As filed with the Securities and Exchange Commission on July 23, 1999
Registration Statement No. 333-_____
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
REGISTRATION STATEMENT
ON FORM S-3
UNDER
THE SECURITIES ACT OF 1933
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BEAR STEARNS ASSET BACKED SECURITIES, INC.
(Depositor)
(Exact name of registrant as specified in its charter)
Delaware 13-3836437
(State of incorporation) (I.R.S. Employer
Identification No.)
245 Park Avenue
New York, New York 10167
(212) 272-4095
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
-------------------
Jonathan Lieberman
245 Park Avenue
New York, New York 10167
(212) 272-2703
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
-------------------
With a copy to:
Stephen B. Esko, Esq.
Brown & Wood LLP
One World Trade Center
New York, New York 10048
Approximate date of commencement of proposed sale to the public: From
time to time after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [ ]
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, please check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Amount Maximum Maximum Amount of
Title of to be Aggregate Price Aggregate Registration
Securities to Be Registered Registered Per Unit* Offering Price* Fee
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<S> <C> <C> <C> <C>
Asset Backed Securities........................... $2,377,230,000 100% $2,377,230,000 $556,000**
===========================================================================================================================
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* Estimated for the purpose of calculating the registration fee.
** This amount relates to the additional $2,000,000,000 registered
hereby. The remaining $377,230,000 of Asset Backed Securities relates
to registration statement No. 333-9532, and the registration fee with
respect thereto has been previously paid.
Pursuant to Rule 429 under the Securities Act of 1933, as amended, the
prospectus included in this registration statement is a combined prospectus
and also relates to registration statement No. 333-9532 as previously filed by
the registrant on Form S-3. Such registration statement No. 333-9532 was
declared effective as of December 4, 1998. This registration statement, which
is a new registration statement, also constitutes post-effective amendment no.
1 to registration statement No. 333-9532 and such post-effective amendment no.
1 shall hereafter become effective concurrently with the effectiveness of this
registration statement and in accordance with Section 8(c) of the Securities
Act of 1933, as amended.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment that specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This
prospectus supplement and the accompanying prospectus are not an offer to sell
these securities and are not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
PROSPECTUS SUPPLEMENT
- ---------------------
(To Prospectus dated ________, ____)
$-------------
_______ Home Equity Loan Trust ____-__
Home Equity Loan Asset-Backed Certificates, Series ____-__
BEAR STEARNS ASSET BACKED SECURITIES, INC.
Depositor
The Assets of the Trust
The assets of the trust consist primarily of two loan groups:
o a pool of closed-end home equity loans bearing fixed rates of interest;
and
o a pool of closed-end home equity loans bearing adjustable rates of
interest.
You should carefully review the information in "Risk Factors" beginning
on page S-7 in this prospectus supplement and on page 3 of the accompanying
prospectus.
This prospectus supplement may be used to offer and sell the certificates
only if accompanied by the prospectus.
The Certificates
The certificates consist of three classes of Class A Certificates listed
below, together with Class I Certificates and Class R Certificates. Only the
three classes of Class A Certificates are offered by this prospectus
supplement and the accompanying prospectus.
The certificates represent interests in the trust only and do not represent
interests in or obligations of any other entity.
The Certificates Offered by this Prospectus Supplement
<TABLE>
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Class of Initial Certificate Pass-Through Price to Underwriting Proceeds to
Certificates Principal Balance(1) Rate Public(2) Discount Depositor(2)(3)
------------ -------------------- ---- --------- -------- ---------------
<S> <C> <C> <C> <C> <C>
Class A-1 Certificates $ % % % %
Class A-2 Certificates $ % % % %
Class A-3 Certificates $ (4) % % %
Total $ % % %
</TABLE>
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(1) Plus or minus 5%
(2) Plus accrued interest, if any, from ____________. (3) Before deducting
expenses, estimated to be $_________. (3) The Class A-3 Certificates will bear
interest at a variable rate.
Credit Enhancement
Credit enhancement will consist of a certificate guaranty insurance policy
issued by the certificate insurer. The policy will guarantee timely payment of
interest and certain payments of principal on the Class A Certificates.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus supplement or the accompanying
prospectus. Any representation to the contrary is a criminal offense.
-----------------------------
Underwriter of the Class A Certificates
BEAR, STEARNS & CO. INC.
The date of this prospectus supplement is _______, ____
<PAGE>
For 90 days following the date of this prospectus supplement, all dealers
selling the Class A Certificates will deliver a prospectus supplement and
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters of the Class A Certificates and with
respect to their unsold allotments or subscriptions.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We
have not authorized anyone to provide you with different information.
We are not offering the Class A Certificates in any state where the offer
is not permitted.
We do not claim that the information in this prospectus supplement and
the accompanying prospectus is accurate as of any date other than the dates
stated on their covers.
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TABLE OF CONTENTS
Page
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Prospectus Supplement
<S> <C>
Summary.........................................................................................................S-3
Risk Factors....................................................................................................S-7
Description of the Loans.......................................................................................S-10
The Seller and the Servicer....................................................................................S-13
Home Equity Loan Program.......................................................................................S-14
Prepayment and Yield Considerations............................................................................S-19
Description of the Certificates................................................................................S-26
The Policy and the Certificate Insurer.........................................................................S-45
Use of Proceeds................................................................................................S-48
Certain Material Federal Income Tax Consequences...............................................................S-48
State Taxes....................................................................................................S-51
Erisa Considerations...........................................................................................S-51
Legal Investment Considerations................................................................................S-52
Underwriting...................................................................................................S-52
Experts........................................................................................................S-53
Ratings........................................................................................................S-53
Legal Matters..................................................................................................S-53
Prospectus
Important Notice About Information in this Prospectus and Each Accompanying Prospectus Supplement................2
Risk Factors.....................................................................................................3
Description of the Securities....................................................................................8
The Trust Funds.................................................................................................13
Enhancement.....................................................................................................23
Servicing of Loans..............................................................................................26
The Agreements..................................................................................................33
Certain Legal Aspects of the Loans..............................................................................44
The Depositor...................................................................................................57
Use of Proceeds.................................................................................................57
Certain Federal Income Tax Considerations.......................................................................58
State Tax Considerations........................................................................................80
FASIT Securities................................................................................................80
ERISA Considerations............................................................................................84
Legal Matters...................................................................................................89
Financial Information...........................................................................................89
Available Information...........................................................................................90
Rating..........................................................................................................90
Legal Investment................................................................................................91
Plan of Distribution............................................................................................91
Index of Defined Terms..........................................................................................92
</TABLE>
<PAGE>
SUMMARY
This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making your
investment decision. You should read carefully this entire prospectus
supplement and the accompanying prospectus.
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<S> <C>
Title of Series: Equity Home Loan Asset-Backed Certificates, Series _______ -
----
Trust: _____ Home Equity Loan Trust _______ - _____
Offered Certificates: Class A-1, Class A-2 and Class A-3 Certificates
Non-Offered Certificates: Class I and Class R Certificates
Seller: __________________
Servicer: __________________
Depositor: Bear Stearns Asset Backed Securities, Inc.
Trustee and Back-up Servicer: __________________________
Certificate Insurer: __________________________
Cut-off Date: The close of business on __________ __, _____
Closing Date: On or about ___________ __, _______
</TABLE>
The Trust
The trust will be formed under a pooling and servicing agreement among the
depositor, the servicer and the trustee. The trustee, a ________, will act as
trustee and back-up servicer for the benefit of the certificateholders.
The Certificates
On the closing date, the trust will issue three classes of Class A
Certificates. Only the Class A Certificates are being offered to you by this
prospectus supplement and the accompanying prospectus. The trust is also
issuing Class I Certificates and Class R Certificates, which are not being
offered to you.
The Servicer
The servicer is a ____________. Under the terms of the pooling and servicing
agreement, the servicer will have the contractual responsibility to service,
manage and make collections on the home equity loans in the trust. Each
calendar month the servicer will retain a portion of the interest payments on
the loans equal to one-twelfth of ___% of the principal balance of each loan
as a fee for its services.
Depositor
The depositor is a Delaware corporation and an affiliate of the underwriter,
Bear, Stearns & Co. Inc. The depositor will acquire the home equity loans from
the seller, and will then sell them to the trust in exchange for the Class A,
Class I and Class R Certificates.
Certificate Insurer
______________, a ____________. See "The Certificate Insurer" in this
prospectus supplement.
Assets of the Trust
The assets of the trust are held by the trustee for the benefit of the
certificateholders. The assets include:
o a pool of fixed rate, closed-end home equity loans, secured by first
or second liens on primarily oneto four-family residential
properties;
o a pool of adjustable rate, closed-end home equity loans, secured by
first liens on primarily one- to four-family residential properties;
o payments of interest due on the loans after the cut-off date and
principal payments on the loans received after the cut-off date;
o property that secured a home equity loan and has been acquired after
the closing date by foreclosure or deed in lieu of foreclosure;
o rights of the depositor under the home equity loan purchase agreement
under which the depositor purchased the home equity loans from the
seller;
o rights of the seller under certain hazard insurance policies covering
the mortgaged properties; and
o funds on deposit in the pre-funding account, the capitalized interest
account and the spread account.
In addition, the certificate insurer has issued a certificate guaranty
insurance policy for your benefit as an owner of the Class A Certificates.
No Obligor or Guarantor
The Class A Certificates represent the obligation of the trust only. Except
for the protection afforded by the certificate guaranty insurance policy as
described in this prospectus supplement, the Class A Certificates are not
insured or guaranteed. The home equity loans in the trust are not insured or
guaranteed by any governmental agency or any other entity.
Denominations
You will be offered Class A Certificates for purchase in minimum denominations
of $25,000 and increments of $1,000.
Distribution Date
You will receive distributions on the Class A Certificates on the 25th day of
each month, beginning in ________ ______. If the 25th day is not a business
day, then the distribution date will be the next business day.
Book-Entry Registration
The trust initially will issue the Class A Certificates in book-entry form.
You will hold your interest in the Class A Certificates through a depository
in the United States or indirectly through participants in the depository.
You will not be entitled to receive a definitive certificate representing your
interest unless definitive certificates are issued.
The Loans
The home equity loans are generally secured by mortgages or other instruments
creating first or second liens on one- to four-family residential or mixed use
properties.
The loans will be divided into two groups.
o Loan Group I consists of fixed rate home equity loans.
o Loan Group II consists of adjustable rate home equity loans.
Interest on the fixed rate loans is calculated on the "simple interest"
method. Interest on the adjustable rate loans is calculated on the "actuarial"
method.
Monthly payments are due on the date of the month specified in the related
note. The due dates occur throughout the month. Except for the balloon loans
in Loan Group I, the loans are fully amortizing.
Monthly Advances
The servicer will be required to make certain monthly cash advances on behalf
of the trust. The servicer is not required to make any monthly advances it
determines would be nonrecoverable. Monthly advances by the servicer are
reimbursable to it subject to certain restrictions.
The Class A Certificates
The Class A-1 and Class A-2 Certificates are related to Loan Group I and the
Class A-3 Certificates are related to Loan Group II. (The Class I
Certificates, which are not offered by this prospectus supplement, are also
related to Loan Group I.) Each class of the Class A Certificates represents
the right to receive
o monthly payments of interest at the per annum certificate rate
described in this prospectus supplement, and
o payments of principal to the extent provided in this prospectus
supplement.
See "Description of the Certificates - Priority of Distributions" in this
prospectus supplement for detailed information.
Pre-Funding Account
On the closing date, the seller or the servicer will deposit into the
pre-funding account cash in an amount not to exceed approximately $_______. Of
this amount, the servicer will use approximately $_________ to purchase
additional fixed rate home equity loans for deposit into Loan Group I and, if
necessary, to make accelerated payments of principal on the Class A-1 and
Class A-2 Certificates, and approximately $_________ to purchase additional
adjustable rate home equity loans for deposit into Loan Group II and, if
necessary, to make accelerated payments of principal on the Class A-3
Certificates.
The trustee will pay any amount remaining in the pre-funding account on the
distribution date occurring immediately following the end of the pre-funding
period as a prepayment of principal of the Class A-1 and Class A-2
Certificates, pro rata, or the Class A-3 Certificates, as applicable, based on
the remaining pre-funded amount allocated to the related loan group.
Capitalized Interest Account
On the closing date, funds will be deposited in the capitalized interest
account, which the trustee will create and maintain. The trustee will use the
amount deposited on the distribution dates during the pre-funding period to
fund the excess, if any, of the interest remittance amounts for the Class A
Certificates and the premium due on the policy over the funds otherwise
available on those distribution dates.
Spread Account
On the closing date, the trustee will establish and then maintain a spread
account. If required by the certificate insurer, the holder of the Class R
Certificates will deliver to the trustee for deposit in the spread account the
amount required by the certificate insurer. Funds on deposit in the spread
account, if any, will be available for withdrawal to fund any shortfalls
between the available funds for distribution to holders of the Class A
Certificates and the related interest remittance amounts or principal
remittance amounts.
Final Scheduled Distribution Date
The final scheduled distribution date for each class of the Class A
Certificates is set forth in the chart below. However, we anticipate that the
actual final payment date for each class of the Class A Certificates will
occur significantly earlier than the date shown in the chart.
Final Scheduled
Class Distribution Date
Class A-1 Certificates.......................____
Class A-2 Certificates.......................____
Class A-3 Certificates.......................____
See "Prepayment and Yield Considerations" in this prospectus supplement for
further information.
The Certificate Insurer
__________, a __________ engaged only in the business of writing financial
guaranty and surety insurance. The certificate insurer insures structured
asset-backed, corporate, municipal and other financial obligations in the
domestic and foreign capital markets. The certificate insurer's claims-paying
ability is rated AAA by Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., and Aaa by Moody's Investors Service, Inc.
The certificate insurer will issue a financial guaranty insurance policy that
irrevocably and unconditionally guaranties to pay the guaranteed interest
payment amount and the guaranteed principal payment amount on each
distribution date to the trustee for the benefit of the holders of the Class A
Certificates.
See "The Policy and the Certificate Insurer" in this prospectus supplement for
further information.
Optional Termination
On any distribution date on which the aggregate of the loan balances is less
than ___% of the aggregate of the cut-off date loan balances, the servicer may
purchase all of the home equity loans and the related real estate owned
property, if any, remaining in the trust.
See "Description of the Certificates--Termination; Retirement of the
Certificates" in this prospectus supplement for further information.
Federal Tax Considerations
Brown & Wood LLP, as counsel to the depositor, is of the opinion that:
o the trust will be treated as a real estate mortgage investment conduit,
or "REMIC", for federal income tax purposes; and
o the Class A Certificates will be "regular interests" in the REMIC and
will be treated as debt instruments of the REMIC for federal income
tax purposes.
See "Certain Federal Income Tax Considerations" in this prospectus supplement
and in the prospectus for further information regarding the federal income tax
consequences of investing in the Class A Certificates.
ERISA Considerations
An employee benefit plan subject to the requirements of the fiduciary
responsibility provisions of the Employee Retirement Income Security Act of
1974, as amended, or "ERISA", or the provisions of Section 4975 of the
Internal Revenue Code of 1986, as amended, that is contemplating the purchase
of Class A Certificates should consult with its counsel before making a
purchase. The fiduciary and its legal advisors should consider whether the
Class A Certificates will satisfy all of the requirements of the "publicly
offered securities" exemption and the possible application of other ERISA
prohibited transaction exemptions described in this prospectus supplement.
Although the depositor expects that the "publicly offered securities"
exemption or the other ERISA prohibited transaction exemptions will apply to
certain purchases of the Class A Certificates by employee benefit plans, there
can be no assurance that those exemptions will apply to all purchases of the
Class A Certificates by plans.
See "ERISA Considerations" in this prospectus supplement for further
information.
Legal Investment Considerations
The offered certificates will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended.
Thus, many institutions with legal authority to invest in comparably rated
securities may not be legally authorized to invest in the Class A
Certificates.
Certificate Ratings
The trust will not issue the Class A Certificates unless they receive the
following ratings.
Class Rating
Class A-1 Certificates
Class A-2 Certificates
Class A-3 Certificates
A rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal by the rating agency.
We refer you to "Ratings" and "Risk Factors--Do Not Rely on Certificate
Rating" in this prospectus supplement for further information.
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors before
purchasing any of the Class A Certificates. You should also carefully consider
the information set forth under "Risk Factors" beginning on page _ of the
accompanying prospectus.
The Trust is the Only Source of Payment on the Class A Certificates
Principal and interest on the Class A Certificates will be payable only
from the funds in the trust, including payments on the home equity loans in
the trust and any amounts available under the certificate guaranty insurance
policy. You will have no recourse to the depositor, the seller, the servicer,
the trustee or any other entity if you do not receive payments on the Class A
Certificates. No government agency or instrumentality insures the Class A
Certificates or the home equity loans in the trust.
Limited Resale
The underwriter intends to make a market for resale in the notes but has
no obligation to do so. There is no assurance that such a market will develop
or, if it develops, that it will continue. Consequently, you may not be able
to sell your Class A Certificates readily or at prices that will enable you to
realize your desired yield. The market values of the Class A Certificates are
likely to fluctuate; these fluctuations may be significant and could result in
significant losses to you.
The secondary market for mortgage-backed and asset-backed securities has
experienced periods of illiquidity and can be expected to do so in the future.
Illiquidity can have a severely adverse effect on the prices of securities
that are especially sensitive to prepayment, credit or interest rate risk, or
that have been structured to meet the investment requirements of limited
categories of investors.
Prepayments May Fluctuate
All of the loans in the trust may be prepaid in whole or in part at any
time without penalty. 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 their rate of prepayment.
Generally, home equity loans are not viewed by borrowers as permanent
financing. As a result, the home equity loans in the trust may have a higher
rate of prepayment than traditional loans. The prepayment experience of the
trust may be affected by a wide variety of factors, including
o general economic conditions,
o prevailing interest rates,
o availability of alternative financing, and
o homeowner mobility.
In addition, all of the loans have due-on-sale provisions, which the servicer
is required to enforce unless enforcement is not allowed by applicable law.
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, the loans are likely to prepay at a higher rate than if prevailing
interest rates remained at or above the interest rates on these loans.
Payments on the Loans May Vary
When a principal prepayment in full is made on a loan, the borrower is
charged interest only up to the date of prepayment, instead of for a full
month. In addition, all of the loans in Loan Group I are "simple interest"
loans for which interest is computed and charged to the borrower on the loan's
outstanding principal balance based on the number of days elapsed from the
date on which interest was last paid on the loan to receipt of the borrower's
most current payment. The portions of each monthly payment allocated to
interest and principal are adjusted based on the actual amount of interest
charged on this basis. Thus, if less than a full month has elapsed between
payments on a simple interest loan, the interest portion of the latter payment
will be less than a full month's interest on the principal balance. If more
than a full month has elapsed between payments on a simple interest loan, the
interest portion of the latter payment will be more than a full month's
interest on the principal balance.
Balloon Loans May Adversely Affect Distributions
Approximately ___% of the initial home equity loans in Loan Group I (by
principal balance as of the cut-off date) have original terms to stated
maturity of up to ___ years and amortization schedules of up to ___ years.
This feature leaves a substantial balloon payment due at the stated maturity
of the loan. The borrower's ability to repay a "balloon" loan at maturity
frequently will depend on his ability to refinance the loan which can be
affected by such factors as
o the level of available mortgage rates at the time,
o the value of the mortgaged property,
o the borrower's equity in the mortgaged property,
o the borrower's financial condition,
o the tax laws, and o general economic conditions at the time.
Although a low interest rate environment may facilitate the refinancing
of a "balloon" loan, the receipt and reinvestment of the proceeds by
certificateholders in such an environment may produce a lower return than that
previously received in respect of the certificates. On the other hand, a high
interest rate environment may make it more difficult for the borrower to
refinance, resulting in more in delinquencies or defaults. Neither the trust
nor any other entity will be required to provide funds to refinance any
"balloon" loan.
Pre-Funding May Adversely Affect Your Investment
If the principal amount of eligible loans available during the
pre-funding period is less than the original pre-funded amount, the depositor
will not have enough loans to sell to the trust on the subsequent transfer
dates. In that case, principal will be prepaid to holders of one or more
classes of the Class A Certificates.
Each subsequent loan must satisfy the eligibility criteria in the pooling
and servicing agreement. However, subsequent loans may be originated or
purchased by the seller using credit criteria different from the criteria used
for the initial loans in the trust and the loans may be of a different credit
quality. Thus, after the transfer of subsequent loans to a loan group, the
aggregate characteristics of the loans then held by the trust as part of that
loan group may vary from the aggregate characteristics of the initial loans in
that loan group.
The ability of the trust to invest in subsequent loans largely depends
upon whether the seller is able to originate or purchase home equity loans
that meet the requirements for transfer to the trust. This ability is affected
by a variety of factors, including interest rates, unemployment levels, the
rate of inflation and consumer perception of economic conditions generally.
Underwriting Standards May Affect Loan Performance
The seller's underwriting standards generally are less stringent than
those of Fannie Mae or Freddie Mac. For example, a borrower's past credit
history may not preclude the seller from originating or purchasing a loan to
that borrower, but it will reduce the size (and thus the combined
loan-to-value ratio) of the loan that the seller is willing to originate or
purchase. As a result of this approach to underwriting, the home equity loans
in the trust may have higher rates of delinquencies, defaults and foreclosures
than loans underwritten in accordance with Fannie Mae's or Freddie Mac's
guidelines. If loan losses occur and the certificate insurer fails to perform
its obligations under the certificate guaranty insurance policy, you may
experience a loss.
Home Equity Loan Default Risks
As purchasers of the Class A Certificates, you are protected by the
certificate guaranty insurance policy against the risk of losses realized on
the home equity loans. However, in the event that the required payments under
the certificate guaranty insurance policy are not made, you will bear the
losses on the home equity loans. The risks presented by the home equity loans
include the following:
o Early Default- Defaults on home equity loans are generally expected to
occur more frequently in the early years of their terms. The weighted
average number of months since origination of the home equity loans as
of the cut-off date is approximately ___ months, which is not a
sufficiently long period of time to develop reliable performance data.
Delinquencies may increase as the home loans become more seasoned.
o High LTV Ratios- Most of the home equity loans are secured by liens on
the mortgaged properties in which the borrowers have little or no
equity. Approximately _____% of the home loans have original combined
loan-to-value ratios in excess of 100%. Home loans with high original
combined loan-to-value ratios will be more sensitive to declining
property values than those with lower original combined loan-to-value
ratios and therefore may experience a higher incidence of default. In
addition, in the case of home loans with original combined
loan-to-value ratios near or in excess of 100%, if the related
borrowers sell their homes, they may be unable to repay the home
equity loans in full from the sale proceeds of the financed properties
and other funds available. Accordingly, those loans likely may
experience higher rates of delinquencies, defaults and losses. In the
case of loans the proceeds of which were used in whole or in part for
debt consolidation, the related borrower may incur further consumer
debt. This reloading of debt could impair the ability of the borrower
ultimately to repay the home equity loan.
o Limitation on Repurchase of Defective Home Equity Loans by the Seller-
We cannot assure you that, at any particular time, the seller will be
capable, financially or otherwise, of repurchasing home equity loans
as a result of breaches of representations and warranties or defects
in the loan files that have not been cured. If the seller does not
make these repurchases, the trustee will use reasonable efforts to
enforce the obligations of the seller to repurchase defective home
equity loans. However, we cannot assure you that any recoveries will
be adequate to fully cover amounts owing on them.
Second Mortgages Involve Greater Risks than First Mortgages
Approximately __% of the initial home equity loans in the trust (by
principal balance as of the cut-off date) are secured by second mortgages.
Second mortgages are subordinate to the rights of the mortgagee under the
related senior mortgage. The proceeds from any foreclosure, liquidation,
insurance or condemnation proceedings will be available to satisfy the
outstanding balance of a second mortgage only after the claims of the senior
mortgagee have been satisfied in full. In addition, the trust may not
foreclose on the mortgaged property securing a second mortgage unless it
forecloses subject to the related senior mortgage. To do so the trust must
either pay the entire amount due on the senior mortgage at or prior to the
foreclosure sale or take on the obligation to make payments on the senior
mortgage if the borrower defaults. However, the trust will not have any funds
to satisfy or pay amounts due on the senior mortgage.
Liquidation expenses with respect to defaulted loans do not vary directly
with the outstanding principal balance of the loan at the time of default.
Therefore, assuming that a servicer took the same steps in realizing upon a
defaulted home equity loan or home improvement contract having a small
remaining principal balance as it would in the case of a defaulted loan having
a larger principal balance, the amount realized after expenses of liquidation
would be smaller as a percentage of the outstanding principal balance of the
smaller loan than would be the case with a larger loan. Because the average
outstanding principal balances of the loans in the trust are small relative to
the size of the loans in a typical pool of conventional first mortgages,
realizations net of liquidation expenses on defaulted loans may also be
smaller as a percentage of the principal amount of the loans than would be the
case with respect to a typical pool of conventional first mortgage loans.
There are several factors that could adversely affect the value of
mortgaged properties such that the outstanding balance of the related second
mortgages, together with any senior financing, would equal or exceed the value
of the mortgaged properties. These factors include an overall decline in the
residential real estate market in the areas in which the mortgaged properties
are located or a decline in the general condition of the mortgaged properties
due to the borrowers' failure to adequately maintain the mortgaged properties
or to natural disasters for which insurance is not necessarily required, such
as earthquakes and floods. These declines could extinguish the value of a
junior interest in the mortgaged property before having any effect on the
related senior mortgage. If this happens, the actual rates of delinquencies,
foreclosure and losses on second mortgages in the trust could be higher than
those currently experienced in the mortgage lending industry in general.
Geographic Concentration of the Loans May Adversely Affect Loan Performance
Approximately _____% (by principal balance as of the cut-off date) of the
home equity loans in Loan Group I and _____% (by principal balance as of the
cut-off date) of the loans in Loan Group II are secured by properties located
in ________. To the extent that _______ has experienced or experiences in the
future weaker economic conditions or greater rates of decline in real estate
values than the United States generally, this concentration of loans and
contracts in ______ may increase the related risks. The depositor cannot
quantify the impact of any recent property value declines on the loans in the
trust or predict whether, to what extent or for how long these declines would
continue.
Difficulty in Pledging
Since transactions in the Class A Certificates can be effected only
through the depository or through its participants and indirect participants,
your ability, as the owner of a Class A Certificate, to pledge a Class A
Certificate to persons or entities that do not participate in the depository
system may be limited due to your not having possession of a physical
certificate.
Potential Delays in Receipt of Distributions
As the owner of Class A Certificate, you may experience some delay in
receiving of distributions of interest and principal on your Class A
Certificates since the funds will be forwarded by the trustee to the
depository. The depository will credit the funds to the accounts of its
participants which will then credit them to the owners' accounts either
directly or indirectly through indirect participants.
Do Not Rely on Certificate Ratings
The ratings of the Class A Certificates will depend primarily upon an
assessment by the rating agencies of the home equity loans in the trust and
upon the claims-paying ability of the certificate insurer. If the rating
agencies reduce the ratings assigned to the claims-paying ability of the
certificate insurer below the ratings initially given to the Class A
Certificates, the rating agencies may reduce the ratings of the Class A
Certificates. When the rating agencies rate the Class A Certificates, they are
not recommending that you purchase, hold or sell the Class A Certificates, as
their ratings do not speak to the market price paid by, or the general
suitability for, a particular investor. We cannot assure you that the ratings
will stay the same for any given period of time or that the rating agencies
will not lower or withdraw them.
Certificateholders Could Be Adversely Affected by Lack of Year 2000 Compliance
As is the case with most companies using computers in their operations,
the servicer and the trustee are faced with the task of preparing for the year
2000 and the risk of major computer system failure or miscalculations. The
servicer and the trustee are currently engaged in various procedures to ensure
that their computer systems and software will be year 2000 compliant. However,
if the servicer or the trustee or any of their suppliers, customers, brokers
or agents do not successfully and timely achieve year 2000 compliance, the
performance of the servicer or the trustee, could be materially adversely
affected, possibly resulting in delays in processing payments on the home
equity loans and a related delay in payments to you.
Similar year 2000 problems face DTC which currently is testing the
compliance of its computer systems and hardware.
DESCRIPTION OF THE LOANS
General
The initial home equity loans (the "Initial Loans") were, and any home
equity loans purchased by the trust after the Closing Date (the "Subsequent
Loans" and, together with the Initial Loans, the "Loans") will be, originated
by the seller or an affiliate in accordance with the policies set forth under
"Home Equity Loan Program." All of the Initial Loans are, and all Subsequent
Loans will be, home equity loans bearing fixed or adjustable interest rates
(the "Loan Rates") and evidenced by promissory notes (the "Mortgage Notes")
secured by first or second deeds of trust, security deeds or mortgages on
mortgaged properties located in _____ states (the "Mortgaged Properties"). The
Mortgaged Properties consist primarily of one- to four-family residential or
mixed-use properties including townhouses and individual units in condominiums
and planned unit developments. The Mortgaged Properties may be owner-occupied
properties (which includes second and vacation homes) or non-owner occupied
investment properties.
Group 1 Loans
The Loans in Loan Group I will be a simple interest loan bearing interest
at a fixed rate. Certain of the Group 1 Loans will have original terms to
stated maturity of up to __ years and amortization schedules of up to __ years
("Balloon Loans"), leaving a substantial payment due at the stated maturity
(each, a "Balloon Payment").
Group 2 Loans
The Loans in Loan Group II will bear interest at an adjustable rate and
will be serviced as an actuarial loan. The Loan Rate borne by each adjustable
rate loan ("ARM") is subject to adjustment on the date set forth in the
related Mortgage Note (each, a "Change Date") to equal the sum of
o the weekly average yield on U.S. Treasury securities adjusted to a
constant maturity of one year, as made available by the Federal
Reserve Board as of the date __ days before the applicable Change Date
(the "Index"), plus
o the number of basis points set forth in such Mortgage Note (the "Gross
Margin"), subject to rounding and to the effects of the Periodic Cap,
the applicable Lifetime Cap and the applicable Lifetime Floor.
The "Periodic Cap" limits changes in the Loan Rate for each ARM on each
Change Date to ___ basis points. The "Lifetime Cap" is the maximum Loan Rate
that may be borne by an ARM over its life and is equal to the sum of the
initial Loan Rate for such ARM and ___ basis points. The "Lifetime Floor" is
the minimum Loan Rate that may be borne by an ARM over its life and is equal
to the initial Loan Rate for such ARM. The ARMs do not provide for negative
amortization.
Statistical Information
Set forth below is certain summary statistical information regarding the
Initial Loans expected to be included in the related loan groups as of the
Closing Date. All such information is approximate and is given as of the
Cut-off Date. More detailed statistical information is set forth in Appendix
A. Prior to the Closing Date, Loans may be removed from the respective loan
groups and other Loans may be substituted for those removed. In addition,
regularly scheduled payments on the Loans will affect the balances and
percentages set forth below and in Appendix A, and Loans may be prepaid at any
time. As a result, certain characteristics of the Loans in one or both loan
groups may vary from the characteristics set forth below and in Appendix A as
of the Cutoff Date.
Initial Home Equity Loans in Loan Group I . With respect to the Initial
Loans in Loan Group I as of the Cut-off Date:
o the principal balances ranged from $________ to $____________;
o the average principal balance was $__________;
o the Loan Rates ranged from ____% to ____%;
o the weighted average Loan Rate was ______%;
o the original Combined Loan-to-Value Ratios ranged from ___% to ___%;
o the weighted average original Combined Loan-to-Value Ratio was
______%;
o the remaining terms to stated maturity of the Balloon Loans ranged
from ___ months to ____ months;
o the weighted average remaining term to stated maturity of the Balloon
Loans was _______ months;
o the remaining terms to stated maturity of the non-Balloon Loans ranged
from ___ months to ___ months;
o the weighted average remaining term to stated maturity of the
non-Balloon Loans was ____ months;
o approximately _____% of Loan Group I (by principal balance) are
Balloon Loans;
o the number of months since funding ranged from __ months to ___
months;
o the weighted average number of months since funding was ____ months;
and
o no more than ____% of the Initial Loans in Loan Group I (by principal
balance) will be secured by Mortgaged Properties located in any one
five-digit postal ZIP code area.
Initial Home Equity Loans in Loan Group II . With respect to the Initial
Loans in Loan Group II as of the Cut-off Date:
o the principal balances ranged from $________ to $____________;
o the average principal balance was $__________;
o the Loan Rates ranged from ____% to ____%;
o the weighted average Loan Rate was ______%;
o the Gross margins ranged from _____ basis points to _____ basis
points;
o the weighted average Gross Margin was ______ basis points;
o the remaining terms to stated maturity ranged from ___ months to ___
months;
o the weighted average remaining term to maturity was ___months;
o the number of months since funding ranged from __ months to ___
months;
o the weighted average number of months since funding was ____ months;
and
o no more than ____% of the Initial Loans in Loan Group II (by principal
balance) will be secured by Mortgaged Properties located in any one
five-digit postal ZIP code area.
Subsequent Loans
The Depositor expects to sell Subsequent Loans to the Trust during the
Pre-Funding Period. The purchase price for each Subsequent Loan will equal its
outstanding principal balance as of the opening of business on the first day
of the month in which such Subsequent Loan is transferred to the Trust (each,
a "Subsequent Cut-Off Date") and will be paid by withdrawal of funds on
deposit in the Pre-Funding Account. The Subsequent Loans will have been
originated more recently than, and may have other characteristics which differ
from, the Initial Loans. As a result, following any sale of Subsequent Loans
to the Trust, the description of the Loan set forth above and in Appendix A
may not accurately reflect the characteristics of all of the Loans. However,
the Subsequent Loans must conform to the representations and warranties set
forth in the Agreement. Following the end of the Pre-Funding Period, the
Depositor expects that the Loans (including Subsequent Loans) will have the
following approximate characteristics.
<TABLE>
<CAPTION>
<S> <C>
Average Unpaid Principal Balance.......................................... at least $______
Weighted Average Loan Rate ............................................... _____% - _____%
Weighted Average Remaining Term to Stated Maturity ...................... __ months - __ months
Weighted Average Original Combined Loan-to-Value Ratio ................... not more than __%
Weighted Average Loan Age ................................................ 0 month - __ month
Loans Secured by Primary Residences ...................................... at least __%
Single Family Detached ................................................... at least __%
State Distribution
________ ............................................................... not more than __%
________ ............................................................... not more than __%
________ ............................................................... not more than __%
Any other individual state ............................................. not more than __%
</TABLE>
THE SELLER AND THE SERVICER
The seller and servicer, _____________, is a ____________ which
originates home equity loans generally secured by first or subordinate liens
on one-to four-family residential and mixed-use properties, including
townhouses and individual units in condominiums and planned unit developments.
The seller conducts its business directly and through ____ affiliated
companies.
For the three fiscal years ended ______________, the seller funded $____
million, $___ million and $____ million, respectively, of mortgage loans. For
the three months ended ___________, the seller funded approximately $____
million of mortgage loans.
As of _________, the seller had approximately ___ employees. The
principal offices of the seller are located at __________________________. Its
telephone number is ____________.
HOME EQUITY LOAN PROGRAM
General
One of the seller's products is a closed-end, fixed rate, fully
amortizing mortgage loan with an original term to maturity of ___ years. The
seller also offers fixed rate, fully amortizing mortgage loans with original
terms to maturity of ___________ and __ years and fixed rate mortgage loans
with original terms to maturity of __ or __ years and an amortization schedule
of up to __ years or an original term to maturity of up to __ years and an
amortization schedule of up to __ years. The seller also offers closed-end,
adjustable rate, fully amortizing mortgage loans with original terms to
maturity of either __ or __ years. Each adjustable rate mortgage loan provides
for annual adjustments based on changes in the level of the Index, subject to
rounding, the Periodic Cap and the applicable Lifetime Cap and the applicable
Lifetime Floor.
In most instances, the seller's mortgage loans are non-purchase money
mortgages secured by first or second liens on owner-occupied one- to
four-family residential and mixed-use properties, including townhouses and
individual units in condominiums and planned unit developments. In the fiscal
year ended ____________ and the three months ended _____________,
approximately ____% and _____%, respectively, of the mortgage loans originated
by the seller were secured by owner occupied residences. The seller also makes
mortgage loans secured by first or second liens on residential rental
properties or vacation properties.
[All of the seller's fixed rate mortgage loans are simple interest
loans.] A simple interest loan provides for a series of substantially equal
monthly payments which, if paid when due, will fully amortize the amount
financed by the scheduled maturity date. Each monthly payment includes an
installment of interest which is calculated on the basis of the outstanding
principal balance of the mortgage loan multiplied by the stated Loan Rate and
further multiplied by a fraction, the numerator of which is the number of days
in the period elapsed since the preceding payment of interest was made and the
denominator of which is the number of days in the annual period for which
interest accrues on such loan. As payments are received under a simple
interest loan, the amount received is applied first to interest accrued to the
date of payment and the balance is applied to reduce the unpaid principal
balance. Accordingly, if a borrower pays a fixed monthly installment on a
simple interest Loan before its scheduled due date, the portion of the payment
allocable to interest for the period since the preceding payment was made will
be less than it would have been had the payment been made as scheduled, and
the portion of the payment applied to reduce the unpaid principal balance will
be correspondingly greater. Conversely, if a borrower pays the fixed monthly
installment after the scheduled due date, the portion of the payment allocable
to interest will be greater, and the amortization of the unpaid principal
balance will be correspondingly less.
All of the seller's mortgage loans may be prepaid by the borrowers in
whole or in part at any time without penalty. Late charges are assessed on
loans for which payments are made after applicable grace periods established
by federal and state laws. None of the Seller's mortgage loans is insured or
guaranteed by any governmental agency or instrumentality, and none is covered
by primary mortgage guaranty insurance policies.
Underwriting Procedures
The following is a description of the underwriting procedures customarily
employed by the seller with respect to fixed rate and adjustable rate mortgage
loans secured by first or second liens on one- to four- family residential
properties, including townhouses and individual units in condominiums and
planned unit developments. The seller's underwriting process, which is
centralized at its corporate headquarters, is intended to assess the
applicant's credit standing and repayment ability and the value and adequacy
of the real property security as collateral for the proposed loan. The seller
considers itself to be a credit lender as opposed to an equity lender,
focusing primarily on the borrower's ability and willingness to repay, and
only secondarily on the potential value of the collateral upon foreclosure, in
determining whether or not to make a mortgage or home improvement loan. As of
___________, the seller employed ____ loan officers and ___ underwriters.
Underwriters are primarily promoted from within the seller on a selective
basis in order to maintain the quality and integrity of the seller's business
philosophy. All underwriters receive fixed annual salaries which are not based
on underwriting volume.
The application process generally is conducted by telephone. Each
applicant for a mortgage or home improvement loan is required to supply the
information necessary to complete an application which lists the applicant's
liabilities, income, credit and employment history and other demographic and
personal information. If the information in the loan application demonstrates
that the applicant has sufficient income and that there is sufficient equity
in the real property to justify making a mortgage loan, the loan officer will
conduct a further credit investigation of the applicant. This investigation
includes obtaining and reviewing an independent credit bureau report on the
credit history of the applicant in order to evaluate the applicant's ability
to repay. The credit report typically contains information relating to such
matters as credit history with local merchants and lenders, installment debt
payments and any record of defaults, bankruptcy, collateral repossessions,
suits or judgments. Any adverse information contained in the credit report
must be acceptable (and if requested, explained) to the loan officer.
Based on the information obtained from the applicant, the loan officer
advises the applicant of the loan program for which the applicant qualifies.
Upon gaining the agreement of the applicant, the loan officer submits the
application to the underwriting department for further review. An underwriter
will then evaluate the submission in accordance with certain established
guidelines. The underwriter will either approve, reject, or amend the loan
request based on the information submitted in the application. If the
applicant accepts the amendment, the underwriter will approve the amended loan
application.
The application is then further processed to verify the accuracy of the
information therein. Verification may take the form of written or verbal
communication with the applicant's employer or recent pay stubs and current
W-2 forms supplied by the applicant. Income tax returns also may be obtained
and reviewed. Self-employed borrowers generally are required to have been in
business for at least two years and must provide signed federal income tax
returns, including all schedules thereto, for the past two tax years, and may
be required to furnish personal and business financial statements if deemed
necessary by the underwriter.
In certain circumstances, the seller may not be able to verify the income
claimed on the application but is able to document adequate cashflow to
support the loan for which the application was made. In such circumstances,
the permitted combined loan-to-value ratio will be less than otherwise would
be the case. Approximately ____% (by principal balance as of the Cut-Off Date)
of the Initial Loans were underwritten using such alternative approach to
income verification.
If there is a senior mortgage on the property to be used as security for
the home equity loan, the loan officer also evaluates the type and outstanding
balance of the senior mortgage loan and its payment history. The seller
obtains a credit reference on the senior mortgage by using either credit
bureau information, telephone verification, the year-end senior mortgage
statement, canceled checks or written verification from the senior mortgagee.
In every instance, the property securing a loan made by the seller is
appraised and title insurance acquired before the loan is closed. The seller
requires appraisals on all properties that will secure its mortgage and home
improvement loans. The appraisals are conducted by approved, independent
third-party appraisers who are paid a fee by the applicant, regardless of
whether the application for a loan is approved. All appraisals are required to
be on forms approved by Fannie Mae or Freddie Mac. The seller obtains a
lender's title insurance policy or binder, or other assurance of title
customary in the relevant jurisdiction. Homeowners' insurance coverage is
required on every property securing a home equity loan or home improvement
loan originated by the seller. Necessary coverage and mortgagee clause
endorsements are acquired and monitored by the loan servicing department.
Forced-placed policies are acquired for properties in which the borrower has
allowed coverage to lapse.
After obtaining all applicable employment, credit and property
information, the seller determines whether sufficient unencumbered equity in
the property exists and whether the prospective borrower has sufficient
monthly income available to support the payments of principal and interest on
the home equity loan in addition to any senior mortgage loan payments
(including any escrows for property taxes and hazard insurance premiums) and
other monthly credit obligations. The seller applies the "debt-to-gross income
ratio" which is the ratio of the borrower's total monthly payments on all
outstanding debt (including the new loan) to the borrower's gross verifiable
monthly income. The debt-to-gross income ratio generally may not exceed __%.
For ARMs, such ratios generally are calculated using the "fully indexed" rate
(i.e., the sum of the applicable Index and the related Gross Margin). In
addition, the maximum Combined Loan-to-Value Ratio of any mortgage loan may
not exceed __% and may be reduced depending on a number of factors, including
the applicant's credit history and employment status.
Any exceptions to the underwriting policies may be approved by the
manager of the underwriting department. The factors considered when
determining if an exception to the general underwriting standards should be
made include: the quality of the property, how long the borrower has owned the
property, the amount of disposable income, the type and length of employment,
the credit history, the current and pending debt obligations, the payment
habits and the status of past and currently existing mortgages.
When an application is approved, a mortgage and/or home improvement loan
is completed by signing the applicable loan documents, including a promissory
note and mortgage. All loans are closed by approved attorneys. Following the
three business day rescission period required by the federal Truth in Lending
Act, a loan is fully funded. Scheduled repayment of principal and interest on
such loan generally begins one month from the date interest starts to accrue.
After a mortgage loan is underwritten, approved and funded, the loan package
is reviewed by an employee.
Refinancing Policy
Where the seller believes that borrowers having existing loans with the
seller are likely to refinance such loans due to interest rate changes or
other reasons, the seller actively attempts to retain such borrowers through
solicitations of such borrowers to refinance with the seller. Such
refinancings generate fee and servicing income for the seller. Since the
solicited borrowers may refinance their existing loans in any case, the seller
believes that this practice will be unlikely to affect the prepayment
experience of the home equity mortgage loans in a material respect. The seller
also has solicited its borrowers who are in good standing to apply for
additional loans, consistent with its origination standards where deemed
appropriate.
Servicing of Home Equity Loans
The servicer has established standard policies for the servicing and
collection of the home equity loans. Servicing includes, but is not limited
to, post-origination loan processing, customer service, collections,
remittance processing and liquidations.
The servicer sends a monthly statement to each of its borrowers.
Collection procedures vary somewhat depending on whether a late payment is the
first payment due under the loan. If the first payment is not received on or
prior to the due date, an initial phone call is made on the first business day
after the due date. Phone calls continue on a daily basis until contact is
made. A "friendly reminder letter" is sent on the second business day after
the due date. If no contact is made with the borrower by the _____ day after
the due date, a "pre-foreclosure letter" is sent, and a qualified outside
agency is used to inspect the property. On the _____ day after a first payment
default a notice of default is sent to the borrower. This notice indicates an
intent to accelerate the loan if satisfactory arrangements are not made within
ten days.
If the delinquency relates to a due date other than the first due date, a
friendly reminder letter is sent on the second business day after the due
date. On the _____ day after the due date, telephone calls to the borrower
begin and telephone calls continue on a daily basis until payment is received
or contact is made. In addition, a series of mailings is made depending on the
borrower's payment history. On the _____ day of delinquency a notice of
default is sent. A qualified outside agency is used to conduct an interview
with the borrower and the property is inspected.
Accounts which are __ days past due without a specific arrangement for
repayment will be sent a notice of intent to foreclose which gives the
borrower _____ days in which to respond. On the _____ day of delinquency, a
determination whether to foreclose is made. If the servicer decides to
foreclose, the necessary documentation is sent to an approved attorney who
then sends the borrower an acceleration letter allowing the borrower __ days
to reinstate the mortgage. When foreclosure proceedings are initiated, a third
party appraiser completes a drive-by evaluation of the property and obtains
comparable sales prices and listings in the area. In addition, homeowner's
insurance is verified and the status of senior mortgages and property taxes is
checked. Subject to applicable state law, all legal expenses are assessed to
the account and become the responsibility of the borrower.
Regulations and practices regarding the liquidation of properties (e.g.,
foreclosure) and the rights of the borrower in default vary greatly from state
to state. The servicer will decide that liquidation is the appropriate course
of action only if a delinquency cannot otherwise be cured. If the servicer
determines that purchasing a property securing a mortgage or home improvement
loan will minimize the loss associated with such defaulted loan, the servicer
may bid at the foreclosure sale for such property or accept a deed in lieu of
foreclosure.
Servicing and collection practices may change over time in accordance
with, among other things, the servicer's business judgment, changes in the
portfolio and applicable laws and regulations. Any realization from the sale
of foreclosed property is taken as recovery. After the Servicer acquires title
to a mortgaged property by foreclosure or deed in lieu of foreclosure, an
approved realtor is selected to list and advertise the property.
