notes will be classified as debt for federal income tax purposes. The
discussion below assumes this characterization of the Notes is correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities or Strip Notes. Moreover, the discussion assumes that the
interest formula for the Notes meets the requirements for "qualified stated
interest" under the OID Regulations, and that any OID on the Notes (i.e., any
excess of the principal amount of the Notes over their issue price) does not
exceed a de minimis amount (i.e., 0.25% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID regulations. If these conditions are not satisfied with respect to any given
series of Notes, additional tax considerations with respect to such Notes will
be disclosed in the applicable Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, in the opinion of Tax Counsel, the Notes
will not be considered issued with OID. The stated interest thereon will be
taxable to a Noteholder as ordinary interest income when received or accrued in
accordance with such Noteholder's method of tax accounting. Under the OID
Regulations, a Holder of a Note issued with a de minimis amount of OID must
include such OID in income, on a pro rata basis, as principal payments are made
on the Note. It is believed that any prepayment premium paid as a result of a
mandatory redemption will be taxable as contingent interest when it becomes
fixed and unconditionally payable. A purchaser who buys a Note for more or less
than its principal amount will generally be subject, respectively, to the
premium amortization or market discount rules of the Code.
A Holder of a Note that has a fixed maturity date of not more than one year
from the issue date of such Note (a "Short-Term Note") may be subject to special
rules. An accrual basis Holder of a Short-Term Note (and certain cash method
Holders, including regulated investment companies, as set forth in Section 1281
of the Code) generally would be required to report interest income as interest
accrues on a straight-line basis over the term of each interest period. Other
cash basis Holders of a Short-Term Note would, in general, be required to report
interest income as interest is paid (or, if earlier, upon the taxable
disposition of the Short-Term Note). However, a cash basis Holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
Sale or Other Disposition. In the opinion of Tax Counsel, if a Noteholder
sells a Note, the Holder will recognize gain or loss in an amount equal to the
difference between the amount realized on the sale and the Holder's adjusted tax
basis in the Note. The adjusted tax basis of a Note to a particular Noteholder
will equal the Holder's cost for the Note, increased by any market discount,
acquisition discount, OID and gain previously included by such Noteholder in
income with respect to the Note and decreased by the amount of bond premium (if
any) previously amortized and by the amount of principal payments previously
received by such Noteholder with respect to such Note. Any such gain or loss
will be capital gain or loss if the Note was held as a capital asset, except for
gain representing accrued interest and accrued market discount not previously
included in income. Capital losses generally may be used only to offset capital
gains.
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Foreign Holders. In the opinion of Tax Counsel, interest payments made (or
accrued) to a Noteholder who is a nonresident alien, foreign corporation or
other non-United States person (a "foreign person") generally will be considered
"portfolio interest," and generally will not be subject to United States federal
income tax and withholding tax, if the interest is not effectively connected
with the conduct of a trade or business within the United States by the foreign
person and the foreign person (i) is not actually or constructively a "10
percent shareholder" of the Trust Fund or the Seller (including a Holder of 10%
of the outstanding Certificates) or a "controlled foreign corporation" with
respect to which the Trust Fund or the Seller is a "related person" within the
meaning of the Code and (ii) provides the Trustee or other person who is
otherwise required to withhold U.S. tax with respect to the Notes with an
appropriate statement (on Form W-8 or a similar form), signed under penalties of
perjury, certifying that the beneficial owner of the Note is a foreign person
and providing the foreign person's name and address. If a Note is held through a
securities clearing organization or certain other financial institutions, the
organization or institution may provide the relevant signed statement to the
withholding agent; in that case, however, the signed statement must be
accompanied by a Form W-8 or substitute form provided by the foreign person that
owns the Note. If such interest is not portfolio interest, then it will be
subject to United States federal income and withholding tax at a rate of 30
percent, unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax; provided, that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each Holder of a Note (other than an exempt Holder such
as a corporation, tax-exempt organization, qualified pension and profit-sharing
trust, individual retirement account or nonresident alien who provides
certification as to status as a nonresident) will be required to provide, under
penalties of perjury, a certificate containing the Holder's name, address,
correct federal taxpayer identification number and a statement that the Holder
is not subject to backup withholding. Should a nonexempt Noteholder fail to
provide the required certification, the Trust Fund will be required to withhold
31 percent of the amount otherwise payable to the Holder, and remit the withheld
amount to the IRS as a credit against the Holder's federal income tax liability.
The New Regulations described herein make certain modifications to the
backup withholding and information reporting rules. The New Regulations
generally will be effective for payments made after December 31, 1999, subject
to certain transition rules. Prospective investors are urged to consult their
own tax advisors regarding the New Regulations.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of Tax Counsel, the IRS successfully asserted that one or more of the Notes did
not represent debt for federal income tax purposes, the Notes might be treated
as equity interests in the Trust Fund. If so treated, the Trust Fund might be
taxable as a corporation with the adverse consequences described above (and the
taxable corporation would not be able to reduce its taxable income by deductions
for interest expense on Notes recharacterized as equity). Alternatively, and
most likely in the view of Tax Counsel, the Trust Fund might be treated as a
publicly traded partnership that would not be taxable as a corporation because
it would meet certain qualifying income tests. Nonetheless, treatment of the
Notes as equity interests in such a publicly traded partnership could have
adverse tax consequences to certain Holders. For example, income to certain
tax-exempt entities (including pension funds) would be "unrelated business
taxable income," income to foreign Holders generally would be subject to U.S.
tax and U.S. tax return filing and withholding requirements, and individual
Holders might be subject to certain limitations on their ability to deduct their
share of the Trust Fund's expenses.