The servicer may not foreclose on the property securing a junior mortgage
loan unless it forecloses subject to the senior mortgage. If the senior
mortgage loan is in default after the servicer has initiated its foreclosure
actions, the servicer may advance funds to keep the senior mortgage loan
current until such time as the Servicer satisfies the senior mortgage loan.
Such amounts are added to the balance of the home equity loan. In the event
that foreclosure proceedings have been instituted on senior mortgage prior to
the initiation of the Servicer's foreclosure action, the servicer will either
satisfy the senior mortgage loan at the time of the foreclosure sale or take
other action to protect its interest in the related property.
Delinquency and Loss Experience
The following tables set forth the delinquency and loss experience for
each of the periods shown for the servicer's portfolio of home equity loans.
The servicer believes that there have been no material trends or anomalies in
the historical delinquency and loss experience as represented in the following
tables. The information in the tables below has not been adjusted to eliminate
the effect of the growth in the size of the servicer's portfolio during the
periods shown. Accordingly, loss and delinquency as percentages of aggregate
principal balance of such loans for each period may be higher than those shown
if a group of such loans were artificially isolated at a point in time and the
information showed the activity only in that isolated group. The data
presented in the following tables are for illustrative purposes only, and
there is no assurance that the delinquency and loss experience of the Loans
will be similar to that set forth below.
DELINQUENCY EXPERIENCE (Dollars in Thousands)
<TABLE>
<CAPTION>
As of As of December 31,
___________, ___(1) _________________________________________________________________________
--- --- ---
--------------------- --------------------- ------------------- -----------------------
Number Amount Number Amount Number Amount Number Amount
of Loans of Loans of Loans of Loans
--------- --------- --------- --------- --------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio Principal $ $ $ $
Outstanding at
Period End.......
Delinquency(1) $ $ $ $
30-59 Days.......
60-89 Days.......
90 or More _____ _____ _____ _____ _____ _____ _____ _____
Days(2)............
Total Delinquencies $ $ $ $
Total Delinquencies % % % % % % % %
as a Percentage
of the Portfolio
at Period End....
</TABLE>
- --------------------
(1) The period of delinquency is based on the number of days payments are
contractually past due for all loans other than mortgage loans previously
charged off.
(2) Includes mortgage loans in foreclosure and not charged off.
<PAGE>
LOSS EXPERIENCE (Dollars in Thousands)
<TABLE>
<CAPTION>
As of Year Ended December 31,
_________, ____(1) _____________________________________________________________________
--- --- ---
------------------------ ---------------------------------------------------------------------
Number of Amount Number of Amount Number Amount Number Amount
Loans Loans of Loans of Loans
----------- -------- ------------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Portfolio Principal $ $ $ $
Outstanding at
Period End.......
Gross Losses....... $ $ $ $
Recoveries......... $ $ $ $
Net Losses......... $ $ $ $
Net Losses as a $ $ $ $
Percentage of
Portfolio at
Period End.......
</TABLE>
- --------------------
(1) Net Losses equal total principal charged off less recoveries. The
customary policy is to charge off mortgage and home improvement loans in
full that are 120 days past due unless foreclosure proceedings are
planned or there are indications that the account will be brought
current. An account that is not charged off because there are indications
that payment is imminent generally will be charged off after an
additional 60 to 90 days if such payment is not forthcoming.
(2) This percentage represents the ___-month period ended _________, ___
annualized and is not necessarily indicative of the results which may
occur for the full year.
PREPAYMENT AND YIELD CONSIDERATIONS
General
The rate of principal payments on each class of the Class A Certificates,
the aggregate amount of distributions on those certificates and the yield to
maturity of those certificates will be related to the rate and timing of
payments of principal on the Loans in the related loan group. The rate of
principal payments on the Loans will in turn be affected by the amortization
schedules of the Loans (including, in the case of ARMs, changes to their
amortization schedules as a result of changes in the Loan Rate) and by the
rate of principal prepayments (including for this purpose prepayments
resulting from refinancing, liquidations of the Loans due to defaults,
casualties, condemnations and repurchases by the seller or purchases by the
servicer). The Loans may be prepaid by the borrowers at any time without a
prepayment penalty.
Prepayments, liquidations and purchases of the Loans (including any
optional purchase by the servicer of a defaulted Loan and any optional
purchase of the remaining Loans in connection with the termination of the
trust), will result in distributions on the related class or classes of the
Class A Certificates of principal amounts which would otherwise be distributed
over the remaining terms of the Loans. In addition, any Pre-Funded Amount
allocated to a loan group remaining at the end of the Pre-Funding Period will
be distributed as a prepayment of the related class or classes of the Class A
Certificates. Since the rate of payment of principal of the Loans will depend
on future events and a variety of factors, no assurance can be given as to
such rate or the rate of principal prepayments. The extent to which the yield
to maturity of a certificate may vary from the anticipated yield will depend
upon the degree to which the certificate is purchased at a discount or
premium.
The prepayment experience on non-conventional home equity loans may
differ from that on conventional first mortgage loans, primarily due to the
credit quality of the typical borrower. Because the credit histories of many
home equity borrowers may preclude them from other traditional sources of
financing, they may be less likely to refinance their loan due to a decline in
market interest rates. Non-conventional home equity loans may experience more
prepayments in a rising interest rate environment as the borrowers' finances
are stressed to the point of default.
The rate of prepayment on the Loans cannot be predicted. Home equity
loans have been originated in significant volume only during the past few
years and the seller is not aware of any publicly available studies or
statistics on the rate at which they prepay. Generally, home equity loans are
not viewed by borrowers as permanent financing. Accordingly, the Loans may
experience a higher rate of prepayment than would traditional first mortgage
loans. The prepayment experience of the trust with respect to the Loans may be
affected by a wide variety of factors, including economic conditions,
prevailing interest rate levels, the availability of alternative financing and
homeowner mobility and changes affecting the deductibility for federal income
tax purposes of interest payments on home equity loans. All of the Loans
contain "due-on-sale" provisions, and the servicer is required by the pooling
and servicing Agreement to enforce those provisions, unless enforcement is not
permitted by applicable law. The enforcement of a "due-on-sale" provision will
have the same effect as a prepayment of the related Loan. See "Certain Legal
Aspects of Loans--Due-on-Sale Clauses in Loans" in the accompanying
prospectus. No assurance can be given as to the level of prepayments that will
be experienced by the trust and it can be expected that a portion of borrowers
will not prepay their Loans to any significant degree.
Overcollateralization and Cross Collateralization
The overcollateralization and cross collateralization features described
in this prospectus supplement will affect the rate and timing of principal
distributions on the Class A Certificates, and consequently the average life
and yield to maturity of each class. On any Distribution Date on which the
Overcollateralization Amount for a loan group is less than the related
Required Overcollateralization Amount, the Remaining Net Excess Spread for
that loan group, the Available Transfer Cashflow and the Net Excess Principal
will be used to reduce the Class Certificate Balance of the related class or
classes of the Class A Certificates through the distribution of Additional
Principal. Until such time, if any, as the Overcollateralization Amount for a
loan group equals the related Required Overcollateralization Amount, there
will be no Available Transfer Cashflow or Net Excess Principal to accelerate
the amortization of the other class or classes of the Class A Certificates.
Loans with higher Loan Rates contribute more interest to the Excess Spread
than do Loans with relatively lower Loan Rates. If Loans with higher Loan
Rates prepay, the amount of Net Excess Spread be reduced, thereby slowing the
amortization of the Class Certificate Balance of the related class or classes
of the Class A Certificates from the distribution of Additional Principal.
Because the Excess Spread for a loan group is available to cover an
Available Funds Shortfall with respect to both that loan group and the other
loan group, there may be no Remaining Net Excess Spread with which to make
payments of Additional Principal. Similarly, any Excess Principal for a loan
group will be applied to cover an Available Funds Shortfall in the other loan
group prior to being applied to the payment of Additional Principal for the
class or classes of the Class A Certificates related to the other loan group.
Thus, the amount and timing of any distributions in respect of Additional
Principal on a Class of the Class A Certificates will depend, in part, on the
prepayment and loss experience of the Loans in the loan group related to the
other class or classes of Class A Certificates.
The application of Remaining Net Excess Spread, Available Transfer
Cashflow and Net Excess Principal to payments of Additional Principal is
intended to create overcollateralization to provide a source of additional
cashflow to cover losses on the Loans in each loan group. If the amount of
losses in a particular Due Period exceeds the amount of Excess Spread for the
related loan group and the Net Excess Spread and Excess Principal for the
other loan group for the related Distribution Date, the amount in respect of
principal distributed to the related class or classes of the Class A
Certificates will be reduced. A draw on the certificate guaranty insurance
policy in respect of principal will not be made until the Loan Group Balance
is less than the aggregate Class Certificate Balance of the related class or
classes of the Class A Certificates, i.e., when the related class or classes
of the Class A Certificates are undercollateralized.
If a Required Overcollateralization Amount is allowed to step down, the
amount of Remaining Net Excess Spread and Net Excess Principal available to
the other loan group may be increased, and the amount of principal distributed
to the class or classes of the Class A Certificates for which the step down
occurred will be decreased.
As a result of the interaction of the foregoing features, there may be
Distribution Dates on which Holders of the Class A Certificates receive little
or no distributions in respect of principal. The Overcollateralization Amount
applicable to each loan group may or may not equal the related Required
Overcollateralization Amount on any Distribution Date. There can be no
assurance as to whether or when the Overcollateralization Amount applicable to
each loan group may equal the related Required Overcollateralization Amount.
ARMs
As is the case with fixed rate loans, the ARMs may be subject to a
greater rate of principal prepayments in a low interest rate environment. For
example, if prevailing interest rates were to fall, borrowers with ARMs may be
inclined to refinance their ARMs with a fixed rate loan to "lock in" a lower
interest rate. The existence of the Periodic Cap, Lifetime Cap and Lifetime
Floor also may affect the likelihood of prepayments resulting from
refinancings. In addition, the delinquency and loss experience on the ARMs may
differ from that on the fixed rate Loans because the amount of the monthly
payments on the ARMs is subject to adjustment on each Change Date. If such
different experience were to occur, the prepayment experience of the Class A-3
Certificates may differ from that of the Class A-1 and Class A-2 Certificates.
Certain of the ARMs were originated with initial Loan Rates that were
based on competitive conditions and did not equal the sum of the applicable
Index and the related Gross Margin. In addition, none of the ARMs has reached
its initial Change Date. As a result, the Loan Rates on such ARMs are more
likely to adjust on their first, and possibly subsequent Change Dates, subject
to the effects of the applicable Periodic Cap and Lifetime Cap. Because the
Certificate Rate for the Class A-3 Certificates is a function of the weighted
average Remittance Rate of the ARMs, limits on changes in the Loan Rates of
the ARMs may limit changes in the Certificate Rate for the Class A-3
Certificates.
Disproportionate principal payments on ARMs having Loan Rates higher than
the current Certificate Rate will also affect the yield on the Class A-3
Certificates. The yield to maturity of the Class A-3 Certificates will be
lower than otherwise would be the case if disproportionate principal payments
(including prepayments) are made on ARMs having Loan Rates that exceed the
related Certificate Rate.
Final Scheduled Distribution Date
The Final Scheduled Distribution Date for each class of the Class A
Certificates is set forth in "Summary of Terms--Final Scheduled Distribution
Date". The Final Scheduled Distribution Date for the Class A-1 Certificates
was determined based on the structuring assumptions described in the following
paragraph and the assumption that there are no prepayments. The Final
Scheduled Distribution Dates for the Class A-2 and Class A-3 Certificates were
set to equal the Distribution Date in the 25th month following the month of
the latest possible scheduled maturity date for any of the Loans in the
related loan group. Since the rate of distributions in reduction of the Class
Certificate Balance of each class of the Class A Certificates will depend on
the rate of payment (including prepayments) of the Loans, the Class
Certificate Balance of any of those classes could be reduced to zero
significantly earlier or later than the applicable Final Scheduled
Distribution Date. The rate of payments on the Loans will depend on their
particular characteristics, as well as on prevailing interest rates from time
to time and other economic factors, and no assurance can be given as to the
actual payment experience of the Loans.
Structuring Assumptions
The information in the decrement tables has been prepared on the basis of
the following assumed characteristics of the Home Equity and the following
additional assumptions (collectively, the "Structuring Assumptions"):
o the Loans prepay at the specified percentages of the Prepayment Ramp
or CPR (each as defined below);
o no defaults or delinquencies in the payment by borrowers of principal
of and interest on the Loans are experienced;
o the initial Class Certificate Balance of each class of the Class A
Certificates is as set forth on the cover page of this prospectus
supplement;,
o interest accrues on each class of the Class A Certificates in each
period at the applicable Certificate Rate or initial Certificate Rate
described in this prospectus supplement;
o distributions on the Class A Certificates are received in cash on the
25th day of each month commencing in ___________;
o the servicer does not exercise its option to purchase the Loans
described in this prospectus supplement under "Description of the
Certificates--Termination; Retirement of Certificates" and "--Optional
Purchase of Defaulted Loans";
o the Class A Certificates are purchased on ________;
o scheduled payments on the Loans are received on the first day of each
month commencing in the calendar month following the Closing Date and
are computed prior to giving effect to prepayments received on the
last day of the prior month;
o prepayments represent prepayments in full of individual Loans and are
received on the last day of each month and include 30 days' interest,
commencing in the calendar month in which the Closing Date occurs;
o the scheduled monthly payment for each Loan has been calculated based
on the assumed loan characteristics set forth in the following table
such that each Loan will amortize in amounts sufficient to repay the
balance of that Loan by its indicated remaining term to maturity;
o all of the indicated Subsequent Loans purchased with funds from the
Pre-Funding Account are purchased during ______;
o the Trust consists of __ Loans with the characteristics set forth in
the following table;
o the level of the Index remains constant at ______%; and
o the Mortgage Rate for each Loan in Loan Group II is adjusted on its
next Change Date (and on subsequent Change Dates, if necessary) to
equal the sum of the assumed level of the Index and the Gross Margin
(that sum being subject to the Periodic Rate Cap).
While it is assumed that each of the Loans prepays at the specified
percentages of the Prepayment Ramp or CPR, as applicable, this is not likely
to be the case. Moreover, discrepancies will exist between the characteristics
of the actual Loans which will be delivered to the trustee (including
Subsequent Loans) and characteristics of the Loans assumed in preparing the
tables contained in this prospectus supplement.
Prepayments of home equity loans are commonly measured relative to a
prepayment standard or model. The model used in this prospectus supplement
(the "Prepayment Ramp") assumes that the Loans prepay at a rate of ___% CPR in
the first month after origination, and an additional ___% each month
thereafter until the __ month. Beginning in the __ month and each month
thereafter, the Prepayment Ramp assumes a prepayment rate of __% CPR. For the
Class A-3 Certificates, it was assumed that the Loans in Loan Group II prepay
at a rate of ___% CPR. The Constant Prepayment Rate ("CPR") represents an
assumed constant rate of prepayment each month, expressed as an annual rate,
relative to the then outstanding principal balance of a pool of home equity
loan for the life of such loans. The Prepayment Ramp does not purport to be
either an historical description of the prepayment experience of any pool of
loans or a prediction of the anticipated rate of prepayment of any home equity
loans, including the Loans to be included in the loan groups.
<TABLE>
<CAPTION>
Original Remaining
Principal Current Loan Term to Term to Gross Months to
Balance($) Rate (%) Maturity Maturity Margin(%) Next Change
(months) (months) Date
---------- ------------ -------- ------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Loan Group I............
Loan Group II...........
</TABLE>
Decrement Tables
The following tables indicate, based on the Structuring Assumptions, the
percentages of the initial Class Certificate Balances of the Classes of
Offered Certificates that would be outstanding after each of the dates shown
at various percentages of the Prepayment Ramp or CPR and the corresponding
weighted average lives of such Classes. It is not likely that all of the Loans
will have the characteristics assumed, that the Loans will prepay at the
specified percentages of the Prepayment Ramp or CPR or at any other constant
percentage or that the level of the Index will remain constant at the level
assumed or at any other level. Moreover, the diverse remaining terms to
maturity of the Loans could produce slower or faster principal distributions
than indicated in the tables at the specified percentages of the Prepayment
Ramp or CPR, even if the weighted average remaining term to maturity of the
Loans is consistent with the remaining terms to maturity of the Loans
specified in the Structuring Assumptions.
<PAGE>
<TABLE>
<CAPTION>
Percent of Initial Class Certificate
Balances Outstanding*
Distribution Date Class A-1 Percentage of CPR Class A-2 Percentage of CPR
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Initial Percent.............
______ ____.................
______ ____.................
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______ ____.................
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______ ____.................
______ ____.................
______ ____.................
______ ____.................
______ ____.................
______ ____.................
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______ ____.................
______ ____.................
______ ____.................
______ ____.................
______ ____.................
______ ____.................
______ ____.................
______ ____.................
______ ____.................
Weighted Average
Life (years)**............
</TABLE>
- ----------------------
* Rounded to the nearest whole percentage.
** The weighted average life of a Class A Certificate is determined by (a)
multiplying the amount of the reduction, if any, of the Class Certificate
Balance of the certificate on each Distribution Date by the number of
years from the date of issuance to that Distribution Date, (b) summing
the results and (c) dividing the sum by the aggregate amount of the
reductions in Class Certificate Balance of the certificate referred to in
clause (a).
<PAGE>
Percent of Initial Class Certificate
Balances Outstanding*
Distribution Date Class A-3 Percentage of CPR
- --------------------------------------------------------------------------
Initial Percent.............
______ ____.................
______ ____.................
______ ____.................
______ ____.................
______ ____.................
______ ____.................
______ ____.................
______ ____.................
______ ____.................
______ ____.................
______ ____.................
______ ____.................
______ ____.................
______ ____.................
______ ____.................
______ ____.................
______ ____.................
______ ____.................
______ ____.................
______ ____.................
______ ____.................
______ ____.................
______ ____.................
______ ____.................
______ ____.................
______ ____.................
______ ____.................
Weighted Average Life
(years)**.................
- ----------------------
* Rounded to the nearest whole percentage.
** The weighted average life of a Class A Offered Certificate is determined
by (a) multiplying the amount of the reduction, if any, of the Class
Certificate Balance of the certificate on each Distribution Date by the
number of years from the date of issuance to that Distribution Date, (b)
summing the results and (c) dividing the sum by the aggregate amount of
the reductions in Class Certificate Balance of the certificate referred
to in clause (a).
DESCRIPTION OF THE CERTIFICATES
The certificates will be issued pursuant to the pooling and servicing
agreement. The following summaries describe certain provisions of the
agreement. The summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
pooling and servicing agreement. Wherever we refer to particular sections or
defined terms of the agreement are referred to, such sections or defined terms
are hereby incorporated herein by reference.
General
Each class of the certificates will evidence specified undivided
interests in the Trust. To the extent provided in the pooling and servicing
agreement, the property of the trust will consist of:
o the Loans,
o payments on the Loans received on and after the Cut-off Date,
o Mortgaged Properties relating to the Loans that are acquired by
foreclosure or deed in lieu of foreclosure,
o each Collection Account and Distribution Account,
o the Capitalized Interest Account,
o the Pre-Funding Account,
o the certificate guaranty insurance policy,
o certain hazard insurance policies maintained by the borrowers of the
Loans or the servicer, and
o the depositor's rights under the home equity loan purchase agreement.
Book-Entry Registration
The Class A Certificates initially will be registered in the name of Cede
& Co. ("Cede"), the nominee of the Depository Trust Company ("DTC"). DTC has
advised the depositor as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Securities Exchange Act of 1934, as amended. DTC was
created to hold securities for its participating organizations
("Participants") and facilitate the clearance and settlement of securities
transactions between Participants through electronic book-entry changes in
their accounts, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and may include certain other
organizations. Indirect access to the DTC system also is available to others
such as brokers, dealers, banks and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participant").
Under a book-entry format, beneficial owners of the Class A Certificates
("Owners") that are not Participants or Indirect Participants but desire to
purchase, sell or otherwise transfer ownership of Class A Certificates
registered in the name of Cede, as nominee of DTC, may do so only through
Participants and Indirect Participants. In addition, Owners will receive all
distributions of principal of and interest on the Class A Certificates from
the trustee through DTC and its Participants. Under a book-entry format,
Owners will receive payments after the related Distribution Date because,
while payments are required to be forwarded to Cede, as nominee for DTC, on
each such date, DTC will forward such payments to its Participants which
thereafter will be required to forward them to Indirect Participants or
Owners. Under a book-entry format, it is anticipated that the only
Certificateholder will be Cede, as nominee of DTC, and that the Owners will
not be recognized by the trustee as Certificateholders under the pooling and
servicing agreement. The Owners will only be permitted to exercise the rights
of Certificateholders under the pooling and servicing agreement indirectly
through DTC and its Participants who in turn will exercise their rights
through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Class A Certificates
and is required to receive and transmit payments of principal of and interest
on the Class A Certificates. Participants and Indirect Participants with which
Owners have accounts with respect to the Class A Certificates similarly are
required to make book-entry transfers and receive and transmit such payments
on behalf of their respective Owners. Accordingly, although Owners will not
possess certificates, the rules provide a mechanism by which Owners will
receive distributions and will be able to transfer their interests.
Owners who are not Participants may transfer ownership of the Class A
Certificates only through Participants by instructing such Participants to
transfer the Class A Certificates, by book-entry transfer, through DTC for the
account of the purchasers of the Class A Certificates, which account is
maintained with their respective Participants. Under the rules and in
accordance with DTC's normal procedures, transfers of ownership of the Class A
Certificates will be executed through DTC and the accounts of the respective
Participants at DTC will be debited and credited. Similarly, the respective
Participants will make debits or credits, as the case may be, on their records
on behalf of the selling and purchasing Owners.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of Owners to
pledge their Class A Certificates to persons or entities that do not
participant in the DTC system, or otherwise take actions in respect of the
Class A Certificates, may be limited due to their not having a physical
certificate.
DTC in general advises that it will take any action permitted to be taken
by an Owner under the pooling and servicing agreement only at the direction of
one or more Participants to whose account with DTC the Class A Certificates
are credited. Additionally, DTC in general advises that it will take such
actions with respect to specified percentages of Owners only at the direction
of and on behalf of Participants whose holdings include current principal
amounts of outstanding Class A Certificates that satisfy the specified
percentages. DTC may take conflicting actions with respect to other current
principal amounts of outstanding Class A Certificates to the extent that such
actions are taken on behalf of Participants whose holdings include such
current principal amounts of outstanding Class A Certificates.
Any Class A Certificates initially registered in the name of Cede, as
nominee of DTC, will be issued in fully registered, certificated form to
Owners or their nominees ("Definitive Certificates"), rather than to DTC or
its nominee only under the following circumstances:
o the depositor advises the trustee in writing that DTC is no longer
willing or able to properly discharge its responsibilities as
depository with respect to the Class A Certificates, and the trustee
or the depositor is unable to locate a qualified successor;
o the depositor, at its option, elects to terminate the book-entry
system through DTC; or
o after the occurrence of an Event of Default (as defined on page S-__),
Owners representing not less than 50% of the aggregate Certificate
Principal Balance of the Class A Certificates advise the trustee and
DTC through Participants in writing that the continuation of a
book-entry system through DTC (or its successor) is no longer in the
best interest of the Owners.
If any of those events occurs, DTC will be required to notify all
Participants of the availability through DTC of Definitive Certificates. Upon
surrender by DTC of the certificates representing the Class A Certificates and
instruction for re-registration, the trustee will issue the Class A
Certificates in the form of Definitive Certificates, and thereafter the
trustee will recognize the holders of the Definitive Certificates as
Certificateholders. Thereafter, payments of principal of and interest on the
Class A Certificates will be made by the trustee directly to
Certificateholders in accordance with the procedures set forth in the pooling
and servicing agreement. The final distribution of any Class A Certificate
(whether Definitive Certificates or Class A Certificates registered in the
name of Cede), however, will be made only upon its presentation and surrender
of the Certificates on the final Distribution Date at such office or agency as
is specified in the notice of final payment to Certificateholders.
Although DTC has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Class A Certificates among
Participants, it is under no obligation to perform or continue to perform
those procedures, which may be discontinued at any time. The depositor, the
seller, the servicer and the trustee have no responsibility for the
performance by DTC or its Participants or Indirect Participants of their
respective obligations under the rules and procedures governing their
operations.
Assignment of Loans
The Loans will be acquired by the depositor from the seller pursuant to
the home equity loan purchase agreement, dated the Closing Date (the "Purchase
Agreement"), between the seller and the depositor. At the time of issuance of
the certificates, the depositor will transfer to the trust all of its right,
title and interest in and to each Loan, the related mortgage note, mortgage
and other related documents (collectively, the "Related Documents"), including
all payments received on or with respect to each such Loan on or after the
Cut-Off Date (exclusive of payments in respect of accrued interest on the
Loans through the related Due Date in the month preceding the month of the
Cut-Off Date). The depositor also will assign to the trustee all of the
depositor's rights under the Purchase Agreement. The trustee, concurrently
with such transfer, will deliver the certificates to the seller. Each Loan
transferred to the trust will be identified on a schedule (the "Loan
Schedule") delivered to the trustee pursuant to the pooling and servicing
Agreement. The Loan Schedule will include information as to the principal
balance of each Loan as of the Cut-Off Date, as well as information with
respect to its current Loan Rate.
The pooling and servicing agreement will require that, within the time
period specified, the depositor will deliver to the trustee (or a custodian,
as the trustee's agent for such purpose) Loans endorsed to the trustee and the
Related Documents. In lieu of delivery of original mortgages, the depositor
may deliver true and correct copies of the mortgages the authenticity of which
have been certified by the appropriate county recording office where such
mortgage is recorded.
Under the terms of the Purchase Agreement, the seller will have 30 days
after the Closing Date to prepare and submit for recording assignments of the
mortgages related to each Loan in favor of the trustee (unless opinions of
counsel satisfactory to the rating agencies and the certificate insurer are
delivered to the trustee and the certificate insurer to the effect that
recordation of such assignments is not required in the relevant jurisdictions
to protect the interests of the trustee in the Loans). If the recording
information with respect to any assignment of mortgage is unavailable within
30 days of the Closing Date, the assignment will be prepared and recorded
promptly after receipt of such information, but in no event later than one
year after the Closing Date.
Within 90 days of the Closing Date, the trustee will review the Loans and
the Related Documents pursuant to the pooling and servicing agreement and if
any Loan or Related Document is found to be defective in any material respect
and the defect is not cured within 90 days following notification to the
seller and the depositor by the trustee, the seller will be obligated to do
one of the following:
o substitute for the Loan an Eligible Substitute Loan; however,
substitution is permitted only within two years of the Closing Date,
and only if an opinion of counsel is provided to the effect that the
substitution will not disqualify the Trust as a REMIC for federal
income tax purposes or result in a prohibited transaction tax under
the Code; or
o purchase the Loan at a price (the "Purchase Price") equal to the
outstanding principal balance of the Loan as of the date of purchase,
plus the greater of
(a) all accrued and unpaid interest on the Loan, and
(b) 30 days' interest on the Loan, computed at the Loan Rate, net of
the related Servicing Fee if the seller or an affiliate is the
servicer, plus the amount of any unreimbursed Servicing Advances
made by the servicer with respect to the Loan.
The Purchase Price will be deposited in the applicable Collection Account on
or before the next Determination Date after the substitution.
The obligation of the Seller to repurchase or substitute for a defective
Loan is the sole remedy regarding any defects in the Loans and Related
Documents available to the trustee or the Certificateholders.
In connection with the substitution of an Eligible Substitute Loan, the
seller will be required to deposit in the applicable Collection Account on or
prior to the next succeeding Determination Date after such obligation arises
an amount (the "Substitution Adjustment") equal to the sum of:
o the excess of the principal balance of the defective Loan over the
principal balance of the related Eligible Substitute Loan, plus
o 30 days' interest on that excess computed at the Loan Rate, net of the
Servicing Fee if the seller or an affiliate is the servicer, plus
o the amount of any unreimbursed Servicing Advances and Monthly Advances
made by the servicer with respect to that defective Loan if the
servicer is not an affiliate of the seller.
The servicer will be deemed to have been reimbursed for any Servicing Advances
and Monthly Advances that are not paid pursuant to the last clause of the
preceding sentence.
An "Eligible Substitute Loan" is a loan substituted by the seller for a
defective Loan which, on the date of such substitution, must
o have an outstanding principal balance (or in the case of a
substitution of more than one Loan for a defective Loan, an aggregate
principal balance), not greater than, and not more than 5% less than,
the principal balance of the defective Loan;
o have a Loan Rate not less than the Loan Rate of the defective Loan and
not more than 1% in excess of the Loan Rate of the defective Loan;
o have a mortgage of the same or higher level of lien priority as the
mortgage relating to the defective Loan;
o have a remaining term to maturity not more than six months earlier and
not later than the remaining term to maturity of the defective Loan;
o comply with each representation and warranty as to the Loans set forth
in the Purchase Agreement (deemed to be made as of the date of
substitution);
o have a Combined Loan-to-Value Ratio not greater than that of the
defective Loan.;
o bear a fixed or adjustable Loan Rate if the deleted Loan was in Loan
Group I or Loan Group II, respectively; and
o if the Loan is an ARM, have a Gross Margin and Lifetime Cap no less
than, the same interval between the Change Dates as, and a Loan Rate
based on the same Index as, that of the defective Loan.
In the Purchase Agreement, the seller will make certain representations
and warranties with respect to the Loans including, among others, the
following:
o The information with respect to each Loan set forth in the Loan
Schedule is true and correct in all material respects as of the
Cut-Off Date;
o Each Mortgage is a valid and subsisting first or second lien of record
on the Mortgaged Property subject, in the case of any second mortgage
Loan, only to a first lien on that Mortgaged Property and subject in
all cases to the exceptions to title set forth in the title insurance
policy with respect to the related Loan, which exceptions are
generally acceptable to mortgage lending companies, and such other
exceptions as to which similar properties are commonly subject and
which do not individually, or in the aggregate, materially and
adversely affect the benefits of the security intended to be provided
by the Mortgage;
o Except with respect to liens released immediately prior to the
transfer contemplated in the Purchase Agreement, each Mortgage Note
and the related Mortgage have not been assigned or pledged and
immediately prior to the transfer and assignment contemplated in the
Purchase Agreement, the seller held good, marketable and indefeasible
title to, and was the sole owner and holder of, each Loan subject to
no liens, charges, mortgages, claims, participation interests,
equities, pledges or security interests of any nature, encumbrances or
rights of others (collectively, a "Lien"); and immediately upon the
completion of the transfers and assignments contemplated in the
pooling and servicing agreement, the trustee will hold good,
marketable and indefeasible title, to, and be the sole owner of, each
Loan subject to no Liens;
o No Loan was 30 or more days delinquent as of the Cut-Off Date, as
measured at the end of the month; and
o Each Loan at the time it was made complied in all material respects
with applicable state and federal laws and regulations, including,
without limitation, usury, equal credit opportunity, consumer credit,
truth-in-lending, real estate settlement procedures and disclosure
laws.
Upon discovery of a breach of any of those representations and warranties
which materially and adversely affects the interests of the Certificateholders
or the certificate insurer in the related Loan, the seller will have a period
of 60 days after discovery or notice of the breach to effect a cure. If the
breach cannot be cured within the 60-day period, the seller will be obligated
to substitute for the defective Loan an Eligible Substitute Loan or purchase
the defective Loan from the trust. The same procedure and limitations that are
set forth above for the substitution or purchase of defective Loans as a
result of deficient documentation will apply to the substitution or purchase
of a defective Loan as a result of a breach of a representation or warranty
that materially and adversely affects the interests of the Certificateholders
or the certificate insurer. The obligation of the seller to repurchase or
substitute for a defective Loan is the sole remedy regarding any breach of a
representation or warranty with respect thereto available to the trustee or
the Certificateholders.
The depositor will make no representations or warranties with respect to
the Loans and will have no obligation (other than to assign to the trustee the
depositor's rights under the Purchase Agreement) or liability with respect to
breaches of the seller's representations or warranties or its obligations to
cure, purchase or substitute for any defective Loan.
Payments on Loans; Deposits to Collection Accounts and Distribution Account
The trustee will establish and maintain a separate account (each, a
"Collection Account") for each loan group. Each Collection Account will be an
Eligible Account (as defined below). Subject to the investment provision
described in the following paragraphs, upon receipt by the servicer of amounts
in respect of the Loans (excluding amounts representing the Servicing Fee,
reimbursement for previous related Monthly Advances or Servicing Advances,
administrative charges, taxes, assessments, credit insurance charges,
insurance proceeds to be applied to the restoration or repair of a Mortgaged
Property or similar items), the servicer will deposit those amounts in the
Collection Account for the applicable loan group. Amounts deposited may be
invested in Eligible Investments (as described in the pooling and servicing
agreement) maturing no later than one business day prior to the date on which
the amount on deposit in the Collection Account is required to be deposited in
the Distribution Account or on the Distribution Date itself, if the rating
agencies and the certificate insurer give their approval.
The trustee will establish a separate account (each, a "Distribution
Account") for each loan group into which it will deposit amounts withdrawn
from the related Collection Account for distribution to Certificateholders on
a Distribution Date. Each Distribution Account will be an Eligible Account.
Amounts on deposit in each Distribution Account may be invested in Eligible
Investments maturing on or before the business day before the related
Distribution Date.
An "Eligible Account" is an account that is
o maintained with a depository institution the deposits in which are
insured by the FDIC to the limits established by the FDIC and the
short-term debt obligations of which (or in the case of a depository
institution that is the principal subsidiary of a holding company, the
short-term debt obligations of which) are rated in the highest
short-term rating category by each Rating Agency and the long-term
debt obligations of which are rated at least Aa3 by Moody's;
o a trust account or accounts maintained with the trust department of a
federal or a state chartered depository institution or trust company
the long-term debt obligations of which are rated at least Baa3 by
Moody's, acting in a fiduciary capacity; or
o an account or accounts otherwise acceptable to each Rating Agency and
the certificate insurer.
Eligible Investments are specified in the Agreement and are limited to
investments which meet the criteria of the Rating Agencies from time to time
as being consistent with their then current ratings of the Certificates.
Pre-Funding Account
On the Closing Date, a total cash amount (the "Pre-Funded Amount") not to
exceed approximately $_________ will be deposited in the Pre-Funding Account.
Of that amount, approximately $__________ will be used to purchase Subsequent
Loans for deposit into Loan Group I and, if required, to make accelerated
payments of principal on the Class A-1 and Class A-2 Certificates, and
approximately $__________ will be used to purchase Subsequent Loans for
deposit into Loan Group II and, if required, to make accelerated payments of
principal on the Class A-3 Certificates. During the period (the "Pre-Funding
Period") from the Closing Date to the earliest to occur of:
o the date on which the amount on deposit in the Pre-Funding Account is
less than $_____,
o the date on which an Event of Default occurs under the pooling and
servicing agreement, and
o __________,
amounts on deposit in the Pre-Funding Account may be withdrawn from time to
time to acquire Subsequent Loans in accordance with the pooling and servicing
agreement. Any net investment earnings on the Pre-Funded Amount will be
transferred to the Capitalized Interest Account on each Distribution Date
during the Pre-Funding Period. Any Pre-Funded Amount remaining in the
Pre-Funding Account at the end of the Pre-Funding Period will be distributed
on the Distribution Date occurring at or immediately following the end of the
Pre-Funding Period as a prepayment of principal of the Class A-1 and Class A-2
Certificates, on a pro rata basis, or the Class A-3 Certificates, as
applicable, based on the remaining Pre-Funded Amount allocated to the related
loan group. Only fixed rate Subsequent Loans may be added to Loan Group I, and
only adjustable rate Subsequent Loans may be added to Loan Group II.]
Capitalized Interest Account
On the Closing Date, funds will be deposited in an account (the
"Capitalized Interest Account") created and maintained with the trustee. The
amount deposited will be used by the trustee on the Distribution Dates in the
Pre-Funding Period to fund the excess, if any, of the Interest Remittance
Amounts for the Class A Certificates and the premium due for the certificate
guaranty insurance policy over the funds available on such Distribution Dates.
Any funds remaining in the Capitalized Interest Account at the end of the
Pre-Funding Period will be distributed to the Holders of the Class R
Certificates.
Advances
Not later than the close of business on the second business day before
the related Distribution Date, the servicer will be required to remit to the
trustee for deposit in the applicable Collection Account an amount, to be
distributed on the related Distribution Date, equal to the sum of the interest
accrued on each Loan through the related Due Date but not received by the
servicer as of the close of business on the related Determination Date (net of
the Servicing Fee with respect to that Loan), plus, with respect to each REO
Property which was acquired during or prior to the related Due Period and as
to which a final disposition did not occur in the related Due Period, an
amount equal to the excess, if any, of interest for the most recently ended
Due Period on the Principal Balance of the Loan relating to such REO Property
at the related Loan Rate (net of the Servicing Fee with respect to such Loan)
over the net income from the REO Property transferred to the related
Collection Account for such Distribution Date pursuant to the pooling and
servicing agreement (the "Monthly Advance"). The servicer may fund all or a
portion of any Monthly Advance from funds on deposit in the applicable
Collection Account that are not required to be distributed on the related
Distribution Date. Any funds used for that purpose must be replaced on or
before the Distribution Date on which such funds will be required to be
distributed.
In the course of performing its servicing obligations, the servicer will
pay all reasonable and customary "out-of-pocket" costs and expenses incurred
in the performance of its servicing obligations, including, but not limited
to, the cost of
o the preservation, restoration and protection of the Mortgaged
Properties;
o any enforcement or judicial proceedings, including foreclosures; and
o the management and liquidation of Mortgaged Properties acquired in
satisfaction of the related Mortgage.
Each of those expenditures will constitute a "Servicing Advance."
The servicer's right to reimbursement for unreimbursed Servicing Advances
is limited to late collections on the related Loan, including Liquidation
Proceeds, released Mortgaged Property proceeds, Insurance Proceeds and such
other amounts as may be collected by the servicer from the related borrower or
otherwise relating to the Loan in respect of which such unreimbursed amounts
are owed. The servicer's right to such reimbursement is prior to the rights of
Certificateholders. The servicer's right to reimbursement for unreimbursed
Monthly Advances is limited to late collections of interest on any Loan and to
Liquidation Proceeds and Insurance Proceeds on the related Loan (as to which
it will have priority over Certificateholders) unless such amounts are
insufficient. In that event (a "Nonrecoverable Advance"), the servicer will be
reimbursed for such Nonrecoverable Advance from funds on deposit in the
applicable Distribution Account.
The servicer is not required to make any Monthly Advance or Servicing
Advance which it determines would be nonrecoverable from amounts received in
respect of the related Loan.
Compensating Interest
The pooling and servicing agreement provides that not later than the
close of business on the second business day prior to the related Distribution
Date, the servicer will remit to the trustee for deposit to the applicable
Collection Account an amount equal to the lesser of
o the aggregate of the Prepayment Interest Shortfalls for the related
Distribution Date resulting from principal prepayments by borrowers
during the related Due Period, and
o the amount otherwise payable to the servicer as its aggregate
Servicing Fee for that Due Period.
The Servicer will not have the right to reimbursement for any of these amounts
deposited to either Collection Account.
Spread Account
The trustee will establish on the Closing Date the Spread Account into
which it will deposit upon receipt from the holder of the Class R Certificate
an amount specified by the certificate insurer (the "Initial Spread Account
Deposit"). Amounts on deposit in the Spread Account will be available for
withdrawal to fund any shortfall between the available funds for distribution
to Holders of a class of Class A Certificates and the related Interest
Remittance Amount and Principal Remittance Amount. If the Initial Spread
Account Deposit is available to fund any shortfall on each Distribution Date,
funds on deposit in the Spread Account equal to the amount of the shortfall
will be withdrawn by the trustee and deposited into the applicable
Distribution Account for distribution to Holders of the affected class or
classes of the Class A Certificates.
Priority of Distributions
On or before each Distribution Date, the trustee will determine the
Overcollateralization Amount for each loan group after giving effect to the
distribution of the Principal Remittance Amount to the related class or
classes of the Class A Certificates on that Distribution Date and the amount
of the related Net Excess Spread. The "Amount Available" for a loan group on a
Distribution Date will equal the sum of:
o the Available Remittance Amount for that loan group; plus
o if an Available Funds Shortfall exists in that loan group,
o first, the Net Excess Spread from the other loan group, to the
extent of the Available Funds Shortfall,
o second, the Excess Principal from the other loan group, to the
extent of any remaining Available Funds Shortfall, and
o third, any amounts in respect of any remaining Available Funds
Shortfall withdrawn from the Spread Account and deposited in the
applicable Distribution Account; plus
o first, the Available Transfer Cashflow, to the extent necessary to
reach the Required Overcollateralization Amount for that loan group
and, second, the Net Excess Principal, to the extent necessary to
reach the Required Overcollateralization Amount for that loan group;
plus
o any Insured Payments with respect to the related class or classes of
the Class A Certificates.
On each Distribution Date the trustee will withdraw from each Distribution
Account the Amount Available and distribute it, to the extent of the Amount
Available, in the following order of priority:
From the Distribution Account for Loan Group I:
o to the certificate insurer the monthly premium then due with respect
to Loan Group I
o to the trustee, the Trustee Fee then due with respect to Loan Group I;
o to the back-up servicer, the Back-Up Servicing Fee then due with
respect to Loan Group I;
o concurrently, to the Class A-1, Class A-2 and Class I Certificates, an
amount allocable to interest equal to the applicable Interest
Remittance Amount;
o sequentially, to the Class A-1 and Class A-2 Certificates, in that
order, an amount allocable to principal equal to the related Principal
Remittance Amount, until their respective Class Certificate Balances
have been reduced to zero;
o to the certificate insurer an amount equal to previously unreimbursed
Insured Payments with respect to the Class A-1, Class A-2 or Class I
Certificates, together with interest thereon at the rate referred to
in the Insurance Agreement;
o sequentially, to the Class A-1 and Class A-2 Certificates, in that
order, an amount allocable to principal equal to the Additional
Principal, until their respective Class Certificate Balances have been
reduced to zero;
o to the certificate insurer, all other amounts owing to the Certificate
Insurer under the Insurance Agreement;
o to the servicer certain reimbursable expenses pursuant to the
Agreement;
o to the servicer, Nonrecoverable Advances not previously reimbursed
with respect to Loan Group I; and
o to the Class R Certificates, the balance, if any.
From the Distribution Account for Loan Group II:
o to the certificate insurer the monthly premium then due with respect
to Loan Group II;
o to the trustee, the Trustee Fee then due with respect to Loan Group
II;
o to the back-up servicer, the Back-Up Servicing Fee then due with
respect to Loan Group II;
o to the Class A-3 Certificates, an amount allocable to interest equal
to the related Interest Remittance Amount;
o to the Class A-3 Certificates, an amount allocable to principal equal
to the related Principal Remittance Amount;
o to the certificate insurer an amount equal to previously unreimbursed
Insured Payments with respect to the Class A-3 Certificates, together
with interest at the rate referred to in the Insurance Agreement;
o to the Class A-3 Certificates, an amount allocable to principal equal
to the Additional Principal;
o to the certificate insurer, all other amounts owing to the certificate
insurer under the Insurance Agreement;
o to the servicer certain reimbursable expenses pursuant to the pooling
and servicing Agreement;
o to the servicer, Nonrecoverable Advances not previously reimbursed
with respect to Loan Group II; and
o to the Class R Certificates, the balance, if any.
Distributions allocable to principal of a class of the Class A
Certificates will not exceed the Class Certificate Balance of that class
immediately before the applicable Distribution Date.
The "Additional Principal" for any class or classes of the Class A
Certificates and any Distribution Date will equal the lesser of
o the amount required to be distributed as principal so that the
Overcollateralization Amount for the related Loan Group equals the
related Required Overcollateralization Amount; and
o the sum of
o the Remaining Net Excess Spread for that Loan Group, plus
o the Available Transfer Cashflow, plus
o the Net Excess Principal.
The "Adjusted Net Loan Rate" for any Loan and any Distribution Date will
equal the related Loan Rate minus the Expense Fee Rate.
An "Available Funds Shortfall" means with respect to any loan group and
Distribution Date, the amount by which the Available Remittance Amount for
that loan group is less than the Required Payments for that loan group.
The "Available Remittance Amount" with respect to any loan group and
Distribution Date is equal to the sum of all amounts received or required to
be paid by the servicer or the seller during the related Due Period with
respect to the Loans in that loan group (exclusive of the Servicing Fee with
respect to each Loan, other servicing compensation payable to the servicer as
permitted by the pooling and servicing agreement and certain amounts available
for reimbursement of Monthly Advances and Servicing Advances, as described
above under "--Advances") and deposited into the applicable Collection Account
pursuant to the pooling and servicing agreement as of the related
Determination Date, including any Monthly Advances, Compensating Interest and,
through the end of the Pre-Funding Period, amounts withdrawn from the
Capitalized Interest Account with respect to the related class or classes of
the Class A Certificates and any remaining amount on deposit in the
Pre-Funding Account at the end of the Pre-Funding Period and allocable to the
related loan group, in each case with respect to such Distribution Date.
The "Available Transfer Cashflow" for any loan group and Distribution
Date will equal the Remaining Net Excess Spread for the other Loan Group
remaining after the payment, if any, of Additional Principal on the class or
classes of the Class A Certificates related to the other Loan Group.
The "Basic Principal Amount" with respect to any Loan Group and
Distribution Date will equal the sum of:
(i) each payment of principal on a Loan received by the servicer
(exclusive of amounts described in clauses (ii) and (iii) below
during the calendar month preceding the calendar month in which
such Distribution Date occurs (with respect to any Distribution
Date, the "Due Period");
(ii) curtailments (i.e., partial prepayments) and prepayments in full
received during the related Due Period;
(iii) all Insurance Proceeds and Net Liquidation Proceeds allocable to
recoveries of principal of Loans received during the related Due
Period;
(iv) an amount equal to the excess, if any, of the Principal Balance
(immediately prior to liquidation) of each Loan liquidated during
the related Due Period over the principal portion of Net
Liquidation Proceeds received during such Due Period (the
"Unrecovered Class A Portion"); and
(v) (a) the outstanding Principal Balance of any Loan purchased by the
seller or the servicer as required or permitted by the pooling and
servicing Agreement as of the related Determination Date and (b)
with respect to any defective Loan for which the seller
substitutes an Eligible Substitute Loan as of the related
Determination Date, any excess of the Principal Balance of that
defective Loan over the principal balance of the Eligible
Substitute Loan, plus the amount of any unreimbursed Servicing
Advances made by the servicer with respect to the Loan to the
extent received.
The "Carry-Forward Amount" for any class of the Class A Certificates on
any Distribution Date will equal the sum of:
o the excess of the aggregate Class Remittance Amounts as of each
preceding Distribution Date over the amount of the actual
distributions to the Holders of that class of the Class A Certificates
made on any such Distribution Date and not subsequently distributed;
plus
o interest on the amount, if any, of the interest component of the
amount described in clause (a) at one-twelfth of the applicable
Certificate Rate.
The "Excess Principal" for any loan group and Distribution Date will
equal the lesser of:
o the portion, if any, of the Basic Principal Amount for that loan group
which is not required to be included in the Principal Remittance
Amount for the related class or classes of the Class A Certificates
for that Distribution Date; and
o the amount of such portion remaining after the application of the
related Available Remittance Amount to the Required Payments for that
loan group.
The "Excess Spread" for any loan group and Distribution Date will equal
interest collected or advanced on the Loans in that loan group (including
amounts allocated to the related class of the Class A Certificates in the
Capitalized Interest Account) minus the sum of:
(a) the Interest Remittance Amount for the related class or classes of
the Class A Certificates and, [in the case of Loan Group I, the
Interest Remittance Amount for the Class I Certificates] and
(b) the Expense Fees for that loan group.
The "Expense Fee Rate" will equal the sum of the per annum rates at which
the Servicing Fee, the Back-up Servicing Fee, the Trustee Fee and the Premium
are calculated which will be ____%.
The "Interest Remittance Amount" for any Distribution Date will equal
interest accrued during the related Interest Period
o in the case of a class of the Class A Certificates, at the applicable
Certificate Rate on the Class Certificate Balance of that class of the
Class A Certificates immediately before the related Distribution Date;
and
o in the case of the Class I Certificates, at the rate of _____% per
annum on their Notional Balance which, [for any Distribution Date,
will equal the Loan Group Balance of Loan Group I as of the first day
of the related Due Period.]
The "Principal Remittance Amount" for any class of the Class A Certificates
and any Distribution Date will be equal to the sum of:
o the lesser of
o the Basic Principal Amount for the related loan group, and
o the portion of such Basic Principal Amount required to be
distributed to increase the Overcollateralization Amount for
the related loan group to the Required Overcollateralization
Amount for that loan group on that Distribution Date; plus
o the Carry-Forward Amount; plus
o on the Distribution Date at the end of the Pre-Funding Period, amounts
deposited in the related Distribution Account from the Pre-Funding
Account pursuant to the pooling and servicing agreement and allocable
to the related loan group.
A "Liquidated Loan" means, as to any Distribution Date, any Loan in
respect of which the servicer has determined, based on the servicing
procedures specified in the pooling and servicing agreement, that, as of the
end of the preceding Due Period, all Liquidation Proceeds which it expects to
recover with respect to the disposition of the related Mortgaged Property have
been recovered.
The "Net Excess Principal" for any loan group and Distribution Date will
equal the Excess Principal for that loan group remaining after its application
to cover an Available Funds Shortfall with respect to the other loan group.
The "Net Excess Spread" for any loan group and Distribution Date will
equal the Excess Spread for that loan group remaining after its application to
cover an Available Funds Shortfall with respect to that loan group.
"Net Liquidation Proceeds" with respect to a Loan are equal to the
Liquidation Proceeds, reduced by related expenses, up to the unpaid Principal
Balance of the Loan plus accrued and unpaid interest. "Liquidation Proceeds"
are the proceeds received in connection with the liquidation of any Loan,
whether through trustee's sale, foreclosure sale or otherwise.
The "Overcollateralization Amount" for any loan group and Distribution
Date will equal the sum of:
o the excess, if any, of
o the sum of the loan group Balance and the amount on deposit
in the Pre-Funding Account allocated to that loan group
(exclusive of any related investment earnings) as of the
close of business on the last day of the related Due Period,
over
o the Class Certificate Balance of the related class or
classes of the Class A Certificates, after giving effect to
the distributions of the related Principal Remittance Amount
on that Distribution Date; plus
o the amount, if any on deposit in the Spread Account allocated to the
related class or classes of the Class A Certificates.
The "Remaining Net Excess Spread" for any loan group and Distribution
Date will equal the Net Excess Spread for that loan group remaining after its
application to cover an Available Funds Shortfall with respect to the other
loan group.
The "Required Payments" for any loan group and Distribution Date will
equal the amount required to pay the Expense Fees, other than the Servicing
Fee, the related Interest Remittance Amount(s) and the related Principal
Remittance Amount and to reimburse the certificate insurer for previously
unreimbursed Insured Payments with respect to the related class or classes of
the Class A Certificates, together with interest at the rate referred to in
the Insurance Agreement.
Reports to Certificateholders
Concurrently with each distribution to the Certificateholders, the
trustee will forward to each Certificateholder a statement setting forth,
among other items, the following information with respect to each class of the
Class A Certificates:
(i) the Available Remittance Amount for the related Distribution
Date;
(ii) the related Interest Remittance Amount and Certificate Rate;
(iii) the related Principal Remittance Amount, stating its components
separately;
(iv) the amount of the Monthly Advances and Compensating Interest
Payments;
(v) the Servicing Fee for that Distribution Date;
(vi) the Additional Principal;
(vii) the Class Certificate Balance, after giving effect to the current
distribution;
(viii) the related Loan Group Balance;
(ix) the number and aggregate Principal Balances of the Loans in the
related loan group as to which the minimum monthly payment is
delinquent for 30-59 days, 60-89 days and 90 or more days,
respectively, as of the end of the preceding Due Period;
(x) the book value of any real estate which is acquired by the Trust
through foreclosure or grant of deed in lieu of foreclosure; and
(xi) the amount of any Insured Payments for that Distribution Date;
and
(xii) the amount of the Unrecovered Class A Portions for each loan
group realized during the related Due Period; the cumulative
amount of losses realized since the Cut-Off Date for each loan
group with separate items indicating gross losses, principal
losses, recoveries, net losses and a breakout for recovery
expenses.
In the case of information furnished pursuant to clauses (ii) and (iii) above,
the amounts shall be expressed as a dollar amount per certificate with a
$1,000 denomination.
Within 60 days after the end of each calendar year, the trustee will
forward to each person who was a Certificateholder during the prior calendar
year a statement containing the information set forth in clauses (ii) and
(iii) of the preceding paragraph aggregated for that calendar year.
Collection and Other Servicing Procedures on Loans
The servicer will make reasonable efforts to collect all payments called
for under the Loans and will, consistent with the pooling and servicing
Agreement, follow such collection procedures as it follows from time to time
with respect to the home equity loans in its servicing portfolio comparable to
the Loans. Consistent with the above, the servicer may in its discretion waive
any late payment charge or any assumption or other fee or charge that may be
collected in the ordinary course of servicing the Loans.
With respect to the Loans, the servicer may arrange with a borrower a schedule
for the payment of interest due and unpaid for a period, provided that any
such arrangement is consistent with the servicer's policies with respect to
the home equity loans it owns or services. With respect to Loans that are
second in priority to a senior mortgage on a Mortgaged Property, the servicer
has the power under certain circumstances to consent to a new mortgage lien on
that Mortgaged Property having priority over such Loan in connection with the
refinancing of the senior mortgage.
The servicer will cause to be maintained fire and hazard insurance with
extended coverage customary in the area where the Mortgaged Property is
located, in an amount which is at least equal to the least of:
o the outstanding principal balance on the Loan and any related senior
mortgage,
o the full insurable value of the premises securing the Loan, and
o the minimum amount required to compensate for damage or loss on a
replacement cost basis in each case in an amount not less than such
amount as is necessary to avoid the application of any co-insurance
clause contained in the related hazard insurance policy.
Generally, if the Mortgaged Property is in an area identified in the
Federal Register by the Federal Emergency Management Agency as Flood Zone "A",
flood insurance has been made available and the servicer determines that such
insurance is necessary in accordance with accepted mortgage servicing
practices of prudent lending institutions servicing similar mortgage loans,
the servicer will cause to be purchased a flood insurance policy with a
generally acceptable insurance carrier, in an amount representing coverage not
less than the least of:
o the outstanding Principal Balance of the Loan and any related senior
mortgage,
o the full insurable value of the Mortgaged Property, and
o the maximum amount of insurance available under the National Flood
Insurance Act of 1968, as amended.
The servicer will also maintain on REO Property, to the extent such
insurance is available, fire and hazard insurance in the applicable amounts
described above, liability insurance and, to the extent required and available
under the National Flood Insurance Act of 1968, as amended, and the servicer
determines that such insurance is necessary in accordance with accepted
mortgage servicing practices of prudent lending institutions servicing similar
mortgage loans, flood insurance in an amount equal to that required above. Any
amounts collected by the servicer under any such policies (other than amounts
to be applied to the restoration or repair of the Mortgaged Property, or to be
released to the borrower in accordance with the servicer's normal mortgage
servicing procedures) will be deposited in the applicable Collection Account,
subject to retention by the servicer to the extent such amounts constitute
servicing compensation or to withdrawal pursuant to the pooling and servicing
agreement.
In the event that the servicer obtains and maintains a blanket policy as
provided in the pooling and servicing agreement insuring against fire and
hazards of extended coverage on all of the Loans, then, to the extent that
policy names the servicer as loss payee and provides coverage in an amount
equal to the aggregate unpaid principal balance of the Loans without
coinsurance and otherwise complies with the requirements of the preceding
paragraph, the servicer will be deemed conclusively to have satisfied its
obligations with respect to fire and hazard insurance coverage.
Realization upon Defaulted Loans
The servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Loans as come into default
when, in accordance with applicable servicing procedures under the pooling and
servicing agreement, no satisfactory arrangements can be made for the
collection of delinquent payments. In connection with such foreclosure or
other conversion, the servicer will follow such practices as it deems
necessary or advisable and as are in keeping with its general mortgage
servicing activities, provided the servicer will not be required to expend its
own funds in connection with foreclosure or other conversion, correction of
default on a related senior mortgage or restoration of any property unless, in
its sole judgment, such foreclosure, correction or restoration will increase
Net Liquidation Proceeds. The servicer will be reimbursed out of Liquidation
Proceeds for advances of its own funds as liquidation expenses before any Net
Liquidation Proceeds are distributed to Certificateholders.
Enforcement of Due-On-Sale Clauses
When any Mortgaged Property is about to be conveyed by the borrower, the
servicer will, to the extent it has knowledge of the prospective conveyance
and before the consummation of the 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 the clause is not
enforceable under applicable law. In that 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 the transferee
becomes liable under the Loan and pursuant to which the original borrower is
released from liability and the transferee is substituted as the borrower and
becomes liable under the Loan. Any fee collected in connection with an
assumption will be retained by the servicer as additional servicing
compensation. The terms of a Loan may not be changed in connection with an
assumption.
Servicing Compensation and Payment of Expenses
With respect to each Due Period, the servicer will receive from interest
payments actually received in respect of the Loans a portion of such interest
payments as a monthly Servicing Fee in the amount equal to ____% per annum
(the "Servicing Fee Rate") on the principal balance of each Loan as of the
first day of each such Due Period. All assumption fees, late payment charges
and other fees and charges, to the extent collected from borrowers, will be
retained by the servicer as additional servicing compensation. The servicer
will pay certain ongoing expenses associated with the trust and incurred by it
in connection with its responsibilities under the pooling and servicing
agreement.
Evidence as to Compliance
The pooling and servicing agreement provides for delivery on or before
January 31 in each year, beginning in January ____, to the depositor, the
trustee, the certificate insurer and the rating agencies of an annual
statement signed by an officer of the servicer to the effect that the servicer
has fulfilled its material obligations under agreement throughout the
preceding fiscal year, except as specified in the statement.
On or before January 31 in each year, beginning in January ____, the
servicer will furnish a report prepared by a firm of nationally recognized
independent public accountants (who may also render other services to the
servicer or the seller) to the depositor, the trustee, the certificate insurer
and the rating agencies to the effect that the firm has examined certain
documents and the records relating to servicing of the Loans under the Uniform
Single Audit Program for Mortgage Bankers and the firm's conclusion with
respect to the servicer's performance.
Certain Matters Regarding the Servicer
The pooling and servicing agreement provides that the servicer may not
resign from its obligations and duties, except in connection with a permitted
transfer of servicing, unless:
o it duties and obligations are no longer permissible under applicable
law or are in material conflict by reason of applicable law with any
other activities of a type and nature presently carried on by it, or
o upon the satisfaction of the following conditions:
o the servicer has proposed a successor servicer to the trustee in
writing and the proposed successor servicer is reasonably
acceptable to the Trustee; and
o the rating agencies have confirmed to the trustee that the
appointment of the proposed successor servicer as the servicer
will not result in the reduction or withdrawal of the then
current rating of the Class A Certificates; and
o the proposed successor servicer is reasonably acceptable to the
certificate insurer.
No resignation will become effective until the trustee or a successor servicer
has assumed the servicer's obligations and duties under the pooling and
servicing agreement.
The servicer may perform any of its duties and obligations under the
pooling and servicing agreement through one or more subservicers or delegates,
which may be affiliates of the servicer. Notwithstanding any such arrangement,
the servicer will remain liable and obligated to the trustee and the
Certificateholders for the servicer's duties and obligations under the
agreement, without any diminution of its duties and obligations and as if the
servicer itself were performing its duties and obligations.
The pooling and servicing agreement provides that none of the depositor,
the seller or the servicer or any of their respective directors, officers,
employees or agents will be under any other liability to the trust, the
trustee, the Certificateholders or any other person for any action taken or
for refraining from taking any action pursuant to the agreement. However, the
servicer will not be protected against any liability which would otherwise be
imposed by reason of its willful misconduct, bad faith or negligence in the
performance of its duties under the agreement or by reason of reckless
disregard of its obligations. In addition, the agreement provides that the
servicer will not be under any obligation to appear in, prosecute or defend
any legal action which is not incidental to the servicer's servicing
responsibilities under the agreement. The servicer may, in its sole
discretion, undertake any legal action which it may deem necessary or
desirable with respect to the pooling and servicing agreement , the rights and
duties of the parties to the agreement and the interest of the
Certificateholders.
Any corporation into which the servicer may be merged or consolidated, or
any corporation resulting from any merger, conversion or consolidation to
which the servicer shall be a party, or any corporation succeeding to the
business of the servicer shall be the successor of the servicer, without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, anything in the pooling and servicing agreement to the
contrary notwithstanding.
The Back-Up Servicer
____________ will be appointed as the back-up servicer under the pooling
and servicing agreement. Prior to the occurrence of an Event of servicer
Termination, the agreement requires the back-up servicer to maintain current
records of each borrower's account therein. The servicer will be required to
furnish electronically those records to the back-up servicer on a monthly
basis, and the back-up servicer will be required to recalculate the servicer's
application of all funds received from or on behalf of the borrowers. Upon the
occurrence of an Event of servicer Termination, the back-up servicer will be
obligated to assume the obligations of the servicer as described below. In
performing its obligations under the pooling and servicing agreement, the
back-up servicer will be entitled to the same protections afforded to the
servicer under the agreement.
Events of Servicer Termination
The servicer's rights under the pooling and servicing agreement may be
terminated upon the occurrence of an Event of Default or a Trigger Event.
"Events of Default" will consist of:
o any failure of the servicer to deposit in either Collection Account
any deposit required to be made under the Agreement, which failure
continues unremedied for three business days after the giving of
written notice of such failure to the servicer by the trustee, or to
the servicer and the trustee by the certificate insurer or
Certificateholders of any class evidencing Percentage Interests
aggregating not less than 25% of that class;
o any failure by the servicer duly to observe or perform in any material
respect any other of its covenants or agreements in the pooling and
servicing agreement which continues unremedied for 30 days after the
giving of written notice of the failure to the servicer by the trust,
or to the servicer and the trust by the servicer or Certificateholders
of any class evidencing Percentage Interests aggregating not less than
25% of that class;
o any failure by the servicer to make any required Servicing Advance,
which failure continues unremedied for a period of 30 days after the
giving of written notice of the failure to the servicer by the trust,
or to the servicer and the trust by the servicer or Certificateholders
of any class evidencing Percentage Interests aggregating not less than
25% of that class;
o certain events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings relating to the servicer
and certain actions by the servicer indicating insolvency,
reorganization or inability to pay its obligations (an "Insolvency
Event");
o so long as the seller is an affiliate of the servicer, any failure of
the seller to repurchase or substitute Eligible Substitute Loans for
defective Loans as required by the Purchase agreement;
o any failure to pay any Monthly Advance or any Compensating Interest
Payments which continues unremedied for a period of one business day;
or
o any insufficiency in Amount Available for either loan group excluding
Insured Payments occurs on a Distribution Date resulting in the need
for an Insured Payment.
A "Trigger Event" will consist of:
o the failure by the seller or the servicer to pay any amount due the
servicer pursuant to the Insurance Agreement among the depositor, the
seller, the servicer and the servicer, which continues unremedied for
three business days after written notice of the failure by the
servicer;
o the servicer determines that the performance of the servicer is not
satisfactory; or
o the servicer is a party to a merger, consolidation or other corporate
transaction in which the servicer is not the surviving entity, the
debt of such surviving entity is not investment grade or the servicer
determines that the servicing capabilities of the surviving entity
could materially and adversely affect the servicing of the Loans.
Rights upon an Event of Servicer Termination
So long as an Event of Default remains unremedied, either the trustee, or
certificateholders of any class evidencing Percentage Interests of at least
51% of that class, with the consent of the certificate insurer, or the
certificate insurer, may terminate all of the rights and obligations of the
servicer under the pooling and servicing agreement and in and to the Loans may
be terminated by the trustee, or by Certificateholders of any class evidencing
Percentage Interests of at least 51% of that class, with the consent of the
certificate insurer. In that event, the back-up servicer will succeed to all
the responsibilities, duties and liabilities of the servicer under the pooling
and servicing agreement and will be entitled to similar compensation
arrangements. Upon the occurrence and continuation beyond the applicable grace
period of the event described in sixth clause in the second preceding
paragraph, the back-up servicer will immediately assume the duties of the
servicer. The back-up servicer, as successor servicer, will be obligated to
make Monthly Advances and Servicing Advances and certain other advances unless
it determines reasonably and in good faith that such advances would not be
recoverable. In the event that the back-up servicer would be obligated to
succeed the servicer but is unwilling or unable to do so, it may appoint, or
petition a court of competent jurisdiction for the appointment of, a housing
and home finance institution or other mortgage loan or home equity loan
servicer with all licenses and permits required to perform its obligations
under the pooling and servicing agreement and having a net worth of at least
$_________ and acceptable to the certificate insurer to act as successor
servicer under the agreement. Pending such appointment, the back-up servicer
will be obligated to act in such capacity unless prohibited by law. The
successor servicer will be entitled to receive the same compensation that the
servicer would otherwise have received (or such lesser compensation as the
trustee and the successor servicer may agree). A trustee in bankruptcy for the
servicer may be empowered to prevent the termination and replacement of the
servicer if the only Event of Default has occurred is an Insolvency Event.
Upon the occurrence of a Trigger Event, the certificate insurer, in its
sole discretion, may direct the trustee to remove the servicer and to appoint
a successor servicer.
Amendment
The pooling and servicing agreement may be amended from time to time by
the depositor, the servicer and the trustee, with the consent of the
certificate insurer, but without the consent of the Certificateholders, to
cure any ambiguity, to correct or supplement any provisions therein which may
be defective or inconsistent with any other provisions of the agreement, to
add to the duties of the depositor or the servicer, to comply with any
requirements imposed by the Code or any Code regulation, or to add or amend
any provisions of the agreement as required by the rating agencies in order to
maintain or improve any rating of the Class A Certificates (it being
understood that, after obtaining the ratings in effect on the Closing Date,
none of the depositor, the seller, the servicer or the trustee is obligated to
obtain, maintain, or improve any rating) or to add any other provisions with
respect to matters or questions arising under the agreement which shall not be
inconsistent with the provisions of the Agreement, provided that such action
will not, as evidenced by an opinion of counsel, materially and adversely
affect the interests of any Certificateholder or the certificate insurer;
provided, that any amendment will not be deemed to materially and adversely
affect the Certificateholders and no opinion will be required to be delivered
if the person requesting the amendment obtains a letter from the rating
agencies stating that such amendment would not result in a downgrading of the
then current rating of the Class A Certificates. The agreement may also be
amended from time to time by the depositor, the servicer and the trustee, with
the consent of Holders of Certificates evidencing Percentage Interests
aggregating not less than 51% of each class affected by the amendment and the
certificate insurer for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of the agreement or of
modifying in any manner the rights of the Certificateholders; provided that no
amendment will (i) reduce in any manner the amount of, or delay the timing of,
collections of payments on the Certificates or distributions or payments under
the certificate guaranty insurance policy which are required to be made on any
Certificate without the consent of the Certificateholder or (ii) reduce the
aforesaid percentage required to consent to any such amendment, without the
consent of the holders of all Certificates then outstanding. Notwithstanding
the foregoing, the provisions of the pooling and servicing agreement relating
to overcollateralization may be reduced or eliminated by the certificate
insurer without the consent of any Certificateholder so long as a certificate
insurer Default has not occurred.
Termination; Retirement of the Certificates
The trust will terminate on the Distribution Date following the later of
o termination of the certificate guaranty insurance policy and payment
in full of all amounts owing to the certificate insurer, and
o the earliest of
o the Distribution Date on which the Class Certificate Balance of
each class of the Class A Certificates has been reduced to zero,
o the final payment or other liquidation of the last Loan in the
trust, and
o the optional transfer to the servicer of the Loans, as described
below.
The servicer will have the right to purchase all remaining Loans, and
related REO Properties in the trust and thereby effect early retirement of the
Class A Certificates, when to the Pool Balance of the Loans and REO Properties
at the time of purchase is less than or equal to __% of the sum of the Pool
Balance as of the Cut-Off Date and the principal balance of each Subsequent
Loan as of the applicable Subsequent Cut-Off Date. In the event the servicer
exercises its option, the purchase price will be at least equal to
o 100% of its then outstanding principal balance; plus
o the greater of
o the aggregate amount of accrued and unpaid interest on the Loans
through the related Due Period, and
o 30 days' accrued interest thereon at the Loan Rate, in each case net
of the Servicing Fee, plus
o any amounts due to the certificate insurer.
The termination of the trust will be effected in a manner consistent with
applicable federal income tax regulations and the status of the trust as a
REMIC.
Optional Purchase of Defaulted Loans
The servicer has the option to purchase from the trust any Loan __ days
or more delinquent at a purchase price equal to
o the outstanding principal balance of the Loan as of the date of
purchase, plus
o the greater of (i) all accrued and unpaid interest on such principal
balance and (ii) 30 days' interest on such principal balance, computed
at the Loan Rate, plus all unreimbursed amounts owing to the
certificate insurer with interest thereon at the rate referred to in
the Insurance Agreement.
The Trustee
________________, a ____________ organized under the laws of the
___________, has been named trustee pursuant to the pooling and servicing
agreement.
The trustee may have normal banking relationships with the depositor, the
seller and the servicer.
The trustee may resign at any time, in which event the depositor will be
obligated to appoint a successor trustee, as approved by the certificate
insurer and the servicer. The depositor may also remove the trustee if the
trustee ceases to be eligible to continue as such under the agreement or if
the trustee becomes insolvent. Upon becoming aware of such circumstances, the
depositor will be obligated to appoint a successor trustee, as approved by the
certificate insurer and the servicer. Any resignation or removal of the
trustee and appointment of a successor trustee will not become effective until
acceptance of the appointment by the successor trustee.
No holder of a Certificate will have any right under the pooling and
servicing agreement to institute any proceeding with respect to the agreement
unless the holder previously has given to the trustee written notice of
default and unless Certificateholders evidencing Percentage Interests of at
least 51% of the applicable class have made written requests upon the trustee
to institute such proceeding in its own name as trustee and have offered to
the trustee reasonable indemnity and the trustee for 60 days has neglected or
refused to institute any proceeding. The trustee will be under no obligation
to exercise any of the trusts or powers vested in it by the agreement or to
make any investigation of matters arising thereunder or to institute, conduct
or defend any litigation thereunder or in relation thereto at the request,
order or direction of any of the Certificateholders, unless the
Certificateholders have offered to the trustee reasonable security or
indemnity against the cost, expenses and liabilities which may be incurred.
THE POLICY AND THE CERTIFICATE INSURER
The Policy
Simultaneously with the issuance of the Certificates, the Certificate
Insurer will issue the Policy pursuant to which it will irrevocably and
unconditionally guaranty payment on each Distribution Date to the Trustee for
the benefit of the Holders of each Class of Offered Certificates of a maximum
amount equal to the applicable Guaranteed Interest Payment Amount and the
applicable Guaranteed Principal Payment Amount for such Distribution Date. The
Offered Certificates and the Agreement may not be amended unless the
Certificate Insurer has given its prior written consent. The amount of the
actual payment (the "Insured Payment"), if any, made by the Certificate
Insurer under the Policy on each Distribution Date allocated to such Class of
Offered Certificates or the Class I Certificates, as the case may be, is equal
to the sum of:
o the excess, if any, of
o the Interest Remittance Amount with respect to such Class and
Distribution Date over
o the Amount Available (net of Insured Payments) for the related Loan
Group and
o the amount by which the Class Certificate Balance of such Class of
Offered Certificates (or in the case of the Fixed Rate Certificates,
the aggregate Class Certificate Balance of such Certificates) after
giving effect to all allocations and distributions to principal on
such Class or Classes of Offered Certificates on such Distribution
Date exceeds the related Loan Group Balance as of such Distribution
Date.
The Certificate Insurer's obligations under the Policy to make Insured
Payments will be discharged to the extent funds are transferred to the Trustee
as provided in the Policy, whether or not such funds are properly applied by
the Trustee.
Payment of claims under the Policy will be made by the Certificate
Insurer following Receipt by the Certificate Insurer of the appropriate notice
for payment on the later to occur of (a) 11:00 a.m., New York City time, on
the second Business Day following Receipt of such notice for payment, and (b)
11:00 a.m., New York City time, on the Business Day immediately preceding the
relevant Distribution Date.
The terms "Receipt" and "Received," with respect to the Policy, means
actual delivery to the Certificate Insurer, prior to 2:00 pm., New York City
time, on a Business Day; delivery either on a day that is not a Business Day
or after 2:00 pm., New York City time, shall be deemed to be Receipt on the
next succeeding Business Day.
If the payment of the Guaranteed Interest Payment Amount or the
Guaranteed Principal Payment Amount is voided pursuant to a final and
non-appealable order (a "Preference Event") under any applicable bankruptcy,
insolvency, receivership or similar law in an Insolvency Proceeding, and, as a
result of such a Preference Event, the Trustee is required to return such
voided payment, or any portion of such voided payment, made in respect of the
Certificates (an "Avoided Payment"), the Certificate Insurer will pay an
amount equal to such Avoided Payment, upon receipt by the Certificate Insurer
from the Trustee of
o a certified copy of a final order of a court exercising jurisdiction
in such Insolvency Proceeding to the effect that the Trustee is
required to return any such payment or portion thereof during the term
of the Policy because such payment was voided under applicable law,
with respect to which order the appeal period has expired without an
appeal having been filed (the "Final Order"),
o an assignment, in form reasonably satisfactory to the Certificate
Insurer, irrevocably assigning to the Certificate Insurer all rights
and claims of the Trustee relating to or arising under such Avoided
Payment and
o a notice for payment appropriately completed and executed by the
Trustee.
Such payment shall be disbursed to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Final Order and not
to the Trustee directly.
Notwithstanding the foregoing, in no event shall the Certificate Insurer
be obligated to make any payment in respect of any Avoided Payment, which
payment represents a payment of the principal amount of a Class of Offered
Certificates, prior to the time the Certificate Insurer would have been
required to make a payment in respect of such principal in the absence of such
Preference Event.
The Certificate Insurer shall make payments due in respect of Avoided
Payments prior to 1:00 p.m., New York City time, on the second Business Day
following the Certificate Insurer's receipt of the documents required under
the first two clauses of the second preceding paragraph. Any such documents
received by the Certificate Insurer after 3:00 p.m., New York City time, on
any Business Day or on any day that is not a Business Day shall be deemed to
have been received by the Certificate Insurer prior to 3:00 p.m. on the next
succeeding Business Day.
Under the Policy, "Business Day" means any day other than (i) a Saturday
or Sunday or (ii) a day on which banking institutions in the City of New York,
New York are authorized or obligated by law or executive order to be closed.
"Insolvency Proceeding" means the commencement, after the Closing Date,
of any bankruptcy, insolvency, readjustment of debt, reorganization,
marshalling of assets and liabilities or similar proceedings by or against any
Person, or the commencement, after the Closing Date, of any proceedings by or
against any Person for the winding up or liquidation of its affairs, or the
consent after the date hereof to the appointment of a trustee, conservator,
receiver or liquidator in any bankruptcy, insolvency, readjustment of debt,
reorganization, marshalling of assets and liabilities or similar proceedings
of or relating to any Person.
The terms of the Policy cannot be modified, altered or affected by any
other agreement or instrument, or by the merger, consolidation or dissolution
of the Depositor, the Seller or Servicer. The Policy by its terms may not be
canceled or revoked. The Policy is governed by the laws of the State of New
York.
Pursuant to the terms of the Agreement, unless a Certificate Insurer
Default exists, the Certificate Insurer will be entitled to exercise all
rights of the Holders of the Offered Certificates, without the consent of such
Certificateholders, and the Holders of the Offered Certificates may exercise
such rights only with the prior written consent of the Certificate Insurer. In
addition, the Certificate Insurer will, as a third party beneficiary to the
Agreement, have, among others, the following rights:
o the right to give notices of breach or to terminate the rights and
obligations of the Servicer under the Agreement in the event of an
Event of Default by the Servicer and to institute proceedings against
the Servicer;
o the right to consent to or direct any waivers of defaults by the
Servicer;
o the right to remove the Trustee pursuant to the Agreement;
o the right to direct the actions of the Trustee during the continuation
of a Servicer default;
o the right to require the Seller to repurchase Loans for breach of
representation and warranty or defect in documentation;
o the right to direct foreclosures upon the failure of the Servicer to
do so in accordance with the Agreement; and
o the right to direct the Trustee to investigate certain matters.
o The Certificate Insurer's consent will be required prior to, among
other things,
o the removal of the Trustee,
o the appointment of any successor Trustee or Servicer or
o any amendment to the Agreement (which consent will not be withheld if
an opinion of counsel is delivered and addressed to the Certificate
Insurer and the Trustee to the effect that failure to amend the
Agreement would adversely affect the interests of the
Certificateholders).
The Certificate Insurer
The information set forth in this section and in Appendix B and Appendix
C hereto has been supplied by ____________. Accordingly, none of the
Depositor, the Seller, the Servicer, the Trustee or the Underwriter makes any
representation as to the accuracy and completeness of such information.
________ is a ___________ which engages only in the business of financial
guarantee and surety insurance. _______ is licensed in ___ states in addition
to _________. ________ insures structured asset-backed, corporate, municipal
and other financial obligations in the U.S. and international capital markets.
____________ also provides financial guarantee reinsurance for structured
asset-backed, corporate, municipal and other financial obligations written by
other major insurance companies.
_________'s claims-paying ability is rated "Aaa" by Moody's Investors
Service, Inc. ("Moody's"), "AAA" by Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc. ("Standard & Poor's"), "AAA" by
Duff & Phelps Credit Rating Co. ("Duff & Phelps") and "AAA" by Fitch IBCA,
Inc. Such ratings reflect only the views of the respective rating agencies,
are not recommendations to buy, sell or hold securities and are subject to
revision or withdrawal at any time by such rating agencies.
________ is regulated by ___________. In addition, _________ is subject
to regulation by the insurance laws and regulations of the other jurisdictions
in which it is licensed. Such insurance laws regulate, among other things, the
amount of net exposure per risk that ________ may retain, capital transfers,
dividends, investment of assets, changes in control, transactions with
affiliates and consolidations and acquisitions. __________ is subject to
periodic regulatory examinations by the same regulatory authorities.
________'s obligations under the Policy may be reinsured. Such
reinsurance does not relieve _________ of any of its obligations under the
Policy.
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY
FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
As at December 31, and , _____________ had qualified statutory capital
(which consists of policyholders' surplus and contingency reserve) of
approximately $____ million and $____ million, respectively, and had not
incurred any debt obligations. ______________ requires ________ to establish
and maintain the contingency reserve, which is available to cover claims under
surety bonds issued by ____________.
The audited financial statements of ______________ prepared in accordance
with generally accepted accounting principles for the period ended December
31, are attached as Appendix B to this Prospectus Supplement, and the
unaudited financial statements of _________ for the period ended
______________, are attached as Appendix C to this Prospectus Supplement.
Copies of _________'s financial statements prepared in accordance with
statutory accounting standards, which differ from generally accepted
accounting principles, and filed with _____________________ are available upon
request. __________ is located at ____________________ and its telephone
number is _______________.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Class A Certificates
will be used by the depositor to purchase the Loans. The Loans will have been
acquired by the depositor from _____________ in a privately negotiated
transaction.
CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The pooling and servicing agreement provides that the trust will comprise
a REMIC organized in a "real estate mortgage investment conduit" ("REMIC")
structure. The REMIC will designate a single class of interests as the
residual interest in the REMIC. The Class R Certificates will represent
ownership of the residual interests in the REMIC. An election will be made to
treat the REMIC as a REMIC for federal income tax purposes.
Each Class of the Class A Certificates will represent beneficial
ownership of regular interests issued by the REMIC.
Upon the issuance of the Class A Certificates, Brown & Wood LLP ("Tax
Counsel"), will deliver its opinion concluding, assuming compliance with the
Pooling and Servicing Agreement, that for federal income tax purposes the
REMIC will qualify as a REMIC within the meaning of section 860D of the
Internal Revenue Code of 1986, as amended (the "Code").
Taxation of Regular Interests
A Certificateholder of a class of Class A Certificates will be treated
for federal income tax purposes as owning an interest in regular interests in
the REMIC.
Upon the sale, exchange, or other disposition of Class A Certificate,
assuming that a Class A Certificate is held as a "capital asset" within the
meaning of section 1221 of the Code, gain or loss on the disposition of a
Class A Certificate should, subject to the limitation described below, be
capital gain or loss. However, gain attributable to a Class A Certificate will
be treated as ordinary income to the extent such gain does not exceed the
excess, if any, of (i) the amount that would have been includible in the
Certificateholder's gross income with respect to the regular interest
component had income thereon accrued at a rate equal to 110% of the applicable
federal rate as defined in section 1274(d) of the Code determined as of the
date of purchase of the Class A Certificate over (ii) the amount actually
included in such Certificateholder's income.
Interest on a REMIC regular interest must be included in income by a
Certificateholder under the accrual method of accounting, regardless of the
Certificateholder's regular method of accounting. In addition, a regular
interest could be considered to have been issued with original issue discount
("OID"). See "Certain Material Federal Income Tax Considerations -- Taxation
of the REMIC" in the Prospectus. The prepayment assumption that will be used
to in determining the accrual of any OID, market discount, or bond premium, if
any, will equal the rate described above under "Yield, Prepayment and Maturity
Considerations--Weighted Average Lives" for Scenario ___. No representation is
made that the Loans will prepay at such a rate or at any other rate. OID must
be included in income as it accrues on a constant yield method, regardless of
whether the Certificateholder receives currently the cash attributable to such
OID.
Status of the Class A Certificates
The regular interest component of the Class A Certificates will be
treated as assets described in section 7701(a)(19)(C) of the Code, and as
"real estate assets" under section 856(c)(5)(B) of the Code, generally, in the
same proportion that the assets of the Trust Fund would be so treated. In
addition, to the extent a regular interest represents real estate assets under
section 856(c)(5)(B) of the Code, the interest derived from that component
would be interest on obligations secured by interests in real property for
purposes of section 856(c)(3) of the Code.
Non-U.S. Persons
Interest paid to or accrued by a Certificateholder who is a Non-U.S.
Person will be considered "portfolio interest", and will not be subject to
U.S. 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 Non-U.S. Person and the Non-U.S. Person (i) is not
actually or constructively a "10 percent shareholder" of the Trust Fund or a
"controlled foreign corporation" with respect to which the Trust Fund is a
"related person" within the meaning of the Code and (ii) provides the Trust
Fund or other person who is otherwise required to withhold U.S. tax with
respect to the Class A Certificates with an appropriate statement (on Form W-8
or a similar form), signed under penalties of perjury, certifying that the
beneficial owner of the Class A Certificate is a Non-U.S. Person and providing
the Non-U.S. Person's name and address. If a Class A Certificate 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
Non-U.S. Person that owns the Class A Certificate.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Class A Certificate by a Non-U.S. Person will be
exempt from United States federal income and withholding tax, provided that
o such gain is not effectively connected with the conduct of a trade or
business in the United States by the Non-U.S. Person, and
o in the case of an individual, the individual is not present in the
United States for 183 days or more in the taxable year.
For purposes of the foregoing discussion, the term "Non-U.S. Person" means any
person other than
o a citizen or resident of the United States;
o a corporation (or entity treated as a corporation for tax purposes)
created or organized in the United States or under the laws of the
United States or of any state thereof, including, for this purpose,
the District of Columbia;
o a partnership (or entity treated as a partnership for tax purposes)
organized in the United States or under the laws of the United States
or of any state thereof, including, for this purpose, the District of
Columbia (unless provided otherwise by future Treasury regulations);
o an estate whose income is includible in gross income for United States
income tax purposes regardless of its source; or
o a trust, if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or
more U.S. Persons have authority to control all substantial decisions
of the trust.
Notwithstanding the last clause of the preceding sentence, to the extent
provided in Treasury regulations, certain trusts in existence on August 20,
1996, and treated as U.S. Persons prior to such date, may elect to continue to
be U.S. Persons.
Prohibited Transactions Tax and Other Taxes
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (the "Prohibited Transactions Tax"). In
general, subject to certain specified exceptions, a prohibited transaction
means the disposition of a Loan, the receipt of income from a source other
than a Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Loans for temporary investment pending distribution
on the Certificates. It is not anticipated that the Trust Fund will engage in
any prohibited transactions in which it would recognize a material amount of
net income.
In addition, certain contributions to a trust fund that elects to be
treated as a REMIC made after the day on which such trust fund issues all of
its interests could result in the imposition of a tax on the trust fund equal
to 100% of the value of the contributed property (the "Contributions Tax").
The Trust Fund will not accept contributions that would subject it to such
tax.
In addition, a trust fund that elects to be treated as a REMIC may also
be subject to federal income tax at the highest corporate rate on "net income
from foreclosure property," determined by reference to the rules applicable to
real estate investment trusts. "Net income from foreclosure property"
generally means gain from the sale of a foreclosure property other than
qualifying rents and other qualifying income for a real estate investment
trust. It is not anticipated that the Trust Fund will recognize net income
from foreclosure property subject to federal income tax.
Backup Withholding
Certain Certificate Owners may be subject to backup withholding at the
rate of 31% with respect to interest paid on the Class A Certificates if the
Certificate Owners, upon issuance, fail to supply the Trustee or their broker
with their taxpayer identification number, furnish an incorrect taxpayer
identification number, fail to report interest, dividends, or other
"reportable payments" (as defined in the Code) properly, or, under certain
circumstances, fail to provide the Trustee or their broker with a certified
statement, under penalty of perjury, that they are not subject to backup
withholding.
The Trustee will be required to report annually to the Internal Revenue
Service (the "IRS"), and to each Certificateholder of record, the amount of
interest paid (and OID accrued, if any) on the Offered Certificates (and the
amount of interest withheld for federal income taxes, if any) for each
calendar year, except as to exempt holders (generally, holders that are
corporations, certain tax-exempt organizations or nonresident aliens who
provide certification as to their status as nonresidents). As long as the only
holder of record of a class of Class A Certificates is Cede, as nominee of
DTC, the IRS and Certificate Owners of such class will receive tax and other
information, including the amount of interest paid on such Certificates owned,
from Participants and Financial Intermediaries rather than from the trustee.
(The trustee, however, will respond to requests for necessary information to
enable Participants, Financial Intermediaries and certain other persons to
complete their reports.) Each non-exempt Certificate Owner will be required to
provide, under penalty of perjury, a certificate on IRS form W-9 containing
his or her name, address, correct federal taxpayer identification number and a
statement that he or she is not subject to backup withholding. Should a
nonexempt Certificate Owner fail to provide the required certification, the
Participants or Financial Intermediaries (or the Paying Agent) will be
required to withhold 31% of the interest (and principal) otherwise payable to
the holder, and remit the withheld amount to the IRS as a credit against the
holder's federal income tax liability.
Those amounts will be deemed distributed to the affected Certificate
Owner for all purposes of the related Certificates and the pooling and
servicing agreement.
STATE TAXES
The depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Class A Certificates under the tax
laws of any state. Investors considering an investment in the Class A
Certificates should consult their own tax advisors regarding such tax
consequences.
All investors should consult their own tax advisors regarding the
federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the Class A Certificates.
ERISA CONSIDERATIONS
Section 406 of ERISA and Section 4975 of the Code prohibit a pension,
profit sharing or other employee benefit or other plan (such as an individual
retirement account or a Keogh plan) that is subject to Title I of ERISA or to
Section 4975 of the Code from engaging in certain transactions involving "plan
assets" with persons that are "parties in interest" under ERISA or
"disqualified persons" under the Code with respect to the Plan. Certain
governmental plans, although not subject to ERISA or the Code, are subject to
federal, state or locals laws ("Similar Law") that impose similar requirements
(such plans subject to ERISA, Section 4975, or Similar Law being referred to
herein as "Plans"). A violation of these "prohibited transaction" rules may
generate excise tax and other liabilities under ERISA and the Code or under
Similar Law for such persons.
ERISA also imposes certain duties on persons who are fiduciaries of Plans
subject to ERISA, including the requirements of investment prudence and
diversification, and the requirement that such a Plan's investments be made in
accordance with the documents governing the Plan. 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. A fiduciary
which decides to invest the assets of the Plan in the Class A Certificates
should consider, among other factors, the extreme sensitivity of the
investment to the rate of principal payments (including prepayments) on the
Loans.
[It is expected that the Class A Certificates will be considered equity
interests in the trust for purposes of the Plan Assets Regulation, and that
the assets of the trust may therefore constitute plan assets if Class A
Certificates are acquired by Plans. It is not expected that the Class A
Certificates will constitute "publicly-offered securities" and the trustee
will not monitor ownership of the Class A Certificates to ensure that
ownership by benefit plan investors is not significant.] [Furthermore, the
trust does not contain only assets to which the Exemption, described in the
Prospectus, applies.
As a result, Class A Certificates shall not be transferred and the
Trustee shall not register any proposed transfer of Class A Certificates
unless it receives (i) a representation substantially to the effect that the
proposed transferee is not a Plan, is not acquiring the Class A Certificates
on behalf of or with the assets of a Plan (including assets that may be held
in an insurance company's separate or general accounts where assets in such
accounts may be deemed "plan assets" for purposes of ERISA), or (ii) an
opinion of counsel in form and substance satisfactory to the Trustee and the
Depositor that the purchase or holding of the Class A Certificates by or on
behalf of a Plan will not constitute a prohibited transaction and will not
result in the assets of the Trust being deemed to be "plan assets" and subject
to the fiduciary responsibility provisions of ERISA or the prohibited
transaction provisions of ERISA and the Code or any Similar Law or subject the
trustee, the certificate administrator or the depositor to any obligation in
addition to those undertaken in the Trust Agreement.]
[It is expected that the Exemption will apply to the acquisition and
holding by Plans of the Class A Certificates, and that all conditions of the
Exemption other than those within the control of the investors will be met. In
addition, as of the date hereof, there is no single mortgagor that is the
obligor on five percent of the obligations included in the trust by aggregate
unamortized principal balance of the assets of the trust.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of PTCE 83-1
described in the Prospectus and the Exemption, and the potential consequences
in their specific circumstances, prior to making an investment in the Class A
Certificates. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification, an
investment in the Class A Certificates is appropriate for the Plan, taking
into account the overall investment policy of the Plan and the composition of
the Plan's investment portfolio.]
LEGAL INVESTMENT CONSIDERATIONS
Because certain of the Loans are secured by junior liens, the Class A
Certificates will not constitute "mortgage related securities" for the
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended.
Accordingly, many institutions with legal authority to invest in "mortgage
related securities" may not be legally authorized to invest in the Offered
Certificates.
There may be restrictions on the ability of certain investors, including
depository institutions, either to purchase the Offered Certificates or to
purchase Offered Certificates representing more than a specified percentage of
the investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the Offered Certificates constitute
legal investments for such investors. See "Legal Investment" in the
Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement (the "Underwriting Agreement") between the Depositor and Bear,
Stearns & Co. Inc. (the "Underwriter"), the Depositor has agreed to sell to
the Underwriter, and the Underwriter has agreed to purchase from the
Depositor, each Class of Offered Certificates.
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Underwriter has agreed to purchase all of the Offered
Certificates, if any are purchased. The Depositor has been advised by the
Underwriter that it proposes initially to offer the Offered Certificates to
the public at the respective offering prices set forth on the cover page of
this prospectus supplement and to certain dealers at those prices less a
concession not in excess of the respective amounts set forth in the table
below (expressed as a percentage of the respective Certificate Principal
Balance). The Underwriter may allow and dealers may reallow a discount not in
excess of the respective amounts set forth in the table below to certain other
dealers.
<TABLE>
<CAPTION>
Selling Reallowance
Class Concession Discount
- ----- ---------- --------
<S> <C> <C>
A-1....................................... % %
A-2....................................... % %
A-3....................................... % %
</TABLE>
The Depositor is an affiliate of the Underwriter.
In connection with the offering of the Offered Certificates, the
Underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of any Class of Offered Certificates. Specifically, the
Underwriters may overallot the offering, creating a syndicate short position.
The Underwriters may bid for and purchase the Offered Certificates in the open
market to cover syndicate short positions. In addition, the Underwriters may
bid for and purchase the Offered Certificates in the open market to stabilize
the price of the Offered Certificates. The activities may stabilize or
maintain the market price of the Offered Certificates above independent market
levels. The Underwriters are not required to engage in these activities, and
may end these activities at any time.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
EXPERTS
The financial statements of ___________ included in this Prospectus
Supplement in Appendix B, as of December 31, and and for each of the years in
the two year period then ended, have been included in reliance upon the report
of ___________, independent certified public accountants, appearing in
Appendix B, upon the authority of such firm as expert in accounting and
auditing.