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Tax Consequences to Holders of the Certificates
Treatment of the Trust Fund as a Partnership. The Trust Fund and the
Servicer will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust Fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
Trust Fund, the partners of the partnership being the Certificateholders, and
the Notes being debt of the partnership. However, the proper characterization of
the arrangement involving the Trust Fund, the Certificates, the Notes, the Trust
Fund and the Servicer is not clear because there is no authority on transactions
closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all payments
on the Certificates are denominated in U.S. dollars, none of the Certificates
are Indexed Securities or Strip Certificates, and that a Series of Securities
includes a single Class of Certificates. If these conditions are not satisfied
with respect to any given Series of Certificates, additional tax considerations
with respect to such Certificates will be disclosed in the applicable Prospectus
Supplement.
Partnership Taxation. If the Trust Fund is a partnership, in the opinion of
Tax Counsel, the Trust Fund will not be subject to federal income tax. Rather,
in the opinion of Tax Counsel, each Certificateholder will be required to
separately take into account such Holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Loans (including
appropriate adjustments for market discount, OID and bond premium) and any gain
upon collection or disposition of Loans. The Trust Fund's deductions will
consist primarily of interest accruing with respect to the Notes, servicing and
other fees, and losses or deductions upon collection or disposition of Loans.
In the opinion of Tax Counsel, the tax items of a partnership are allocable
to the partners in accordance with the Code, Treasury regulations and the
partnership agreement (here, the Trust Agreement and related documents). The
Trust Agreement will provide, in general, that the Certificateholders will be
allocated taxable income of the Trust Fund for each month equal to the sum of
(i) the interest that accrues on the Certificates in accordance with their terms
for such month, including interest accruing at the Pass-Through Rate for such
month and interest on amounts previously due on the Certificates but not yet
distributed; (ii) any Trust Fund income attributable to discount on the Loans
that corresponds to any excess of the principal amount of the Certificates over
their initial issue price (iii) prepayment premium payable to the
Certificateholders for such month; and (iv) any other amounts of income payable
to the Certificateholders for such month. Such allocation will be reduced by any
amortization by the Trust Fund of premium on Loans that corresponds to any
excess of the issue price of Certificates over their principal amount. All
remaining taxable income of the Trust Fund will be allocated to the Depositor.
Based on the economic arrangement of the parties, in the opinion of Tax Counsel,
this approach for allocating Trust Fund income should be permissible under
applicable Treasury regulations, although no assurance can be given that the IRS
would not require a greater amount of income to be allocated to
Certificateholders. Moreover, in the opinion of Tax Counsel, even under the
foregoing method of allocation, Certificateholders may be allocated income equal
to the entire Pass-Through Rate plus the other items described above even though
the Trust Fund might not have sufficient cash to make current cash distributions
of such amount. Thus, cash basis Holders will in effect be required to report
income from
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the Certificates on the accrual basis and Certificateholders may become liable
for taxes on Trust Fund income even if they have not received cash from the
Trust Fund to pay such taxes. In addition, because tax allocations and tax
reporting will be done on a uniform basis for all Certificateholders but
Certificateholders may be purchasing Certificates at different times and at
different prices, Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to them
by the Trust Fund.
In the opinion of Tax Counsel, all of the taxable income allocated to a
Certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
Holder under the Code.
In the opinion of Tax Counsel, an individual taxpayer's share of expenses
of the Trust Fund (including fees to the Servicer but not interest expense)
would be miscellaneous itemized deductions. Such deductions might be disallowed
to the individual in whole or in part and might result in such Holder being
taxed on an amount of income that exceeds the amount of cash actually
distributed to such Holder over the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Loan, the Trust Fund
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Loans were not issued with
OID, and, therefore, the Trust Fund should not have OID income. However, the
purchase price paid by the Trust Fund for the Loans may be greater or less than
the remaining Principal Balance of the Loans at the time of purchase. If so, in
the opinion of Tax Counsel, the Loan will have been acquired at a premium or
discount, as the case may be. (As indicated above, the Trust Fund will make this
calculation on an aggregate basis, but might be required to recompute it on a
Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium, the
Trust Fund will elect to include any such discount in income currently as it
accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
Section 708 Termination. In the opinion of Tax Counsel, under Section 708
of the Code, the Trust Fund will be deemed to terminate for federal income tax
purposes if 50% or more of the capital and profits interests in the Trust Fund
are sold or exchanged within a 12-month period. Pursuant to final Treasury
regulations issued May 9, 1997 under Section 708 of the Code, if such a
termination occurs, the Trust Fund (the "old partnership") would be deemed to
contribute its assets to a new partnership (the "new partnership") in exchange
for interests in the new partnership. Such interests would be deemed distributed
to the partners of the old partnership in liquidation thereof, which would not
constitute a sale or exchange.
Disposition of Certificates. Generally, in the opinion of Tax Counsel,
capital gain or loss will be recognized on a sale of Certificates in an amount
equal to the difference between the amount realized and the seller's tax basis
in the Certificates sold. A Certificateholder's tax basis in a Certificate will
generally equal the Holder's cost increased by the Holder's share of Trust Fund
income (includible in income) and decreased by any distributions received with
respect to such Certificate. In addition, both the tax basis in the Certificates
and the amount realized on a sale of a Certificate would include the Holder's
share of the Notes and other liabilities of the Trust Fund. A Holder acquiring
Certificates at different prices may be
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required to maintain a single aggregate adjusted tax basis in such Certificates,
and, upon sale or other disposition of some of the Certificates, allocate a
portion of such aggregate tax basis to the Certificates sold (rather than
maintaining a separate tax basis in each Certificate for purposes of computing
gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the Holder's share of
unrecognized accrued market discount on the Loans would generally be treated as
ordinary income to the Holder and would give rise to special tax reporting
requirements. The Trust Fund does not expect to have any other assets that would
give rise to such special reporting requirements. Thus, to avoid those special
reporting requirements, the Trust Fund will elect to include market discount in
income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a Holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust Fund were to file an election under
Section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the Trust Fund will not make such
election. As a result, Certificateholders might be allocated a greater or lesser
amount of Trust Fund income than would be appropriate based on their own
purchase price for Certificates.
Administrative Matters. The Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust Fund will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust Fund and will report each Certificateholder's allocable share of items of
Trust Fund income and expense to Holders and the IRS on Schedule K-1. The Trust
Fund will provide the Schedule K-l information to nominees that fail to provide
the Trust Fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
Certificates. Generally, Holders must file tax returns that are consistent with
the information return filed by the Trust Fund or be subject to penalties unless
the Holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
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address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (a) the name, address and identification number of such person,
(b) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization or any wholly owned agency or
instrumentality of either of the foregoing, and (c) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund information
as to themselves and their ownership of Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Trust Fund. The information referred to above
for any calendar year must be furnished to the Trust Fund on or before the
following January 31. Nominees, brokers and financial institutions that fail to
provide the Trust Fund with the information described above may be subject to
penalties.
The Depositor will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the Certificateholders, and,
under certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the Trust Fund. An
adjustment could also result in an audit of a Certificateholder's returns and
adjustments of items not related to the income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether the
Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a failure
to withhold. The Trust Fund expects to withhold on the portion of its taxable
income that is allocable to foreign Certificateholders pursuant to Section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign Holders that are taxable as corporations
and 39.6% for all other foreign Holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the Trust Fund to change its withholding procedures. In determining a Holder's
withholding status, the Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the
Holder's certification of nonforeign status signed under penalties of perjury.
Each foreign Holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Trust Fund's income. Each foreign Holder must
obtain a taxpayer identification number from the IRS and submit that number to
the Trust Fund on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign Holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the Trust Fund taking the
position that no taxes were due because the Trust Fund was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a
Certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Trust Fund. If these interest payments are properly
characterized as guaranteed payments, then the interest will not be considered
"portfolio interest." As a result, Certificateholders will be subject to United
States federal income tax and withholding tax at a rate of 30 percent, unless
reduced or eliminated pursuant to an applicable treaty. In such case, a foreign
Holder would only be entitled to claim a refund for that portion of the taxes in
excess of the taxes that should be withheld with respect to the guaranteed
payments.
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Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the Holder is an exempt recipient under
applicable provisions of the Code. The New Regulations described herein make
certain modifications to the backup withholding and information reporting rules.
The New Regulations will generally be effective for payments made after December
31, 1999, subject to certain transition rules. Prospective investors are urged
to consult their own tax advisors regarding the New Regulations.
STATE TAX CONSIDERATIONS
In addition to the federal income tax considerations described in "Certain
Federal Income Tax Considerations," potential investors should consider the
state and local income tax consequences of the acquisition, ownership, and
disposition of the Securities. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in the
Securities.
FASIT SECURITIES
General. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory vehicle
for the issuance of mortgage-backed and asset-backed securities ("FASIT
Securities"). Although the FASIT provisions of the Code became effective on
September 1, 1997, no Treasury regulations or other administrative guidance has
been issued with respect to those provisions. Accordingly, definitive guidance
cannot be provided with respect to many aspects of the tax treatment of Holders
of FASIT Securities. Investors also should note that the FASIT discussions
contained herein constitutes only a summary of the federal income tax
consequences to Holders of FASIT Securities. With respect to each Series of
FASIT Securities, the related Prospectus Supplement will provide a detailed
discussion regarding the federal income tax consequences associated with the
particular transaction.
FASIT Securities will be classified as either FASIT Regular Securities,
which generally will be treated as debt for federal income tax purposes, or
FASIT Ownership Securities, which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect to
the taxable income or loss of the related Series. The Prospectus Supplement for
each Series of Securities will indicate whether one or more FASIT elections will
be made for such Series, and which Securities of such Series will be designated
as Regular Securities, and which, if any, will be designated as Ownership
Securities.
Qualification as a FASIT. The Trust Fund underlying a Series (or one or
more designated pools of assets held in the Trust Fund) will qualify under the
Code as a FASIT in which the FASIT Regular Securities and the FASIT Ownership
Securities will constitute the "regular interests" and the "ownership
interests," respectively, if (i) a FASIT election is in effect, (ii) certain
tests concerning (a) the composition of the FASIT's assets and (b) the nature of
the Holders' interest in the FASIT are met on a continuing basis and (iii) the
Trust Fund is not a regulated company as defined in Section 851(a) of the Code.
Asset Composition. In order for a Trust Fund (on one or more designated
pools of assets held by a Trust Fund) to be eligible for FASIT status,
substantially all of the assets of the Trust Fund (or the designated pool) must
consist of "permitted assets" as of the close of the third month beginning after
the Closing Date and at all times thereafter (the "FASIT Qualification Test").