RATINGS
It is a condition to issuance that each Class of Offered Certificates be
rated not lower than ____ by __________ and ____ by __________.
A securities rating addresses the likelihood of the receipt by Holders of
distributions on the Loans to which they are entitled. The rating takes into
consideration the characteristics of the Loans and the structural, legal and
tax aspects associated with the Class A Certificates. The ratings on the Class
A Certificates do not, however, constitute statements regarding the likelihood
or frequency of prepayments on the Loans or the possibility that Holders might
realize a lower than anticipated yield. The ratings assigned to the Class A
Certificates will depend primarily upon the creditworthiness of the
certificate insurer. Any reduction in a rating assigned to the claims-paying
ability of the certificate insurer below the ratings initially assigned to the
Class A Certificates may result in a reduction of one or more of the ratings
assigned to the Class A Certificates.
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.
LEGAL MATTERS
Certain legal matters with respect to the Certificates will be passed
upon by Brown & Wood LLP, New York, New York.
<PAGE>
APPENDIX A
CERTAIN STATISTICAL INFORMATION
REGARDING THE INITIAL LOANS IN THE LOAN GROUPS
AS OF THE CUT-OFF DATE
LOAN GROUP I
LOAN GROUP II
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered _______
Home Equity Loan Trust ____-__ $__________ Asset-Backed Certificates, Series
____-__ (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, [Cedelbank or Euroclear]. The Global Securities will be traceable as
home market instruments in [both the European and] the U.S. domestic markets.
Initial settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors through Cedelbank [and
Euroclear] will be conducted in the ordinary way in accordance with the normal
rules and operating procedures of Cedelbank [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 Cedelbank or Euroclear and DTC
Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of
Cedelbank 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, Cedelbank 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 Cedelbank 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 home
equity loan asset-backed certificates issues in same-day funds.
[Trading between Cedelbank and/or Euroclear Participants. Secondary
market trading between Cedelbank Participants or Euroclear Participants will
be settled using the procedures applicable to conventional eurobonds in
same-day funds.]
[Trading between DTC Seller and Cedelbank or Euroclear Purchaser. When
Global Securities are to be transferred from the account of a DTC Participant
to the account of a Cedelbank Participant or a Euroclear Participant, the
purchaser will send instructions to Cedelbank or Euroclear through a Cedelbank
Participant or Euroclear Participant at least one business day prior to
settlement. Cedelbank 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 Cedelbank 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 Cedelbank or Euroclear cash
debt will be valued instead as of the actual settlement date.]
[Cedelbank 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 Cedelbank or Euroclear. Under
this approach, they may take on credit exposure to Cedelbank or Euroclear
until the Global Securities are credited to their account one day later. As an
alternative, if Cedelbank or Euroclear has extended a line of credit to them,
Cedelbank 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, Cedelbank 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 Cedelbank 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 Cedelbank
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 Cedelbank or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Cedelbank 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 Cedelbank or Euroclear through a Cedelbank Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Cedelbank 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 the Cedelbank Participant or Euroclear Participant the
following day, and receipt of the cash proceeds in the Cedelbank 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 Cedelbank 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 Cedelbank Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date.]
[Finally, day traders that use Cedelbank or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedelbank 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 Cedelbank or Euroclear for one day (until the
purchase side of the trade is reflected in their Cedelbank or
Euroclear accounts) in accordance with the clearing system's
customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the
Global Securities sufficient time to be reflected in their Cedelbank
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
Cedelbank Participant or Euroclear Participant.]
Certain U.S. Federal Income Tax Documentation Requirements
[A beneficial owner of Global Securities holding securities through
Cedelbank or Euroclear (or through DTC if the holder has an address outside
the U.S.) will be subject to the 30% U.S. withholding tax that generally
applies to payments of interest (including original issue discount) on
registered debt issued by U.S. Persons (as defined below), unless (i) each
clearing system, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business in the chain of
intermediaries between such beneficial owner and the U.S. entity required to
withhold tax complies with applicable certification requirements and (ii) such
beneficial owner takes one of the following steps to obtain an exemption or
reduced tax rate.]
Exemption for Non-U.S. Persons (Form W-8). Beneficial Holders of Global
Securities that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation
or bank with a U.S. branch, for which the interest income is effectively
connected with its conduct of a trade or business in the United States, can
obtain an exemption from the withholding tax by filing Form 4224 (Exemption
from Withholding of Tax on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
Exemption or reduced rate for Non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Holdership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by Certificate Holders or their agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Holder of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds the
security (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means 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 or any political subdivision thereof (except,
in the case of a partnership, to the extent provided in regulations), or an
estate whose income is subject to United States federal income tax regardless
of its source, or a trust if a court within the United States is able to
exercise primary supervision over the administration of the trust and one or
more United States Persons have the authority to control all substantial
decisions of the trust. The term "Non-U.S. Person" means any person who is not
a U.S. Person. This summary does not deal with all aspects of U.S. Federal
income tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Global
Securities.
<PAGE>
________ Home Equity Loan Trust ____-__
Issuer of the Certificates
$__________ ASSET-BACKED CERTIFICATES, SERIES ____-__
[LOGO]
-------------------------------
PROSPECTUS SUPPLEMENT
-------------------------------
Bear, Stearns & Co. Inc.
--------, ----
The information in this prospectus supplement is not complete and may not be
changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This prospectus
supplement and the accompanying prospectus are not an offer to sell these
securities and are not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED ___________, ____)
$--------------
________________ HOME LOAN OWNER TRUST _____-__
HOME LOAN ASSET-BACKED NOTES, SERIES _____-__
BEAR STEARNS ASSET BACKED SECURITIES, INC.
Depositor
<TABLE>
<CAPTION>
- --------------------- -------------- ------------ --------------- ----------------- -------------------
Initial Proceeds
Class of Principal Note Price to Underwriting to the
Notes Balance(1) Rate Public(2) Discount Depositor(2)(3)
- --------------------- ------------- ----------- -------------- ---------------- --------------------
<S> <C> <C> <C> <C> <C>
Class A Notes $ %(4) % % %
Class M-1 Notes $ %(4) % % %
Class M-2 Notes $ %(4) % % %
Total $ $ $ $
</TABLE>
- ---------------------
(1) Plus or minus 5%.
(2) Plus accrued interest from _______.
(3) Before deducting expenses, estimated to be $_______.
(4) After the first payment date on which an option to redeem the Notes
may be exercised, this rate will increase by ____% if no option is
exercised.
<TABLE>
<CAPTION>
<S> <C>
You should carefully review the THE ASSETS OF THE TRUST
information in "Risk Factors"
beginning on Page S-7 of this The assets of the trust consist primarily of home equity loans bearing fixed rates
prospectus supplement and on page of interest.
3 of the accompanying
prospectus. THE NOTES
This prospectus supplement may be The trust will issue the three classes of
used to offer and sell notes listed on the chart above. Only the
the notes only if accompanied notes are being offered by this prospectus supplement and the accompanying
by the prospectus. prospectus supplement.
The notes are principally secured by
the assets of the trust and are not
insured or guaranteed by any
governmental agency or any other
entity.
</TABLE>
CREDIT ENHANCEMENT
The trust will also issue six classes of certificates which are not offered by
this prospectus supplement. The certificates will provide credit support for
the notes. In addition, the Class M-1 Notes will provide credit support for
the Class A Notes and the Class M-2 Notes will provide credit support for the
Class A Notes and the Class M-1 Notes.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
BEAR, STEARNS & CO. INC.
The date of this prospectus supplement is ____________, ______
<PAGE>
For 90 days following the date of this prospectus supplement, all
dealers selling the notes will deliver a prospectus supplement and prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters of the notes and with respect to their unsold
allotments or subscriptions.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We
have not authorized anyone to provide you with different information.
We are not offering the notes in any state where the offer is not
permitted.
We do not claim that the information in this prospectus supplement
and the accompanying prospectus is accurate as of any date other than the
dates stated on their respective covers.
TABLE OF CONTENTS
PAGE
PROSPECTUS SUPPLEMENT
Summary..............................................................S-3
Risk Factors.........................................................S-7
Use of Proceeds......................................................S-10
Description of the Trust.............................................S-10
The Home Loan Pool...................................................S-11
The Seller...........................................................S-19
The Servicer.........................................................S-21
Description of Credit Enhancement....................................S-22
Description of the Securities........................................S-23
Description of the Transfer and Servicing Agreements.................S-30
Prepayment and Yield Considerations..................................S-35
Certain Federal Income Tax Consequences..............................S-42
Erisa Considerations.................................................S-45
Underwriting.........................................................S-46
Legal Investment Matters.............................................S-46
Ratings..............................................................S-47
Legal Opinions.......................................................S-47
Index of Terms.......................................................S-48
PROSPECTUS
Important Notice About Information in this Prospectus and Each
Accompanying Prospectus Supplement................................... 2
Risk Factors......................................................... 3
Description of the Securities........................................ 8
The Trust Funds......................................................13
Enhancement..........................................................23
Servicing of Loans...................................................26
The Agreements.......................................................33
Certain Legal Aspects of the Loans...................................44
The Depositor........................................................57
Use of Proceeds......................................................57
Certain Federal Income Tax Considerations............................58
State Tax Considerations.............................................80
FASIT Securities.....................................................80
ERISA Considerations.................................................84
Legal Matters........................................................89
Financial Information................................................89
Available Information................................................90
Rating...............................................................90
Legal Investment.....................................................91
Plan of Distribution.................................................91
Index of Defined Terms...............................................92
<PAGE>
SUMMARY
This summary highlights selected information from this document and
does not contain all of the information that you need to consider in making
your investment decision. You should read carefully this entire prospectus
supplement and the accompanying prospectus.
<TABLE>
<CAPTION>
<S> <C> <C>
TITLE OF SERIES: Home Loan Asset-Backed Notes, Series _______ - ____
TRUST: _____ Home Loan Owner Trust _______ - _____
OFFERED NOTES: Class A, Class M-1 and Class M-2 Notes
NON-OFFERED CERTIFICATES: Class A-IO, Class B-1,
Class B-2, Class B-3, Class B-4 and Residual Interest Certificates
SELLER: __________________
SERVICER: __________________
DEPOSITOR: Bear Stearns Asset Backed Securities, Inc.
INDENTURE TRUSTEE/CO-OWNER TRUSTEE: __________________________
OWNER TRUSTEE: __________________________, acting not in its individual capacity but
solely as owner trustee
CUT-OFF DATE: The close of business on __________ __, _____
CLOSING DATE: On or about ___________ __, _______
</TABLE>
HOME LOAN ASSET-BACKED NOTES
<TABLE>
<CAPTION>
Expected
Original Maturity Ratings(S&P/
Class Note Rate Principal Balance(1) Date(2) Moody's/Fitch)
-------------------- ----------- -------------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Class A Notes % (3) $ ______ AAA/Aaa/AAA
Class M-1 Notes % (3) $ ______ AA/Aa2/AA
Class M-2 Notes % (3) $ ______ A/A2/A
</TABLE>
(1) Plus or minus 5%.
(2) The payment date in the month listed below. We expect the
actual maturity date for the notes will be significantly
earlier than the dates shown below.
(3) After the first payment date on which an option to redeem the
notes may be exercised, this rate will increase by _____% if no
option is exercised.
<PAGE>
THE TRUST
The trust will be a Delaware business trust formed under a trust agreement
among the depositor, the owner trustee and the co-owner trustee.
THE NOTES
On the closing date, the trust will issue the three classes of notes listed in
the chart above. Only the notes are being offered to you by this prospectus
supplement and the accompanying prospectus.
THE SERVICER
The servicer is a ____________. Under the terms of the sale and servicing
agreement, the servicer will have the contractual responsibility to service,
manage and make collections on the loans in the trust. Each calendar month the
servicer will retain as a fee for its services a portion of the interest
payments on the loans equal to one-twelfth of ___% of the principal balance of
each loan.
DEPOSITOR
The depositor is a Delaware corporation and an affiliate of Bear, Stearns &
Co. Inc. The depositor will acquire the loans from the seller and will then
sell them to the trust in exchange for the notes and the certificates.
ASSETS OF THE TRUST
The assets of the trust include:
o a pool of fixed rate, closed-end home equity loans, secured primarily
by second liens on one- to four-family residential properties and the
related loan files;
o payments of interest due on the loans received on or after the
cut-off date;
o property that secured a home equity loan and has been acquired after
the closing date by foreclosure or deed in lieu of foreclosure;
o rights of the depositor under the home equity loan purchase agreement
under which the depositor purchased the home equity loans from the
seller;
o rights of the seller under certain hazard insurance policies covering
the mortgaged properties; and
o funds on deposit in certain accounts described in this prospectus
supplement.
NO OBLIGOR OR GUARANTOR
The notes do not represent the obligation of any entity other than the trust.
Neither the notes nor the loans in the trust are insured or guaranteed by any
governmental agency or any other entity.
DENOMINATIONS
You will be offered notes for purchase in minimum denominations of $25,000 and
increments of $1.
PAYMENT DATE
You will receive payments on the notes on the 25th day of each month,
beginning in ________ ______. If the 25th day is not a business day, then the
distribution date will be the next business day.
BOOK-ENTRY REGISTRATION
The trust initially will issue the notes in book-entry form. You will hold
your interest in the notes through a depository in the United States or
indirectly through participants in the depository.
You will not be entitled to receive a definitive note representing your
interest unless definitive notes are issued.
LOAN STATISTICS
The home loans will have the following characteristics as of the close of
business on ______________, ______:
o number of loans: __________
o aggregate principal balance: $___________
o average principal balance of loans: $__________ (approximate)
o principal balances of loans range: $__________ to $_________
o mortgaged property location: ____ states
o interest rates range: ______% to ______%
o weighted average interest rate: ______% (approximate)
o loan age range: ___ to ___ months
o weighted average loan age: ___ months (approximate)
o combined loan-to-value ratio range: ______% to ______% (approximate)
o weighted average combined loan-to-value ratio: ______% (approximate)
See "The Home Loan Pool" in this prospectus supplement for additional
information.
LOAN CHARACTERISTICS
Interest on the home loans will accrue at a fixed rate calculated on the
"actuarial interest" method.
The home loans are fully amortizing.
A majority of the home loans will be secured by liens on mortgaged properties
in which the borrowers have little or no equity (i.e., the related combined
loan-to-value ratios approach or exceed 100%).
Borrowers used their loan proceeds to finance
o property improvements,
o debt consolidation, or
o a combination of property improvements, debt consolidation,
cash-out, credit insurance premiums, origination costs or
other consumer purposes.
See "The Home Loan Pool" in this prospectus supplement for additional
information.
MONTHLY EXPENSE ADVANCES
The servicer may make cash advances on behalf of the trust to cover customary
property protection expenses. Neither the servicer nor any other entity is
required to advance delinquent principal or interest.
See "Description of the Transfer and Servicing Agreements--Servicing" in this
prospectus supplement for additional information.
THE NOTES
Interest Payments
Interest on the notes will accrue during the calendar month prior to the
applicable payment date. The indenture trustee will calculate interest based
on an assumed 360-day year of twelve 30-day months. On each payment date, you
will be entitled to the following amounts:
o interest accrued on your note balance during the related accrual
period at the related note rate;
o any interest that was due on a prior payment date and was not paid;
and
o interest accrued at the related note rate on the amount of interest
previously due and not paid to the extent permitted by applicable law.
Principal Payments
You will be entitled to the principal collected during the prior due period on
the loans in the trust to the extent and in the order of priority described in
this prospectus supplement under the heading "Description of the Transfer and
Servicing Agreements--Priority of Payments."
For a period of at least three years from the closing date, all principal
received on the home loans will be payable solely to the Class A Notes, until
their principal balance has been reduced to zero.
See "Description of the Securities--Payments" in this prospectus supplement
for additional information.
CREDIT ENHANCEMENT
Losses on the home loans will be allocable first to the certificates and then
to the Class M-2, Class M-1, and Class A-1 Notes, in that order.
OPTIONAL REDEMPTION
The holder of the Residual Interest Certificate, at its option, may effect an
early redemption of the notes (and purchase of the certificates) on any
payment date after the aggregate principal balance of the loans in the trust
is reduced to 5% of the aggregate principal balance of the loans as of the
cut-off date. If the Residual Interest Certificateholder fails to exercise its
option for 30 days or more, the servicer will have the right to do so on the
same terms as the Residual Interest Certificateholder.
If the option to redeem the notes is not exercised, the interest rate of each
class of notes will be increased by 0.50%.
FEDERAL TAX CONSIDERATIONS
For federal income tax purposes:
o Tax counsel is of the opinion that the notes will be treated as debt
instruments.
o You must agree to treat your note as indebtedness for federal, state and
local income and franchise tax purposes.
ERISA CONSIDERATIONS
The fiduciary responsibility provisions of the Employee Retirement Income
Security Act of 1974, as amended, can limit investments by certain pension and
other employee benefit plans.
Pension and other employee benefit plans should be able to purchase
investments like the notes so long as they are treated as debt under
applicable state law and have no "substantial equity features." Any plan
fiduciary considering whether to purchase the notes on behalf of a plan should
consult with its counsel regarding the applicability of the provisions of
ERISA and the Internal Revenue Code and the availability of any exemptions.
See "ERISA Considerations" in this prospectus supplement and the accompanying
prospectus for additional information.
LEGAL INVESTMENT CONSIDERATIONS
The notes will not be "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1974, as amended.
NOTE RATINGS
The trust will not issue the notes unless the notes receive the ratings set
forth on the table at the beginning of this summary.
A rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal by any rating agency.
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors before
purchasing any of the notes. You should also carefully consider the
information set forth under "Risk Factors" beginning on page of the
accompanying prospectus.
THE TRUST IS THE ONLY SOURCE OF PAYMENT ON THE NOTES
Principal and interest on the notes will be payable only from the
funds in the trust, including payments on the home loans. You will have no
recourse to any other entity if you do not receive payments on the notes.
LIMITED RESALE
The underwriters intend to make a market for resale in the notes but
has no obligation to do so. There is no assurance that such a market will
develop or, if it develops, that it will continue. Consequently, you may not
be able to sell your notes readily or at prices that will enable you to
realize your desired yield. The market values of the notes are likely to
fluctuate; these fluctuations may be significant and could result in
significant losses to you.
The secondary market for mortgage-backed and asset-backed securities
have experienced periods of illiquidity and can be expected to do so in the
future. Illiquidity can have a severely adverse effect on the prices of
securities that are especially sensitive to prepayment, credit or interest
rate risk, or that have been structured to meet the investment requirements of
limited categories of investors.
PREPAYMENTS MAY FLUCTUATE
All of the home loans in the trust may be prepaid in whole or in part
at any time although [ ] % require the payment of a prepayment fee for a
limited period. Home loans like those in the trust 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 their rate of
prepayment. Generally, these loans are not viewed by borrowers as permanent
financing. As a result, the home loans in the trust may have a higher rate of
prepayment than traditional loans. The prepayment experience of the trust may
be affected by a wide variety of factors, including
o general economic conditions,
o prevailing interest rates,
o availability of alternative financing, and
o homeowner mobility.
In addition, all of the loans have due-on-sale provisions, which the
servicer is required to enforce unless enforcement is not allowed by applicable
law.
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, the loans are likely to prepay at a higher rate than if prevailing
interest rates remained at or above the interest rates of these loans.
CREDIT ENHANCEMENT MAY BE INADEQUATE
Credit enhancement will be provided by
o the subordination of the certificates to the notes,
o the subordination of the Class M-2 Notes to the Class M-1 and Class A Notes,
and o the subordination of the Class M-1 Notes to the Class A Notes.
The notes are not insured by any financial guaranty insurance policy.
If the home loans experience higher rates of delinquencies, defaults
or losses than initially expected, the amounts available from the credit
enhancement may be inadequate to cover the resulting delays or shortfalls in
payments. If the amounts available from the available credit enhancement are
inadequate, noteholders will bear the risk of any resulting delays in payment
or losses.
HOME LOAN DEFAULT RISKS
As purchasers of notes, you are protected to the extent of the
available of credit enhancement against the risk of losses realized on the
home loans. However, in the event that the credit enhancement provides
inadequate protection, you will bear the losses on the home loans. The risks
presented by the home loans include the following:
o Early Default- Defaults on home loans are generally expected to
occur more frequently in the early years of their terms. The
weighted average number of months since origination of the home
loans as of the cut-off date is approximately ___ months, which
is not a sufficiently long period of time to develop reliable
performance data. Delinquencies may increase as the home loans
become more seasoned.
o High LTV Ratios- Most of the home loans are secured by liens on
the mortgaged properties in which the borrowers have little or
no equity. Approximately _____% of the home loans have original
combined loan-to-value ratios in excess of 100%. Home loans
with high original combined loan-to-value ratios will be more
sensitive to declining property values than those with lower
original combined loan-to-value ratios and therefore may
experience a higher incidence of default. In addition, in the
case of home loans with original combined loan-to-value ratios
near or in excess of 100%, if the related borrowers sell their
homes, they may be unable to repay the home loans in full from
the sale proceeds of the financed properties and other funds
available. Accordingly, those loans likely may experience
higher rates of delinquencies, defaults and losses. In the case
of loans the proceeds of which were used in whole or in part
for debt consolidation, the related borrower may incur further
consumer debt. This reloading of debt could impair the ability
of the borrower ultimately to repay the home loan. o Junior
Liens- Substantially all of the home loans are secured by liens
junior to one or more senior liens on the related mortgaged
properties. In general, a junior lienholder may not foreclose
on the related mortgaged property unless it forecloses subject
to the senior lien(s), in which case it must either pay the
entire amount due under the senior mortgage or agree to make
payments under the senior mortgage if the borrower is in
default thereunder. As a result, in general, the servicer does
not expect to foreclose on home loans secured by junior liens.
o Limitation on Repurchase of Defective Home Loans by the Seller-
No assurance can be given that, at any particular time, the
seller will be capable, financially or otherwise, of
repurchasing home loans as a result of breaches of
representations and warranties or defects in the home loan
files that have not been cured. If the seller does not make
these repurchases, the indenture trustee will use reasonable
efforts to enforce the obligations of the seller to repurchase
defective home loans. However, there is no assurance that any
recoveries will be adequate to fully cover amounts owing on
them.
SERVICER DOES NOT ADVANCE DELINQUENT PAYMENTS.
If a borrower is delinquent or in default on a home loan, no other
party will have any obligation to advance scheduled monthly payments of
principal and interest on that loan. As a result, the amount of principal and
interest received on the home loans during any particular due period may be
less than the amount of principal and interest payable on the securities on
the related payment date.
UNDERWRITING STANDARDS MAY AFFECT LOAN PERFORMANCE
The seller's underwriting standards generally are less stringent than
those of Fannie Mae or Freddie Mac. For example, a borrower's past credit
history may not preclude the seller from originating or purchasing a loan to
that borrower, but it will reduce the size (and thus the combined
loan-to-value ratio) of the loan that the seller is willing to originate or
purchase. As a result of this approach to underwriting, the home loans in the
trust may have higher rates of delinquencies, defaults and foreclosures than
loans underwritten in accordance with Fannie Mae's or Freddie Mac's
guidelines. If loan losses occur, you may experience a loss on the notes.
SECURITY INTEREST NOT PERFECTED IN ALL HOME LOANS
____________ or ______________________, as applicable, will deliver
to ____________ the assignments of the home loan mortgages in recordable form
within thirty days of the closing date. The indenture trustee will deliver all
the assignments for recordation.
_____________will deliver to the custodian the mortgage notes, the
mortgages and any assumption or modification agreements relating to the home
loans on or before the closing date and will deliver the assignments of each
mortgage in recordable form within ninety days of the closing date. However,
assignments of the mortgages to the indenture trustee will not be recorded in
_________________ and ____________. Before delivery and recordation, the
indenture trustee's interest in the mortgages, the mortgage notes and any
proceeds from the home loans may be subject to the claims of creditors or to
sale to a third party, as well as to a receiver or conservator appointed in
the event of the insolvency of ____________.
In certain states in which the mortgaged properties are located,
failure to record the assignments of the related mortgages to the indenture
trustee will have the result of making the sale of the home loans potentially
ineffective against:
o any creditors of __________ who may have been fraudulently or
inadvertently induced to rely on the home loans as assets of
__________; or
o any purchaser of a home loan who had no notice of the prior
conveyance to the trust if the purchaser perfects his interest
in the loan by taking possession of the related documents or
other evidence of indebtedness or otherwise.
In either case, the trust would be an unsecured creditor of ____________.
LIMITED HISTORICAL DELINQUENCY, LOSS AND PREPAYMENT INFORMATION
____________ has limited historical delinquency and default
experience for purposes of estimating the future delinquency and loss
experience of the home loans in the trust. In addition, the servicer does not
have any meaningful historical performance data available for its portfolio of
home loans similar to the home loans in the trust that are serviced for others
because they reflect a variety of underwriting guidelines.
GEOGRAPHIC CONCENTRATION OF THE LOANS MAY ADVERSELY AFFECT LOAN PERFORMANCE
Approximately _____% of the home loans (by principal balance as of
the cut-off date) are secured by properties located in ________. To the extent
that _______ has experienced or experiences in the future weaker economic
conditions or greater rates of decline in real estate values than the United
States generally, this concentration of loans and contracts in ______ may
increase the related risks. The depositor cannot quantify the impact of any
recent property value declines on the loans in the trust or predict whether,
to what extent or for how long these declines would continue.
DO NOT RELY ON NOTE RATINGS
The ratings of the notes will depend primarily upon an assessment by
the rating agencies of the home loans in the trust and upon the adequacy of
credit enhancement. The rating agencies may reduce, suspend or withdraw the
ratings of the notes at any time. When the rating agencies rate the notes,
they are not recommending that you purchase, hold or sell the notes, as their
ratings do not speak to the market price paid by, or the general suitability
for, a particular investor. We cannot assure you that the ratings will stay
the same for any given period of time or that the rating agencies will not
lower or withdraw them.
NOTEHOLDERS COULD BE ADVERSELY AFFECTED BY LACK OF YEAR 2000 COMPLIANCE
As is the case with most companies using computers in their
operations, the servicer, the indenture trustee and the owner trustee are
faced with the task of preparing for the year 2000 and the risk of major
computer system failure or miscalculations. The servicer, the indenture
trustee and the owner trustee are currently engaged in various procedures to
ensure that their computer systems and software will be year 2000 compliant.
However, if they or any of their suppliers, customers, brokers or agents do
not successfully and timely achieve year 2000 compliance, the performance of
the servicer, the indenture trustee or the owner trustee could be materially
adversely affected, possibly resulting in delays in processing payments on the
home loans and a related delay in payments to you.
Similar year 2000 problems face DTC which currently is testing the
compliance of its computer systems and software.
USE OF PROCEEDS
The proceeds from the sale of the notes, net of certain expenses,
will be used by the trust to purchase the home loans from the depositor. The
depositor will use the proceeds from the sale of the loans to the trust for
the purchase of the loans from the seller. The seller in turn will use all or
a substantial portion of the proceeds from the sale of the loans for general
corporate purposes.
DESCRIPTION OF THE TRUST
GENERAL
The, ________________ Home Loan Owner Trust ______-__ will be a
business trust formed under the laws of the State of Delaware pursuant to the
trust agreement for the transactions described in this prospectus supplement.
After its formation, the trust will not engage in any activity other than
o acquiring, holding and managing the home loans and the other
assets of the trust and proceeds from those assets,
o issuing the notes and the non-offered certificates (together,
the "Securities")
o making payments on the Securities, and
o engaging in related activities.
On the closing date, the trust will purchase home loans (the "Home
Loans") having an aggregate principal balance of approximately $______________
(the "Original Pool Principal Balance") as of the cut-off date from the
depositor pursuant to a sale and servicing agreement to be dated as of
_________ 1, _______, the "Sale and Servicing Agreement"), among the trust,
the depositor, the seller, the servicer, the co-owner trustee, the custodian
and the indenture trustee. The depositor will purchase the Home Loans from the
Seller on the closing date pursuant to a home loan purchase agreement dated as
of _________ 1, ______ (the "Home Loan Purchase Agreement") between the seller
and the depositor.
The assets of the Trust will consist primarily of the Home Loans. The
assets of the Trust will also include:
o payments of accrued interest and principal collected in respect
of the Home Loans received after the Cut-Off Date;
o amounts on deposit in the Collection Account (excluding
investment income thereon), Note Payment Account and
Certificate Distribution Account;
o the related Home Loan Files and credit files; and
o certain other ancillary or incidental funds, rights and
properties related to the foregoing. On the closing date, the
trust will include the unpaid principal balance of each Home
Loan as of the cut-off date (the "Cut-Off Date Principal
Balance"). The "Principal Balance" of a Home Loan on any day is
equal to its Cut-Off Date Principal Balance, minus all
principal reductions credited against the principal balance of
that Home Loan since such cut-off date; provided, however, that
the Principal Balance of a Liquidated Home Loan will be zero.
With respect to any date, the "Pool Principal Balance" will be
equal to the aggregate Principal Balance of the Home Loans as
of that date.
The servicer will be required to service the Home Loans pursuant to
the Sale and Servicing Agreement (collectively, with the Indenture, the
Administration Agreement, the Home Loan Purchase Agreement and the Trust
Agreement, the "Transfer and Servicing Agreements") and will be compensated
for its services as described in this prospectus supplement under "Description
of the Transfer and Servicing Agreements--Servicing".
The trust's principal offices are located in Wilmington, Delaware, in
care of _____________________, as owner trustee, at the address set forth
below under "--The Owner Trustee and Co-Owner Trustee."
THE OWNER TRUSTEE AND CO-OWNER TRUSTEE
____________________ will act not in its individual capacity but
solely as the owner trustee under the Trust Agreement. __________________ is a
Delaware _____________________ and its principal offices are located at
____________________________________, Delaware ________.
Certain functions of the owner trustee under the Trust Agreement and
the Sale and Servicing Agreement will be performed by
_________________________, in its capacity as co-owner trustee, including
maintaining the Certificate Distribution Account and making distributions from
that account.
______________________ will also perform certain additional
administrative functions on behalf of the trust pursuant to the terms of an
administration agreement dated as of _________ 1, ______ (the "Administration
Agreement") among the trust, _______________________ and ___________, as
co-administrator (the "Co-Administrator"). ______________________ will also
perform custodial functions as custodian (in such capacity, the "Custodian")
on behalf of the trust pursuant to the terms of the Sale and Servicing
Agreement.
THE HOME LOAN POOL
GENERAL
The Home Loan Pool will consist of the Home Loans conveyed to the
trust. The Home Loans will consist of loans for which the related net proceeds
were used to finance
o property improvements,
o debt consolidation, or
o a combination of property improvements, debt consolidation, cash-out,
credit insurance premiums, origination costs or other consumer
purposes. Substantially all of the Mortgage, deeds of trust and other
security instruments ("Mortgages") securing the Home Loans will be
junior in priority to one or more senior liens on the related
mortgaged properties, which will consist primarily of owner-one-to
four occupied single family residences. Substantially all of the Home
Loans will be secured by liens on Mortgaged Properties in which the
borrowers have little or no equity (i.e., the related combined
loan-to-value ratios approach or exceed 100%).
"Combined loan-to-value ratio" means, with respect to any Home Loan,
the fraction, expressed as a percentage, the numerator of which is the
principal balance of that loan at origination plus, in the case of a junior
lien Home Loan, the aggregate outstanding principal balance of the related
senior lien loans on the date of origination of that Home Loan, and the
denominator of which is the appraised or stated value of the related Mortgaged
Property at the time of origination of that Home Loan (determined as described
in this prospectus supplement under "The Seller--Underwriting Criteria").
For a description of the underwriting criteria applicable to the Home
Loans, see "The Seller--Underwriting Criteria" in this prospectus supplement.
All of the Home Loans were acquired by the seller and, pursuant to the Home
Loan Purchase Agreement, sold by the seller to the depositor and, pursuant to
the Sale and Servicing Agreement, sold by the depositor to the trust. Pursuant
to the Indenture, the trust will pledge and assign the Home Loans to the
indenture trustee for the benefit of the Noteholders. The trust will be
entitled to all payments of interest and principal and all proceeds received
in respect of the Home Loans on or after the cut-off date.
PAYMENTS ON THE HOME LOANS
Each Home Loan provides for a schedule of payments that if timely
paid, will be, sufficient to amortize fully the principal balance of that loan
on or before its maturity date. The scheduled monthly payment dates of the
Home Loans vary. Each Home Loan bears interest at a fixed rate (the "Home Loan
Rate"). Interest on the Home Loans will accrue on an "actuarial interest"
method. No Home Loan provides for deferred interest or negative amortization.
The "actuarial interest" method provides that interest is charged and
payments are due as of a scheduled day each month that is fixed at the time of
origination, and payments received after a grace period following such
scheduled day are subject to late charges. A scheduled payment on a Home Loan
received either earlier or later than its scheduled due date will not affect
the amortization schedule or the relative application of the payment to
principal and interest of the loan.
Certain borrowers are covered by credit life insurance policies and
involuntary unemployment insurance policies, which provide for payment in full
of the outstanding principal balance of the related Home Loans in the event of
the accidental death or disability of the borrower, or for payment of the
applicable monthly payment (up to $500 per month) in the case of employment
interruption. The credit life insurance policies and involuntary unemployment
insurance policies generally have terms of five years. If a borrower covered
by such a policy elects to cancel it, the amount of the premium refund payable
in connection with the cancellation will be applied as a principal payment on
the related Home Loan. Any proceeds received by the trust in respect of those
types of insurance policies will affect the rate of prepayments on the Home
Loans. See "Prepayment and Yield Considerations" in this prospectus
supplement.
CHARACTERISTICS OF THE HOME LOANS
Set forth below is certain statistical information regarding
characteristics of the Home Loans expected to be included in the Home Loan
Pool as of the date of this prospectus supplement. Prior to the closing date,
the Seller may remove any of the Home Loans intended for inclusion in the Home
Loan Pool, substitute comparable loans, or add comparable loans to the pool;
provided, however, that the aggregate Principal Balance of Home Loans that are
removed, replaced or added will not exceed 5% of the Pool Principal Balance.
As a result, the statistical information presented below regarding the
characteristics of the Home Loans expected to be included in the Home Loan
Pool may vary in certain respects from comparable information based on the
actual composition of the Home Loan Pool at the closing date. A schedule of
the Home Loans included in the Home Loan Pool as of the closing date will be
attached to the Sale and Servicing Agreement.
The Home Loans expected to be included in the Home Loan Pool will
consist of approximately ________ loans having a Pool Principal Balance of
approximately $__________. Approximately _____% of the Home Loans by Cut-Off
Date Principal Balance were 30-59 days delinquent in payment as of the cut-off
date. Approximately _____% of the Home Loans by Cut-Off Date Principal Balance
were 60 days or more delinquent in payment as of the cut-off date.
Except as provided in the second preceding paragraph, the Home Loans
are expected to have the approximate characteristics as of the cut-off date
set forth in the tables beginning on the following page. The sums of the
amounts and percentages in the following tables may not equal the totals shown
due to rounding.
Wherever reference is made in this prospectus supplement to a
percentage of the Home Loans, such percentage is determined (unless otherwise
specified) on the basis of the Original Pool Principal Balance.
<PAGE>
HOME LOAN RATES
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE TOTAL
RANGE OF HOME NUMBER OF PRINCIPAL BY AGGREGATE
LOAN RATES (%) HOME LOANS BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
10.51 to 11.00............................................. $ %
11.01 to 11.50.............................................
11.51 to 12.00.............................................
12.01 to 12.50.............................................
12.51 to 13.00.............................................
13.01 to 13.50.............................................
13.51 to 14.00.............................................
14.01 to 14.50.............................................
14.51 to 15.00.............................................
15.01 to 15.50.............................................
15.51 to 16.00.............................................
16.01 to 16.50.............................................
16.51 to 17.00.............................................
17.01 to 17.50.............................................
17.51 to 18.00.............................................
--------------- --------------- -------------
Total................................................ 100.00%
=============== =============== =============
</TABLE>
The weighted average Home Loan Rate of the Home Loans as of the
cut-off date was approximately _____% per annum.
CURRENT PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE TOTAL
RANGE OF CUT-OFF DATE NUMBER OF PRINCIPAL BY AGGREGATE
PRINCIPAL BALANCES ($) HOME LOANS BALANCE PRINCIPAL BALANCE
- ---------------------- ---------- ------- -----------------
<S> <C> <C> <C>
Up to 10,000.00............................................
10,000.01 to 20,000.00.....................................
20,000.01 to 30,000.00.....................................
30,000.01 to 40,000.00.....................................
40,000.01 to 50,000.00.....................................
50,000.01 to 60,000.00.....................................
60,000.01 to 70,000.00.....................................
70,000.01 to 80,000.00.....................................
80,000.01 to 90,000.00.....................................
---------------- --------------- ---------------
Total................................................ 100.00%
================ =============== ===============
</TABLE>
The average principal balance of the Home Loans as of the cut-off
date was approximately $_________.
<PAGE>
ORIGINAL LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF TOTAL
RANGE OF CUT-OFF DATE NUMBER OF PRINCIPAL BY AGGREGATE
PRINCIPAL BALANCES ($) HOME LOANS BALANCE PRINCIPAL BALANCE
- ---------------------- ---------- ------- -----------------
<S> <C> <C> <C>
Up to 10,000.00............................................
10,000.01 to 20,000.00.....................................
20,000.01 to 30,000.00.....................................
30,000.01 to 40,000.00.....................................
40,000.01 to 50,000.00.....................................
50,000.01 to 60,000.00.....................................
60,000.01 to 70,000.00.....................................
70,000.01 to 80,000.00.....................................
80,000.01 to 90,000.00.....................................
---------------- --------------- -----------
Total................................................ 100.00%
================ =============== ===========
</TABLE>
The average principal balance of the Home Loans at origination was
approximately $_________.
REMAINING TERMS TO MATURITY
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF TOTAL
RANGE OF REMAINING NUMBER OF PRINCIPAL BY AGGREGATE
TERM TO MATURITY (MONTHS) HOME LOANS BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
0 to 48................................................
49 to ................................................60
61 to 120.................................................
121 to 180..................................................
181 to 240..................................................
241 to 300..................................................
---------------- ------------------ -------
Total................................................. 100.00%
================ ================== =======
</TABLE>
The weighted average remaining term to maturity of the Home Loans as
of the cut-off date was approximately ___ months.
ORIGINAL TERM TO MATURITY
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF TOTAL
RANGE OF MONTHS NUMBER OF PRINCIPAL BY AGGREGATE
SINCE ORIGINATION HOME LOANS BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
0 to 60................................................
61 to120.................................................
121 to 180.................................................
181 to 240.................................................
241 to 300.................................................
-------------- ---------------- ----------
Total................................................ 100.00%
============== ================ ==========
</TABLE>
The weighted original term to maturity of the Home Loans as of the
cut-off date was approximately ___ months.
<PAGE>
GEOGRAPHIC CONCENTRATION
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
NUMBER OF AGGREGATE PRINCIPAL BY AGGREGATE
STATE HOME LOANS BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
Alabama..............................................
Alaska...............................................
Arizona..............................................
Arkansas.............................................
California...........................................
Colorado.............................................
Connecticut..........................................
Delaware.............................................
Florida..............................................
Georgia..............................................
Idaho................................................
Illinois.............................................
Indiana..............................................
Iowa.................................................
Kansas...............................................
Kentucky.............................................
Louisiana............................................
Maine................................................
Maryland.............................................
Massachusetts........................................
Michigan.............................................
Minnesota............................................
Mississippi..........................................
Missouri.............................................
Montana..............................................
Nebraska.............................................
Nevada...............................................
New Hampshire........................................
New Jersey...........................................
New Mexico...........................................
New York.............................................
North Carolina.......................................
North Dakota.........................................
Ohio.................................................
Oklahoma.............................................
Oregon...............................................
Pennsylvania.........................................
Rhode Island.........................................
South Carolina.......................................
South Dakota.........................................
Tennessee............................................
Texas................................................
Utah.................................................
Virginia.............................................
Washington...........................................
West Virginia........................................
Wisconsin............................................
Wyoming.............................................. --------------------- --------------------- -------
Total.......................................... 100.00%
===================== ===================== =======
</TABLE>
CREDIT SCORES*
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF TOTAL
RANGE OF NUMBER OF PRINCIPAL BY AGGREGATE
CREDIT SCORES HOME LOANS BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
620 to 639.................................................
640 to 659.................................................
660 to 679.................................................
680 to 699.................................................
700 to 719.................................................
720 to 739.................................................
740 to 759.................................................
760 to 779.................................................
780 to 799.................................................
Greater than or equal to 800...............................
--------------- ---------------- ----------
Total................................................ 100.00%
=============== ================ ==========
</TABLE>
- -----------
*Determined prior to origination of the related Home Loan.
The weighted average Credit Score of the Home Loans as of the cut-off date was
approximately ___.
DEBT-TO-INCOME RATIOS
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF TOTAL
RANGE OF NUMBER OF PRINCIPAL BY AGGREGATE
DEBT-TO-INCOME RATIOS(%) HOME LOANS BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
5.01 to 10.00............................................
10.01 to 15.00.............................................
15.01 to 20.00.............................................
20.01 to 25.00.............................................
25.01 to 30.00.............................................
30.01 to 35.00.............................................
35.01 to 40.00.............................................
40.01 to 45.00.............................................
45.01 to 50.00.............................................
50.01 to 55.00.............................................
55.01 to 60.00.............................................
----------------- ---------------- --------
Total................................................ 100.00%
================== ================ ========
</TABLE>
The weighted average debt-to-income ratio of the Home Loans as of the
cut-off date was approximately _____%.
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF TOTAL
RANGE OF COMBINED NUMBER OF PRINCIPAL BY AGGREGATE
LOAN-TO-VALUE RATIOS(%) HOME LOANS BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
15.01 to 20.00..........................................
25.01 to 30.00..........................................
30.01 to 35.00..........................................
35.01 to 40.00..........................................
40.01 to 45.00..........................................
45.01 to 50.00..........................................
50.01 to 55.00..........................................
55.01 to 60.00..........................................
60.01 to 65.00..........................................
65.01 to 70.00..........................................
70.01 to 75.00..........................................
75.01 to 80.00..........................................
80.01 to 85.00..........................................
85.01 to 90.00..........................................
90.01 to 95.00..........................................
95.01 to 100.00..........................................
100.01 to 105.00...........................................
105.01 to 110.00...........................................
110.01 to 115.00...........................................
115.01 to 120.00...........................................
120.01 to 125.00...........................................
125.01 to 130.00...........................................
Greater than 130.00........................................
---------------- ------------------ --------
Total................................................ 100.00%
================ =================== ========
</TABLE>
MORTGAGED PROPERTY TYPES
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF TOTAL
NUMBER OF PRINCIPAL BY AGGREGATE
PROPERTY TYPE HOME LOANS BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
Single Family..............................................
Condominium................................................
Multifamily................................................
Manufactured housing.......................................
Two Families...............................................
-------------- ------------ -----------
Total................................................ 100.00%
============== ============= ===========
</TABLE>
<PAGE>
LIEN POSITION
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF TOTAL
NUMBER OF PRINCIPAL BY AGGREGATE
LIEN POSITION HOME LOANS BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
First Lien.................................................
Second Lien................................................
Third Lien.................................................
---------------- --------------- ----------
Total................................................ 100.00%
================ ================ ==========
</TABLE>
OCCUPANCY TYPE
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF TOTAL
NUMBER OF PRINCIPAL BY AGGREGATE
OCCUPANCY TYPE HOME LOANS BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
Owner Occupied.............................................
Non-Owner Occupied.........................................
Total................................................ 100.00%
---------------- --------------- ----------
Total................................................ 100.00%
================ ================ ==========
</TABLE>
THE SELLER
GENERAL
__________________________ is a ___________________________ with its
principal offices at ______________________________ (telephone: -------------).
[Seller Information]
PURCHASE OF HOME LOANS
_____________ purchased the Home Loans from originators which had
been contacted by ______________________________, a __________________ with
its principal offices located in _____________________. In connection with
____________'s purchase of the Home Loans, ____________, through its
subsidiary, ________________, a _____________________, re-underwrote the Home
Loans in accordance with the re-underwriting guidelines for
______________________ Loan program.
UNDERWRITING CRITERIA
[Description of Underwriting Criteria]
REPURCHASE OR SUBSTITUTION OF HOME LOANS
The trust will have the option after the closing date to deposit
monies into the Collection Account and release from the lien of the Indenture
any Home Loan incident to foreclosure or default of that loan. The seller will
be obligated either to repurchase any Defective Home Loan or to remove such
Defective Home Loan and substitute a Qualified Substitute Home Loan (as
defined below). The purchase or repurchase of any Home Loan in this way
(rather than the replacement thereof through substitution) will result in
accelerated principal payments on the Securities.
The seller is required (i) within 60 days after discovery or notice
thereof to cure in all material respects any breach of the representations or
warranties made with respect to a Home Loan (a "Defective Home Loan") or (ii)
on or before the Determination Date next succeeding the end of that 60-day
period, to repurchase that Defective Home Loan at a price (the "Purchase
Price") equal to the Principal Balance of the Defective Home Loan as of the
date of repurchase, plus all accrued and unpaid interest on the Defective Home
Loan to and including the Due Date in the most recent Due Period computed at
the applicable Home Loan Rate. In lieu of repurchasing a Defective Home Loan,
the Seller may replace such Defective Home Loan with one or more Qualified
Substitute Home Loans. If the aggregate outstanding principal balance of the
Qualified Substitute Home Loan(s) is less than the outstanding principal
balance of the Defective Home Loan(s), the seller will also deposit in the
Collection Account an amount (a "Substitution Adjustment") equal to that
shortfall, which will result in a prepayment of principal on the Securities
then entitled to receive principal in the amount of that shortfall. As used in
this prospectus supplement, a "Qualified Substitute Home Loan" is a home loan
that
(i) has an interest rate that differs from the Home Loan Rate for
the Defective Home Loan it replaces (each, a "Deleted Home
Loan") by no more than one percentage point,
(ii) matures not more than one year later than and not more than one
year earlier than the Deleted Home Loan,
(iii) has a principal balance (after application of all payments
received on or prior to the date of the substitution) equal to
or less than the Principal Balance of the Deleted Home Loan as
of such date,
(iv) has a lien priority no lower than the Deleted Home Loan,
(v) complies as of the date of substitution with each
representation and warranty set forth in the Home Loan Purchase
Agreement with respect to the Home Loans, and
(vi) has a borrower with a comparable credit grade classification to
that of the borrower under the Deleted Home Loan; provided,
that with respect to a substitution of multiple loans, items
(i), (ii), (iii) and (vi) above may be considered on an
aggregate or weighted average basis.
No assurance can be given that, at any particular time, the seller
will be capable, financially or otherwise, of repurchasing Defective Home
Loans or substituting Qualified Substitute Home Loans for Defective Home Loans
in the manner described above. If the seller repurchases, or is obligated to
repurchase, Defective Home Loans from any additional series of asset backed
securities, the financial ability of the seller to repurchase Defective Home
Loans from the trust may be adversely affected. In addition, other events
relating to the seller and its mortgage lending and consumer finance
operations can occur that would adversely affect the financial ability of the
seller to repurchase Defective Home Loans from the trust, including without
limitation the sale or other disposition of all or any significant portion of
its assets. If the servicer or the indenture trustee is unable to collect all
amounts due to the trust in respect of a Defective Home Loan, the resulting
loss will be borne by Noteholders to the extent that the loss is not otherwise
covered by amounts available from the applicable credit enhancement. See "Risk
Factors-- Potential Inadequacy of Credit Enhancement" in this prospectus
supplement.
DELINQUENCY AND FORECLOSURE EXPERIENCE OF ___________
The seller has no historical delinquency and default experience that
may be referred to for purposes of estimating the future delinquency and loss
experience of the Home Loans underwritten pursuant to _______________ Loan
Program described in this prospectus supplement. The seller began acquiring
home loans comparable to the Home Loans in ________________. Accordingly,
there is insufficient historical delinquency, bankruptcy, foreclosure or
default experience that may be referred to for purposes of estimating the
future delinquency and loss experience of home loans similar to the Home
Loans. See "Risk Factors--Limited Historical Delinquency, Loss and Payment
Information" in this prospectus supplement.
DUTIES OF CO-ADMINISTRATOR DUTIES
___________, as Co-Administrator, will also perform certain
administrative functions on behalf of the trust pursuant to the Administration
Agreement.
THE SERVICER
GENERAL
The servicer will service the Home Loans in accordance with the terms
set forth in the Sale and Servicing Agreement and will be entitled to the
Servicing Fee and to certain additional servicing compensation. The servicer
may perform any of its obligations under the Sale and Servicing Agreement
through one or more subservicers. Notwithstanding any subservicing
arrangement, the servicer will remain liable for its servicing duties and
obligations under the Sale and Servicing Agreement as if the servicer alone
were servicing the Home Loans. The information set forth in this section has
been provided by the servicer, and neither the depositor nor the seller makes
any representation as to its accuracy or completeness.
THE SERVICER
_________________, the servicer, is a subsidiary of _______________,
a ______________________, with its principal executive offices located in
_______________________ with assets as of ________________, ______, in excess
of $__________.
[Servicer Information]
Servicer Events of Default. "Servicer Events of Default" will consist
of, subject to applicable cure periods, without limitation:
(i) any failure of the servicer to deposit in the Collection
Account any amount required to be deposited under the Sale and
Servicing Agreement, which failure continues unremedied for two
business days;
(ii) any failure by the servicer duly to observe or perform in any
material respect any other of its covenants or agreements in
the Sale and Servicing Agreement, which failure continues
unremedied for a period of 30 days after notice;
(iii) the cumulative loss experience with respect to the Home Loans
exceeds certain levels as specified in the Sale and Servicing
Agreement; and
(iv) certain events of insolvency, readjustment of debt, marshaling
of assets and liabilities or similar proceedings relating to
the servicer and certain actions by the servicer indicating
insolvency, reorganization or inability to pay its obligations
or the servicer shall dissolve or liquidate, in whole or part,
in any material respect.
If a Servicer Event of Default occurs, the indenture trustee may, and
at the direction of (i) the holders of a majority of the then outstanding
amount of the notes, or (ii) the trust with the consent of the holders of a
majority of the then outstanding amount of the notes shall, remove the
servicer. The servicer may resign, only in accordance with the terms of the
Sale and Servicing Agreement. No removal or resignation shall become effective
until the indenture trustee or a successor servicer acceptable to the
indenture trustee shall have assumed the servicer's responsibilities and
obligations.
The servicer may not assign its obligations under the Sale and
Servicing Agreement, in whole or in part, unless it shall have first obtained
the written consent of the indenture trustee, which consent shall not be
unreasonably withheld; provided, that any assignee must meet the eligibility
requirements for a successor servicer set forth in the Sale and Servicing
Agreement.
Delinquency and Loss Experience of the Servicer
_______________ has been servicing home loans similar to the Home
Loans since _______________. ____________ does not have available for
distribution loss and delinquency information with respect to its aggregate
portfolio of home loans similar to the Home Loans which are serviced for
others because they were underwritten pursuant to a variety of underwriting
guidelines of many different originators and aggregating their loss and
delinquency experience would not provide meaningful statistics for comparison
to the Home Loans. However, the servicer does maintain loss and delinquency
information with respect to each portfolio it services for others. See "Risk
Factors--Limited Historical Delinquency, Loss and Prepayment Information" in
this prospectus supplement.
DESCRIPTION OF CREDIT ENHANCEMENT
SUBORDINATION AND ALLOCATION OF LOSSES
On each Payment Date, payments of interest on the Securities will be
made,
first to the Class A Notes and the Class A-IO Certificates pro rata
(based on the amount of interest payable thereon on such Payment Date),
second to the Class M-1 Notes,
third to the Class M-2 Notes,
fourth to the Class B-1 Certificates,
fifth to the Class B-2 Certificates,
sixth to the Class B-3 Certificates and
seventh to the Class B-4 Certificates.
No interest will be paid to a Security until all required interest
payments have been made to each Security with a higher order of priority. On
each Payment Date, payments of principal on the Securities will be made,
first to the Class A Notes, until the Class Principal Balance thereof
is reduced to the Class A Optimal Principal Balance,
second to the Class M-1 Notes, until the Class Principal Balance
thereof is reduced to the Class M-1 Optimal Class Principal Balance,
third to the Class M-2 Notes, until the Class Principal Balance
thereof is reduced to the Class M-2 Optimal Principal Balance,
fourth to the Class B-1 Certificates, until the Class Principal
Balance thereof is reduced to the Class B-1 Optimal Principal Balance,
fifth to the Class B-2 Certificates, until the Class Principal
Balance thereof is reduced to the Class B-2 Optimal Principal Balance,
sixth to the Class B-3 Certificates, until the Class Principal
Balance thereof is reduced to the Class B-3 Optimal Principal Balance, and
seventh to the Class B-4 Certificates, until the Class Principal
Balance thereof is reduced to the Class B-4 Optimal Principal Balance.
The rights of the holder of the Residual Interest Certificate to
receive distributions on any Payment Date will be subordinate to the rights of
the other Securityholders. The subordination described above is intended to
enhance the likelihood of the regular receipt of interest and principal due to
the holders of the Notes and to afford them protection against losses on the
Home Loans. See "RISK FACTORS--Potential Inadequacy of Credit Enhancement" in
this prospectus supplement.
On each Payment Date, the "Allocable Loss Amount" will be equal to
the excess, if any, of (a) the aggregate of the outstanding principal balances
of the Securities (after giving effect to all payments on such Payment Date)
over (b) the Pool Principal Balance as of the end of the preceding Due Period.
On each Payment Date, any Allocable Loss Amount will be applied in reduction
of the Class Principal Balance of,
first the Class B-4 Certificates, until the Class Principal Balance
thereof is reduced to zero,
second the Class B-3 Certificates, until the Class Principal Balance
thereof is reduced to zero,
third the Class B-2 Certificates, until the Class Principal Balance
thereof is reduced to zero,
fourth the Class B-1 Certificates, until the Class Principal Balance
thereof is reduced to zero,
fifth the Class M-2 Notes, until the Class Principal Balance thereof
is reduced to zero, and
sixth the Class M-1 Notes, until the Class Principal Balance thereof
is reduced to zero. No Allocable Loss Amounts will be allocated to the Class A
Notes.
On each Payment Date, a Class of Securities which previously had
Allocable Loss Amounts allocated to it will be entitled to receive any
Deferred Amounts available on such Payment Date, up to the amount of any
unreimbursed allocation of Allocable Loss Amounts, in the following order of
priority,
first to the Class M-1 Notes,
second to the Class M-2 Notes,
third to the Class B-1 Certificates,
fourth to the Class B-2 Certificates,
fifth to the Class B-3 Certificates and
sixth to the Class B-4 Certificates.
"Deferred Amounts" for any Payment Date will equal any amounts
remaining after giving effect to the distributions in clauses (i) through
(xvi) under "Description of the Transfer and Servicing Agreements--Priority of
Distributions" herein.
DESCRIPTION OF THE SECURITIES
GENERAL
The trust will issue the Class A Notes, the Class M-1 Notes and the
Class M-2 Notes pursuant to the Indenture. The trust will also issue the Class
A-IO Certificates, the Class B-1 Certificates, the Class B-2 Certificates, the
Class B-3 Certificates, the Class B-4 Certificates and the Residual Interest
Certificates pursuant to the trust agreement dated as of __________ 1, _______
(the "Trust Agreement") among the depositor, the owner trustee and the
co-owner trustee. The notes will be secured by the assets of the trust
pursuant to the indenture. The certificates will represent the ownership
interest in the trust. The certificates are not being offered by this
prospectus supplement.
On each Payment Date, the indenture trustee or its designee and the
owner trustee or its designee will pay to the persons in whose names the
Securities are registered on the last business day of the month immediately
preceding the month of the related Payment Date (the "Record Date") the
portion of the aggregate payment to be made to each Securityholder as
described below. A "Certificateholder" is a holder of record of any class of
certificates as of the related Record Date. A "Noteholder" is a holder of
record of any class of notes as of the related Record Date. A "Securityholder"
is either a Certificateholder or a Noteholder. Payments on the notes will be
made to Beneficial Owners only through DTC and its Participants (except under
certain limited circumstances).
BOOK-ENTRY AND DEFINITIVE NOTES
The notes will be issued in the form of beneficial interests in one
or more restricted global certificates (the "Book-Entry Notes"), deposited
with a custodian for The Depository Trust Company ("DTC" and, together with
any successor depository selected by the depositor, the "Depository"). The
notes will not be issued in bearer form. Beneficial interests in the notes may
be held in denominations of $25,000 or any greater integral multiples of $1.
The registered holders of the notes are sometimes referred to in this section
as "Noteholders" and the owners of beneficial interests in the Book-Entry
Notes as "Note Owners".
BOOK-ENTRY NOTEs. The notes will be represented initially by one or
more Book-Entry Notes and will be deposited with DTC or its custodian and
registered in the name of Cede & Co., as nominee of DTC. DTC is a limited
purpose trust company organized under the laws of the State of New York, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to Section 17A of the Securities Exchange Act of 1934, as
amended. DTC was created to hold securities for its participating
organizations ("Participants") and to facilitate the clearance and settlement
of securities transactions between Participants through electronic
book-entries, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks,
trust companies and clearing corporations. Indirect access to the DTC system
also is available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("Indirect Participants").
Owners of beneficial interests in Book-Entry Notes that are not
Participants or Indirect Participants of DTC who desire to purchase, sell or
otherwise transfer ownership of, or other interests in, notes may do so only
through Participants and Indirect Participants. In addition, Note Owners will
receive all distributions of principal of and interest on the notes through
Participants, as described below. It is anticipated that the only "Noteholder"
of record of the Book-Entry Notes will be Cede & Co., as nominee of DTC. Note
Owners will not be recognized by the Indenture Trustee as Noteholders, as such
term is used in the Indenture, and Note Owners will be permitted to exercise
the rights of Noteholders only indirectly through DTC and its Participants.
Under the rules, regulations and procedures creating and affecting
DTC and its operations (the "Rules"), DTC is required to make book-entry
transfers of Book-Entry Notes among Participants on whose behalf it acts with
respect to the Book-Entry Notes. Participants and Indirect Participants with
which Note Owners have accounts with respect to the notes similarly are
required to make book-entry transfers and receive and transmit distributions
on behalf of their respective Note Owners. Accordingly, although Note Owners
will not hold physical certificates for Notes represented by the Book-Entry
Notes, the Rules provide a mechanism by which Note Owners will receive
payments and will be able to transfer their interests in the notes.
Because DTC can act only on behalf of Participants, who in turn act
on behalf of Indirect Participants and certain banks, the ability of a holder
to pledge Book-Entry Notes to persons or entities that do not participate in
the DTC system, or to otherwise act with respect to such Book-Entry Notes, may
be limited due to the lack of a physical certificate.
DTC has advised the trust that, unless and until physical notes are
issued in registered form, it will take any action permitted to be taken by a
Noteholder under the Indenture only at the direction of one or more
Participants to whose accounts with DTC the Book-Entry Notes are credited. DTC
may take conflicting actions with respect to other undivided interests to the
extent that the actions are taken on behalf of Participants whose holdings
include such undivided interests.
Except as required by law, none of the depositor, the trust, the
owner trustee, the seller, the servicer, the co-owner trustee or the indenture
trustee will have any liability for any aspect of the records relating to or
distributions made on account of beneficial ownership interests in the
Book-Entry Notes held by Cede & Co., as nominee for DTC, or for maintaining,
supervising or reviewing any records relating to those beneficial ownership
interests.
PHYSICAL NOTES. Physical notes will be issued in registered form to
Noteholders, or their nominees, rather than to DTC, only if (i) DTC advises
the indenture trustee in writing that DTC is no longer willing or able to
discharge properly its responsibilities as nominee and Depository with respect
to notes and the indenture trustee is unable to locate a qualified successor;
(ii) the trust, at its sole option and with the consent of the indenture
trustee, elects to terminate the book-entry system through DTC; or (iii) after
the occurrence of any Indenture Event of Default, DTC, at the direction of
Noteholders having a majority in interest of the notes, advises the indenture
trustee in writing that the continuation of a book-entry system through DTC
(or its successor) to the exclusion of any physical securities being issued to
Noteholders is no longer in the best interest of Noteholders. Upon issuance in
registered form of physical notes, the notes will be transferable directly
(and not exclusively on a book-entry basis), and registered holders will deal
directly with the indenture trustee with respect to transfers, notices and
distributions.
The holder of any physical note may exchange the same in whole or in
part (in an original principal amount equal to $25,000 or any greater integral
multiple of $1) for other physical notes or, if the holder is entitled to hold
an interest in Book-Entry Notes (subject to the rules and procedures of DTC),
for a beneficial interest in Book-Entry Notes by surrendering the physical
note to the indenture trustee (and completing the form of transfer on the
reverse of the note) together with any certificate or other required
documentation. No service charge will be imposed for any registration of
transfer or exchange, but the indenture trustee may require payment of a sum
sufficient to cover any tax or other governmental charge imposed in this
connection.
PAYMENTS
For the definitions of certain of the defined terms used in the
following subsection, see "--Related Definitions" below.
AVAILABLE COLLECTION AMOUNT. Payments on the Securities on each
Payment Date will be made from the Available Collection Amount. The Available
Collection Amount will be calculated on the second business day prior to each
Payment Date (each such day, a "Determination Date"). The indenture trustee
will withdraw from the Collection Account for deposit in the Note Payment
Account and the Certificate Distribution Account the Available Collection
Amount on the business day prior to each Payment Date. With respect to each
Payment Date, the "Available Collection Amount" is the sum of
(i) all amounts received in respect of the Home Loans or paid by
the trust or the seller (exclusive of amounts not required
to be deposited in or permitted to be withdrawn from the
Collection Account pursuant to the Sale and Servicing
Agreement) during the related Due Period (and, in the case
of amounts required to be paid by the seller in connection
with the purchase or substitution of a Defective Home Loan
or amounts paid by the trust for the repurchase of a Home
Loan incident to default, foreclosure or imminent default,
deposited in the Collection Account on or before the related
Determination Date), and
(ii) with respect to the final Payment Date, or an early
redemption or purchase of the Securities by the Residual
Interest Certificateholder or the servicer, the Termination
Price.
PAYMENTS OF INTEREST. Interest on the Class Principal Balance (or
Class Notional Balance) of each Class of Securities will accrue during each
Accrual Period at the applicable Interest Rate described in this prospectus
supplement, and will be payable to Securityholders on each Payment Date,
commencing in ____________. The "Accrual Period" for each class of Securities
will be the calendar month preceding the month in which the related Payment
Date occurs. Interest on each class of Securities will be calculated on the
basis of a 360-day year of twelve 30-day months.
The Interest Rate on any Class A-IO Certificate for any Payment Date
will be equal to the excess of (a) the Net Weighted Average Rate for such
Payment Date over (b) _____%. The "Class Notional Balance" for the Class A-IO
Certificates and any Payment Date, will equal the Pool Principal Balance as of
the first day of the related Due Period. The "Net Weighted Average Rate" with
respect to any Payment Date will be the per annum rate equal to the weighted
average (by principal balance) of the Home Loan Rates as of the first day of
the related Due Period, as reduced by the Servicing Fee Rate, owner trustee
fee rate and the indenture trustee fee rate.
Payments of interest on the Securities will be made from the
Available Collection Amount remaining after payment of the fees payable to the
indenture trustee, the owner trustee and the co-owner trustee (the "Available
Funds"). Under certain circumstances the amount available to make interest
payments on any Payment Date could be less than the amount of interest due on
all of the Securities on that date. Any interest deficiency with respect to
any class of Securities, along with interest at the Interest Rate for that
class on the deficiency (if permitted by applicable law), will be paid to
holders of each affected class of Securities on subsequent Payment Dates to
the extent that sufficient funds are available. The Trust will remain
obligated to pay interest deficiencies on the Securities, which are carried
forward until the deficiencies have been paid. See "--Rights of Noteholders
upon Occurrence of Event of Default" below.
PAYMENTS OF PRINCIPAL. Principal payments will be made from Available
Funds on each Payment Date in an amount equal to the Regular Principal Payment
Amount.
PAYMENT PRIORITIES ON THE SECURITIES
See "Description of the Transfer and Servicing Agreements--Priority of
Payments" in this prospectus supplement.
RELATED DEFINITIONS
Aggregate Liquidation Losses: With respect to any Payment Date, the
aggregate losses incurred with respect to Liquidated Home Loans from the
cut-off date through the last day of the related Due Period, after giving
effect to the receipt of any related Net Liquidation Proceeds.
Business day: Any day other than (i) a Saturday or Sunday or (ii) a
day on which banking institutions in __________________, ___________________,
New York, New York or the city in which the corporate trust office of the
indenture trustee is located are authorized or obligated by law or executive
order to be closed.
Certificateholder's Interest Carry-Forward Amount: With respect to
any Payment Date, the excess, if any, of the Certificateholder's Monthly
Interest Distribution Amount for the preceding Payment Date and any
Certificateholder's Interest Carry-Forward Amount remaining outstanding with
respect to prior Payment Dates (including interest on such outstanding amount
at the applicable Interest Rate if permitted by applicable law), over the
amount in respect of interest that was distributed on the Certificates on the
preceding Payment Date.
Certificateholder's Interest Distribution Amount: With respect to any
Payment Date, the sum of the Certificateholder's Monthly Interest Distribution
Amount for that Payment Date and the Certificateholder's Interest
Carry-Forward Amount for that Payment Date; provided, however, that on the
Payment Date, if any, on which the Principal Balance of the Class B-1
Certificates is reduced to zero through application of the Allocable Loss
Amount, the amount of the Certificateholder's Interest Distribution Amount
will be equal to the amount calculated without giving effect to this proviso,
minus the portion, if any, of the Allocable Loss Amount that otherwise would
be applied to any class of notes on that Payment Date in the absence of this
proviso.
Certificateholder's Monthly Interest Distribution Amount: With
respect to any Payment Date, the aggregate amount of interest accrued for the
related Accrual Period at the applicable Interest Rate on the Class Principal
Balance or Class Notional Balance, as applicable, of each class of
certificates immediately preceding that Payment Date.
Class A Optimal Principal Balance: With respect to any Payment Date
prior to the Stepdown Date, zero; and with respect to any other Payment Date,
an amount equal to 10% of the Pool Principal Balance as of the end of the
related Due Period.
Class B-1 Optimal Principal Balance: With respect to any Payment Date
prior to the Stepdown Date, the original Class Principal Balance of the Class
B-1 Certificates, provided that on and after the Payment Date on which the
aggregate Class Principal Balance of the notes is reduced to zero, the Class
B-1 Optimal Principal Balance for any Payment Date prior to the Stepdown Date
shall be zero; and
with respect to any other Payment Date, the Pool Principal Balance as
of the end of the related Due Period minus the sum of (a) the aggregate of the
Class Principal Balances of the Class A Notes, the Class M-1 Notes and the
Class M-2 Notes (after taking into account any payments made on that Payment
Date to reduce the balances) and (b) __% of the Pool Principal Balance as of
the end of the related Due Period.
Class B-2 Optimal Principal Balance: With respect to any Payment Date
prior to the Stepdown Date, the original Class Principal Balance of the Class
B-2 Certificates, provided that on and after the Payment Date on which the
aggregate Class Principal Balance of the Notes and the Class B-1 Certificates
is reduced to zero, the Class B-2 Optimal Principal Balance for any Payment
Date prior to the Stepdown Date shall be zero; and
with respect to any other Payment Date, the Pool Principal Balance as
of the end of the related Due Period, minus the sum of (a) the aggregate of
the Class Principal Balances of the notes and the Class B-1 Certificates
(after taking into account any payments made on such Payment Date in reduction
thereof) and (b) __% of the Pool Principal Balance as of the end of the
related Due Period.
Class B-3 Optimal Principal Balance: With respect to any Payment Date
prior to the Stepdown Date, the original Class Principal Balance of the Class
B-3 Certificates, provided that on and after the Payment Date on which the
aggregate Class Principal Balance of the notes, the Class B-1 Certificates and
the Class B-2 Certificates is reduced to zero, the Class B-3 Optimal Principal
Balance for any Payment Date prior to the Stepdown Date shall be zero; and
with respect to any other Payment Date, the Pool Principal Balance as
of the end of the related Due Period, minus the sum of (a) the aggregate of
the Class Principal Balances of the notes, the Class B-1 Certificates and the
Class B-2 Certificates (after taking into account any payments made on such
Payment Date in reduction thereof) and (b) ___% of the Pool Principal Balance
as of the end of the related Due Period.
Class B-4 Optimal Principal Balance: With respect to any Payment Date
prior to the Stepdown Date, the original Class Principal Balance of the Class
B-4 Certificates, provided that on and after the Payment Date on which the
aggregate Class Principal Balance of the notes, the Class B-1 Certificates,
the Class B-2 Certificates and the Class B-3 Certificates is reduced to zero,
the Class B-4 Optimal Principal Balance for any Payment Date prior to the
Stepdown Date shall be zero; and
with respect to any other Payment Date, the Pool Principal Balance as
of the end of the related Due Period, minus the sum of the aggregate of the
Class Principal Balances of the notes, the Class B-1 Certificates, the Class
B-2 Certificates and the Class B-3 Certificates (after taking into account any
payments made on such Payment Date in reduction thereof).
Class M-1 Optimal Principal Balance: With respect to any Payment Date
prior to the Stepdown Date, the original Class Principal Balance of the Class
M-1 Notes, provided that on and after the Payment Date on which the Class
Principal Balance of the Class A Notes is reduced to zero, the Class M-1
Optimal Principal Balance for any Payment Date prior to the Stepdown Date
shall be zero; and
with respect to any other Payment Date, the Pool Principal Balance as
of the end of the related Due Period, minus the sum of (a) the Class Principal
Balance of the Class A Notes (after taking into account any payments made on
such Payment Date in reduction thereof) and (b) __% of the Pool Principal
Balance as of the end of the related Due Period.
Class M-2 Optimal Principal Balance: With respect to any Payment Date
prior to the Stepdown Date, the original Class Principal Balance of the Class
M-2 Notes, provided that on and after the Payment Date on which the aggregate
Class Principal Balance of the Class A Notes and the Class M-1 Notes is
reduced to zero, the Class M-2 Optimal Principal Balance for any Payment Date
prior to the Stepdown Date shall be zero; with respect to any other Payment
Date, the Pool Principal Balance as of the end of the related Due Period,
minus the sum of (a) the aggregate of the Class Principal Balances of the
Class A Notes and the Class M-1 Notes (after taking into account any payments
made on such Payment Date in reduction thereof) and (b) __% of the Pool
Principal Balance as of the end of the related Due Period.
Class Optimal Principal Balance: Either of the Class A Optimal
Principal Balance or the Class M-1 Optimal Principal Balance, as applicable.
Class Principal Balance: For each class of Securities, other than the
Class A-IO Certificates and the Residual Interest Certificate, as of any date
of determination, the balance equal to the Original Class Principal Balance
thereof reduced by (i) all amounts previously paid to the Securityholders of
such Class in reduction of the Class Principal Balance thereof on all previous
Payment Dates and (ii) any Allocable Loss Amounts previously applied thereto.
Due Period: With respect to each Payment Date, the calendar month
immediately preceding the month in which that Payment Date occurs.
Insurance Proceeds: With respect to any Payment Date and any Home
Loan, the proceeds paid to the indenture trustee or the servicer by any
insurer pursuant to any insurance policy covering a Home Loan, Mortgaged
Property or REO Property or any other insurance policy that relates to a Home
Loan, net of any expenses incurred by the indenture trustee or the servicer in
connection with the collection of such proceeds and not otherwise reimbursed,
but excluding any such proceeds that are to be applied to the restoration or
repair of the Mortgaged Property or released to the borrower in accordance
with customary loan servicing procedures.
Interest Payment Amount: The sum of the Noteholders' Interest
Payment Amount and the Certificateholder's Interest Distribution Amount.
Liquidated Home Loan: A defaulted Home Loan as to which the servicer
has determined that all recoverable liquidation and insurance proceeds have
been received, which will be deemed to occur upon the earlier of:
(a) the liquidation of the related Mortgaged Property acquired
through foreclosure or similar proceedings,
(b) the servicer's determination in accordance with customary
servicing practices that no further amounts are collectible
from the Home Loan and any related collateral securing such
Home Loan, or
(c) any portion of a scheduled monthly payment of principal and
interest is in excess of 180 days past due.
Net Liquidation Proceeds: With respect to any Payment Date, any cash
amounts received in respect of Liquidated Home Loans, whether through
trustee's sale, foreclosure sale, disposition of REO, whole loan sale or
otherwise (other than Insurance Proceeds and Released Mortgaged Property
Proceeds), and any other cash amounts received in connection with the
management of the Mortgaged Properties related to defaulted Home Loans, in
each case, net of any reimbursements to the servicer made from such amounts
for any unreimbursed Servicing Fees and unreimbursed Servicing Advances
(including such Servicing Advances deemed to be nonrecoverable Servicing
Advances) made and any other fees and expenses paid in connection with the
foreclosure, conservation and liquidation of the related Liquidated Home Loans
or Mortgaged Properties.
Noteholders' Interest Carry-Forward Amount: With respect to any
Payment Date, the excess, if any, of the Noteholders' Monthly Interest Payment
Amount for the preceding Payment Date and any Noteholders' Interest
Carry-Forward Amount remaining outstanding with respect to prior Payment Dates
(including interest on such outstanding amount at the applicable Interest Rate
if permitted by applicable law), over the amount in respect of interest that
was paid on the notes on the preceding Payment Date.
Noteholders' Interest Payment Amount: With respect to any Payment
Date, the sum of the Noteholders' Monthly Interest Payment Amount for that
Payment Date and the Noteholders' Interest Carry-Forward Amount for that
Payment Date.
Noteholders' Monthly Interest Payment Amount: With respect to any
Payment Date, the aggregate of interest accrued for the related Accrual Period
at the applicable Interest Rate on the Class Principal Balance of each Class
of Notes immediately preceding that Payment Date.
Original Class Principal Balance: The principal balance for each
class of Security (other than the Class A-IO Certificates and the Residual
Interest Certificates) on the closing date.
Regular Payment Amount: With respect to any Payment Date, the lesser
of (a) the Available Funds and (b) the sum of (i) the Interest Payment Amount
and (ii) the Regular Principal Payment Amount.
Regular Principal Payment Amount: With respect to each Payment Date,
an amount equal to the lesser of:
(a) the sum of (i) each scheduled payment of principal collected by
the servicer in the related Due Period, (ii) all partial and
full principal prepayments applied by the servicer during such
Due Period, (iii) the principal portion of all Net Liquidation
Proceeds, Insurance Proceeds and Released Mortgaged Property
Proceeds received by the servicer during such Due Period in
respect of any Home Loan, to the extent received on or prior to
the date on which such Home Loan became a Liquidated Home Loan,
(iv) that portion of the Purchase Price of any repurchased Home
Loan allocable to principal and (v) the principal portion of any
Substitution Adjustments required to be deposited in the
Collection Account as of the related Determination Date; and
(b) the aggregate of the outstanding principal balances of the
Securities immediately prior to such Payment Date.
Released Mortgaged Property Proceeds: With respect to any Payment
Date and any Home Loan, the proceeds received by the servicer in connection
with (a) a taking of an entire Mortgaged Property by exercise of the power of
eminent domain or condemnation or (b) any release of part of the Mortgaged
Property from the lien of the related Mortgage, whether by partial
condemnation, sale or otherwise, which in either case are not released to the
borrower in accordance with applicable law, accepted servicing practices and
the Sale and Servicing Agreement, less unreimbursed Servicing Fees and
Servicing Advances (including such Servicing Advances deemed to be
nonrecoverable with respect to that Home Loan).
Stepdown Date: The Payment Date occurring on the later of (i) the
first Payment Date after the Payment Date in ______________ and (ii) the
Payment Date on which the Class A Principal Balance, after giving effect to
payments of principal on that Payment Date, is less than or equal to 10% of
the Pool Principal Balance as of the end of the related Due Period; provided,
however, if the Aggregate Liquidation Losses for that Payment Date exceed ___%
of the Original Pool Principal Balance, then the Stepdown Date will be the
Payment Date on which the Class A Principal Balance, after giving effect to
payments of principal on that Payment Date, is less than or equal to __% of
the Pool Principal Balance as of the end of the related Due Period.
Termination Price: An amount equal to the sum, as of the related
Payment Date, of
(a) the aggregate of the outstanding Class Principal Balances of
the Securities plus all accrued and unpaid interest thereon at
the applicable Interest Rates,
(b) any Servicing Compensation due and unpaid,
(c) any unreimbursed Servicing Advances, including such Servicing
Advances deemed to be nonrecoverable,
(d) any unreimbursed Deferred Amounts owed to a class of notes and
(e) the indenture trustee, the co-owner trustee and owner trustee
fees due and unpaid.
OPTIONAL REDEMPTION
The Residual Interest Certificateholder may (and, if the Residual
Interest Certificateholder does not exercise its option for 30 days or more,
then the servicer may) effect an early redemption of the notes and purchase of
the certificates on any Payment Date on or after which the Pool Principal
Balance declines to 5% or less of the Original Pool Principal Balance by
depositing with the indenture trustee an amount equal to the Termination
Price. The first Payment Date on which this option may be exercised is the
"Initial Call Date" On the first Payment Date after the Initial Call Date, the
Interest Rate of each class of Securities with a Class Principal Balance will
be increased by _____% if the early redemption is not effected.
RIGHTS OF NOTEHOLDERS UPON OCCURRENCE OF EVENT OF DEFAULT
Events of default under the Indenture (each an "Indenture Event of
Default") will include, without limitation
(i) default for a period in excess of five days in the payment
of any interest on any note or default in the payment of the
entire Principal Balance (including any Deferred Amount to
the extent required to be paid under the Indenture) of any
note on the Maturity Date;
(ii) default in the observance or performance of any covenant or
agreement of the Issuer made in the Indenture, or any
representation or warranty of the Issuer made in the
Indenture which is was not eliminated or otherwise cured,
for a period of 30 days after notice to the Issuer; and
(iii) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings
relating to the Issuer and certain actions by the Issuer
indicating insolvency, reorganization or inability to pay
its obligations or if the Issuer shall dissolve or
liquidate, in whole or in part, in any material respect.
A failure to pay the full amount of the portion of the Noteholders'
Interest Payment Amount within five days of the Payment Date on which such
payment is due (without regard to the amount of Available Funds) will
constitute an Indenture Event of Default. Until the notes have been declared
due and payable upon an Indenture Event of Default, the holders of the notes
may not request the indenture trustee to take any action, other than the
application of Available Funds to principal and interest as provided in this
prospectus supplement, and may not otherwise take or cause any action to be
taken to enforce the obligation of the Trust to pay principal and interest on
the notes. Upon the occurrence of a Servicer Event of Default, the indenture
trustee may have the right to terminate the servicer.
Subject to the conditions specified herein under "Description of the
Transfer and Servicing Agreements--Duties of Owner Trustee and Indenture
Trustee", upon the occurrence and continuation of an Indenture Event of
Default, Holders of the Most Senior Class (as defined in the Sale and
Servicing Agreement) of notes representing more than 66 2/3% of the then
outstanding amount of such Class of notes may exercise their remedies under
the Indenture. These remedies include (i) the right to declare the principal
of each Class of Notes to be immediately due and payable and (ii) the right to
direct the indenture trustee's actions under the Indenture to consent to the
sale of the assets pledged to secure the notes; provided, however, if the
amount payable to Noteholders from the proceeds of such sale will not be
sufficient to discharge in full all unpaid principal and interest accrued
(including any Deferred Amounts) on the outstanding notes, such direction
shall require the request of the holders of 100% of the outstanding amount of
the notes.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes certain terms of the Home Loan
Purchase Agreement, the Indenture, the Sale and Servicing Agreement, the
Administration Agreement and the Trust Agreement (collectively, the "Transfer
and Servicing Agreements"). Copies of the Transfer and Servicing Agreements
will be filed with the Commission following the issuance of the Securities.
The summary does not purport to be complete and is subject to, and qualified
in its entirety by reference to, all the provisions of the Transfer and
Servicing Agreements. The following summary supplements, and to the extent
inconsistent therewith replaces, the description of the general terms and
provisions of the Transfer and Servicing Agreements set forth under the
heading "The Agreements" in the prospectus.
SALE AND ASSIGNMENT OF THE HOME LOANS
On the Closing Date, the seller will sell the Home Loans (excluding,
the right to receive prepayment fees and prepayment penalties which right will
be retained by the seller) to the depositor, and the depositor will sell the
Home Loans (excluding, the right to receive prepayment fees and prepayment
penalties which right will be retained by the seller) to the trust. The trust
will, concurrently with such sale of the Home Loans, deliver or cause to be
delivered the Securities to the depositor. The trust will pledge and assign
the Home Loans to the Indenture trustee in exchange for the Notes. Each Home
Loan will be identified in a schedule appearing as an exhibit to the Sale and
Servicing Agreement.
In addition, the seller will, as to each Home Loan, deliver or cause
to be delivered to the Custodian the related mortgage note endorsed to the
order of the indenture trustee without recourse, any assumption and
modification agreements and the Mortgage with evidence of recording indicated
thereon (except for any Mortgage not returned from the public recording
office), an assignment of the Mortgage in the name of the indenture trustee in
recordable form, and any intervening assignments of the Mortgage
(collectively, a "Home Loan File"); provided, however, with respect to a
substantial number of the Home Loans, the assignment from _______ to
__________ has not been recorded. The indenture trustee will record such
assignment within thirty days of the Closing Date. See "Risk Factors--Lack of
Perfected Security Interest on the Home Loans." Assignments of the Mortgages
to the indenture trustee will be recorded by the indenture trustee in the real
property records for those states in which such recording is deemed necessary
to protect the Trust and the indenture trustee's interest in the Home Loans
against the claims of certain creditors of the seller or subsequent
purchasers. In these circumstances, the indenture trustee will deliver such
assignments to the Custodian after recordation. In the event that, with
respect to any Home Loan as to which recordation of the related assignment is
required, the seller cannot deliver the Mortgage or any assignment with
evidence of recording thereon concurrently with the conveyance thereof under
the Sale and Servicing Agreement because they have not yet been returned by
the public recording office, the seller will deliver or cause to be delivered
to the Custodian a certified true photocopy of such Mortgage or assignment.
The Seller will deliver or cause to be delivered to the Custodian any such
Mortgage or assignment with evidence of recording indicated thereon upon
receipt thereof from the public recording office. The indenture trustee or the
Custodian will review (or cause to be reviewed) each Home Loan File within 30
days after the conveyance of the related Home Loan to the Trust to ascertain
that all required documents have been executed and received.
SERVICING
In consideration for the performance of the loan servicing functions
for the Home Loans, the Servicer is entitled to a monthly fee (the "Servicing
Fee") equal to _____% per annum (the "Servicing Fee Rate") of the Pool
Principal Balance as of the first day of the Due Period immediately preceding
the related Payment Date. The servicer may retain subservicers to service
certain of the Home Loans. Any such subservicer may be an affiliate of the
servicer. The servicer will remain responsible for the servicing of any such
Home Loans and will pay the fees of any subservicer out of its own funds. In
addition to the Servicing Fee, the servicer is entitled to retain additional
servicing compensation in the form of assumption and other administrative
fees, release fees, insufficient funds charges, late payment charges,
investment income on the amounts in the Collection Account and any other
servicing-related penalties and fees other than prepayment fees or prepayment
penalties (collectively, such additional compensation and Servicing Fee, the
"Servicing Compensation").
In the event of a delinquency or default with respect to a Home Loan,
neither the servicer nor any subservicer will have an obligation to advance
scheduled monthly payments of principal or interest with respect to such Home
Loan. However, the servicer or any subservicer will make reasonable servicing
advances with respect to the Home Loans (each, a "Servicing Advance") and will
be entitled to reimbursement for Servicing Advances as described herein
(including such Servicing Advances deemed to be nonrecoverable). Servicing
Advances may include costs and expenses advanced for the preservation,
restoration and protection of any Mortgaged Property, including advances to
pay delinquent real estate taxes and insurance. Any Servicing Advances
including nonrecoverable Servicing Advances by the servicer or any subservicer
will be netted from collections on the Home Loans prior to deposit in the
Collection Account or withdrawn from the Collection Account, as described
under "--Collection Account, Note Payment Account and Certificate Distribution
Account" below.
COLLECTION ACCOUNT, NOTE PAYMENT ACCOUNT AND CERTIFICATE DISTRIBUTION ACCOUNT
The servicer is required to deposit in an Eligible Account (as
defined in the Sale and Servicing Agreement) (the "Collection Account"),
within two Business Days of receipt, all payments received after the Cut-Off
Date on account of principal and interest on the Home Loans, all Net
Liquidation Proceeds, Insurance Proceeds, Released Mortgaged Property
Proceeds, any amounts payable in connection with the repurchase or
substitution of any Home Loan and any amount required to be deposited in the
Collection Account in connection with the redemption of the notes and the
purchase of the Certificates. The foregoing requirements for deposit in the
Collection Account will be exclusive of payments on account of principal and
interest collected on the Home Loans on or before the Cut-Off Date. The
servicer will be entitled to net its Servicing Compensation, Servicing
Advances and any unreimbursed Servicing Compensation and Servicing Advances
prior to deposit into the Collection Account or to withdraw such amounts
therefrom. Withdrawals will be made from the Collection Account only for the
purposes specified in the Sale and Servicing Agreement. The Collection Account
may be maintained at any depository institution that satisfies the
requirements set forth in the definition of Eligible Account in the Sale and
Servicing Agreement.
Amounts on deposit in the Collection Account will be invested in
Permitted Investments at the direction of the servicer. All interest and any
other investment earnings on amounts on deposit in the Collection Account (net
of investment losses) will be payable to the servicer from the Collection
Account as part of its Servicing Compensation.
Any subservicer will also maintain a collection account for deposit
of payments received with respect to the Home Loans being serviced by that
subservicer and that collection account will be an Eligible Account and will
satisfy requirements that are substantially similar to the requirements for
the Collection Account.
The indenture trustee will establish and maintain an Eligible
Account, in the name of the indenture trustee on behalf of the Noteholders,
into which amounts released from the Collection Account for payment to the
Noteholders will be deposited and from which all payments to the Noteholders
will be made (the "Note Payment Account"). The indenture trustee will also
establish and maintain an Eligible Account, in the name of the Co-Owner
Trustee on behalf of the Certificateholders, into which amounts released from
the Collection Account for distribution to the Certificateholders will be
deposited and from which all distributions to the Certificateholders will be
made (the "Certificate Distribution Account"). The Note Payment Account and
the Certificate Distribution Account are referred to in this prospectus
supplement collectively as the "Payment Accounts".
PRIORITY OF PAYMENTS
On the Business Day prior to each Payment Date, the indenture trustee
will withdraw from the Collection Account the Available Collection Amount for
deposit into the Payment Accounts. On each Payment Date, the indenture trustee
will make withdrawals from the applicable Payment Account for application of
the amounts specified below in the following order of priority: (i) to provide
for the payment to the servicer of the Servicing Compensation and all unpaid
Servicing Compensation from prior Due Periods to the extent not previously
retained by the servicer or withdrawn from the Collection Account and paid to
the servicer;
(ii) to each of the indenture trustee, the co-owner trustee, and the
owner trustee fees due and payable on that Payment Date;
(iii) to the holders of the Class A Notes and the Class A-IO
Certificates, pro rata, the portion of the Noteholders'
Interest Payment Amount and Certificateholder's Interest
Distribution Amount, respectively, required to be paid in
respect of that Class on that Payment Date;
(iv) to the holders of the Class M-1 Notes, the portion of the
Noteholders' Interest Payment Amount required to be paid in
respect of the Class M-1 Notes on that Payment Date;
(v) to the holders of the Class M-2 Notes, the portion of the
Noteholders' Interest Payment Amount required to be paid in
respect of the Class M-2 Notes on that Payment Date;
(vi) to the holders of the Class B-1 Certificates, the portion of
the Certificateholders' Interest Distribution Amount required
to be paid in respect of the Class B-1 Certificates on that
Payment Date;
(vii) to the holders of the Class B-2 Certificates, the portion of
the Certificateholders' Interest Distribution Amount required
to be paid in respect of the Class B-2 Certificates on that
Payment Date;
(viii) to the holders of the Class B-3 Certificates, the portion of
the Certificateholders' Interest Distribution Amount required
to be paid in respect of the Class B-3 Certificates on that
Payment Date;
(ix) to the holders of the Class B-4 Certificates, the portion of
the Certificateholders' Interest Distribution Amount required
to be paid in respect of the Class B-4 Certificates on that
Payment Date;
(x) to the holders of the Class A Notes, the amount necessary to
reduce the Class Principal Balance thereof to the Class A
Optimal Principal Balance;
(xi) to the holders of the Class M-1 Notes, the amount necessary to
reduce the Class Principal Balance thereof to the Class M-1
Optimal Principal Balance;
(xii) to the holders of the Class M-2 Notes, the amount necessary to
reduce the Class Principal Balance thereof to the Class M-2
Optimal Principal Balance;
(xiii) to the holders of the Class B-1 Certificates, the amount
necessary to reduce the Class Principal Balance thereof to the
Class B-1 Optimal Principal Balance;
(xiv) to the holders of the Class B-2 Certificates, the amount
necessary to reduce the Class Principal Balance thereof to the
Class B-2 Optimal Principal Balance;
(xv) to the holders of the Class B-3 Certificates, the amount
necessary to reduce the Class Principal Balance thereof to the
Class B-3 Optimal Principal Balance;
(xvi) to the holders of the Class B-4 Certificates, the amount
necessary to reduce the Class Principal Balance thereof to the
Class B-4 Optimal Principal Balance;
(xvii) to the Classes of Securities, if any, which previously accrued
Allocable Loss Amounts, in the following order of priority,
first to the Class M-1 Notes, second to the Class M-2 Notes,
third to the Class B-1 Certificates, fourth to the Class B-2
Certificates, fifth to the Class B-3 Certificates and sixth to
the Class B-4 Certificates, any Deferred Amounts, in each case
to the extent of any accrued Allocable Loss Amounts in respect
of such Class;
(xviii) to the Co-Administrator, the fees and expenses of the
Co-Administrator; and
(xix) to the holder of the Residual Interest Certificate, the
remainder of the amount on deposit in the Certificate
Distribution Account.
Notwithstanding the foregoing, upon the occurrence of certain trigger
events set forth in the Trust Agreement based upon levels of the Aggregate
Liquidation Losses, payments of principal and interest on the Certificates
will be made on a sequential basis.
THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The owner trustee, the indenture trustee and any of their respective
affiliates may hold Securities in their own names or as pledgees. For the
purpose of meeting the legal requirements of certain jurisdictions, the owner
trustee and the indenture trustee acting jointly (or in some instances, the
owner trustee or the indenture trustee acting alone) will have the power to
appoint co-trustees or separate trustees of all or any part of the Trust. In
the event of such an appointment, all rights, powers, duties and obligations
conferred or imposed upon the owner trustee by the Trust Agreement and upon
the indenture trustee by the Indenture will be conferred or imposed upon the
owner trustee and the indenture trustee, respectively, and in each such case
such separate trustee or co-trustee, jointly, or, in any jurisdiction in which
the owner trustee or indenture trustee will be incompetent or unqualified to
perform certain acts, singly upon such separate trustee or co-trustee, which
will exercise and perform such rights, powers, duties and obligations solely
at the direction of the owner trustee or the indenture trustee, as applicable.
The owner trustee and the indenture trustee may resign at any time,
in which event the Residual Interest Certificateholder will be obligated to
appoint a successor to the owner trustee, and the Trust will be obligated to
appoint a successor to the indenture trustee. The Securityholders may also
remove the owner trustee or the indenture trustee if either ceases to be
eligible to continue as such under the Trust Agreement or the indenture, as
the case may be, becomes legally unable to act or becomes insolvent. In such
circumstances, the Residual Interest Certificateholder or the Trust, as
applicable, will be obligated to appoint a successor owner trustee or a
successor indenture trustee, as applicable. Any resignation or removal of the
owner trustee or indenture trustee and appointment of a successor thereto will
not become effective until acceptance of the appointment by such successor.
The Trust Agreement and Indenture will provide that the owner trustee
and indenture trustee will be entitled to indemnification by the Residual
Interest Certificateholder for, and will be held harmless against, any loss,
liability or expense incurred by the owner trustee or indenture trustee not
resulting from its own willful misfeasance, bad faith or negligence (other
than by reason of a breach of any of its representations or warranties to be
set forth in the Trust Agreement or Indenture, as the case may be).