Permitted assets include (i) cash or cash equivalents, (ii) debt instruments
with fixed terms that would qualify as REMIC regular
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interests if issued by a REMIC (generally, instruments that provide for interest
at a fixed rate, a qualifying variable rate, or a qualifying interest-only
("IO") type rate, (iii) foreclosure property, (iv) certain hedging instruments
(generally, interest and currency rate swaps and credit enhancement contracts)
that are reasonably required to guarantee or hedge against the FASIT's risks
associated with being the obligor on FASIT interests, (v) contract rights to
acquire qualifying debt instruments or qualifying hedging instruments, (vi)
FASIT regular interests and (vii) REMIC regular interests. Permitted assets do
not include any debt instruments issued by the Holder of the FASIT's ownership
interest or by any person related to such Holder.
Interests in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT also must meet certain requirements. All
of the interests in a FASIT must belong to either of the following: (i) one or
more Classes of regular interests or (ii) a single Class of ownership interest
that is held by a fully taxable domestic corporation. In the case of Series that
include FASIT Ownership Securities, the ownership interest will be represented
by the FASIT Ownership Securities.
A FASIT interest generally qualifies as a regular interest if (i) it is
designated as a regular interest, (ii) it has a stated maturity no greater than
thirty years, (iii) it entitles its Holder to a specified principal amount, (iv)
the issue price of the interest does not exceed 125% of its stated principal
amount, (v) the yield to maturity of the interest is less than the applicable
Treasury rate published by the IRS plus 5% and (vi) if it pays interest, such
interest is payable at either (a) a fixed rate with respect to the principal
amount of the regular interest or (b) a permissible variable rate with respect
to such principal amount. Permissible variable rates for FASIT regular interests
are the same as those for REMIC regular interest (i.e., certain qualified
floating rates and weighted average rates). See "Certain Federal Income Tax
Considerations--Taxation of Debt Securities--Variable Rate Debt Securities."
If a FASIT Security fails to meet one or more of the requirements set out
in clauses (iii), (iv) or (v) above, but otherwise meets the above requirements,
it may still qualify as a type of regular interest known as a "High-Yield
Interest." In addition, if a FASIT Security fails to meet the requirements of
clause (vi), but the interest payable on the Security consists of a specified
portion of the interest payments on permitted assets and that portion does not
vary over the life of the Security, the Security also will qualify as a
High-Yield Interest. A High-Yield Interest may be held only by domestic
corporations that are fully subject to corporate income tax ("Eligible
Corporations"), other FASITs and dealers in securities who acquire such
interests as inventory, rather than for investment. In addition, Holders of
High-Yield Interests are subject to limitations on offset of income derived from
such interest. See "Certain Federal Income Tax Considerations--FASIT
Securities--Tax Treatment of FASIT Regular Securities--Treatment of High-Yield
Interests."
Consequences of Disqualification. If a Series of FASIT Securities fails to
comply with one or more of the Code's ongoing requirements for FASIT status
during any taxable year, the Code provides that its FASIT status may be lost for
that year and thereafter. If FASIT status is lost, the treatment of the former
FASIT and the interests therein for federal income tax purposes is uncertain.
The former FASIT might be treated as a grantor trust, as a separate association
taxed as a corporation, or as a partnership. The FASIT Regular Securities could
be treated as debt instruments for federal income tax purposes or as equity
interests. Although the Code authorizes the Treasury to issue regulations that
address situations where a failure to meet the requirements for FASIT status
occurs inadvertently and in good faith, such regulations have not yet been
issued. It is possible that disqualification relief might be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of the
FASIT's income for a period of time in which the requirements for FASIT status
are not satisfied.
Tax Treatment of FASIT Regular Securities. Payments received by Holders of
FASIT Regular Securities generally should be accorded the same tax treatment
under the Code as payments received on
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other taxable corporate debt instruments and on REMIC Regular Securities. As in
the case of Holders of REMIC Regular Securities, Holders of FASIT Regular
Securities must report income from such Securities under an accrual method of
accounting, even if they otherwise would have used the case receipts and
disbursements method. Except in the case of FASIT Regular Securities issued with
original issue discount or acquired with market discount or premium, interest
paid or accrued on a FASIT Regular Security generally will be treated as
ordinary income to the Holder and a principal payment on such Security will be
treated as a return of capital to the extent that the Holder's basis is
allocable to that payment. FASIT Regular Securities issued with original issue
discount or acquired with market discount or premium generally will treat
interest and principal payments on such Securities in the same manner described
for REMIC Regular Securities. See "Certain Federal Income Tax
Considerations--Taxation of Debt Securities," "--Market Discount," and
"--Premium" above. High-Yield Securities may be held only by fully taxable
domestic corporations, other FASITs, and certain securities dealers. Holders of
High-Yield Securities are subject to limitations on their ability to use current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from those Securities.
If a FASIT Regular Security is sold or exchanged, the Holder generally will
recognize gain or loss upon the sale in the manner described above for REMIC
Regular Securities. See "Certain Federal Income Tax Considerations--Sale or
Exchange." In addition, if a FASIT Regular Security becomes wholly or partially
worthless as a result of Default and Delinquencies of the underlying assets, the
Holder of such Security should be allowed to deduct the loss sustained (or
alternatively be able to report a lesser amount of income). See "Certain Federal
Income Tax Considerations--Taxation of Debt Instruments--Effects of Default and
Delinquencies."
FASIT Regular Securities held by a REIT will qualify as "real estate
assets" within the meaning of section 856(c)(4)(A) of the Code, and interest on
such Securities will be considered Qualifying REIT Interest to the same extent
that REMIC Securities would be so considered. FASIT Regular Securities held by a
Thrift Institution taxed as a "domestic building and loan association" will
represent qualifying assets for purposes of the qualification requirements set
forth in Code Section 7701(a)(19) to the same extent that REMIC Securities would
be so considered. See "Certain Federal Income Tax Considerations--Taxation of
Debt Securities--Status as Real Property Loans." In addition, FASIT Regular
Securities held by a financial institution to which Section 585 of the Code
applies will be treated as evidences of indebtedness for purposes of Section
582(c)(1) of the Code. FASIT Securities will not qualify as "Government
Securities" for either REIT or RIC qualification purposes.
Treatment of High-Yield Interests. High-Yield Interests are subject to
special rules regarding the eligibility of Holders of such interests, and the
ability of such Holders to offset income derived from their FASIT Security with
losses. High-Yield Interests may be held only by Eligible Corporations other
FASITs, and dealers in securities who acquire such interests as inventory. If a
securities dealer (other than an Eligible Corporation) initially acquires a
High-Yield Interest as inventory, but later begins to hold it for investment,
the dealer will be subject to an excise tax equal to the income from the
High-Yield Interest multiplied by the highest corporate income tax rate. In
addition, transfers of High-Yield Interests to disqualified Holders will be
disregarded for federal income tax purposes, and the transferor still will be
treated as the Holder of the High-Yield Interest.
The Holder of a High-Yield Interest may not use non-FASIT current losses or
net operating loss carryforwards or carrybacks to offset any income derived from
the High-Yield Interest, for either regular federal income tax purposes or for
alternative minimum tax purposes. In addition, the FASIT provisions contain an
anti-abuse rule that imposes corporate income tax on income derived from a FASIT
Regular Security that is held by a pass-through entity (other than another
FASIT) that issues debt or equity securities backed by the FASIT Regular
Security and that have the same features as High-Yield Interests.
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Tax Treatment of FASIT Ownership Securities. A FASIT Ownership Security
represents the residual equity interest in a FASIT. As such, the Holder of a
FASIT Ownership Security determines its taxable income by taking into account
all assets, liabilities and items of income, gain, deduction, loss and credit of
a FASIT. In general, the character of the income to the Holder of a FASIT
Ownership Interest will be the same as the character of such income of the
FASIT, except that any tax-exempt interest income taken into account by the
Holder of a FASIT Ownership Interest is treated as ordinary income. In
determining that taxable income, the Holder of a FASIT Ownership Security must
determine the amount of interest, original issue discount, market discount and
premium recognized with respect to the FASIT's assets and the FASIT Regular
Securities issued by the FASIT according to a constant yield methodology and
under an accrual method of accounting. In addition, Holders of FASIT Ownership
Securities are subject to the same limitations on their ability to use losses to
offset income from their FASIT Security as are the Holders of High-Yield
Interests. See "Certain Federal Income Tax Considerations--Treatment of
High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Securities. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where,
within six months before or after the disposition, the seller of such Security
acquires any other FASIT Ownership Security or, in the case of a FASIT holding
mortgage assets, any interest in a Taxable Mortgage Pool that is economically
comparable to a FASIT Ownership Security. In addition, if any security that is
sold or contributed to a FASIT by the Holder of the related FASIT Ownership
Security was required to be marked-to-market under Code section 475 by such
Holder, then section 475 will continue to apply to such securities, except that
the amount realized under the mark-to-market rules will be a greater of the
securities' value under present law or the securities' value after applying
special valuation rules contained in the FASIT provisions. Those special
valuation rules generally require that the value of debt instruments that are
not traded on an established securities market be determined by calculating the
present value of the reasonably expected payments under the instrument using a
discount rate of 120% of the applicable federal rate, compounded semiannually.
The Holder of a FASIT Ownership Security will be subject to a tax equal to
100% of the net income derived by the FASIT from any "prohibited transactions."
Prohibited transactions include (i) the receipt of income derived from assets
that are not permitted assets, (ii) certain dispositions of permitted assets,
(iii) the receipt of any income derived from any loan originated by a FASIT and
(iv) in certain cases, the receipt of income representing a servicing fee or
other compensation. Any Series for which a FASIT election is made generally will
be structured in order to avoid application of the prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration. Holders of FASIT
Securities will be subject to backup withholding to the same extent Holders of
REMIC Securities would be subject. See "Certain Federal Income Tax
Considerations--Miscellaneous Tax Aspects--Backup Withholding." For purposes of
reporting and tax administration, Holders of record of FASIT Securities
generally will be treated in the same manner as Holders of REMIC Securities.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO HOLDERS AND
THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO MANY ASPECTS OF THOSE
RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE
TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND DISPOSITION OF THE SECURITIES.
ERISA CONSIDERATIONS
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The following describes certain considerations under ERISA and the Code,
which apply only to Securities of a Series that are not divided into subclasses.
If Securities are divided into subclasses, the related Prospectus Supplement
will contain information concerning considerations relating to ERISA and the
Code that are applicable to such Securities and such subclasses of Securities.
ERISA imposes requirements on employee benefit plans (and on certain other
retirement plans and arrangements, including certain individual retirement
accounts and annuities, Keogh plans and collective investment funds and separate
accounts in which such plans, accounts or arrangements are invested)
(collectively "Plans") subject to ERISA and on persons who are fiduciaries with
respect to such Plans. Generally, ERISA applies to investments made by Plans.