DUTIES OF THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The owner trustee will make no representations as to the validity or
sufficiency of the Trust Agreement, the Certificates (other than the execution
and authentication thereof), the notes or any Home Loans or related documents,
and will not be accountable for the use or application by the seller or the
servicer of any funds paid to the seller or the servicer in respect of the
Securities or the Home Loans, or the investment of any monies by the servicer
of funds in the Collection Account. So long as no Indenture Event of Default
has occurred and is continuing, the owner trustee will be required to perform
only those duties specifically required of it under the Trust Agreement.
Generally, those duties will be limited to the receipt of the various
certificates, reports or other instruments required to be furnished to the
owner trustee under the Trust Agreement, in which case it will only be
required to examine them to determine whether they conform to the requirements
of the Trust Agreement. The owner trustee will not be charged with knowledge
of a failure by the servicer to perform its duties under the Transfer and
Servicing Agreements which failure constitutes an Indenture Event of Default,
unless the owner trustee obtains actual knowledge of the failure.
The owner trustee will be under no obligation to exercise any of the
rights or powers vested in it by the Trust Agreement or to make any
investigation of matters, or to institute, conduct or defend any litigation,
in connection with the Trust Agreement at the request, order or direction of
the holders of the Certificates, unless the Certificateholders have offered to
the owner trustee reasonable security or indemnity against the costs, expenses
and liabilities that it may incurr. Subject to the rights or consent of the
Noteholders and indenture trustee, no Certificateholder will have any right
under the Trust Agreement to institute any proceeding with respect to the
Trust Agreement, unless the holder previously has given to the owner trustee
written notice of the occurrence of an Indenture Event of Default and (i) an
Indenture Event of Default arises from the servicer's failure to remit
payments when due or (ii) the holders of a majority of the outstanding amount
of the certificates have made a written request upon the owner trustee to
institute the proceeding in its own name as the owner trustee and have offered
to the owner trustee reasonable indemnity, and the owner trustee for 30 days
has neglected or refused to institute any the proceeding.
The indenture trustee will make no representations as to the validity
or sufficiency of the indenture, the certificates, the notes (other than the
execution and authentication) or any Home Loans or related documents, and will
not be accountable for the use or application by the seller, the servicer or
the owner trustee of any funds paid to the seller, the servicer or the owner
trustee in respect of the Securities or the Home Loans, or the investment of
any monies by the servicer of funds in the Collection Account. So long as no
Event of Default under the indenture has occurred or is continuing, the
indenture trustee will be required to perform only those duties specifically
required of it under the Transfer and Servicing Agreements. The indenture
trustee will not be charged with knowledge of a failure by the servicer to
perform its duties under the Transfer and Servicing Agreements, which failure
constitutes an Event of Default under the Transfer and Servicing Agreements,
unless the indenture trustee obtains actual knowledge of the failure.
The indenture trustee will be under no obligation to exercise any of
the rights or powers vested in it by the indenture or to make any
investigation of matters, or to institute, conduct or defend any litigation,
in connection with the Trust Agreement at the request, order or direction of
any of the Noteholders, unless the Noteholders have offered to the Indenture
Trustee reasonable security or indemnity against the costs, expenses and
liabilities that it may incur. No Noteholder will have any right under the
indenture to institute any proceeding with respect to the indenture, unless
that Holder previously has given to the indenture trustee written notice of
the occurrence of an Indenture Event of Default and (i) the Indenture Event of
Default arises from the servicer's failure to remit payments when due or (ii)
Noteholders evidencing more than 50% of the outstanding amount of each class
of notes, acting together as a single class, have made a written request upon
the indenture trustee to institute the proceeding in its own name as the
indenture trustee and have offered to the indenture trustee reasonable
indemnity, and the indenture trustee for 30 days has neglected or refused to
institute the proceeding. See "Description of the Securities--Rights of
Noteholders upon Occurrence of Event of Default" in this prospectus
supplement.
PREPAYMENT AND YIELD CONSIDERATIONS
No principal payments will be made on a class of notes on any Payment
Date until the Class Principal Balance of each class of notes having a higher
principal payment priority has been reduced to its related Class Optimal
Principal Balance for that Payment Date. See "Description of the
Securities--Payments" in this prospectus supplement. As the rate of payment of
principal of the notes depends primarily on the rate and timing of payment
(including prepayments) of the principal balance of the Home Loans, final
payment of any class of notes could occur significantly earlier than the
Maturity Date. Noteholders will bear the risk of being able to reinvest
principal payments on the notes at yields at least equal to the yield on their
respective notes. No prediction can be made as to the rate or timing of
prepayments on the Home Loans in either stable or changing interest rate
environments. Any reinvestment risk due to the rate of prepayment of the Home
Loans will be borne entirely by Noteholders.
The subordination of the Certificates to the notes and of each class
of notes having a lower principal payment priority to each class of notes
having a higher principal payment priority will provide limited protection to
holders of the notes against losses on the Home Loans. If the actual rate and
amount of losses experienced on the Home Loans exceed the rate and amount of
losses anticipated by an investor, the yields to maturity (or to redemption,
as described under "Description of the Securities--Optional Redemption" below)
on the subordinate notes may be lower than anticipated.
Approximately ____% of the Home Loans provide for payment of
prepayment penalties; however, no detailed data are available with respect to
the terms of the prepayment penalties. The rate of prepayment on the Home
Loans cannot be accurately predicted. The prepayment experience of the trust
with respect to the Home Loans may be affected by a wide variety of factors,
including, without limitation, economic conditions, prevailing interest rate
levels, the availability of alternative financing, homeowner mobility and
changes affecting the deductibility for federal income tax purposes of
interest payments on the Home Loans. Generally, however, because the Home
Loans bear interest at fixed rates, and the rate of prepayment on fixed rate
loans is sensitive to prevailing interest rates, if prevailing interest rates
fall significantly below the interest rates on the Home Loans, the Home Loans
are likely to be subject to higher prepayment rates than if prevailing rates
remain at or above the interest rates on the Home Loans. Conversely, if
prevailing interest rates rise significantly above the interest rates on the
Home Loans, the rate of prepayments would be likely to decrease. No
representations are made as to the particular factors that will affect the
prepayment of the Home Loans, as to the relative importance of such factors,
or as to the percentage of the principal balance of the Home Loan that will be
paid as of any date.
The effective yield to Noteholders will be lower than the yield
otherwise produced by the applicable Interest Rate, because the payment of
interest accrued during the applicable Accrual Period will not be made until
the Payment Date occurring in the month following that Accrual Period. See
"Description of the Securities--Payments" in this prospectus supplement. This
delay will result in funds being paid to Noteholders approximately 24 days
after the end of the applicable Accrual Period. During that 24-day period no
interest will accrue on the funds.
The rate of principal payments on the notes, the aggregate amount of
distributions on the notes and the yields to maturity of the notes will be
directly affected by the rate and timing of principal reductions on the Home
Loans. Principal reductions may be in the form of scheduled amortization
payments or unscheduled payments or reductions, which may include prepayments,
repurchases and liquidations or write-offs due to default, casualty, insurance
or other disposition. On any Payment Date on or after the Payment Date on
which the Pool Principal Balance declines to 5% or less of the Original Pool
Principal Balance, the Residual Interest Certificateholder or the servicer may
effect a redemption of the notes and purchase of the certificates as described
in this prospectus supplement under "Description of the Securities--Optional
Redemption."
The "weighted average life" of a class of notes refers to the average
amount of time that will elapse from the closing date to the date each dollar
in respect of principal of that class is repaid. The weighted average life of
each class of notes will be influenced by, among other factors, the rate at
which principal reductions occur on the Home Loans as described in this
prospectus supplement. If substantial principal prepayments on the Home Loans
are received as a result of unscheduled payments, liquidations or repurchases,
payments to Noteholders may significantly shorten the weighted average lives
of the notes. If the Home Loans experience delinquencies and defaults in the
payment of principal, then Noteholders will experience a delay in the receipt
of principal payments attributable to such delinquencies and defaults, which
in certain instances may result in longer actual average weighted lives of the
notes than would otherwise be the case. Interest shortfalls on the Home Loans
due to principal prepayments in full and curtailments, and any resulting
shortfall in amounts payable on the notes, will be covered to the extent of
amounts available from the applicable credit enhancement. See "Risk
Factors--Potential Inadequacy of Credit Enhancement" above.
The rate and timing of principal payments on the Home Loans will be
influenced by a variety of economic, geographic, social and other factors.
These factors may include changes in borrowers' housing needs, job transfers,
unemployment, borrowers' net equity, if any, in the mortgaged properties,
servicing decisions, homeowner mobility, the existence and enforceability of
"due-on-sale" clauses, seasoning of loans, market interest rates for similar
types of loans and the availability of funds for such loans. Substantially all
of the Home Loans contain due-on-sale provisions and the servicer intends to
enforce this unless (i) the servicer, in a manner consistent with its
servicing practices, permits the purchaser of the related Mortgaged Property
to assume the Home Loan, or (ii) enforcement is not permitted by applicable
law. In certain cases, the servicer may, in a manner consistent with its
servicing practices, simply release the lien on the existing collateral,
leaving the related Home Loan unsecured. In that case, the servicer generally
will require the borrower to make a partial prepayment in reduction of the
principal balance of the Home Loan to the extent that the borrower has
received proceeds from the sale of the prior residence that will not be
applied to the purchase of the new residence.
Payments of principal at a faster rate than anticipated will decrease
the yield on notes purchased at a premium; payments of principal at a slower
rate than anticipated will decrease the yield on notes purchased at a
discount. The effect on an investor's yield due to payments of principal
occurring at a rate that is faster (or slower) than the rate anticipated by
the investor during any period following the issuance of the notes will not be
entirely offset by a subsequent like reduction (or increase) in the rate of
payments of principal during any subsequent period.
The rate of delinquencies and defaults on the Home Loans and of
recoveries, if any, on defaulted Home Loans and foreclosed properties will
affect the rate and timing of principal payments on the Home Loans, and,
accordingly, the weighted average lives of the notes, and could cause a delay
in the payment of principal to the holders of the notes. Certain factors may
influence delinquencies and defaults, including origination and underwriting
standards, loan-to-value ratios and delinquency history. In general, defaults
on Home Loans are expected to occur with greater frequency in their early
years, although few data are available with respect to the rate of default on
similar types of home loans. The rate of default on Home Loans with high
loan-to-value ratios, or on Home Loans secured by junior liens, may be higher
than that of home loans with lower loan-to-value ratios or secured by first
liens on comparable properties. In addition, the rate and timing of
prepayments, defaults and liquidations on the Home Loans will be affected by
the general economic condition of the area in which the related Mortgaged
Properties are located or the related borrower is residing. The risk of
delinquencies and losses is greater and voluntary principal prepayments are
less likely in regions where a weak or deteriorating economy exists, as may be
evidenced by, among other factors, increasing unemployment or falling property
values.
Although data have been published with respect to the historical
prepayment experience of certain residential mortgage loans those loans differ
in material respects from the Home Loans and the data may not be reflect
conditions applicable to the Home Loans. No significant historical prepayment
data are generally available with respect to the types of Home Loans included
in the Home Loan Pool or similar types of loans, and there can be no assurance
that the Home Loans will achieve or fail to achieve any particular rate of
principal prepayment. A number of factors suggest that the prepayment
experience of the Home Loan Pool may be significantly different from that of a
pool of conventional first-lien, single family mortgage loans with equivalent
interest rates and maturities. One such factor is that the principal balance
of the average Home Loan is smaller than that of the average conventional
first-lien mortgage loan. A smaller principal balance may be easier for a
borrower to prepay than a larger balance and, therefore, a higher prepayment
rate may result for the Home Loan Pool than for a pool of first-lien mortgage
loans, irrespective of the relative average interest rates and the general
interest rate environment. In addition, in order to refinance a first-lien
mortgage loan, the borrower must generally repay any junior liens. However, a
small principal balance may make refinancing a Home Loan at a lower interest
rate less attractive to the borrower as the perceived impact to the borrower
of lower interest rates on the size of the monthly payment may not be
significant. Other factors that might be expected to affect the prepayment
rate of the Home Loan Pool include the relative creditworthiness of the
borrowers, the amounts of and interest rates on the underlying senior mortgage
loans, and the tendency of borrowers to use real property mortgage loans as
long-term financing for home purchase and junior liens as shorter-term
financing for a variety of purposes, which may include the direct or indirect
financing of home improvement, education expenses, debt consolidation,
purchases of consumer durables such as automobiles, appliances and furnishings
and other consumer purposes. Furthermore, because at origination the majority
of the Home Loans had combined loan-to-value ratios that approached or
exceeded 100%, the related borrowers may have less opportunity to refinance
the indebtedness secured by the related Mortgaged Properties, including the
Home Loans, and a lower prepayment rate may result for the Home Loan Pool than
for a pool of mortgage (including first or junior lien) loans that have
combined loan-to-value ratios less than 100%. However, the availability of
credit from an increased number of lenders making loans similar to the Home
Loans may result in faster rates of prepayment of the Home Loans than would
otherwise be the case. In addition, any increase in the market values of
Mortgaged Properties, and the resulting decrease in the combined loan-to-value
ratios of the related Home Loans, may make alternative sources of financing
available to the related borrowers at lower interest rates.
REINVESTMENT RISK
During periods of falling interest rates, Noteholders may receive an
increased amount of principal payments at a time when such holders may be
unable to reinvest such payments in investments having a yield and rating
comparable to the notes. Conversely, during periods of rising interest rates,
Noteholders are likely to receive a decreased amount of principal payments at
a time when such holders may have an opportunity to reinvest such payments in
investments having a yield and rating comparable to the notes.
MATURITY DATE
The Maturity Date of each class of notes is the Payment Date in ____
____. The Maturity Date was determined by calculating the final Payment Date
with respect to each class on the basis of the Modeling Assumptions and an
assumed constant prepayment rate of 0% of the Prepayment Assumption (as
defined below), and adding three years. The actual maturity of any class of
notes may be significantly earlier than the Maturity Date.
WEIGHTED AVERAGE LIVES
Generally, greater than anticipated prepayments of principal will
increase the yield on notes purchased at a price less than par. Generally,
greater than anticipated prepayments of principal will decrease the yield on
notes purchased at a price greater than par. The effect on an investor's yield
due to principal payments on the Home Loans occurring at a rate that is faster
(or slower) than the rate anticipated by the investor in the period
immediately following the issuance of the notes will not be entirely offset by
a subsequent like reduction (or increase) in the rate of principal payments.
The weighted average lives of the notes will also be affected by the amount
and timing of delinquencies and defaults on the Home Loans and the recoveries,
if any, on Home Loans and foreclosed properties.
The following information illustrates the effect of prepayments of
the Home Loans on the weighted average lives of the notes under certain stated
assumptions and is not a prediction of the prepayment rate that might actually
be experienced on the Home Loans. Weighted average life refers to the average
amount of time that will elapse from the date of delivery of a security until
each dollar of principal of that security will be repaid to the investor. The
weighted average lives of the notes will be influenced by the rate at which
principal of the Home Loans is paid, which may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
unscheduled reductions of principal, including without limitation those
resulting from full or partial prepayments, refinancings, liquidations and
write-offs due to defaults, casualties or other dispositions, substitutions
and repurchases by or on behalf of the seller).
Prepayments on loans such as the Home Loans are commonly measured
relative to a prepayment standard or model. The 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
the pool of loans for the life of such loans. A 100% Prepayment Assumption
assumes a constant prepayment rate ("CPR") of 0.0% per annum of the
outstanding principal balance of such loans in the first month of the life of
the loans and an additional approximately _______% (expressed as a percentage
per annum) in each month thereafter until the fifteenth month; beginning in
the fifteenth month and in each subsequent month during the life of the loans,
a CPR of 15% per annum each month is assumed. As used in the table below, 0%
Prepayment Assumption assumes prepayment rates equal to 0% of the Prepayment
Assumption (i.e., no prepayments), 100% Prepayment Assumption assumes
prepayment rates equal to 100% of the Prepayment Assumption, and so forth. The
Prepayment Assumption does not purport to be a historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of loans, including the Home Loans. The seller does not make any
representations about the appropriateness of the Prepayment Assumption or the
CPR model.
Modeling Assumptions. For purposes of preparing the tables below, the
actual characteristics of the Home Loans as of the cut-off date have been used
and the following assumptions (the "Modeling Assumptions") have been made:
(i) all scheduled payments on the Home Loans are timely received on
the first day of each month, commencing _______ 1, ____;
(ii) there are no defaults, losses or delinquencies on the Home
Loans;
(iii) the Home Loans prepay monthly at the respective specified
constant annual percentages of CPR specified in the table;
(iv) the Closing Date is ___________, _____;
(v) all principal prepayments represent prepayments in full of the
Home Loans and include 30 days of interest thereon;
(vi) there are no repurchases of or substitutions for the Home
Loans;
(vii) no early redemption of the notes is effected (except in the
case of "Weighted Average Life with Optional Redemption"); and
(viii) cash distributions are received by the Noteholders on the 25th
day of each month, commencing in _________ , ____.
The tables on the following pages indicate the percentage of the
Original Class Principal Balance of each class of notes that would be
outstanding at each of the dates shown at the specified percentages of the
Prepayment Assumption and the corresponding weighted average life of each
class of notes. Since these tables have been prepared based on the Modeling
Assumptions (including the assumptions regarding the characteristics and
performance of the Home Loans). There are discrepancies between the
characteristics of the actual Home Loans and the characteristics of the Home
Loans assumed in preparing the tables. Any such discrepancy may have an effect
upon the percentages of Class Principal Balances outstanding and weighted
average lives of the notes set forth in the tables. In addition, since the
actual Home Loans have characteristics which differ from those assumed in
preparing the tables set forth below, the distributions of principal on the
notes may be made earlier or later than as indicated in the tables.
The weighted average life of a class of notes is determined by
(a) multiplying the amount of each payment of principal thereof by
the number of years from the date of issuance to the related
Payment Date,
(b) summing the results and
(c) dividing the sum by the aggregate payments of principal referred to in
clause (a) and rounding to one decimal place.
<PAGE>
PERCENTAGE OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION(1)(2)
<TABLE>
<CAPTION>
CLASS A CLASS M-1
------------------------------------------- --------------------------------------------------
PAYMENT BALANCE 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
- ----------------------------- --- --- --- ---- ---- ---- --- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance........... 100 100 100 100 100 100 100 100 100 100 100 100
- ----------................
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Weighted Average Life
Without Optional
Termination............
With Optional Termination
- -----------------------------
</TABLE>
* Less than 0.5% but greater than 0%
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) Except in the case of the "Weighted Average Life With Optional
Redemption.", based on the assumption that neither the Residual Interest
Certificateholder nor the servicer exercises its option to redeem the
notes and purchase the certificates as described above "Description of
the Securities--Optional Redemption".
<PAGE>
PERCENTAGE OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION(1)(2)
<TABLE>
<CAPTION>
CLASS M-2
-----------------------------------------------------------
PAYMENT BALANCE 0% 50% 75% 100% 125% 150%
---- ----- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Initial Balance.................................. 100 100 100 100 100 100
- ----------.......................................
- ----------.......................................
- ----------.......................................
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- ----------.......................................
- ----------.......................................
- ----------.......................................
- ----------.......................................
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Weighted Average Life
Without Optional Termination..............
With Optional Termination...................
</TABLE>
* Less than 0.5% but greater than 0%
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) Except in the case of the "Weighted Average Life With Optional
Redemption.", based on the assumption that neither the Residual Interest
Certificateholder nor the servicer exercises its option to redeem the
notes and purchase the certificates as described above "Description of
the Securities--Optional Redemption".
<PAGE>
The paydown scenarios for the notes set forth in the foregoing tables
are subject to significant uncertainties and contingencies (including those
discussed above under "Prepayment and Yield Considerations"). As a result,
there can be no assurance that any of the foregoing paydown scenarios and the
Modeling Assumptions on which they were made will prove to resemble the actual
performance of the Home Loans and the notes, or that the actual weighted
average lives of the notes will not vary substantially from those set forth in
the foregoing tables, which variations may be shorter or longer, and which
variations may be greater with respect to later years. Furthermore, it is not
expected that the Home Loans will prepay at a constant rate or that all of the
Home Loans will prepay at the same rate. Moreover, the Home Loans actually
included in the Home Loan Pool, the payment experience of such Home Loans and
certain other factors affecting the payments on the notes will not conform to
the Modeling Assumptions made in preparing the above tables. In fact, the
characteristics and payment experience of the Home Loans will differ in many
respects from the Modeling Assumptions. See "The Home Loan Pool" herein. To
the extent that the Home Loans actually included in the Home Loan Pool have
characteristics and a payment experience that differ from those assumed in
preparing the foregoing tables, the notes are likely to have weighted average
lives that are shorter or longer than those set forth in the foregoing tables.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following summary of certain United States federal income tax
consequences of the purchase, ownership and disposition of the notes is based
upon laws, regulations, rulings and decisions now in effect, all of which are
subject to change (including changes in effective dates) or possible differing
interpretations. It deals only with notes held as capital assets and does not
purport to deal with persons in special tax situations, such as financial
institutions, insurance companies, regulated investment companies, dealers in
securities or currencies, persons holding notes as a hedge against currency
risks or as a position in a "straddle" for tax purposes, or persons whose
functional currency is not the United States dollar. It also does not deal
with holders other than original purchasers (except where otherwise
specifically noted). Persons considering the purchase of the notes should
consult their own tax advisors concerning the application of United States
federal income tax laws to their particular situations as well as any
consequences of the purchase, ownership and disposition of the notes arising
under the laws of any other taxing jurisdiction.
As used herein, the term "U.S. Holder" means a beneficial owner of a
note that is for United States federal income tax purposes (i) a citizen or
resident of the United States, (ii) a corporation or partnership (including an
entity treated as a corporation or partnership for U.S. income tax purposes)
created or organized in or under the laws of the United States or any state
thereof, including the District of Columbia (other than a partnership that is
not treated as a United States person under any applicable Treasury
regulations), (iii) an estate whose income is subject to United States federal
income tax regardless of its source, (iv) a trust if a court within the United
States is able to exercise primary supervision over the administration 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 Treasury regulations, certain trusts in existence on
August 20, 1996, and treated as United States persons under the United States
Internal Revenue Code of 1986, as amended (the "Code") and applicable Treasury
regulations thereunder prior to such date, that elect to continue to be
treated as United States persons under the Code or applicable Treasury
regulations thereunder also will be a U.S. Holder. As used herein, the term
"non-U.S. Holder" means a beneficial owner of a note that is not a U.S.
Holder.
CHARACTERIZATION OF NOTES AS INDEBTEDNESS
In the opinion of Brown & Wood LLP ("Tax Counsel"), for federal
income tax purposes, (i) the Notes will be treated as debt instruments, and
(ii) the Trust will not be treated as an association (or publicly traded
partnership) taxable as a corporation or as a taxable mortgage pool within the
meaning of Section 7701(i) of the Code. The Class M-1 Notes and the Class M-2
Notes will be treated as having been issued with original issue discount. As a
result, holders of those notes may be required to recognize income with
respect to such notes in advance of the receipt of cash attributable to that
income. Each Noteholder, by the acceptance of a note, will agree to treat the
notes as indebtedness for federal income tax purposes.
In general, whether for U.S. federal income tax purposes a
transaction constitutes an equity investment or a loan, the repayment of which
is secured by property, is a question of fact, the resolution of which is
based upon the economic substance of the transaction rather than its form or
the manner in which it is labeled. While the Internal Revenue Service (the
"IRS") and the courts have set forth several factors to be taken into account
in determining whether the substance of a transaction is a sale of property or
a secured loan, the primary factor in making this determination is whether
transferee has assumed the risk of loss or other economic burdens relating to
the property and has obtained the benefits of ownership thereof. Tax Counsel
has analyzed and relied on several factors in reaching its opinion that the
weight of the benefits and burdens of ownership of the Home Loans has been
retained by the Trust or its beneficial owners and has not been transferred to
the Noteholders.
U.S. HOLDERS
Payments of Interest. Payments of interest on a note generally will
be taxable to a U.S. Holder as ordinary interest income at the time such
payments are accrued or are received (in accordance with the U.S. Holder's
regular method of tax accounting).
Original Issue Discount. Payments of qualified stated interest on a
note issued with OID (a "Discount Note") are taxable to a U.S. Holder as
ordinary interest income at the time such payments are accrued or are received
(in accordance with the U.S. Holder's regular method of tax accounting). A
U.S. Holder of a Discount Note must include OID in income as ordinary interest
for United States federal income tax purposes as it accrues under a constant
yield method in advance of receipt of the cash payments attributable to such
income, regardless of such U.S. Holder's regular method of tax accounting.
The OID Regulations do not contain provisions specifically
interpreting Code Section 1272(a)(6) which applies to prepayable securities
such as the notes. Until the Treasury issues guidance which applies to
prepayable securities such as the notes, the indenture trustee intends to base
its OID computation on Code Section 1272(a)(6) and the OID Regulations as
described in the 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 yield used to calculate accruals of OID with respect to the notes
with OID will be the original yield to maturity of such notes, determined by
assuming that the Home Loans will prepay in accordance with 100% of the
Prepayment Assumption. No representation is made as to the actual rate at
which the Home Loans will prepay. See "Certain Federal Income Tax
Consequences" in the Prospectus for a discussion of the application of the OID
rules and for purposes of calculating OID.
Disposition of a Note. Except as discussed in the Prospectus, upon
the sale, exchange or retirement of a note, a U.S. Holder generally will
recognize taxable gain or loss equal to the difference between the amount
realized on the sale, exchange or retirement (other than amounts representing
accrued and unpaid interest) and such U.S. Holder's adjusted tax basis in the
note. A U.S. Holder's adjusted tax basis in a note generally will equal such
U.S. Holder's initial investment in the note increased by any OID included in
income (and accrued market discount, if any, if the U.S. Holder has included
such market discount in income) and decreased by the amount of any payments,
other than qualified stated interest payments, received and amortizable bond
premium taken with respect to such Note. Such gain or loss generally will be
long-term capital gain or loss if the note were held for more than the
applicable holding period, except to the extent of any accrued market discount
not previously included in income.
POSSIBLE CLASSIFICATION OF THE TRUST AS A PARTNERSHIP OR ASSOCIATION TAXABLE AS
A CORPORATION
The opinion of Tax Counsel is not binding on the courts or the IRS.
It is possible that the IRS could assert that for purposes of the Code, the
transaction contemplated by the this Prospectus Supplement constitutes an
equity investment in the Home Loans (or an interest therein) to the
Noteholders, and that one or more classes of the notes constitute equity
interests. If it were determined that this transaction created an entity
classified as a corporation (including a publicly traded partnership taxable
as a corporation), the Trust would be subject to U.S. federal income tax at
corporate income tax rates on the income it derives from the Home Loans, which
would reduce the amounts available for payments to the Noteholders. Cash
payments to the Noteholders whose interests were characterized as equity
interests generally would be treated as dividends for tax purposes to the
extent of such corporation's earnings and profits. If the transaction were
treated as creating a partnership, the partnership itself would not be subject
to U.S. federal income tax (unless it were to be characterized as a publicly
traded partnership taxable as a corporation) or a taxable mortgage pool,
described below. Rather, each Certificateholders and each Noteholder holding
an equity interest would be taxed individually on its respective distributive
share of the partnership's income, gain, loss, deductions and credits. The
amount and timing of items of income and deductions of such Noteholders could
differ if the notes were to constitute partnership interests rather than
indebtedness.
POSSIBLE CLASSIFICATION AS A TAXABLE MORTGAGE POOL
In relevant part, Section 7701(i) of the Code provides that any
entity (or a portion of an entity) that is a "taxable mortgage pool" will be
classified as a taxable corporation and will not be permitted to file a
consolidated U.S. federal income tax return with another corporation. Any
entity (or a portion of any entity) will be a taxable mortgage pool if (i)
substantially all of its assets consist of debt instruments, more than 50% of
which are principally secured by an interest in real property, (ii) the entity
is the obligor under debt obligations with two or more maturities, and (iii)
under the terms of the entity's debt obligations (or an underlying
arrangement), payments on such debt obligations bear a relationship to the
debt instruments held by the entity.
Assuming compliance with all of the provisions of relevant documents,
and based upon representations received from seller establishing that the Home
Loans transferred to the trust will not cause the trust to hold debt
instruments more than 50% of which are principally secured by an interest in
real property within the meaning of the taxable mortgage pool provisions of
the Code, Tax Counsel is of the opinion that the trust will not be a taxable
mortgage pool under Section 7701(i) of the Code.
The opinion of Tax Counsel is not binding on the IRS or the courts.
If the IRS were to contend successfully (or future regulations were to
provide) that the arrangement is a taxable mortgage pool, such arrangement
would be subject to U.S. federal corporate income tax on its taxable income
generated by ownership of the Home Loans. Such a tax might reduce amounts
available for payments to the Noteholders. The amount of such a tax would
depend upon whether payments to Noteholders would be deductible as interest
expense in computing the taxable income of such an arrangement as a taxable
mortgage pool.
NON-U.S. HOLDERS
In general, a non-U.S. Holder will not be subject to U.S. federal
income taxes on payments of principal, premium (if any) or interest (including
OID, if any) on a note, unless such non-U.S. Holder is a direct or indirect
10% or greater shareholder of _________ or the Trust, a controlled foreign
corporation related to _________ or the Trust or a bank receiving interest
described in section 881(c)(3)(A) of the Code. To qualify for the exemption
from taxation, the last United States payor in the chain of payment prior to
payment to a non-U.S. Holder (the "Withholding Agent") must have received in
the year in which a payment of interest or principal occurs, or in either of
the two preceding calendar years, a statement that (i) is signed by the
beneficial owner of the note under penalties of perjury, (ii) certifies that
such owner is not a U.S. Holder and (iii) provides the name and address of the
beneficial owner. The statement may be made on an IRS Form W-8 or a
substantially similar form, and the beneficial owner must inform the
Withholding Agent of any change in the information on the statement within 30
days of such change. If a note is held through a securities clearing
organization or certain other financial institutions, the organization or
institution may provide a signed statement to the Withholding Agent. However,
in such case, the signed statement must be accompanied by a copy of the IRS
Form W-8 or the substitute form provided by the beneficial owner to the
organization or institution.
Generally, a non-U.S. Holder will not be subject to federal income
taxes on any amount which constitutes capital gain upon retirement or
disposition of a note, provided that (i) such gain is not attributable to an
office or other fixed place of business maintained by the non-U.S. Holder in
the United States, and (ii) in the case of an individual non-U.S. Holder, the
non-U.S. Holder is not present in the U.S. for 183 days or more in the taxable
year. Certain other exceptions may be applicable, and a non-U.S. Holder should
consult its tax advisor in this regard.
The notes will not be includible in the estate of a non-U.S. Holder
unless the individual is a direct or indirect 10% or greater shareholder of
_________ or the Trust or, at the time of such individual's death, payments in
respect of the Notes would have been effectively connected with the conduct by
such individual of a trade or business in the United States.
Final regulations dealing with backup withholding and information
reporting on income paid to a foreign person and related matters (the "New
Withholding Regulations") unify current certification procedures and forms and
clarify reliance standards. The New Withholding Regulations generally will be
effective for payments made after December 31, 1999, subject to certain
transition rules. Prospective non-U.S. Holders of the Notes are strongly urged
to consult their own tax advisor with respect to the New Withholding
Regulations.
BACKUP WITHHOLDING
Backup withholding of United States federal income tax at a rate of
31% may apply to payments made in respect of the notes to registered owners
who are not "exempt recipients" and who fail to provide certain identifying
information (such as the registered owner's taxpayer identification number) in
the required manner. Generally, individuals are not exempt recipients, whereas
corporations and certain other entities generally are exempt recipients.
Payments made in respect of the notes to a U.S. Holder must be reported to the
IRS, unless the U.S. Holder is an exempt recipient or establishes an
exemption. Compliance with the identification procedures described in the
preceding section would establish an exemption from backup withholding for
those non-U.S.
Holders who are not exempt recipients.
In addition, upon the sale of a note to (or through) a broker, the
broker must withhold 31% of the entire purchase price, unless either (i) the
broker determines that the seller is a corporation or other exempt recipient
or (ii) the seller provides, in the required manner, certain identifying
information and, in the case of a non-U.S. Holder, certifies that such seller
is a non-U.S. Holder (and certain other conditions are met). Such a sale must
also be reported by the broker to the IRS, unless either (i) the broker
determines that the seller is an exempt recipient or (ii) the seller certifies
its non-U.S. status (and certain other conditions are met). Certification of
the registered owner's non-U.S. status would be made normally on an IRS Form
W-8 under penalties of perjury, although in certain cases it may be possible
to submit other documentary evidence.
Any amounts withheld under the backup withholding rules from a
payment to a beneficial owner would be allowed as a refund or a credit against
such beneficial owner's United States federal income tax provided the required
information is furnished to the IRS.
As previously mentioned, the New Withholding Regulations generally
will be effective for payments made after December 31, 1999, subject to
certain transition rules Prospective Noteholders are strongly urged to consult
their own tax advisor with respect to the New Withholding Regulations.
ERISA CONSIDERATIONS
Except as described below, the notes may be purchased by an employee
benefit plan or an individual retirement account (a "Plan") subject to ERISA
or Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code").
A fiduciary of a Plan must determine that the purchase of a note is consistent
with its fiduciary duties under ERISA and does not result in a nonexempt
prohibited transaction as defined in Section 406 of ERISA or Section 4975 of
the Code. For additional information regarding treatment of the Notes under
ERISA, See "ERISA Considerations" in the Prospectus.
The notes may not be purchased with the assets of a Plan if the
seller, the servicer, the indenture trustee, the owner trustee 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.
UNDERWRITING
Subject to the terms and conditions set forth in an Underwriting
Agreement (the "Underwriting Agreement"), the depositor has agreed to sell to
each of the Underwriters named below (collectively, the "Underwriters"), and
each of the Underwriters has severally agreed to purchase, the principal
amount of Notes set forth opposite its name in the tables below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF
---------------------------------------------------------
UNDERWRITER CLASS A CLASS M-1 CLASS M-2
- ----------- --------- ----------- -----------
<S> <C> <C> <C>
Bear, Stearns & Co. Inc.............................. $ $ $
___________________.................................
Total.......................................... $ $ $
================== =================== ===============
</TABLE>
The depositor has been advised that the Underwriters propose
initially to offer the notes to the public at the respective offering prices
set forth on the cover hereof and to certain dealers at such prices less a
selling concession not to exceed the percentage of the note denomination set
forth below, and that the Underwriters may allow and such dealers may reallow
a reallowance discount not to exceed the percentage of the note denomination
set forth below:
<TABLE>
<CAPTION>
CLASS A CLASS M-1 CLASS M-2
--------------- ------------ ------------
<S> <C> <C> <C>
Concessions...................................... % % %
Reallowances..................................... % % %
</TABLE>
Until the distribution of the notes is completed, rules of the SEC
may limit the ability of the Underwriters and certain selling group members to
bid for and purchase those classes of notes. As an exception to these rules,
the Underwriters are permitted to engage in certain transactions that
stabilize the price of the notes. Such transactions consist of bids of
purchase for the purpose of pegging, fixing or maintaining the price of those
classes of notes.
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 depositor nor any of the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the prices of the notes. In
addition, neither the depositor nor any of the Underwriters makes any
representation that the Underwriters will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
The depositor has been advised by Bear, Stearns & Co. Inc. that it
presently intends to make a market in the notes; however, it is not obligated
to do so, any market-making may be discontinued at any time, and there can be
no assurance that an active public market for the Notes will develop or, if it
does develop, that it will continue.
The depositor is an affiliate of Bear, Stearns & Co. Inc.
The Underwriting Agreement provides that the depositor and the seller
will indemnify the Underwriters against certain civil liabilities, including
liabilities under the Act.
LEGAL INVESTMENT MATTERS
The notes will not constitute "mortgage related securities" under the
Secondary Mortgage Market Enhancement Act of 1984. Accordingly, many
institutions with legal authority to invest in "mortgage related securities"
may not be legally authorized to invest in the notes.
There may be restrictions on the ability of certain investors,
including depository institutions, either to purchase the notes or to purchase
notes representing more than a specified percentage of the investor's assets.
Investors should consult their own legal advisors in determining whether and
to what extent the notes constitute legal investments for such investors.
RATINGS
It is a condition to the issuance of the notes that (i) the Class A
Notes be rated "AAA" by each of Fitch IBCA, Inc. ("Fitch") and Standard and
Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc.
("S&P"), and "Aaa" by Moody's Investors Service, Inc. ("Moody's", and together
with Fitch and S&P, the "Rating Agencies"), (ii) the Class M-1 Notes be rated
"AA" by each of Fitch and S&P and "Aa2" by Moody's and (iii) the Class M-2
Notes be rated "A" by each of Fitch and S&P and "A2" by Moody's.
The ratings on the notes address the likelihood of the receipt by
Noteholders of all payments on the Home Loans to which they are entitled. The
ratings on the notes also address the structural, legal and issuer-related
aspects associated with the notes, including the nature of the Home Loans. In
general, the ratings on the notes address credit risk and not prepayment risk.
The ratings on the notes do not represent any assessment of the likelihood
that principal prepayments of the Home Loans will be made by borrowers or the
degree to which the rate of such prepayments might differ from that originally
anticipated. As a result, the initial ratings assigned to the notes do not
address the possibility that Noteholders might suffer a lower than anticipated
yield in the event of principal payments on the notes resulting from rapid
prepayments of the Home Loans, or in the event that the trust is terminated
prior to the Maturity Date of the notes.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to any of the notes by the Rating Agencies are subsequently
lowered for any reason, no person or entity is obligated to provide any
additional support or credit enhancement with respect to those notes.
LEGAL OPINIONS
In addition to the legal opinions described in the Prospectus,
certain legal matters relating to the issuance of the notes will be passed
upon for the seller by _____________________ and for the depositor and the
Underwriters by Brown & Wood LLP, New York, New York. Brown & Wood LLP will
also pass on certain federal income tax matters.
<PAGE>
INDEX OF TERMS
Administration Agreement.................................................S-16
Available Funds..........................................................S-29
Book-Entry Notes.........................................................S-27
Certificate Distribution Account.........................................S-35
Co-Administrator.........................................................S-16
Code...............................................................S-44, S-47
Collection Account.......................................................S-35
combined loan-to-value ratio.............................................S-12
CPR......................................................................S-41
Custodian................................................................S-16
Cut-Off Date Principal Balance...........................................S-15
Defective Home Loan......................................................S-24
Deleted Home Loan........................................................S-24
Depository...............................................................S-27
Determination Date.......................................................S-29
Discount Note............................................................S-45
ERISA.....................................................................S-5
FDIC.....................................................................S-10
FHLMC....................................................................S-12
Fitch....................................................................S-49
FNMA.....................................................................S-12
Home Loan File...........................................................S-34
Home Loan Purchase Agreement.............................................S-15
Home Loan Rate...........................................................S-16
home loans................................................................S-4
Home Loans...............................................................S-15
Indenture Event of Default...............................................S-33
Indirect Participants....................................................S-27
Industry.................................................................S-13
Initial Call Date........................................................S-33
IRS......................................................................S-45
Modeling Assumptions.....................................................S-41
New Withholding Regulations..............................................S-47
Note Payment Account.....................................................S-35
Notes....................................................................S-27
Original Pool Principal Balance..........................................S-15
Participants.............................................................S-27
Plan.....................................................................S-47
Prepayment and Yield Considerations......................................S-44
Prepayment Assumption....................................................S-41
Purchase Price...........................................................S-24
Rating Agencies..........................................................S-49
Record Date..............................................................S-27
Rules....................................................................S-28
S&P......................................................................S-49
Sale and Servicing Agreement.............................................S-15
Securities...............................................................S-27
Servicing Advance........................................................S-34
Servicing Compensation...................................................S-34
Servicing Fee............................................................S-34
Servicing Fee Rate.......................................................S-34
SMMEA....................................................................S-48
Substitution Adjustment..................................................S-24
Systems..................................................................S-13
Tax Counsel..............................................................S-44
The Seller--Underwriting Criteria.........................................S-16
Transfer and Servicing Agreements..................................S-15, S-33
Trust Agreement..........................................................S-27
Underwriters.............................................................S-48
Underwriting Agreement...................................................S-48
Weighted Average Life with Optional Redemption...........................S-41
Withholding Agent........................................................S-46
<PAGE>
________________ HOME LOAN OWNER TRUST _____-__
ISSUER OF THE CERTIFICATES
$__________ HOME LOAN ASSET-BACKED Notes
[LOGO]
- ------------------------------------------------------------------------------
PROSPECTUS SUPPLEMENT
- ------------------------------------------------------------------------------
BEAR, STEARNS & CO. INC.
--------, ----
PROSPECTUS
Asset-Backed Securities
(Issuable in Series)
BEAR STEARNS ASSET BACKED SECURITIES, INC.
Depositor
The Securities
- ----------------------------------------------------------
Consider carefully the risk factors beginning on page 3
of this prospectus.
The securities represent obligations of the trust only and
do not representan interest in or obligation of the depositor,
the seller, the master servicer or any of their affiliates.
This prospectus may be used to offer and sell the
securities only if accompanied by a prospectus supplement.
- -----------------------------------------------------------
Bear Stearns Asset Backed Securities, Inc., as depositor, will sell the
securities, which may be in the form of asset-backed certificates or
asset-backed notes. Each issue of securities will have its own series
designation and will evidence either:
o ownership interests in certain assets in a trust fund or
o debt obligations secured by certain assets in a trust fund.
Each series of securities will consist of one or more classes. Each
class of securities will represent the entitlement to a specified portion of
future interest payments and a specified portion of future principal payments on
the assets in the related trust fund. In each case, the specified portion may
equal from 0% to 100%. A series may include one or more classes of securities
that are senior in right of payment to one or more other classes. One or more
classes of securities may be entitled to receive distributions of principal,
interest or both prior to one or more other classes, or before or after certain
specified events have occurred. The related prospectus supplement will specify
each of these features.
The Trust Fund and Its Assets
As specified in the related prospectus supplement, each trust fund will
consist primarily of assets from one of the following categories:
o closed-end and/or revolving home equity loans secured by senior or
subordinate liens on one- to four-family residential or mixed-use
properties;
o home improvement installment sales contracts and installment loan
agreements that are either unsecured or secured by senior or
subordinate liens on one- to four-family residential or mixed-use
properties or by purchase money security interests in the related
home improvements; and
o private asset backed securities.
Each trust fund may be subject to early termination in certain
circumstances.
Market for the Securities
No market will exist for the securities of any series before they are
issued. In addition, even after the securities of a series have been issued and
sold, there can be no assurance that a resale market will develop.
Offers of the Securities
Offers of the securities are made through Bear, Stearns & Co. Inc. and
the other underwriters listed in the related prospectus supplement.
Neither the Securities and Exchange Commission nor any state securities
commission has approved these securities or determined that this prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
<PAGE>
Bear, Stearns & Co. Inc.
_______ __, _____
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS
AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT
Information about each series of securities is contained in the
following documents:
o this prospectus, which provides general information, some of which
may not apply to a particular series; and
o the accompanying prospectus supplement for a particular series,
which describes the specific terms of the securities of that
series. If the prospectus supplement contains information about a
particular series that differs from the information contained in
this prospectus, you should rely on the information in the
prospectus supplement.
You should rely only on the information contained in this prospectus
and the accompanying prospectus supplement. We have not authorized anyone to
provide you with information that is different from that contained in this
prospectus and the accompanying prospectus supplement. The information in this
prospectus is accurate only as of the date of this prospectus.
Each prospectus supplement generally will include the following
information with respect to the related series of securities:
o the principal amount, interest rate and authorized denominations
of each class of securities;
o information concerning the home equity loans, home
improvement contracts and/or private securities in the related
trust fund;
o information concerning the seller or sellers of the home
equity loans, home improvement contracts and/or private
securities and information concerning any servicer;
o the terms of any credit enhancement with respect to particular
classes of the securities;
o information concerning other trust fund assets, including any
reserve fund;
o the final scheduled distribution date for each class of
securities;
o the method for calculating the amount of principal to be paid
to each class of securities, and the timing and order of
priority of principal payments;
o information about any REMIC or FASIT tax elections for some or
all of the trust fund assets; and
o particulars of the plan of distribution for the securities.
If you require additional information, the mailing address of our
principal executive offices is Bear Stearns Asset Backed Asset Securities, Inc.,
245 Park Avenue, New York, New York 10167 and our telephone number is (212)
272-4095. For other means of acquiring additional information about us or a
series of securities, see "The Trust Funds -- Incorporation of Certain
Information by Reference" beginning on page 22 of this prospectus.
<PAGE>
RISK FACTORS
You should consider the following information carefully, since it
identifies certain significant sources of risk associated with an investment in
the securities.
Limited Liquidity
No market will exist for the securities of any series before they are
issued. In addition, we cannot give you any assurance that a resale market will
develop following the issuance and sale of any series of the securities. Even if
a resale market does develop, it might not provide you with liquidity of
investment or continue for the life of the securities.
Limited Assets for Making Payments
The securities of each series will be payable solely from the assets of
the related trust fund, including any credit enhancement that may be applicable
to certain classes. In the case of securities that are in the form of notes, the
related indenture will require that noteholders proceed only against the assets
of the related trust fund. We cannot give you any assurance that the market
value of the assets in any trust fund will be equal to or greater than the total
principal amount of the related series of securities then outstanding, plus
accrued interest. Moreover, if the assets of a trust fund are ever sold, the
sale proceeds will be applied first to reimburse any related trustee, servicer
and credit enhancement provider for their unpaid fees and expenses before any
remaining amounts are distributed to securityholders.
In addition, at the times specified in the related prospectus
supplement, certain assets of the trust fund and the related security accounts
may be released to the depositor, the servicer, the credit enhancement provider
or other persons, if
o all payments then due on the related securities have been made, and
o any other payments specified in the related prospectus supplement
have been made.
Once released, such assets will no longer be available to make payments
to securityholders.
You will have no recourse against the depositor or any other person if
any required distribution on the securities is not made or for any other
default. The only obligations of the depositor with respect to the related trust
fund or the securities would result from a breach of the representations and
warranties that the depositor may make concerning the trust assets. However,
because of the depositor's very limited assets, even if the depositor should be
required to repurchase a loan from a particular trust fund because of the breach
of a representation or warranty, its sole source of funds for the repurchase
would be:
o funds obtained from enforcing any similar obligation of the
originator of the loan, or
o monies from any reserve fund established to pay for loan
repurchases.