Among other things, ERISA requires that the assets of Plans be held in trust and
that the trustee, or other duly authorized fiduciary, have exclusive authority
and discretion to manage and control the assets of such Plans. ERISA also
imposes certain duties on persons who are fiduciaries of Plans. Under ERISA, any
person who exercises any authority or control respecting the management or
disposition of the assets of a Plan is considered to be a fiduciary of such Plan
(subject to certain exceptions not here relevant). Certain employee benefit
plans, such as governmental plans (as defined in ERISA Section 3(32)) and, if no
election has been made under Section 410(d) of the Code, church plans (as
defined in ERISA Section 3(33)), are not subject to ERISA requirements.
Accordingly, assets of such plans may be invested in Securities without regard
to the ERISA considerations described above and below, subject to the provisions
of applicable state law. Any such plan that is qualified and exempt from
taxation under Code Sections 401(a) and 501(a), however, is subject to the
prohibited transaction rules set forth in Code Section 503.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA and Section 4975 of the Code prohibit a
broad range of transactions involving Plan assets and persons ("Parties in
Interest") having certain specified relationships to a Plan and imposes
additional prohibitions where Parties in Interest are fiduciaries with respect
to such Plan. Certain Parties in Interest that participate in a prohibited
transaction may be subject to an excise tax imposed pursuant to Section 4975 of
the Code, or a penalty imposed pursuant to Section 502(i) of ERISA, unless a
statutory, regulatory or administrative exemption is available.
On November 13, 1986, the United States Department of Labor (the "DOL")
issued final regulations (Labor Reg. Section 2510.3-101) concerning the
definition of what constitutes the assets of a Plan (the "Plan Asset
Regulation"). Under this regulation, the underlying assets and properties of
corporations, partnerships and certain other entities in which a Plan acquires
an "equity" interest could be deemed for purposes of ERISA to be assets of the
investing Plan in certain circumstances.
Under the Plan Asset Regulation, the term "equity" interest is defined as
any interest in an entity other than an instrument that is treated as
indebtedness under "applicable local law" and which has no "substantial equity
features." If the Trust Fund issues Notes that are not treated as equity
interests in the Trust Fund for purposes of the Plan Asset Regulation, a Plan's
investment in such Notes would not cause the assets of the Trust to be deemed
Plan assets. However, the Seller, the Servicer, the Special Servicer, the Backup
Servicer, the Indenture Trustee, the Owner Trustee and the Depositor may be the
sponsor of or investment advisor with respect to one or more Plans. Because such
parties may receive certain benefits in connection with the sale of the Notes,
the purchase of Notes using Plan assets over which any such parties (or any
affiliates thereof) has investment authority might be deemed to be a violation
of the prohibited transaction rules of ERISA and the Code for which no exemption
may be available. Accordingly, Notes may not be purchased using the assets of
any Plan if the Seller, the Servicer, the Special Servicer, the Indenture
Trustee, the Owner Trustee, the Depositor or any of their affiliates (a) has
investment or administrative discretion with respect to such Plan assets; (b)
has authority or responsibility to give, or regularly gives, investment advice
with respect to such Plan assets for a fee and pursuant to an agreement of
understanding that such advice (i) will serve as a primary basis for investment
decisions
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with respect to such Plan assets and (ii) will be based on the particular
investment needs for such Plan; or (c) is an employer maintaining or
contributing to such Plan.
In addition, the Trust Fund, any underwriter, trustee, servicer,
administrator or producer of credit support or their affiliates might be
considered or might become Parties in Interest with respect to a Plan. Also, any
holder of Notes, because of its activities or the activities of its respective
affiliates, may be deemed to be a Party in Interest with respect to certain
Plans, including but not limited to Plans sponsored by such holder. In either
case, the acquisition or holding of Notes by or on behalf of such a Plan could
be considered to give rise to an indirect prohibited transaction within the
meaning of ERISA and the Code, unless it is subject to one or more exemptions
such as: Prohibited Transaction Class Exemption ("PTCE") 84-14, which exempts
certain transactions effected on behalf of a Plan by a "qualified professional
asset manager"; PTCE 90-1, which exempts certain transactions involving
insurance company pooled separate accounts; PTCE 91-38, which exempts certain
transactions involving bank collective investment funds; PTCE 95-60, which
exempts certain transactions involving insurance company general accounts; or
PTCE 96-23, which exempts certain transactions effected on behalf of a Plan by
certain "in-house asset managers." There can be no assurance that any of these
class exemptions will apply with respect to any particular Plan investment in
Notes, or, even if it did apply, that any exemption would apply to all
prohibited transactions that may occur in connection with such an investment.
Each prospective purchaser or transferee of a Note that is a Plan or a person
acting on behalf or investing the assets of a Plan shall be required to
represent (or, with respect to any transfer of a beneficial interest in a Global
Note, shall be deemed to represent) to the Indenture Trustee and the Note
Registrar that the relevant conditions for exemptive relief under at least one
of the foregoing exemptions have been satisfied.
The Plan Asset Regulation provides that, generally, the assets of a
corporation or partnership in which a Plan invests will not be deemed for
purposes of ERISA to be assets of such Plan if the equity interest acquired by
the investing Plan is a publicly-offered security. A publicly-offered security,
as defined in the Plan Asset Regulation, is a security that is widely held,
freely transferable and registered under the Exchange Act.
If no exception under the Plan Asset Regulation applies, then if a Plan (or
a person investing Plan assets, such as an insurance company general account)
acquires an equity interest in the Trust Fund, then the assets of the Trust Fund
would be considered to be assets of the Plan. Because the Loans held by the
Trust Fund may be deemed Plan assets of each Plan that purchases Securities, an
investment in the Securities by a Plan might be a prohibited transaction under
ERISA Sections 406 and 407 and subject to an excise tax under Code Section 4975
and may cause transactions undertaken in the course of operating the Trust Fund
to constitute prohibited transactions, unless a statutory or administrative
exemption applies.