Limited Protection Against Losses
Credit enhancement is intended to reduce the effect of delinquent
payments or loan losses on those classes of securities that have the benefit of
the credit enhancement. Nevertheless, the amount of any credit enhancement is
subject to the limits described in the related prospectus supplement. Moreover,
the amount of credit enhancement may decline or be depleted under certain
circumstances before the related securities are paid in full. As a result,
securityholders may suffer losses.
Your Yields on the Securities May Vary
The timing of principal payments on the securities of a series will be
affected by a number of factors, including the following:
o the extent of prepayments on the underlying loans
in the trust fund or, if the trust fund contains
underlying securities, on the loans backing the underlying
securities;
o the method by which payments of principal are allocated among the
classes of securities of that series as specified in the related
prospectus supplement;
o if any party has an option to terminate the related trust
early, the effect of the exercise of the option;
o the rate and timing of defaults and losses on the assets in the
related trust fund;
o repurchases of assets in the related trust fund as a result of
material breaches of representations and warranties made by the
depositor or a seller; and
o in the case of a trust fund that contains revolving credit line
loans, any provisions for non-amortization, early amortization or
scheduled amortization periods described in the related prospectus
supplement.
All the above factors may affect the yield to maturity of the
securities.
Interest payable on the securities on any given distribution date will
include all interest accrued during the related interest accrual period. Each
prospectus supplement will specify the interest accrual period for the
securities of the related series. If interest accrues during the calendar month
before the related distribution date, your effective yield will be less than it
would be if the interest accrual period ended the day before the distribution
date. As a result, your effective yield at par may be less than the indicated
coupon rate.
Some Loans Require Balloon Payments
Certain of the underlying loans may not be fully amortizing over their
terms to maturity and may require a substantial principal payment (i.e., a
"balloon" payment) at their stated maturity. Loans of this type involve a
greater degree of risk than fully amortizing loans since the related borrower
generally must be able to refinance the loan or sell the related property prior
to the loan's maturity date. The borrower's ability to do so will depend on such
factors as the level of available mortgage rates at the time of sale or
refinancing, the relative strength of the local housing market, the borrower's
equity in the property, the borrower's general financial condition and tax laws.
Adjustable Rate Loans May Be Underwritten Differently
A trust fund may include adjustable rate loans that were underwritten
on the assumption that the borrowers would be able to make higher monthly
payments in a relatively short period of time. In fact, however, the borrowers'
income may not be sufficient to meet their loan payments as payment amounts
increase, thus increasing the risk of default.
Property Values May Be Insufficient
If the home equity loans in a trust fund are primarily in a junior lien
position, any proceeds from liquidations, insurance recoveries or condemnations
must be used first to satisfy the claims of the related senior lien loans (and
related foreclosure expenses) before being available to satisfy the junior lien
loans. In addition, a junior mortgage lender may only foreclose subject to the
related senior mortgage. As a result, the junior mortgage lender must either pay
the related senior mortgage lender in full, at or before the foreclosure sale,
or agree to make the regular payments on the senior mortgage. The trust will not
have a source of funds to satisfy any senior mortgages or to continue making
payments on them. As a result, the trust's ability, as a practical matter, to
foreclose on any junior mortgage loan will be quite limited. The following
factors, among others, could adversely affect property values in such a way that
the outstanding balance of the related loans, together with any senior financing
on the same properties, would equal or exceed those values:
o an overall decline in the residential real estate markets where the
properties are located;
o failure of borrowers to maintain their properties adequately; and
o natural disasters that may not be covered by hazard insurance,
such as earthquakes and floods.
If property values decline, actual rates of delinquencies, foreclosures
and losses on the underlying loans could be higher than those currently
experienced by the mortgage lending industry in general.
Home Improvement Contracts and Other Loans May Not Have Sufficient Security
A trust fund may include home improvement contracts that are not
secured by an interest in real estate or otherwise. It may also include home
equity loans with original loan-to-value ratios (or combined loan-to-value
ratios in the case of junior loans) greater than 100%. In these cases, the trust
fund could be treated as a general unsecured creditor for the unsecured portion
of these loans.
If a loan of this type goes into default, the trust fund will have
recourse only against the borrower's assets generally for the unsecured portion
of the loan, along with the borrower's other general unsecured creditors. In a
bankruptcy proceeding, the unsecured portion of the loan may be discharged, even
if the value of the borrower's assets available to the trust fund would be
insufficient to pay the remaining amounts owing on the loan.
Home Improvement Contracts Will Not Be Stamped
The depositor will ensure that a UCC-1 financing statement is filed
that identifies as collateral the home improvement contracts included in a trust
fund. However, unless the related prospectus supplement provides otherwise, the
home improvement contracts themselves will not be stamped or marked to reflect
their assignment to the trust fund. Thus, if as a result of negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
contracts without notice of the assignment to the trust fund, the interests of
the related securityholders in those contracts could be defeated.
Pre-Funding May Adversely Affect Your Investment
The related prospectus supplement may provide that the depositor or
seller will deposit a specified amount in a pre-funding account on the date the
securities are issued. In this case, the deposited funds may be used only to
acquire additional assets for the trust during a specified period after the
initial issuance of the securities. Any amounts remaining in the account at the
end of that period will be distributed as a prepayment of principal to the
holders of the related securities. As a result, the yield to maturity on your
investment may be adversely affected.
Bankruptcy Laws May Adversely Affect Trust Fund Assets
The federal bankruptcy code and state debtor relief laws may adversely
affect the ability of the trust fund, as a secured lender, to realize upon its
security. For example, in a federal bankruptcy proceeding, a lender may not
foreclose on mortgaged property without the bankruptcy court's permission.
Similarly, the debtor may propose a rehabilitation plan, in the case of
mortgaged property that is not his principal residence, that would reduce the
amount of the lender's secured indebtedness to the value of the property as of
the commencement of the bankruptcy. As a result, the lender would be treated as
a general unsecured creditor for the reduced amount, the amount of the monthly
payments due on the loan could be reduced, and the interest rate and loan
payment schedule could be changed.
Any such actions could result in delays in receiving payments on the
loans underlying the securities and result in the reduction of total payments.
Environmental Risks May Adversely Affect Trust Fund Assets
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and safety.
In certain circumstances, these laws and regulations impose obligations on
owners or operators of residential properties such as those that secure the
loans. Failure to comply with these laws and regulations can result in fines and
penalties that could be assessed against the trust fund as owner of the related
property.
In some states, a lien on the property due to contamination has
priority over the lien of an existing mortgage. Further, a mortgage lender may
be held liable as an "owner" or "operator" for costs associated with the release
of petroleum from an underground storage tank under certain circumstances. If
the trust fund is considered the owner or operator of a property, it will suffer
losses as a result of any liability imposed for environmental hazards on the
property.
Consumer Protection Laws May Adversely Affect Trust Fund Assets
The loans and contracts in each trust fund also may be subject to
federal laws relating to loan origination and underwriting. These laws
o require certain disclosures to the borrowers regarding the terms
of the loans;
o prohibit discrimination on the basis of age, race, color, sex,
religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the consumer credit
protection act, in the extension of credit;
o regulate the use and reporting of information related to the
borrower's credit experience; and
o require additional application disclosures, limit changes that
may be made to the loan documents without the borrower's consent
and restrict a lender's ability to declare a default or to
suspend or reduce a borrower's credit limit to certain enumerated
events.
Certain loans are also subject to federal laws that impose additional
disclosure requirements on creditors with respect to non-purchase money mortgage
loans with high interest rates or high up-front fees and charges. These laws can
impose specific liabilities upon creditors that fail to comply and may affect
the enforceability of the related loans. In addition, the trust fund, as
assignee of the creditor, would generally be subject to all claims and defenses
that the borrower could assert against the creditor, including the right to
rescind the loan.
Certain home improvement contracts are subject to federal laws that
protect the borrower from defective or incomplete work by a contractor. These
laws permit the borrower to withhold payment if the work does not meet the
quality and durability standards agreed to between the borrower and the
contractor. These laws have the effect of subjecting the trust fund, as assignee
of the creditor, to all claims and defenses which the borrower in a sale
transaction could assert against the seller of defective goods.
If certain provisions of these federal laws are violated, the servicer
may be unable to collect all or part of the principal or interest on the loans.
The trust fund also could be subject to damages and administrative enforcement.
Subordinate Securities Are Subject to Additional Risk
If you invest in any class of subordinate securities, your rights as an
investor to receive payments otherwise due you will be subordinate to the rights
of the servicer and the holders of the related senior securities. As a result,
before investing in any subordinate securities, you must be prepared to bear the
risk that payments on your securities may be delayed and that you might not
recover all of your initial investment.
Financial Instruments May Not Perform As Expected
As described under "Enhancement--Financial Instruments," a trust fund
may include financial instruments to protect against certain risks or to provide
certain cash flow characteristics for particular classes of the securities of a
series. If you invest in such a class and the issuer of the financial
instruments fails to perform its obligations, the yield to maturity, market
price and liquidity of your securities could be materially adversely affected.
In addition, if the issuer of the related financial instruments experiences a
credit rating downgrade, the market price and liquidity of your securities could
be reduced. Finally, if the financial instruments are intended to provide an
approximate or partial hedge for certain risks or cashflow characteristics, the
yield to maturity, market price and liquidity of your securities could be
adversely affected to the extent that the financial instrument does not provide
a perfect hedge.
REMIC Residual Securities Are Subject to Additional Risk
If you invest in any class of securities that represent the "residual
interest" in a real estate mortgage investment conduit (REMIC), you will be
required to report as ordinary income your pro rata share of the REMIC's taxable
income, whether or not you actually received any cash. Thus, as the holder of a
REMIC residual interest security, you could have taxable income and tax
liabilities in a year that are in excess of your ability to deduct servicing
fees and any other REMIC expenses. In addition, because of their special tax
treatment, your after-tax yield on a REMIC residual interest security may be
significantly less than that of a corporate bond with similar cash-flow
characteristics and pre-tax yield. Transfers of REMIC residual interest
securities are also restricted.
FASIT Ownership Securities Are Subject to Additional Risk
If you are a fully taxable domestic corporation that invests in any
class of securities representing the "ownership interest" in a financial asset
securitization investment trust (FASIT), you will be required to report as
ordinary income your pro rata share of the FASIT's taxable income, whether or
not you actually received any cash. Thus, as the holder of a FASIT ownership
interest security, you could have taxable income and tax liabilities in a year
that are in excess of your ability to deduct servicing fees and any other FASIT
expenses. In addition, because of their special tax treatment, your after-tax
yield on a FASIT ownership interest security may be significantly less than that
of a corporate bond with similar cash-flow characteristics and pre-tax yield.
Transfers of FASIT ownership interest securities are also restricted.
Book Entry Registration
Limit on Liquidity of Securities. Securities issued in book-entry form
may have only limited liquidity in the resale market, since investors may be
unwilling to purchase securities for which they cannot obtain physical
instruments.
Limit on Ability to Transfer or Pledge. Transactions in book-entry
securities can be effected only through The Depository Trust Company (DTC), its
participating organizations, its indirect participants and certain banks. As a
result, your ability to transfer or pledge securities issued in book-entry form
may be limited.
Delays in Distributions. You may experience some delay in the receipt
of distributions on book-entry securities since the distributions will be
forwarded by the trustee to DTC for credit to the accounts of its participants.
In turn, these participants will credit the distributions to your account either
directly or indirectly through indirect participants.
Security Ratings Are Not Recommendations
Any class of securities issued under this prospectus and the
accompanying prospectus supplement will be rated in one of the four highest
rating categories of a nationally recognized rating agency. A rating is based on
the adequacy of the value of the trust fund assets and any credit enhancement
for that class and reflects the rating agency's assessment of the likelihood
that holders of the class of securities will receive the payments to which they
are entitled. A rating is not an assessment of the likelihood that principal
prepayments on the underlying loans will be made, the degree to which the rate
of prepayments might differ from that originally anticipated or the likelihood
of an early termination of the securities. You should not view a rating as a
recommendation to purchase, hold or sell securities because it does not address
the market price or suitability of the securities for any particular investor.
There is no assurance that any rating will remain in effect for any
given period or that the rating agency will not lower or withdraw the rating in
the future. The rating agency could lower or withdraw its rating due to:
o any decrease in the adequacy of the value of the trust fund
assets or any related credit enhancement, or
o an adverse change in the financial or other condition of a credit
enhancement provider.
DESCRIPTION OF THE SECURITIES
General
Bear Stearns Asset Backed Securities, Inc. (the "Depositor") will
establish a trust fund (each, a "Trust Fund") for each series (a "Series") of
its Asset-Backed Notes (the "Notes") and of its Asset-Backed Certificates (the
"Certificates").
Each Series of Notes will be issued pursuant to an indenture (each, an
"Indenture") between the Trust Fund and the entity named in the related
Prospectus Supplement as trustee (the "Trustee") with respect to that Series. A
form of Indenture has been filed as an exhibit to the Registration Statement of
which this prospectus forms a part. If the Trust Fund includes Loans, the Trust
Fund and the related servicer (the "Servicer") will also enter into a Servicing
Agreement (each, a "Servicing Agreement") with respect to the Loans.
The Certificates will also be issued in Series pursuant to separate
agreements (each, a "Pooling and Servicing Agreement" or a "Trust Agreement")
among the Depositor, the related Servicer (if the Trust Fund includes Loans) and
the related Trustee A form of Pooling and Servicing Agreement has been filed as
an exhibit to the Registration Statement of which this prospectus forms a part.
A Series may consist of both Notes and Certificates. We refer to both Notes and
Certificates in this prospectus as "Securities."
The seller or sellers named in the related Prospectus Supplement
(collectively, the "Seller"), from which the Depositor will have purchased
certain of the assets included in the Trust Fund, may agree to reimburse the
Depositor for certain fees and expenses that the Depositor incurs in connection
with the offering of the related Securities.
The following summaries describe certain provisions in the Pooling and
Servicing Agreement or Trust Agreement, in the case of a Series of Certificates,
and the Indenture and the Servicing Agreement, in the case of a Series of Notes
(collectively, the "Agreements") common to each Series of Securities. The
summaries do not purport to be complete and are subject to, and are qualified in
their entirety by reference to, the provisions of the Agreements and the
Prospectus Supplement relating to each Series of Securities. Where particular
provisions or terms used in the Agreements are referred to, the actual
provisions (including definitions of terms) are incorporated in this prospectus
by reference as part of such summaries.
Each Series of Securities will consist of one or more classes (each, a
"Class"), one or more of which may be compound interest Securities, variable
interest Securities, planned balance (PAC) Securities, zero coupon Securities,
principal only Securities, interest only Securities or participating Securities.
A Series may also include one or more Classes of subordinated Securities. The
Securities of each Series will be issued only in fully registered form, without
coupons, in the authorized denominations for each Class specified in the related
Prospectus Supplement. Upon satisfaction of any conditions, applicable to a
particular Class as described in the related Prospectus Supplement, the transfer
of the Securities may be registered and the Securities may be exchanged at the
office of the Trustee without the payment of any service charge, other than any
tax or governmental charge payable in connection with the registration of
transfer or exchange. If specified in the related Prospectus Supplement, one or
more Classes of a Series may be available in book-entry form only.
Unless otherwise provided in the related Prospectus Supplement,
payments of principal of and interest on a Series of Securities will be made on
the distribution dates specified in the Prospectus Supplement (each, a
"Distribution Date") by check mailed to holders of that Series, registered as
such at the close of business on the record date (specified in the Prospectus
Supplement) that is applicable to that Distribution Date at their addresses
appearing on the security register (each, a "Holder"). However, payments may be
made by wire transfer (at the expense of the Holder requesting payment by wire
transfer) in certain circumstances described in the Prospectus Supplement. In
addition final payments of principal in retirement of each Security will be made
only upon presentation and surrender of the Security at the office of the
related Trustee. Notice of the final payment on a Security will be mailed to the
Holder of that Security before the Distribution Date on which the final
principal payment is expected to be made.
Payments of principal of and interest on the Securities will be made by
the Trustee, or a paying agent on behalf of the Trustee, as specified in the
related Prospectus Supplement. Unless otherwise provided in the related
Prospectus Supplement, the following amounts will be deposited directly into an
account (each, a "Collection Account") established for a particular Series with
the Trustee (or with the Servicer in the name of the Trustee):
o all payments with respect to the Primary Assets (as defined below)
for a Series, together with reinvestment income thereon;
o amounts withdrawn from any cash, letters of credit, short-term
investments or other instruments acceptable to the rating agencies
identified in the Prospectus Supplement as rating that Series
(each, a "Rating Agency") deposited in one or more reserve funds
established in the name of the Trustee (each, a "Reserve Fund');
and
o amounts available pursuant to any other credit enhancement.
If provided in the related Prospectus Supplement, the deposits may be
net of certain amounts payable to the Servicer and any other person specified in
the Prospectus Supplement. Those amounts thereafter will be deposited into the
separate distribution account (each, a "Distribution Account") established for
that Series and will be available to make payments on the Securities of that
Series on the next Distribution Date. See "The Trust Funds--Collection and
Distribution Accounts" in this prospectus.
The Primary Assets and Their Valuation
The "Primary Assets" of each Trust Fund may include one or more pools
of the following:
o closed-end and/or revolving home equity loans (the "Mortgage
Loans"), secured by senior or subordinate liens on one- to
four-family residential or mixed-use properties;
o home improvement installment sales contracts and installment loan
agreements (the "Home Improvement Contracts"), which are either
unsecured or secured generally by subordinate liens on one- to
four-family residential or mixed-use properties, or by purchase
money security interests in the related home improvements (the
"Home Improvements"); and
o securities (the "Private Securities") backed or secured by
Mortgage Loans, Contracts and/or Home Improvement Contracts (the
"Underlying Loans").
The Mortgage Loans and the Home Improvement Contracts are collectively
referred to in this prospectus as the "Loans". The residential or mixed-use
properties that secure the Mortgage Loans are collectively referred to in this
prospectus as the "Mortgaged Properties".
If specified in the related Prospectus Supplement for a Series of
Notes, each Primary Asset included in the related Trust Fund will be assigned an
initial "Asset Value." Unless otherwise specified in the related Prospectus
Supplement, at any time the Asset Value of the Primary Assets will be equal to
o the product of the Asset Value Percentage as set forth in the
Indenture and
o the lesser of
(a) the stream of remaining regularly scheduled payments on
the Primary Assets, net, unless otherwise provided in the
related Prospectus Supplement, of certain amounts payable
as expenses, together with income earned on each such
scheduled payment received through the day preceding the
next Distribution Date at the Assumed Reinvestment Rate,
if any, discounted to present value at the highest
interest rate on the Notes of that Series over periods
equal to the interval between payments on the Notes, and
(b) the then-outstanding principal balance of the Primary
Assets.
Unless otherwise specified in the related Prospectus Supplement, the
initial Asset Value of the Primary Assets will be at least equal to the
principal amount of the Notes of the related Series at the date of issuance.
The "Assumed Reinvestment Rate," if any, for a Series will be the
highest rate permitted by the Rating Agencies or a rate insured by means of a
surety bond, guaranteed investment contract or reinvestment agreement or other
arrangement satisfactory to the Rating Agencies. If the Assumed Reinvestment
Rate is insured in this way, the related Prospectus Supplement will set forth
the terms of the arrangement.
Payments of Interest
The Securities of each Class that by their terms are entitled to
receive interest will bear interest (calculated, unless otherwise specified in
the related Prospectus Supplement, on the basis of a 360-day year of twelve
30-day months) from the date and at the rate specified, or will be entitled to
receive interest payment amounts calculated in the method described, in the
related Prospectus Supplement. Interest on the interest-bearing Securities of a
Series will be payable on the Distribution Date specified in the related
Prospectus Supplement. The rate of interest on Securities of a Series may be
variable or may change with changes in the annual interest rates of the Loans
(or Underlying Loans) included in the related Trust Fund and/or as prepayments
occur with respect to the Loans (or Underlying Loans). Principal only Securities
may not be entitled to receive any interest distributions or may be entitled to
receive only nominal interest distributions. Any interest on zero coupon
Securities that is not paid on the related Distribution Date will accrue and be
added to principal on such Distribution Date.
Interest payable on the Securities on a Distribution Date will include
all interest accrued during the period specified in the related Prospectus
Supplement. In the event interest accrues during the calendar month preceding a
Distribution Date, the effective yield to Holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the Securities were to
accrue through the day immediately preceding that Distribution Date.
Payments of Principal
On each Distribution Date for a Series, principal payments will be made
to the Holders of the related Securities on which principal is then payable, to
the extent set forth in the related Prospectus Supplement. The payments will be
made in a total amount determined as specified in the related Prospectus
Supplement and will be allocated among the respective Classes of the Series in
the manner, at the times and in the priority (which may, in certain cases,
include allocation by random lot) set forth in the related Prospectus
Supplement.
Final Scheduled Distribution Date
The "Final Scheduled Distribution Date" with respect to each Class of a
Series of Notes is the date no later than which the total principal balance of
that Class will be fully paid, and with respect to each Class of a Series of
Certificates is the date on which the principal balance of that Class is
expected to be reduced to zero, in each case calculated on the basis of the
assumptions applicable to that Series described in the related Prospectus
Supplement. The Final Scheduled Distribution Date for each Class of a Series
will be specified in the related Prospectus Supplement. Since payments on the
Primary Assets will be used to make distributions that reduce the outstanding
principal amount of the Securities, it is likely that the actual final
Distribution Date of any Class will occur earlier, and may occur substantially
earlier, than its Final Scheduled Distribution Date. Furthermore, with respect
to a Series of Certificates, unless otherwise specified in the related
Prospectus Supplement, the actual final Distribution Date of any Certificate may
occur later than its Final Scheduled Distribution Date as a result of
delinquencies, defaults and liquidations of the Primary Assets in the Trust
Fund. No assurance can be given as to the actual prepayment experience with
respect to a Series. See "-Weighted Average Lives of the Securities" below.
Special Redemption
If so specified in the Prospectus Supplement relating to a Series of
Securities having other than monthly Distribution Dates, one or more Classes of
Securities of that Series may be subject to special redemption, in whole or in
part, on the day specified in the related Prospectus Supplement (the "Special
Redemption Date") if, as a consequence of prepayments on the related Loans (or
Underlying Loans) or low yields then available for reinvestment, the entity
specified in the Prospectus Supplement determines, based on assumptions set
forth in the applicable Agreement, that the amount available for the payment of
interest that will have accrued on those Securities (the "Available Interest
Amount") through the designated interest accrual date specified in the related
Prospectus Supplement is less than the amount of interest that will have accrued
on those Securities to that date. In this event and as further described in the
Prospectus Supplement, the Trustee will redeem a principal amount of outstanding
Securities of that Series sufficient to cause the Available Interest Amount to
equal the amount of interest that will have accrued through the designated
interest accrual date for that Series of Securities outstanding immediately
after the redemption.
Optional Redemption, Purchase or Termination
The Depositor or the Servicer or any other entity that may be
designated in the related Prospectus Supplement will have the option to redeem,
in whole or in part, one or more Classes of Notes or purchase one or more
Classes of Certificates of any Series on any Distribution Date under the
circumstances, if any, specified in the related Prospectus Supplement.
Alternatively, if the Prospectus Supplement for a Series of Certificates so
provides, the Depositor, the Servicer or another entity designated in the
related Prospectus Supplement will have the option to cause an early termination
of the Trust Fund by repurchasing all of the Primary Assets from the Trust Fund
on or after a date specified in the Prospectus Supplement, or on or after such
time as the total outstanding principal amount of the Certificates or Primary
Assets (as specified in the Prospectus Supplement) is equal to or less than the
amount or percentage specified in the Prospectus Supplement. Notice of such
redemption, purchase or termination must be given by the Depositor or the
Trustee prior to the related date. The redemption, purchase or repurchase price
will be set forth in the Prospectus Supplement. If specified in the Prospectus
Supplement, in the event that a REMIC election has been made, the Trustee shall
receive a satisfactory opinion of counsel that the optional redemption, purchase
or termination will be conducted so as to constitute a "qualified liquidation"
under Section 860F of the Internal Revenue Code of 1986, as amended (the
"Code").
In addition, the Prospectus Supplement may provide other circumstances
under which Holders of Securities of a Series could be fully paid significantly
earlier than would otherwise be the case if payments or distributions were
solely based on the activity of the related Primary Assets.
Weighted Average Lives of the Securities
Weighted average life refers to the average amount of time that will
elapse from the date of issue of a security until each dollar of principal of
the security will be repaid to the investor. Unless otherwise specified in the
related Prospectus Supplement, the weighted average life of the Securities of a
Class will be influenced by the rate at which the amount financed under the
Loans (or Underlying Loans relating to the Private Securities, as applicable)
included in the Trust Fund for a Series is paid, whether in the form of
scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to
a prepayment standard or model. The Prospectus Supplement for a Series of
Securities will describe the prepayment standard or model, if any, that is used
and may contain tables setting forth the projected weighted average life of each
Class of Securities of the Series and the percentage of the original principal
amount of each Class of Securities of the Series that would be outstanding on
specified Distribution Dates based on the assumptions stated in such Prospectus
Supplement, including assumptions that prepayments on the Loans (or Underlying
Loans relating to the Private Securities, as applicable) included in the related
Trust Fund are made at rates corresponding to various percentages of the
prepayment standard or model specified in the Prospectus Supplement.
There is, however, no assurance that prepayment of the Loans (or
Underlying Loans relating to the Private Securities, as applicable) included in
the related Trust Fund will conform to any level of any prepayment standard or
model specified in the related Prospectus Supplement. The rate of principal
prepayments on pools of loans may be influenced by a variety of factors,
including job-related factors such as transfers, layoffs or promotions and
personal factors such as divorce, disability or prolonged illness. Economic
conditions, either generally or within a particular geographic area or industry,
also may affect the rate of principal prepayments. Demographic and social
factors may influence the rate of principal prepayments in that some borrowers
have greater financial flexibility to move or refinance than do others. The
deductibility of mortgage interest payments, servicing decisions and other
factors also can affect the rate of principal prepayments. As a result, there
can be no assurance as to the rate or timing of principal prepayments of the
Loans (or Underlying Loans) either from time to time or over the lives of the
Loans (or Underlying Loans).
The rate of prepayments of conventional housing loans and other
receivables has fluctuated significantly in recent years. In general, however,
if prevailing interest rates fall significantly below the interest rates on the
Loans (or Underlying Loans) for a Series, those loans are likely to prepay at
rates higher than if prevailing interest rates remain at or above the interest
rates borne by those loans. In this regard, it should be noted that the Loans
(or Underlying Loans) for a Series may have different interest rates. In
addition, the weighted average life of a Class of the Securities may be affected
by the varying maturities of the Loans (or Underlying Loans). If any Loans (or
Underlying Loans) for a Series have actual terms to stated maturity that are
less than those that were assumed in calculating the Final Scheduled
Distribution Date of the related Securities, one or more Classes of the Series
may be fully paid prior to their respective Final Scheduled Distribution Date,
even in the absence of prepayments and a reinvestment return higher than the
Assumed Reinvestment Rate.
THE TRUST FUNDS
General
The Notes of each Series will be secured by the pledge of the assets of
the related Trust Fund, and the Certificates of each Series will represent
interests in the assets of the related Trust Fund. The Trust Fund of each Series
will include assets purchased by the Depositor from the Seller composed of:
o the Primary Assets;
o amounts available from the reinvestment of payments on the Primary
Assets at the Assumed Reinvestment Rate, if any, specified in the
related Prospectus Supplement;
o any credit enhancement ("Enhancement") in the form of an
irrevocable letter of credit, surety bond, insurance policy or
other form of credit support;
o any Mortgaged Property or Home Improvement that secured a Loan but
which is acquired by foreclosure or deed in lieu of foreclosure or
repossession "REO Property"); and
o the amount, if any, initially deposited into the Collection
Account or Distribution Account(s) for a Series as specified in
the related Prospectus Supplement.
The Securities will be non-recourse obligations of the related Trust
Fund. The assets of the Trust Fund specified in the related Prospectus
Supplement for a Series of Securities, unless the Prospectus Supplement
indicates otherwise, will serve as collateral only for that Series of
Securities. Holders of a Series of Notes may only proceed against the collateral
securing that Series of Notes in the case of a default with respect to that
Series of Notes and may not proceed against any assets of the Depositor or the
related Trust Fund not pledged to secure those Notes.
The Primary Assets for a Series will be sold by the Seller to the
Depositor or purchased by the Depositor in the open market or in privately
negotiated transactions (which may include transactions with affiliates) and
will be transferred by the Depositor to the Trust Fund. Loans relating to a
Series will be serviced by the Servicer (which may be the Seller) that is
specified in the related Prospectus Supplement. The Servicer will service the
Loans pursuant to a Pooling and Servicing Agreement, with respect to a Series of
Certificates or a Servicing Agreement between the Trust Fund and Servicer, with
respect to a Series of Notes.
If the Prospectus Supplement so provides, a Trust Fund relating to a
Series of Securities may be a business trust formed under the laws of the state
specified in the Prospectus Supplement pursuant to a trust agreement (each, a
"Trust Agreement") between the Depositor and the Trustee.
Each Trust Fund, prior to the initial offering of the related Series of
Securities, will have no assets or liabilities. No Trust Fund is expected to
engage in any activities other than:
o to acquire, manage and hold the related Primary Assets and
other assets contemplated in this prospectus and in the related
Prospectus Supplement, and the proceeds thereof;
o to issue the Securities;
o to make payments and distributions on the Securities; and
o to perform certain related activities.
No Trust Fund is expected to have any source of capital other than its
assets and any related Enhancement.
Primary Assets included in the Trust Fund for a Series may consist of
any combination of Loans and Private Securities, as and to the extent the
related Prospectus Supplement specifies.
The Loans
Mortgage Loans. The Primary Assets for a Series may consist, in whole
or in part, of closed-end home equity loans (the "Closed-End Loans") and/or
revolving home equity loans or certain balances forming a part of the revolving
loans (the "Revolving Credit Line Loans" and, together with the Closed-End
Loans, the "Mortgage Loans") secured by mortgages, primarily on one- to
four-family residential or mixed-use properties, that may be subordinated to
other mortgages on the same Mortgaged Property. The Mortgage Loans may have
fixed interest rates or adjustable interest rates and may provide for other
payment characteristics as described below and in the related Prospectus
Supplement.
The full principal amount of a Closed-End Loan is advanced at
origination of the loan and generally is repayable in equal (or substantially
equal) installments of an amount sufficient to fully amortize such loan at its
stated maturity. Unless otherwise described in the related Prospectus
Supplement, the original terms to stated maturity of Closed-End Loans will not
exceed 360 months. Principal amounts on a Revolving Credit Line Loan may be
drawn down (up to a maximum amount as set forth in the related Prospectus
Supplement) or repaid under each Revolving Credit Line Loan from time to time,
but may be subject to a minimum periodic payment. Except to the extent provided
in the related Prospectus Supplement, the Trust Fund will not include any
amounts borrowed under a Revolving Credit Line Loan after the date designated in
the Prospectus Supplement as the cut-off date (the "Cut-off Date"). As more
fully described in the related Prospectus Supplement, interest on each Revolving
Credit Line Loan, excluding introductory rates offered from time to time during
promotional periods, is computed and payable monthly on the average daily
Principal Balance of that Loan. Under certain circumstances, under either a
Revolving Credit Line Loan or a Closed-End Loan, a borrower may choose an
interest-only payment option under which only the amount of interest that
accrues on the loan during the billing cycle must be paid. An interest-only
payment option may be available for a specified period before the borrower must
begin paying at least the minimum monthly payment of a specified percentage of
the average outstanding balance of the loan.
The rate of prepayment on the Mortgage Loans cannot be predicted. Home
equity loans have been originated in significant volume only during the past few
years and the Depositor is not aware of any publicly available studies or
statistics on the rate of prepayment of such loans. Generally, home equity loans
are not viewed by borrowers as permanent financing. Accordingly, the Mortgage
Loans may experience a higher rate of prepayment than traditional first mortgage
loans. On the other hand, because home equity loans such as the Revolving Credit
Line Loans generally are not fully amortizing, the absence of voluntary borrower
prepayments could cause rates of principal payments to be lower than, or similar
to, those of traditional fully-amortizing first mortgage loans. The prepayment
experience of the related Trust Fund may be affected by a wide variety of
factors, including general economic conditions, prevailing interest rate levels,
the availability of alternative financing and homeowner mobility and the
frequency and amount of any future draws on any Revolving Credit Line Loans.
Other factors that might be expected to affect the prepayment rate of a pool of
home equity mortgage loans or home improvement contracts include the amounts of,
and interest rates on, the underlying first mortgage loans, and the use of first
mortgage loans as long-term financing for home purchase and subordinate mortgage
loans as shorter-term financing for a variety of purposes, including home
improvement, education expenses and purchases of consumer durables such as
automobiles. Accordingly, the Mortgage Loans may experience a higher rate of
prepayment than traditional fixed-rate first mortgage loans. In addition, any
future limitations on the right of borrowers to deduct interest payments on home
equity loans for federal income tax purposes may further increase the rate of
prepayments of the Mortgage Loans. Moreover, the enforcement of a "due-on-sale"
provision (as described below) will have the same effect as a prepayment of the
related Mortgage Loan. See "Certain Legal Aspects of the Loans--Due-on-Sale
Clauses in Mortgage Loans."
Collections on Revolving Credit Line Loans may vary for a number of
reasons, including those listed below.
o A borrower may make a payment during a month in an amount that is
as little as the minimum monthly payment for that month or, during
the interest-only period for certain Revolving Credit Line Loans
(and, in more limited circumstances, Closed-End Loans with respect
to which an interest-only payment option has been selected), the
interest, fees and charges for that month.
o A borrower may make a payment that is as much as the entire
Principal Balance plus accrued interest and related fees and
charges during a month.
o A borrower may fail to make the required periodic payment.
o Collections on the Mortgage Loans may vary due to seasonal
purchasing and the payment habits of borrowers.
The Mortgage Loans will be secured by "Single Family Properties" (i.e.,
one- to four-family residential housing, including condominium units and
cooperative dwelling units) and mixed-use properties. Mixed-use properties will
consist of structures of no more than three stories that include one- to
four-residential dwelling units and space used for retail, professional or other
commercial uses. Such uses, which will not involve more than 50% of the space in
the structure, may include doctor, dentist or law offices, real estate agencies,
boutiques, newsstands, convenience stores or other similar types of uses
intended to cater to individual customers as specified in the related Prospectus
Supplement. The properties may be located in suburban or metropolitan districts.
Any such non-residential use will be in compliance with local zoning laws and
regulations. The Single Family Properties may consist of detached individual
dwellings, individual condominiums, townhouses, duplexes, row houses, individual
units in planned unit developments and other attached dwelling units. Each
Single Family Property will be located on land owned in fee simple by the
borrower or on land leased by the borrower for a term at least ten years (unless
otherwise provided in the related Prospectus Supplement) greater than the term
of the related Loan. Attached dwellings may include owner-occupied structures
where each borrower owns the land upon which the unit is built, with the
remaining adjacent land owned in common or dwelling units subject to a
proprietary lease or occupancy agreement in a cooperatively owned apartment
building.
Unless otherwise specified in the related Prospectus Supplement,
Mortgages on cooperative dwelling units consist of a lien on the shares issued
by the cooperative dwelling corporation and the proprietary lease or occupancy
agreement relating to the cooperative dwelling.
The aggregate Principal Balance of Loans secured by Single Family
Properties that are owner-occupied will be disclosed in the related Prospectus
Supplement. Unless otherwise specified in the Prospectus Supplement, the sole
basis for a representation that a given percentage of the Loans are secured by
Single Family Property that is owner-occupied will be either
o a representation by the borrower at origination of the Mortgage
Loan either that the underlying Mortgaged Property will be used by
the borrower for a period of at least six months every year or
that the borrower intends to use the Mortgaged Property as a
primary residence, or
o a finding that the address of the underlying Mortgaged Property is
the borrower's mailing address as reflected in the Servicer's
records.
To the extent specified in the related Prospectus Supplement, Single
Family Properties may include non-owner occupied investment properties and
vacation and second homes.
Home Improvement Contracts. The Primary Assets for a Series may
consist, in whole or in part, of home improvement installment sales contracts
and installment loan agreements (the "Home Improvement Contracts") originated by
a home improvement contractor in the ordinary course of business. As specified
in the related Prospectus Supplement, the Home Improvement Contracts will either
be unsecured or secured by senior or junior Mortgages primarily on Single Family
Properties, or by purchase money security interests in the related Home
Improvements. Unless otherwise specified in the applicable Prospectus
Supplement, the Home Improvement Contracts will be fully amortizing and may have
fixed interest rates or adjustable interest rates and may provide for other
payment characteristics as described below and in the related Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
home improvements (the "Home Improvements") securing the Home Improvement
Contracts include, but are not limited to, replacement windows, house siding,
new roofs, swimming pools, satellite dishes, kitchen and bathroom remodeling
goods and solar heating panels. As used in this prospectus, the term "Property"
includes the Mortgaged Properties and the Home Improvements.
Additional Information. The selection criteria that will apply with
respect to the Loans, including, but not limited to, the combined loan-to-value
ratios or loan-to-value ratios, as applicable, original terms to maturity and
delinquency information, will be specified in the related Prospectus Supplement.
The Loans for a Series may include Loans that do not amortize their
entire Principal Balance by their stated maturity in accordance with their terms
and require a balloon payment of the remaining Principal Balance at maturity, as
specified in the related Prospectus Supplement. As further described in the
related Prospectus Supplement, the Loans for a Series may include Loans that do
not have a specified stated maturity.
The Loans will be conventional contracts or contracts insured by the
Federal Housing Administration (the "FHA") or partially guaranteed by the
Veterans Administration (the "VA"). Loans designated in the related Prospectus
Supplement as insured by the FHA will be insured by the FHA under various FHA
programs as authorized under the United States Housing Act of 1937, as amended..
These programs generally limit the principal amount and interest rates of the
mortgage loans insured. Loans insured by the FHA generally require a minimum
down payment of approximately 5% of the original principal amount of the loan.
No FHA-insured Loans relating to a Series may have an interest rate or original
principal amount exceeding the applicable FHA limits at the time or origination
of such loan.
The insurance premiums for Loans insured by the FHA are collected by
lenders approved by the Department of Housing and Urban Development ("HUD") and
are paid to the FHA. The regulations governing FHA single-family mortgage
insurance programs provide that insurance benefits are payable either upon
foreclosure (or other acquisition of possession) and conveyance of the mortgaged
premises to HUD or upon assignment of the defaulted Loan to HUD. With respect to
a defaulted FHA-insured Loan, the Servicer is limited in its ability to initiate
foreclosure proceedings. When it is determined, either by the Servicer or HUD,
that default was caused by circumstances beyond the borrower's control, the
Servicer is expected to make an effort to avoid foreclosure by entering, if
feasible, into one of a number of available forms of forbearance plans with the
borrower. Such plans may involve the reduction or suspension of regular mortgage
payments for a specified period, with such payments to be made upon or before
the maturity date of the mortgage, or the recasting of payments due under the
mortgage up to or beyond the maturity date. In addition, when a default caused
by such circumstances is accompanied by certain other criteria, HUD may provide
relief by making payments to the Servicer in partial or full satisfaction of
amounts due under the Loan (which payments are to be repaid by the mortgagor to
HUD) or by accepting assignment of the loan from the Servicer. With certain
exceptions, at least three full monthly installments must be due and unpaid
under the Loan and HUD must have rejected any request for relief from the
borrower before the Servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Currently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The Servicer of each FHA-insured Loan will be obligated
to purchase any such debenture issued in satisfaction of a Loan upon default for
an amount equal to the principal amount of the debenture.
The amount of insurance benefits generally paid by the FHA is equal to
the entire unpaid principal amount of the defaulted Loan adjusted to reimburse
the Servicer for certain costs and expenses and to deduct certain amounts
received or retained by the Servicer after default. When entitlement to
insurance benefits results from foreclosure (or other acquisition of possession)
and conveyance to HUD, the Servicer is compensated for no more than two-thirds
of its foreclosure costs, and is compensated for interest accrued and unpaid
prior to the date of foreclosure but in general only to the extent it was
allowed pursuant to a forbearance plan approved by HUD. When entitlement to
insurance benefits results from assignment of the Loan to HUD, the insurance
payment includes full compensation for interest accrued and unpaid to the
assignment date. The insurance payment itself, upon foreclosure of an
FHA-insured Loan, bears interest from a date 30 days after the borrower's first
uncorrected failure to perform any obligation to make any payment due under the
Loan and, upon assignment, from the date of assignment to the date of payment of
the claim, in each case at the same interest rate as the applicable HUD
debenture interest rate as described above.
Loans designated in the related Prospectus Supplement as guaranteed by
the VA will be partially guaranteed by the VA under the Serviceman's
Readjustment Act of 1944, as amended. The Serviceman's Readjustment Act of 1944,
as amended, permits a veteran (or in certain instances, the spouse of a veteran)
to obtain a mortgage loan guaranty by the VA covering mortgage financing of the
purchase of a one- to four-family dwelling unit at interest rates permitted by
the VA. The program has no mortgage loan limits, requires no down payment from
the purchaser and permits the guarantee of mortgage loans of up to 30 years'
duration.
The maximum guaranty that may be issued by the VA under a VA-
guaranteed mortgage loan depends upon the original principal amount of the
mortgage loan, as further described in 38 United States Code Section 1803(a), as
amended. The liability on the guaranty is reduced or increased pro rata with any
reduction or increase in the amount of indebtedness, but in no event will the
amount payable on the guaranty exceed the amount of the original guaranty. The
VA may, at its option and without regard to its guaranty, make full payment to a
mortgage holder of unsatisfied indebtedness on a mortgage upon its assignment to
the VA.
With respect to a defaulted VA-guaranteed Loan, the Servicer is, absent
exceptional circumstances, authorized to announce its intention to foreclose
only when the default has continued for three months. Generally, a claim for the
guaranteed amount is submitted to the VA after liquidation of the Mortgaged
Property.
The amount payable under a VA guaranty will be the percentage of the
VA- insured loan originally guaranteed by the VA applied to the indebtedness
outstanding as of the applicable date of computation specified in the VA
regulations. Payments under the guaranty will be equal to the unpaid principal
amount of the loan, interest accrued on the unpaid balance of the loan to the
appropriate date of computation and limited expenses of the mortgagee, but in
each case only to the extent that such amounts have not been recovered through
liquidation of the mortgaged property. The amount payable under the guaranty may
in no event exceed the amount of the original guaranty.
The related Prospectus Supplement for each Series will provide
information with respect to the Loans that are Primary Assets as of the Cut-off
Date, including, among other things, and to the extent relevant:
o the aggregate unpaid Principal Balance of the Loans;
o the range and weighted average interest rates on the Loans, and,
in the case of adjustable rate Loans, the range and weighted
average of the current interest rates and the lifetime interest
rate caps, if any;
o the range and average Principal Balance of the Loans;
o the weighted average original and remaining terms to stated
maturity of the Loans and the range of original and remaining
terms to stated maturity, if applicable;
o the range and weighted average of combined loan-to-value ratios
or loan-to-value ratios for the Loans, as applicable;
o the percentage (by Principal Balance as of the Cut-off Date) of
Loans that accrue interest at adjustable or fixed interest rates;
o any special hazard insurance policy or bankruptcy bond or other
enhancement relating to the Loans;
o the percentage (by Principal Balance as of the Cut-off Date) of
Loans that are secured by Mortgaged Properties or Home
Improvements or that are unsecured;
o the geographic distribution of any Mortgaged Properties securing
the Loans;
o for Loans that are secured by Single Family Properties, the
percentage (by Principal Balance as of the Cut-off Date) secured
by shares relating to cooperative dwelling units, condominium
units, investment property and vacation or second homes;
o the lien priority of the Loans;
o the delinquency status and year of origination of the Loans;
o whether such Loans are Closed-End Loans and/or Revolving Credit
Line Loans; and
o in the case of Revolving Credit Line Loans, the general payments
and credit line terms of those Loans and other pertinent features.
The related Prospectus Supplement will also specify any other
limitations on the types or characteristics of Loans for a Series.
If information of the nature described above respecting the Loans is
not known to the Depositor at the time the Securities are initially offered,
more general or approximate information of the nature described above will be
provided in the Prospectus Supplement and additional information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related Series and to be filed with the Commission within 15
days after the initial issuance of the Securities.
Private Securities
General. Primary Assets for a Series may consist, in whole or in
part, of Private Securities that include:
o pass-through certificates representing beneficial interests
in loans of the type that would otherwise be eligible to be
Loans (the "Underlying Loans") or
o collateralized obligations secured by Underlying Loans.
The pass-through certificates or collateralized obligations will have previously
been
o offered and distributed to the public pursuant to an effective
registration statement, or
o purchased in a transaction not involving any public offering
from a person that is not an affiliate of the issuer of the
Private Securities at the time of sale (nor its affiliate at any
time during the three preceding months) and a period of two years
has elapsed since the date the Private Securities were acquired
from the issuer or from its affiliate, whichever is later.
Although individual Underlying Loans may be insured or guaranteed by
the United States or an agency or instrumentality thereof, they need not be, and
the Private Securities themselves will not be insured or guaranteed.
Private Securities will have been issued pursuant to a pooling and
servicing agreement, a trust agreement or similar agreement (each, a "PS
Agreement"). The seller/servicer of the Underlying Loans will have entered into
the PS Agreement with the trustee under such PS Agreement (the "PS Trustee").
The PS Trustee or its agent, or a custodian, will possess the Underlying Loans.
Underlying Loans will be serviced by a servicer (the "PS Servicer") directly or
by one or more sub-servicers who may be subject to the supervision of the PS
Servicer.
The sponsor of the Private Securities (the "PS Sponsor") will be
o a financial institution or other entity engaged generally in the
business of lending;
o a public agency or instrumentality of a state, local or federal
government; or
o a limited purpose corporation organized for the purpose of,
among other things, establishing trusts and acquiring and selling
loans to such trusts, and selling beneficial interests in such
trusts.
If so specified in the Prospectus Supplement, the PS Sponsor may be an
affiliate of the Depositor. The obligations of the PS Sponsor generally will be
limited to certain representations and warranties that it makes with respect to
the assets conveyed by it to the related trust. Unless otherwise specified in
the related Prospectus Supplement, the PS Sponsor will not have guaranteed any
of the assets conveyed to the related trust or any of the Private Securities
issued under the PS Agreement.
Distributions of principal and interest will be made on the Private
Securities on the dates specified in the related Prospectus Supplement. The
Private Securities may be entitled to receive nominal or no principal
distributions or nominal or no interest distributions. Principal and interest
distributions will be made on the Private Securities by the PS Trustee or the PS
Servicer. The PS Sponsor or the PS Servicer may have the right to repurchase the
Underlying Loans after a certain date or under other circumstances specified in
the related Prospectus Supplement.
The Underlying Loans may be fixed rate, level payment, fully amortizing
loans or adjustable rate loans or loans having balloon or other irregular
payment features. The Underlying Loans will be secured by mortgages on Mortgaged
Properties.
Credit Support Relating to Private Securities. Credit support in the
form of reserve funds, subordination of other private securities issued under
the PS Agreement, guarantees, cash collateral accounts, security policies or
other types of credit support may be provided with respect to the Underlying
Loans or with respect to the Private Securities themselves. The type,
characteristics and amount of credit support will be a function of certain
characteristics of the Underlying Loans and other factors and will have been
established for the Private Securities on the basis of requirements of the
nationally recognized statistical rating organization that rated the Private
Securities.
Additional Information. The Prospectus Supplement for a Series for
which the Primary Assets include Private Securities will specify, to the extent
relevant and to the extent such information is reasonably available to the
Depositor and the Depositor reasonably believes such information to be reliable:
o the total approximate principal amount and type of the Private
Securities to be included in the Trust Fund for that Series;
o certain characteristics of the Underlying Loans, including
(a) the payment features of the Underlying Loans (i.e., whether
they are Closed-End Loans and/or Revolving Credit Line
Loans, whether they are fixed rate or adjustable rate and
whether they provide for fixed level payments or other
payment features);
(b) the approximate aggregate Principal Balance, if known, of
the Underlying Loans insured or guaranteed by a
governmental entity;
(c) the servicing fee or range of servicing fees for the
Underlying Loans;
(d) the minimum and maximum stated maturities of the Underlying
Loans at origination;
(e) the lien priority of the Underlying Loans; and
(f) the delinquency status and year of origination of such
Underlying Loans;
o the maximum original term to stated maturity of the Private
Securities;
o the weighted average term to stated maturity of the Private
Securities;
o the pass-through or certificate rate or range of rates for the
Private Securities;
o the PS Sponsor, the PS Servicer (if other than the PS Sponsor)
and the PS Trustee for the Private Securities;
o certain characteristics of any credit support such as
reserve funds, security policies or guarantees relating to the
Underlying Loans or to the Private Securities themselves;
o the terms on which Underlying Loans may, or are required to,
be purchased prior to their stated maturity or the stated
maturity of the Private Securities; and
o the terms on which Underlying Loans may be substituted for
those originally underlying the Private Securities.
The above disclosure may be on an approximate basis and will be as of
the date specified in the related Prospectus Supplement. If information of the
nature described above for the Private Securities is not known to the Depositor
at the time the Securities are initially offered, more general or approximate
information of a similar nature will be provided in the Prospectus Supplement
and the additional information, if available, will be set forth in a Current
Report on Form 8-K to be available to investors on the date of issuance of the
related Series and to be filed with the SEC within 15 days of the initial
issuance of such Securities.
Collection and Distribution Accounts
A separate Collection Account will be established by the Trustee, or
the Servicer in the name of the Trustee, for each Series of Securities for
receipt of any cash specified in the related Prospectus Supplement to be
initially deposited therein by the Depositor, all amounts received on or with
respect to the Primary Assets and, unless otherwise specified in the related
Prospectus Supplement, income earned thereon. Certain amounts on deposit in such
Collection Account and certain amounts available pursuant to any Enhancement, as
provided in the related Prospectus Supplement, will be deposited into the
applicable Distribution Account, which will also be established by the
applicable Trustee for each such Series of Securities, for distribution to the
related Holders. Unless otherwise specified in the related Prospectus
Supplement, the applicable Trustee will invest the funds in the Collection
Account and the Distribution Account(s) in Eligible Investments maturing, with
certain exceptions, not later, in the case of funds in the Collection Account,
than the day preceding the date such funds are due to be deposited into the
Distribution Account(s) or otherwise distributed and, in the case of funds in
the Distribution Account(s), than the day preceding the next Distribution Date
for the related Series of Securities.
"Eligible Investments" include, among other investments, obligations of
the United States and certain agencies thereof, federal funds, certificates of
deposit, commercial paper, demand and time deposits and banker's acceptances,
certain repurchase agreements of United States government securities and certain
guaranteed investment contracts, in each case acceptable to the Rating Agencies.
Notwithstanding any of the foregoing, amounts may be deposited and
withdrawn pursuant to any deposit agreement or minimum principal payment
agreement that may be specified in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, a Trust Fund will
include one or more segregated trust accounts (each, a "Pre-Funding Account")
established and maintained with the Trustee for the related Series. If so
specified, on the Closing Date for the Series, a portion of the proceeds of the
sale of the related Securities (such amount, the "Pre-Funded Amount") will be
deposited into the Pre-Funding Account and may be used to purchase additional
Primary Assets during the period of time specified in the related Prospectus
Supplement (the "Pre-Funding Period"). In no case will the Pre-Funded Amount
exceed 50% of the total principal amount of the related Securities, and in no
case will the Pre-Funding Period exceed one year. The Primary Assets to be
purchased generally will be selected on the basis of the same criteria as those
used to select the initial Primary Assets, and the same representations and
warranties will be made with respect to them. If any Pre-Funded Amount remains
on deposit in the Pre-Funding Account at the end of the Pre-Funding Period, such
amount will be applied in the manner specified in the related Prospectus
Supplement to prepay the Notes and/or the Certificates of the applicable Series.
If a Pre-Funding Account is established, one or more segregated trust
accounts (each, a "Capitalized Interest Account") may be established and
maintained with the Trustee for the related Series. On the Closing Date for the
Series, a portion of the proceeds of the sale of the Securities of the Series
will be deposited into the Capitalized Interest Account and used to fund the
excess, if any, of
o the sum of
(i) the amount of interest accrued on the Securities of the Series
and
(ii) if specified in the related Prospectus Supplement, certain
fees or expenses during the Pre-Funding Period,
over
o the amount of interest available from the Primary Assets in the Trust
Fund.
Any amounts on deposit in the Capitalized Interest Account at the end
of the Pre-Funding Period that are not necessary for such purposes will be
distributed to the person specified in the related Prospectus Supplement.
ENHANCEMENT
If so provided in the Prospectus Supplement relating to a Series of
Securities, simultaneously with the Depositor's assignment of the Primary Assets
to the Trustee, the Depositor will obtain a security policy, issue subordinated
securities or obtain any other form of enhancement or combination thereof
(collectively, "Enhancement") in favor of the Trustee on behalf of the Holders
of the related Series or designated Classes of the Series from an institution or
by other means acceptable to the Rating Agencies. The Enhancement will support
the payment of principal of and interest on the Securities, and may be applied
for certain other purposes to the extent and under the conditions set forth in
the Prospectus Supplement. Enhancement for a Series may include one or more of
the forms described below, or such other form as may be specified in the related
Prospectus Supplement. If so specified in the related Prospectus Supplement, any
Enhancement may be structured so as to protect against losses relating to more
than one Trust Fund, in the manner described in that Prospectus Supplement.
Subordinated Securities
If specified in the related Prospectus Supplement, Enhancement for a
Series may consist of one or more Classes of subordinated Securities. The rights
of the Holders of subordinated Securities to receive distributions on any
Distribution Date will be subordinate in right and priority to the rights of
Holders of senior Securities of the same Series, but only to the extent
described in the related Prospectus Supplement.
Insurance
If specified in the related Prospectus Supplement, Enhancement for a
Series may consist of pool insurance policies, special hazard insurance
policies, bankruptcy bonds and other types of insurance relating to the Primary
Assets, as described below and in the related Prospectus Supplement.
Pool Insurance Policy. If so specified in the related Prospectus
Supplement, the Depositor will obtain a pool insurance policy (the "Pool
Insurance Policy") for the Loans in the related Trust Fund. The Pool Insurance
Policy will cover any loss (subject to the limitations described in a related
Prospectus Supplement) by reason of default, but will not cover the portion of
the Principal Balance of any Loan that is required to be covered by any primary
mortgage insurance policy. The amount and terms of any such coverage will be set
forth in the related Prospectus Supplement.
Special Hazard Insurance Policy. Although the terms of such policies
vary to some degree, a special hazard insurance policy typically provides that,
where there has been damage to Property securing a defaulted or foreclosed Loan
(title to which has been acquired by the insured) and to the extent such damage
is not covered by the standard hazard insurance policy (or any flood insurance
policy, if applicable) required to be maintained with respect to the Property,
or in connection with partial loss resulting from the application of the
coinsurance clause in a standard hazard insurance policy, the special hazard
insurer will pay the lesser of
(i) the cost of repair or replacement of the Property, or
(ii) upon transfer of the Property to the special hazard insurer, the
unpaid Principal Balance of the Loan at the time of acquisition of
the Property by foreclosure or deed in lieu of foreclosure, plus
accrued interest to the date of claim settlement and certain
expenses incurred by the Servicer with respect to the Property.
If the unpaid Principal Balance plus accrued interest and certain
expenses is paid by the special hazard insurer, the amount of further coverage
under the special hazard insurance policy will be reduced by that amount less
any net proceeds from the sale of the Property. Any amount paid as the cost of
repair of the Property will reduce coverage by that amount. Special hazard
insurance policies typically do not cover losses occasioned by war, civil
insurrection, certain governmental actions, errors in design, faulty workmanship
or materials (except under certain circumstances), nuclear reaction, flood (if
the mortgaged property is in a federally designated flood area), chemical
contamination and certain other risks.
Restoration of the Property with the proceeds described under clause
(i) in the second previous paragraph is expected to satisfy the condition under
any Pool Insurance Policy that the Property be restored before a claim under the
Pool Insurance Policy may be validly presented with respect to the defaulted
Loan secured by the Property. The payment described under clause (ii) in the
second previous paragraph will render unnecessary presentation of a claim in
respect of the Loan under any Pool Insurance Policy. Therefore, so long as a
Pool Insurance Policy remains in effect, the payment by the special hazard
insurer of the cost of repair or of the unpaid Principal Balance of the related
Loan plus accrued interest and certain expenses will not affect the total amount
in respect of insurance proceeds paid to Holders of the Securities, but will
affect the relative amounts of coverage remaining under the special hazard
insurance policy and Pool Insurance Policy.
Bankruptcy Bond. In the event of a bankruptcy of a borrower, the
bankruptcy court may establish the value of the Property securing the related
Loan at an amount less than the then-outstanding Principal Balance of the Loan.
The amount of the secured debt could be reduced to that value, and the holder of
the Loan thus would become an unsecured creditor to the extent the Principal
Balance of the Loan exceeds the value assigned to the Property by the bankruptcy
court. In addition, certain other modifications of the terms of a Loan can
result from a bankruptcy proceeding. See "Certain Legal Aspects of the Loans" in
this prospectus. If the related Prospectus Supplement so provides, the Depositor
or other entity specified in the Prospectus Supplement will obtain a bankruptcy
bond or similar insurance contract covering losses resulting from proceedings
with respect to borrowers under the Federal Bankruptcy Code. The bankruptcy bond
will cover certain losses resulting from a reduction by a bankruptcy court of
scheduled payments of principal of and interest on a Loan or a reduction by the
court of the principal amount of a Loan and will cover certain unpaid interest
on the amount of any principal reduction from the date of the filing of a
bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount
specified in the Prospectus Supplement for all Loans in the Trust Fund for the
related Series. Such amount will be reduced by payments made under the
bankruptcy bond in respect of the Loans, unless otherwise specified in the
related Prospectus Supplement, and will not be restored.
Reserve Funds
If the Prospectus Supplement relating to a Series of Securities so
specifies, the Depositor will deposit into one or more funds to be established
with the Trustee as part of the Trust Fund for that Series or for the benefit of
any provider of Enhancement with respect to that Series (each, a "Reserve Fund")
cash, a letter or letters of credit, cash collateral accounts, Eligible
Investments, or other instruments meeting the criteria of the Rating Agencies in
the amount specified in such Prospectus Supplement. In the alternative or in
addition to such an initial deposit, a Reserve Fund for a Series may be funded
over time through application of all or a portion of the excess cash flow from
the Primary Assets for the Series, to the extent described in the related
Prospectus Supplement. If applicable, the initial amount of the Reserve Fund and
the Reserve Fund maintenance requirements for a Series of Securities will be
described in the related Prospectus Supplement.
Amounts withdrawn from any Reserve Fund will be applied by the
applicable Trustee to make payments on the Securities of the related Series, to
pay expenses, to reimburse any provider of Enhancement for the Series or for any
other purpose, in the manner and to the extent specified in the related
Prospectus Supplement.
Amounts deposited into a Reserve Fund will be invested by the
applicable Trustee in Eligible Investments maturing no later than the day
specified in the related Prospectus Supplement.
Minimum Principal Payment Agreement
If provided in the Prospectus Supplement relating to a Series of
Securities, the Depositor will enter into a minimum principal payment agreement
with an entity meeting the criteria of the Rating Agencies pursuant to which the
entity will provide certain payments on the Securities of the Series in the
event that aggregate scheduled principal payments and/or prepayments on the
Primary Assets for the Series are not sufficient to make certain payments on the
Securities of the Series, as provided in the Prospectus Supplement.
Deposit Agreement
If specified in a Prospectus Supplement, the Depositor and the
applicable Trustee for such Series of Securities will enter into a deposit
agreement with the entity specified in such Prospectus Supplement on or before
the sale of the related Series of Securities. The purpose of a deposit agreement
would be to accumulate available cash for investment so that such cash, together
with income thereon, can be applied to future distributions on one or more
Classes of Securities. The Prospectus Supplement for a Series of Securities
pursuant to which a deposit agreement is used will contain a description of the
terms of such deposit agreement.
Financial Instruments
If provided in the related Prospectus Supplement, the Trust Fund may
include one or more financial instruments that are intended to meet the
following goals:
o to convert the payments on some or all of the Loans and Private
Securities from fixed to floating payments, or from floating to
fixed, or from floating based on a particular index to floating
based on another index;
o to provide payments if any index rises above or falls below
specified levels; or
o to provide protection against interest rate changes, certain types
of losses or other payment shortfalls to one or more Classes of
the related Series.
If a Trust Fund includes financial instruments of this type, the
instruments may be structured to be exempt from the registration requirements of
the Securities Act of 1933, as amended.
The related Prospectus Supplement will include, or incorporate by
reference, material financial and other information about the provider of the
financial instruments.
SERVICING OF LOANS
General
Customary servicing functions with respect to Loans comprising the
Primary Assets in a Trust Fund will be provided by the Servicer directly,
pursuant to the related Servicing Agreement or Pooling and Servicing Agreement,
as the case may be, with respect to a Series of Securities.
Collection Procedures; Escrow Accounts
The Servicer will make reasonable efforts to collect all payments
required to be made under the Loans and will, consistent with the terms of the
related Agreement for a Series and any applicable Enhancement, follow such
collection procedures as it follows with respect to comparable loans held in its
own portfolio. Consistent with the above, the Servicer may, in its discretion,
(i) waive any assumption fee, late payment charge, or other charge in connection
with a Loan and (ii) to the extent provided in the related Agreement, arrange
with a borrower a schedule for the liquidation of delinquencies by extending the
Due Dates for Scheduled Payments on a Loan.
If the related Prospectus Supplement so provides, the Servicer, to the
extent permitted by law, will establish and maintain escrow or impound accounts
(each, an "Escrow Account") with respect to Loans in which payments by borrowers
to pay taxes, assessments, mortgage and hazard insurance policy premiums, and
other comparable items will be deposited. In the case of Loans that do not
require such payments under the related loan documents, the Servicer will not be
required to establish any Escrow Account for those Loans. The Servicer will make
withdrawals from the Escrow Accounts to effect timely payment of taxes,
assessments and mortgage and hazard insurance, to refund to borrowers amounts
determined to be overages, to pay interest to borrowers on balances in the
Escrow Account to the extent required by law, to repair or otherwise protect the
related Property and to clear and terminate such Escrow Account. The Servicer
will be responsible for the administration of the Escrow Accounts and generally
will make advances to such accounts when a deficiency exists therein.
Deposits to and Withdrawals from the Collection Account
Unless the related Prospectus Supplement specifies otherwise, the
Trustee or the Servicer will establish a separate account (the "Collection
Account") in the name of the Trustee. Unless the related Prospectus Supplement
provides otherwise, the Collection Account will be an account maintained
o at a depository institution, the long-term unsecured debt
obligations of which at the time of any deposit are rated by each
Rating Agency that rates the related the Securities of that Series
at levels satisfactory to each Rating Agency; or
o in an account or accounts the deposits in which are insured to the
maximum extent available by the Federal Deposit Insurance
Corporation or that are secured in a manner meeting requirements
established by each Rating Agency.
Unless otherwise specified in the related Prospectus Supplement, the
funds held in the Collection Account may be invested in Eligible Investments. If
so specified in the related Prospectus Supplement, the Servicer will be entitled
to receive as additional compensation any interest or other income earned on
funds in the Collection Account.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer, the Depositor, the Trustee or the Seller, as appropriate, will deposit
into the Collection Account for each Series, on the business day following the
Closing Date, all scheduled payments of principal and interest on the Primary
Assets ("Scheduled Payments") due after the related Cut-off Date but received by
the Servicer on or before the Closing Date, and thereafter, within two business
days after the date of receipt thereof, the following payments and collections
received or made by it (other than, unless otherwise provided in the related
Prospectus Supplement, in respect of principal of and interest on the related
Primary Assets due on or before the Cut-off Date):
(i) All payments in respect of principal, including prepayments, on
the Primary Assets;
(ii) All payments in respect of interest on the Primary Assets after
deducting therefrom, at the discretion of the Servicer (but only
to the extent of the amount permitted to be withdrawn or withheld
from the Collection Account in accordance with the related
Agreement), the fee payable to the Servicer (the "Servicing Fee")
in respect of such Primary Assets;
(iii) All amounts received by the Servicer in connection with
the liquidation of Primary Assets or the related Property,
whether through foreclosure sale, repossession or otherwise,
including payments in connection with the Primary Assets received
from the borrower, other than amounts required to be paid or
refunded to the borrower pursuant to the terms of the applicable
loan documents or otherwise pursuant to law, net of related
liquidation expenses (such net amount, the "Liquidation
Proceeds"), exclusive of, in the discretion of the Servicer (but
only to the extent of the amount permitted to be withdrawn from
the Collection Account in accordance with the related Agreement),
the Servicing Fee, if any, in respect of the related Primary
Asset;
(iv) All proceeds under any title insurance, hazard insurance policy
or other insurance policy covering any such Primary Asset, other
than proceeds to be applied to the restoration or repair of the
related Property or released to the borrower in accordance with
the related Agreement;
(v) All amounts required to be deposited therein from any Reserve
Fund for the Series pursuant to the related Agreement;
(vi) All advances of cash made by the Servicer in respect of
delinquent Scheduled Payments on a Loan and for any other purpose
as required pursuant to the related Agreement ("Advances"); and
(vii) All repurchase prices of any Primary Assets repurchased by the
Depositor, the Servicer or the Seller pursuant to the related
Agreement.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer is permitted, from time to time, to make withdrawals from the
Collection Account for each Series for the following purposes:
(i) to reimburse itself for Advances made by it in connection with
that Series pursuant to the related Agreement; provided, that the
Servicer's right to reimburse itself is limited to amounts
received on or in respect of particular Loans (including, for
this purpose, Liquidation Proceeds and proceeds of insurance
policies covering the related Loans and Mortgaged Properties
("Insurance Proceeds")) that represent late recoveries of
Scheduled Payments with respect to which the Advance was made;
(ii) to the extent provided in the related Agreement, to reimburse
itself for any Advances that it made in connection with the
Series which the Servicer determines in good faith to be
nonrecoverable from amounts representing late recoveries of
Scheduled Payments respecting which the Advance was made or from
Liquidation Proceeds or Insurance Proceeds;
(iii) to reimburse itself from Liquidation Proceeds for liquidation
expenses and for amounts expended by it in good faith in
connection with the restoration of damaged Property and, in the
event deposited into the Collection Account and not previously
withheld, and to the extent that Liquidation Proceeds after such
reimbursement exceed the Principal Balance of the related Loan,
together with accrued and unpaid interest thereon to the Due Date
for the Loan next succeeding the date of its receipt of the
Liquidation Proceeds, to pay to itself out of the excess the
amount of any unpaid Servicing Fee and any assumption fees, late
payment charges, or other charges on the related Loan;
(iv) in the event it has elected not to pay itself the Servicing
Fee out of the interest component of any Scheduled Payment, late
payment or other recovery with respect to a particular Loan prior
to the deposit of the Scheduled Payment, late payment or recovery
into the Collection Account, to pay to itself the Servicing Fee,
as adjusted pursuant to the related Agreement, from any such
Scheduled Payment, late payment or other recovery, to the extent
permitted by the related Agreement;
(v) to reimburse itself for expenses incurred by and recoverable
by or reimbursable to it pursuant to the related Agreement;
(vi) to pay to the applicable person with respect to each Primary
Asset or related REO Property that has been repurchased or
removed from the Trust Fund by the Depositor, the Servicer or the
Seller pursuant to the related Agreement, all amounts received
thereon and not distributed as of the date on which the related
repurchase price was determined;
(vii) to make payments to the Trustee of the Series for deposit into
the related Distribution Account, if any, or for remittance to
the Holders of the Series in the amounts and in the manner
provided for in the related Agreement; and
(viii) to clear and terminate the Collection Account pursuant to the
related Agreement.
In addition, if the Servicer deposits into the Collection Account for a
Series any amount not required to be deposited therein, the Servicer may, at any
time, withdraw the amount from the Collection Account.
Advances and Limitations on Advances
The related Prospectus Supplement will describe the circumstances, if
any, under which the Servicer will make Advances with respect to delinquent
payments on Loans. If specified in the related Prospectus Supplement, the
Servicer will be obligated to make Advances. Its obligation to make Advances may
be limited in amount, or may not be activated until a certain portion of a
specified Reserve Fund is depleted. Advances are intended to provide liquidity
and, except to the extent specified in the related Prospectus Supplement, not to
guarantee or insure against losses. Accordingly, any funds advanced are
recoverable by the Servicer out of amounts received on particular Loans that
represent late recoveries of Scheduled Payments, Insurance Proceeds or
Liquidation Proceeds respecting which any Advance was made. If an Advance is
made and subsequently determined to be nonrecoverable from late collections,
Insurance Proceeds or Liquidation Proceeds from the related Loan, the Servicer
may be entitled to reimbursement from other funds in the Collection Account or
Distribution Account(s), as the case may be, or from a specified Reserve Fund,
as applicable, to the extent specified in the related Prospectus Supplement.
Maintenance of Insurance Policies and Other Servicing Procedures
Standard Hazard Insurance; Flood Insurance. Except as otherwise
specified in the related Prospectus Supplement, the Servicer will be required to
maintain (or to cause the borrower under each Loan to maintain) a standard
hazard insurance policy providing the standard form of fire insurance coverage
with extended coverage for certain other hazards as is customary in the state in
which the related Property is located. The standard hazard insurance policies
will provide for coverage at least equal to the applicable state standard form
of fire insurance policy with extended coverage for property of the type
securing the related Loans. In general, the standard form of fire and extended
coverage policy will cover physical damage to or destruction of, the related
Property caused by fire, lightning, explosion, smoke, windstorm, hail, riot,
strike and civil commotion, subject to the conditions and exclusions
particularized in each policy. Because the standard hazard insurance policies
relating to the Loans will be underwritten by different hazard insurers and will
cover Properties located in various states, the policies will not contain
identical terms and conditions. The basic terms, however, generally will be
determined by state law and generally will be similar. Most such policies
typically will not cover any physical damage resulting from war, revolution,
governmental actions, floods and other water-related causes, earth movement
(including earthquakes, landslides and mudflows), nuclear reaction, wet or dry
rot, vermin, rodents, insects or domestic animals, theft and, in certain cases,
vandalism. The foregoing list is merely indicative of certain kinds of uninsured
risks and is not intended to be all inclusive. Uninsured risks not covered by a
special hazard insurance policy or other form of Enhancement will adversely
affect distributions to Holders. When a Property securing a Loan is located in a
flood area identified by HUD pursuant to the Flood Disaster Protection Act of
1973, as amended, the Servicer will be required to cause flood insurance to be
maintained with respect to the Property, to the extent available.
The standard hazard insurance policies covering Properties typically
will contain a "coinsurance" clause, which in effect will require that the
insured at all times carry hazard insurance of a specified percentage (generally
80% to 90%) of the full replacement value of the Property, including any
improvements on the Property, in order to recover the full amount of any partial
loss. If the insured's coverage falls below this specified percentage, the
coinsurance clause will provide that the hazard insurer's liability in the event
of partial loss will not exceed the greater of (i) the actual cash value (i.e.,
replacement cost less physical depreciation) of the Property, including the
improvements, if any, damaged or destroyed or (ii) such proportion of the loss,
without deduction for depreciation, as the amount of insurance carried bears to
the specified percentage of the full replacement cost of the Property and
improvements. Since the amount of hazard insurance to be maintained on the
improvements securing the Loans declines as their Principal Balances decrease,
and since the value of the Properties will fluctuate over time, the effect of
this requirement in the event of partial loss may be that hazard Insurance
Proceeds will be insufficient to restore fully the damage to the affected
Property.
Unless otherwise specified in the related Prospectus Supplement,
coverage will be in an amount at least equal to the greater of (i) the amount
necessary to avoid the enforcement of any co-insurance clause contained in the
policy or (ii) the outstanding Principal Balance of the related Loan. Unless
otherwise specified in the related Prospectus Supplement, the Servicer will also
maintain on REO Property a standard hazard insurance policy in an amount that is
at least equal to the maximum insurable value of the REO Property. No earthquake
or other additional insurance will be required of any borrower or will be
maintained on REO Property other than pursuant to such applicable laws and
regulations as shall at any time be in force and shall require the additional
insurance.
Any amounts collected by the Servicer under any those insurance
policies (other than amounts to be applied to the restoration or repair of the
Property, released to the borrower in accordance with normal servicing
procedures or used to reimburse the Servicer for amounts to which it is entitled
to reimbursement) will be deposited into the Collection Account. In the event
that the Servicer obtains and maintains a blanket policy insuring against hazard
losses on all of the Loans, written by an insurer then acceptable to each Rating
Agency that assigns a rating to the related Series, it will conclusively be
deemed to have satisfied its obligations to cause to be maintained a standard
hazard insurance policy for each Loan or related REO Property. This blanket
policy may contain a deductible clause, in which case the Servicer will be
required, in the event that there has been a loss that would have been covered
by the policy absent the deductible clause, to deposit into the Collection
Account the amount not otherwise payable under the blanket policy because of the
application of the deductible clause.
Realization upon Defaulted Loans
The Servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the Properties
securing the related Loans that come into and continue in default and as to
which no satisfactory arrangements can be made for collection of delinquent
payments. In this connection, the Servicer will follow such practices and
procedures as it deems necessary or advisable and as are normal and usual in its
servicing activities with respect to comparable loans that it services. However,
the Servicer will not be required to expend its own funds in connection with any
foreclosure or towards the restoration of the Property unless it determines that
(i) such restoration or foreclosure will increase the Liquidation Proceeds of
the related Loan available to the Holders after reimbursement to itself for its
expenses and (ii) its expenses will be recoverable either through Liquidation
Proceeds or Insurance Proceeds. Notwithstanding anything to the contrary herein,
in the case of a Trust Fund for which a REMIC election has been made, the
Servicer will be required to liquidate any REO Property by the end of the third
calendar year after the Trust Fund acquires beneficial ownership of the REO
Property. While the holder of an REO Property can often maximize its recovery by
providing financing to a new purchaser, the Trust Fund, if applicable, will have
no ability to do so and neither the Servicer nor the Depositor will be required
to do so.
The Servicer may arrange with the borrower on a defaulted Loan a change
in the terms of such Loan to the extent provided in the related Prospectus
Supplement. This type of modification may only be entered into if it meets the
underwriting policies and procedures employed by the Servicer in servicing
receivables for its own account and meets the other conditions set forth in the
related Prospectus Supplement.
Enforcement of Due-On-Sale Clauses
Unless otherwise specified in the related Prospectus Supplement for a
Series, when any Property is about to be conveyed by the obligor, the Servicer
will, to the extent it has knowledge of the prospective conveyance and prior to
the time of the consummation of the conveyance, exercise its rights to
accelerate the maturity of the related Loan under any applicable "due-on-sale"
clause, unless it reasonably believes that the clause is not enforceable under
applicable law or if the enforcement of the clause would result in loss of
coverage under any primary mortgage insurance policy. In that event, the
Servicer is authorized to accept from or enter into an assumption agreement with
the person to whom the Property has been or is about to be conveyed. Under the
assumption, the transferee of the Property becomes liable under the Loan and the
original borrower is released from liability and the transferee is substituted
as the borrower and becomes liable under the Loan. Any fee collected in
connection with an assumption will be retained by the Servicer as additional
servicing compensation. The terms of a Loan may not be changed in connection
with an assumption.
Servicing Compensation and Payment of Expenses
Except as otherwise provided in the related Prospectus Supplement, the
Servicer will be entitled to a periodic Servicing Fee in an amount to be
determined as specified in the related Prospectus Supplement. The Servicing Fee
may be fixed or variable, as specified in the related Prospectus Supplement. In
addition, unless otherwise specified in the related Prospectus Supplement, the
Servicer will be entitled to additional servicing compensation in the form of
assumption fees, late payment charges and similar items, or excess proceeds
following disposition of Property in connection with defaulted Loans.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will pay certain expenses incurred in connection with the servicing of
the Loans, including, without limitation, the payment of the fees and expenses
of each applicable Trustee and independent accountants, payment of Security
Policy and insurance policy premiums, if applicable, and the cost of credit
support, if any, and payment of expenses incurred in preparation of reports to
Holders.
When a borrower makes a principal prepayment in full between due dates
on the related Loan, the borrower generally will be required to pay interest on
the amount prepaid only to the date of prepayment. If and to the extent provided
in the related Prospectus Supplement, in order that one or more Classes of the
Securities of a Series will not be adversely affected by any resulting shortfall
in interest, the amount of the Servicing Fee may be reduced to the extent
necessary to include in the Servicer's remittance to the applicable Trustee for
deposit into the related Distribution Account an amount equal to one month's
interest on the related Loan (less the Servicing Fee). If the total amount of
such shortfalls in a month exceeds the Servicing Fee for such month, a shortfall
to Holders may occur.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will be entitled to reimbursement for certain expenses that it incurs
in connection with the liquidation of defaulted Loans. The related Holders will
suffer no loss by reason of the Servicer's expenses to the extent the expenses
are covered under related insurance policies or from excess Liquidation
Proceeds. If claims are either not made or paid under the applicable insurance
policies or if coverage thereunder has been exhausted, the related Holders will
suffer a loss to the extent that Liquidation Proceeds, after reimbursement of
the Servicer's expenses, are less than the Principal Balance of and unpaid
interest on the related Loan that would be distributable to Holders. In
addition, the Servicer will be entitled to reimbursement of its expenses in
connection with the restoration of REO Property This right of reimbursement is
prior to the rights of the Holders to receive any related Insurance Proceeds,
Liquidation Proceeds or amounts derived from other Enhancement. The Servicer
generally is also entitled to reimbursement from the Collection Account for
Advances.
Unless otherwise specified in the related Prospectus Supplement, the
rights of the Servicer to receive funds from the Collection Account for a
Series, whether as the Servicing Fee or other compensation, or for the
reimbursement of Advances, expenses or otherwise, are not subordinate to the
rights of Holders of Securities of the Series.
Evidence as to Compliance
If so specified in the related Prospectus Supplement, the applicable
Agreement will provide that, each year, a firm of independent public accountants
will furnish a statement to the Trustee to the effect that the firm has examined
certain documents and records relating to the servicing of the Loans by the
Servicer and that, on the basis of the examination, the firm is of the opinion
that the servicing has been conducted in compliance with the Agreement, except
for (i) such exceptions as the firm believes to be immaterial and (ii) any other
exceptions set forth in the statement.
If so specified in the related Prospectus Supplement, the applicable
Agreement will also provide for delivery to the Trustee of an annual statement
signed by an officer of the Servicer to the effect that the Servicer has
fulfilled its obligations under the Agreement throughout the preceding calendar
year.
Certain Matters Regarding the Servicer
The Servicer for each Series will be identified in the related
Prospectus Supplement. The Servicer may be an affiliate of the Depositor and may
have other business relationships with the Depositor and its affiliates.
If an Event of Default (defined below) occurs under either a Servicing
Agreement or a Pooling and Servicing Agreement, the Servicer may be replaced by
the Trustee or a successor Servicer. Unless otherwise specified in the related
Prospectus Supplement, the Events of Default and the rights of a Trustee upon a
default under the Agreement for the related Series will be substantially similar
to those described under "The Agreements--Events of Default; Rights upon Event
of Default--Pooling and Servicing Agreement; Servicing Agreement" in this
prospectus.
Unless otherwise specified in the Prospectus Supplement, the Servicer
does not have the right to assign its rights and delegate its duties and
obligations under the related Agreement unless the successor Servicer accepting
such assignment or delegation
o services similar loans in the ordinary course of its business;
o is reasonably satisfactory to the Trustee;
o has a net worth of not less than the amount specified in the
Prospectus Supplement;
o would not cause any Rating Agency's rating of the
related Securities in effect immediately prior to the assignment,
sale or transfer to be qualified, downgraded or withdrawn as a
result of the assignment, sale or transfer; and
o executes and delivers to the Trustee an agreement, in form
and substance reasonably satisfactory to the Trustee, that
contains an assumption by the successor Servicer of the due and
punctual performance and observance of each covenant and
condition required to be performed or observed by the Servicer
under the Agreement from and after the date of the agreement.
No assignment will become effective until the Trustee or a successor
Servicer has assumed the servicer's obligations and duties under the related
Agreement. To the extent that the Servicer transfers its obligations to a
wholly-owned subsidiary or affiliate, the subsidiary or affiliate need not
satisfy the criteria set forth above; however, in such instance, the assigning
Servicer will remain liable for the servicing obligations under the Agreement.
Any entity into which the Servicer is merged or consolidated or any successor
corporation resulting from any merger, conversion or consolidation will succeed
to the Servicer's obligations under the Agreement provided that the successor or
surviving entity meets the requirements for a successor Servicer set forth
above.
Except to the extent otherwise provided therein, each Agreement will
provide that neither the Servicer nor any director, officer, employee or agent
of the Servicer will be under any liability to the related Trust Fund, the
Depositor or the Holders for any action taken or for failing to take any action
in good faith pursuant to the related Agreement, or for errors in judgment.
However, neither the Servicer nor any such person will be protected against any
breach of warranty or representations made under the Agreement, or the failure
to perform its obligations in compliance with any standard of care set forth in
the Agreement, or liability that would otherwise be imposed by reason of willful
misfeasance, bad faith or negligence in the performance of their duties or by
reason of reckless disregard of their obligations and duties under the
Agreement. Each Agreement will further provide that the Servicer and any
director, officer, employee or agent of the Servicer is entitled to
indemnification from the related Trust Fund and will be held harmless against
any loss, liability or expense incurred in connection with any legal action
relating to the Agreement or the Securities, other than any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or negligence in
the performance of duties under the Agreement or by reason of reckless disregard
of those obligations and duties. In addition, the Agreement will provide that
the Servicer is not under any obligation to appear in, prosecute or defend any
legal action that is not incidental to its servicing responsibilities under the
Agreement that, in its opinion, may involve it in any expense or liability. The
Servicer may, in its discretion, undertake any such action that it may deem
necessary or desirable with respect to the Agreement and the rights and duties
of the parties thereto and the interests of the Holders thereunder. In that
event, the legal expenses and costs of the action and any resulting liability
may be expenses, costs, and liabilities of the Trust Fund and the Servicer may
be entitled to be reimbursed therefor out of the Collection Account.
THE AGREEMENTS
The following summaries describe certain provisions of the Agreements.
The summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Agreements. Where
particular provisions or terms used in the Agreements are referred to, the
provisions or terms are as specified in the related Agreements.
Assignment of Primary Assets
General. At the time of issuance of the Securities of a Series, the
Depositor will transfer, convey and assign to the related Trust Fund all right,
title and interest of the Depositor in the Primary Assets and other property to
be transferred to the Trust Fund. Such assignment will include all principal and
interest due on or with respect to the Primary Assets after the Cut-off Date
(except for any retained interests). The Trustee will, concurrently with the
assignment, execute and deliver the Securities.
Assignment of Mortgage Loans. Unless otherwise specified in the related
Prospectus Supplement, the Depositor will deliver or cause to be delivered to
the Trustee (or, if specified in the Prospectus Supplement, a custodian on
behalf of the Trustee (the "Custodian")), as to each Mortgage Loan, the related
note endorsed without recourse to the order of the Trustee or in blank, the
original mortgage, deed of trust or other security instrument (each, a
"Mortgage") with evidence of recording indicated thereon (except for any
Mortgage not returned from the public recording office, in which case a copy of
such Mortgage will be delivered, together with a certificate that the original
of such Mortgage was delivered to such recording office), and an assignment of
the Mortgage in recordable form. The Trustee, or, if so specified in the related
Prospectus Supplement, the Custodian, will hold those documents in trust for the
benefit of the Holders.
If so specified in the related Prospectus Supplement, at the time of
issuance of the Securities, the Depositor will cause assignments to the Trustee
of the Mortgages relating to the Loans to be recorded in the appropriate public
office for real property records, except in states where, in the opinion of
counsel acceptable to the Trustee, recording is not required to protect the
Trustee's interest in the related Loans. If specified in the Prospectus
Supplement, the Depositor will cause the assignments to be recorded within the
time after issuance of the Securities as is specified in the related Prospectus
Supplement. In this event, the Prospectus Supplement will specify whether the
Agreement requires the Depositor to repurchase from the Trustee any Loan the
related Mortgage of which is not recorded within that time, at the price
described below with respect to repurchases by reason of defective
documentation. Unless otherwise provided in the Prospectus Supplement, the
enforcement of the repurchase obligation would constitute the sole remedy
available to the Holders or the Trustee for the failure of a Mortgage to be
recorded.
Assignment of Home Improvement Contracts. Unless otherwise specified in
the related Prospectus Supplement, the Depositor will deliver or cause to be
delivered to the Trustee (or the Custodian), as to each Home Improvement
Contract, the original Home Improvement Contract and copies of related documents
and instruments and, other than in the case of unsecured Home Improvement
Contracts, the security interest in the related Home Improvements. In order to
give notice of the right, title and interest of Holders to the Home Improvement
Contracts, the Depositor will cause a UCC-1 financing statement to be executed
by the Depositor or the Seller identifying the Trustee as the secured party and
identifying all Home Improvement Contracts as collateral. Unless otherwise
specified in the related Prospectus Supplement, the Home Improvement Contracts
will not be stamped or otherwise marked to reflect their assignment to the
Trust. Therefore, if, through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the Home Improvement
Contracts without notice of such assignment, the interest of Holders in the Home
Improvement Contracts could be defeated. See "Certain Legal Aspects of the
Loans--The Home Improvement Contracts" in this prospectus.
Loan Schedule. Each Loan will be identified in a schedule
appearing as an exhibit to the related and will specify with respect to each
Loan:
o the original principal amount,
o its unpaid Principal Balance as of the Cut-off Date,
o the current interest rate,
o the current Scheduled Payment of principal and interest,
o the maturity date, if any, of the related note, and
o if the Loan is an adjustable rate Loan, the lifetime rate cap,
if any, and the current index.
Assignment of Private Securities. The Depositor will cause Private
Securities to be registered in the name of the PS Trustee (or its nominee or
correspondent). The PS Trustee (or its nominee or correspondent) will have
possession of any certificated Private Securities. Unless otherwise specified in
the related Prospectus Supplement, the PS Trustee will not be in possession of
or be assignee of record of any underlying assets for a Private Security. See
"The Trust Funds--Private Securities" in this prospectus. Each Private Security
will be identified in a schedule appearing as an exhibit to the related
Agreement, which will specify the original principal amount, Principal Balance
as of the Cut-off Date, annual pass-through rate or interest rate and maturity
date for each Private Security conveyed to the Trust Fund. In the Agreement, the
Depositor will represent and warrant to the PS Trustee regarding the Private
Securities that:
o the information contained in the Private Securities schedule is
true and correct in all material respects;
o immediately prior to the conveyance of the Private Securities,
the Depositor had good title, and was their sole owner (subject
to any retained interest);
o there has been no other sale by the Private Securities; and
o there is no existing lien, charge, security interest or
other encumbrance (other than any retained interest) on the
Private Securities.
Repurchase and Substitution of Non-Conforming Primary Assets. Unless
otherwise provided in the related Prospectus Supplement, if any document in the
file relating to the Primary Assets delivered by the Depositor to the Trustee
(or Custodian) is found by the Trustee, within 90 days of the execution of the
related Agreement (or promptly after the Trustee's receipt of any document
permitted to be delivered after the Closing Date), to be defective in any
material respect and the Depositor or Seller does not cure such defect within 90
days, (or within any other period specified in the related Prospectus
Supplement), the Depositor or Seller will, not later than 90 days (or within
such any period specified in the related Prospectus Supplement), after the
Trustee's notice to the Depositor or the Seller, as the case may be, of the
defect, repurchase the related Primary Asset or any property acquired in respect
thereof from the Trustee. Unless otherwise specified in the related Prospectus
Supplement, the repurchase shall be effected at a price equal to the:
(a) the lesser of
(i) the Principal Balance of the Primary Asset, and
(ii) the Trust Fund's federal income tax basis in the Primary Asset;
plus
(b) accrued and unpaid interest to the date of the next Scheduled
Payment on the Primary Asset at the rate set forth in the
related Agreement;
provided, however, the purchase price shall not be limited in (i) above
to the Trust Fund's federal income tax basis, if the repurchase at a price equal
to the Principal Balance of the repurchased Primary Asset will not result in any
prohibited transaction tax under Section 860F(a) of the Code.
If provided in the related Prospectus Supplement, the Depositor or
Seller, as the case may be, may, rather than repurchase the Primary Asset as
described above, remove the non-conforming Primary Asset from the Trust Fund
(the "Deleted Primary Asset") and substitute in its place one or more other
Primary Assets (each, a "Qualifying Substitute Primary Asset"); provided,
however, that (i) with respect to a Trust Fund for which no REMIC election is
made, the substitution must be effected within 120 days of the date of initial
issuance of the Securities and (ii) with respect to a Trust Fund for which a
REMIC election is made, after a specified time period, the Trustee must have
received a satisfactory opinion of counsel that such substitution will not cause
the Trust Fund to lose its status as a REMIC or otherwise subject the Trust Fund
to a prohibited transaction tax.
Unless otherwise specified in the related Prospectus Supplement, any
Qualifying Substitute Primary Asset will, on the date of substitution,
o have a Principal Balance, after deduction of all Scheduled
Payments due in the month of substitution, not in excess of the
Principal Balance of the Deleted Primary Asset (the amount of any
shortfall to be deposited to the Collection Account in the month
of substitution for distribution to Holders),
o have an interest rate not less than (and not more than 2% greater
than) the interest rate of the Deleted Primary Asset,
o have a remaining term-to-stated maturity not greater than (and not
more than two years less than) that of the Deleted Primary Asset;
and
o comply with all of the representations and warranties set forth in
the applicable Agreement as of the date of substitution.
Unless otherwise provided in the related Prospectus Supplement, the
above-described cure, repurchase or substitution obligations constitute the sole
remedies available to the Holders or the Trustee for a material defect in a
document for a Primary Asset.
The Depositor or another entity will make representations and
warranties with respect to Primary Assets for a Series. If the Depositor or the
other entity cannot cure a breach of any such representations and warranties in
all material respects within the time period specified in the related Prospectus
Supplement after notification by the Trustee of such breach, and if the breach
is of a nature that materially and adversely affects the value of such Primary
Asset, the Depositor or the other entity will be obligated to repurchase the
affected Primary Asset or, if provided in the Prospectus Supplement, provide a
Qualifying Substitute Primary Asset, subject to the same conditions and
limitations on purchases and substitutions as described above.
The Depositor's only source of funds to effect any cure, repurchase or
substitution will be through the enforcement of the corresponding obligations,
if any, of the responsible originator or Seller of the non-conforming Primary
Assets. See "Risk Factors--Limited Assets for Making Payments" in this
prospectus.
No Holder of Securities of a Series, solely by virtue of the Holder's
status as a Holder, will have any right under the applicable Agreement to
institute any proceeding with respect to Agreement, unless Holder previously has
given to the Trustee for the Series written notice of default and unless the
Holders of Securities evidencing not less than 51% of the aggregate voting
rights of the Securities of the Series have made written request upon the
Trustee to institute the proceeding in its own name as Trustee thereunder and
have offered to the Trustee reasonable indemnity, and the Trustee for 60 days
has neglected or refused to institute any such proceeding.
Reports to Holders
The applicable Trustee or other entity specified in the related
Prospectus Supplement will prepare and forward to each Holder on each
Distribution Date, or as soon thereafter as is practicable, a statement setting
forth, to the extent applicable to any Series, among other things:
(i) the amount of principal distributed to Holders of the related
Securities and the outstanding principal balance of the
Securities following the distribution;
(ii) the amount of interest distributed to Holders of the related
Securities and the current interest on the Securities;
(iii) the amount of
(a) any overdue accrued interest included in such distribution,
(b) any remaining overdue accrued interest with respect to the
Securities, or
(c) any current shortfall in amounts to be distributed as
accrued interest to Holders of such Securities;
(iv) the amount of
(a) any overdue payments of scheduled principal included in
the distribution,
(b) any remaining overdue principal amounts with respect to
the Securities,
(c) any current shortfall in receipt of scheduled
principal payments on the related Primary Assets or
(d) any realized losses or Liquidation Proceeds to be
allocated as reductions in the outstanding principal
balances of the Securities;
(v) the amount received under any related Enhancement, and the
remaining amount available under the Enhancement;
(vi) the amount of any delinquencies with respect to payments
on the related Primary Assets;
(vii) the book value of any REO