In Prohibited Transaction Class Exemption 83-1 ("PTCE 83-1"), which amended
Prohibited Transaction Class Exemption 81-7, the DOL exempted from ERISA's
prohibited transaction rules certain transactions relating to the operation of
residential mortgage pool investment trusts and the purchase, sale and holding
of "mortgage pool pass-through certificates" in the initial issuance of such
certificates. PTCE 83-1 permits, subject to certain conditions, transactions
that might otherwise be prohibited between Plans and Parties in Interest with
respect to those Plans related to the origination, maintenance and termination
of mortgage pools consisting of mortgage loans secured by first or second
mortgages or deeds of trust on single-family residential property, and the
acquisition and holding of certain mortgage pool pass-through certificates
representing an interest in such mortgage pools by Plans. If the general
conditions (discussed below) of PTCE 83-1 are satisfied, investments by a Plan
in Securities that represent interests in a Pool consisting of Loans conforming
to these requirements ("Single Family Securities") will be exempt from the
prohibitions of ERISA Sections 406(a) and 407 (relating generally to
transactions with Parties in Interest who are not fiduciaries) if the Plan
purchases the Single Family Securities at no more than fair
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market value and will be exempt from the prohibitions of ERISA Sections
406(b)(1) and (2) (relating generally to transactions with fiduciaries) if, in
addition, the purchase is approved by an independent fiduciary, no sales
commission is paid to the pool sponsor, the Plan does not purchase more than 25%
of all Single Family Securities, and at least 50% of all Single Family
Securities are purchased by persons independent of the pool sponsor or pool
trustee. PTCE 83-1 does not provide an exemption for transactions involving
Subordinated Securities. Accordingly, unless otherwise provided in the related
Prospectus Supplement, no transfer of a Subordinated Security or a Security that
is not a Single Family Security may be made to a Plan.
The discussion in this and the next succeeding paragraph applies only to
Single Family Securities. The Depositor believes that, for purposes of PTCE
83-1, the term "mortgage pass-through certificate" would include: (i) Securities
issued in a Series consisting of only a single Class of Securities; and (ii)
Securities issued in a Series in which there is only one Class of those
particular Trust Securities; provided, that the Securities in the case of clause
(i), or the Securities in the case of clause (ii), evidence the beneficial
ownership of both a specified percentage of future interest payments (greater
than 0%) and a specified percentage (greater than 0%) of future principal
payments on the Loans. It is not clear whether a Class of Securities that
evidences the beneficial ownership in a Trust Fund divided into Loan groups,
beneficial ownership of a specified percentage of interest payments only or
principal payments only, or a notional amount of either principal or interest
payments, or a Class of Securities entitled to receive payments of interest and
principal on the Loans only after payments to other Classes or after the
occurrence of certain specified events would be a "mortgage pass-through
certificate" for purposes of PTCE 83-1.
PTCE 83-1 sets forth three general conditions that must be satisfied for
any transaction to be eligible for exemption: (i) the maintenance of a system of
insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying Holders against reductions in
pass-through payments due to property damage or defaults in loan payments in an
amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan; (ii) the existence of a pool trustee who
is not an affiliate of the pool sponsor; and (iii) a limitation on the amount of
the payment retained by the pool sponsor, together with other funds inuring to
its benefit, to not more than adequate consideration for selling the mortgage
loans plus reasonable compensation for services provided by the pool sponsor to
the Pool. The Depositor believes that the first general condition referred to
above will be satisfied with respect to the Securities in a Series issued
without a subordination feature, or the unsubordinated Securities only in a
Series issued with a subordination feature; provided, that the subordination and
Reserve Account, subordination by shifting of interests, the pool insurance or
other form of credit enhancement described herein (such subordination, pool
insurance or other form of credit enhancement being the system of insurance or
other protection referred to above) with respect to a Series of Securities is
maintained in an amount not less than the greater of one percent of the
aggregate Principal Balance of the Loans or the Principal Balance of the largest
Loan. See "Description of the Securities" herein. In the absence of a ruling
that the system of insurance or other protection with respect to a Series of
Securities satisfies the first general condition referred to above, there can be
no assurance that these features will be so viewed by the DOL. The Trustee will
not be affiliated with the Depositor.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Single Family Securities
must make its own determination as to whether the first and third general
conditions, and the specific conditions described briefly in the preceding
paragraph, of PTCE 83-1 have been satisfied, or as to the availability of any
other prohibited transaction exemptions. Each Plan fiduciary should also
determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the Securities is appropriate for the
Plan, taking
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into account the overall investment policy of the Plan and the composition of
the Plan's investment portfolio.
The DOL issued to Bear, Stearns & Co. Inc., an individual exemption
(Prohibited Transaction Exemption 90-30; Exemption Application No. D-8207, 55
Fed. Reg. 21461 (1990)) (the "Underwriter Exemption"), which applies to certain
sales and servicing of "certificates" that are obligations of a "trust" with
respect to which Bear, Stearns & Co. Inc. is the underwriter, manager or
co-manager of an underwriting syndicate. The Underwriter Exemption provides
relief generally similar to that provided by PTCE 83-1, but is broader in
several respects.
The Underwriter Exemption contains several requirements, some of which
differ from those in PTCE 83-l. The Underwriter Exemption contains an expanded
definition of "certificate," which includes an interest that entitles the Holder
to pass-through payments of principal, interest and/or other payments. The
Underwriter Exemption contains an expanded definition of "trust," which permits
the trust corpus to consist of secured consumer receivables. The definition of
"trust," however, does not include any investment pool unless, inter alia, (i)
the investment pool consists only of assets of the type that have been included
in other investment pools, (ii) certificates evidencing interests in such other
investment pools have been purchased by investors other than Plans for at least
one year prior to the Plan's acquisition of certificates pursuant to the
Underwriter Exemption and (iii) certificates in such other investment pools have
been rated in one of the three highest generic rating categories of the four
credit rating agencies noted below. Generally, the Underwriter Exemption holds
that the acquisition of the certificates by a Plan must be on terms (including
the price for the certificates) that are at least as favorable to the Plan as
they would be in an arm's length transaction with an unrelated party. The
Underwriter Exemption requires that the rights and interests evidenced by the
certificates not be "subordinated" to the rights and interests evidenced by
other certificates of the same trust. The Underwriter Exemption requires that
certificates acquired by a Plan have received a rating at the time of their
acquisition that is in one of the three highest generic rating categories of
Standard & Poor's, a division of The McGraw-Hill Companies, Inc., Moody's
Investors Service, Inc., Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc. The
Underwriter Exemption specifies that the pool trustee must not be an affiliate
of the pool sponsor, nor an affiliate of the Underwriter, the pool servicer, any
obligor with respect to mortgage loans included in the trust constituting more
than five percent of the aggregate unamortized principal balance of the assets
in the trust, or any affiliate of such entities. Finally, the Underwriter
Exemption stipulates that any Plan investing in the certificates must be an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of the
Commission under the Securities Act.
On July 21, 1997, the DOL published in the Federal Register an amendment to
the Underwriter Exemption, which extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. The amendment generally
allows mortgage loans or other secured receivables (the "Obligations")
supporting payments to certificateholders, and having a value equal to no more
than twenty-five percent (25%) of the total principal amount of the certificates
being offered by the trust, to be transferred to the trust within a 90-day or
three-month period following the closing date (the "Specified Funding Period"),
instead of requiring that all such Obligations be either identified or
transferred on or before the Closing Date. The relief is available when the
following conditions are met:
(1) The ratio of the amount allocated to the pre-funding account to the
total principal amount of the certificates being offered (the "Specified
Funding Limit") must not exceed twenty-five percent (25%).
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(2) All Obligations transferred after the Closing Date (the "Additional
Obligations") must meet the same terms and conditions for eligibility as
the original Obligations used to create the trust, which terms and
conditions have been approved by an Exemption Rating Agency.
(3) The transfer of such Additional Obligations to the trust during the
Specified Funding Period must not result in the certificates to be covered
by the Exemption receiving a lower credit rating from an Exemption Rating
Agency upon termination of the Specified Funding Period than the rating
that was obtained at the time of the initial issuance of the certificates
by the trust.
(4) Solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate for all of the Obligations in the trust at
the end of the Specified Funding Period must not be more than 100 basis
points lower than the average interest rate for the Obligations transferred
to the trust on the Closing Date.
(5) In order to insure that the characteristics of the Additional
Obligations are substantially similar to the original Obligations which
were transferred to the Trust Fund:
(i) the characteristics of the Additional Obligations must be
monitored by an insurer or other credit support provider that is
independent of the depositor; or
(ii) an independent accountant retained by the depositor must
provide the depositor with a letter (with copies provided to each
Exemption Rating Agency rating the certificates, the related
underwriter and the related trustee) stating whether or not the
characteristics of the Additional Obligations conform to the
characteristics described in the related prospectus or prospectus
supplement and/or pooling and servicing agreement. In preparing
such letter, the independent accountant must use the same type of
procedures as were applicable to the Obligations transferred to the
trust as of the Closing Date.
(6) The period of pre-funding must end no later than three months or 90
days after the Closing Date or earlier in certain circumstances if the
pre-funding account falls below the minimum level specified in the pooling
and servicing agreement or an Event of Default occurs.
(7) Amounts transferred to any pre-funding account and/or capitalized
interest account used in connection with the pre-funding may be invested
only in certain permitted investments ("Permitted Investments").
(8) The related prospectus or prospectus supplement must describe:
(i) any pre-funding account and/or capitalized interest account
used in connection with a pre-funding account;
(ii) the duration of the period of pre-funding;
(iii) the percentage and/or dollar amount of the Specified
Funding Limit for the trust; and
(iv) that the amounts remaining in the pre-funding account at
the end of the Specified Funding Period will be remitted to
certificateholders as repayments of principal.
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$178,200,000
HOME EQUITY LOAN-BACKED NOTES,
SERIES 1999-2
IRWIN HOME EQUITY LOAN TRUST 1999-2
ISSUER
IRWIN HOME EQUITY CORPORATION
ORIGINATOR
IRWIN UNION BANK AND TRUST COMPANY
MASTER SERVICER
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
$53,500,000 CLASS A-1 NOTES
$85,100,000 CLASS A-2 NOTES
$17,400,000 CLASS A-3 NOTES
$22,200,000 CLASS A-4 NOTES
------------------------
PROSPECTUS SUPPLEMENT
------------------------
BEAR, STEARNS & CO. INC.
MAY 6, 1999
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
CERTIFICATES OFFERED HEREBY, NOR AN OFFER OF THE CERTIFICATES IN ANY STATE OR
JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER WOULD BE UNLAWFUL.
THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AT ANY TIME DOES
NOT IMPLY THAT INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE; HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED
ACCORDINGLY.
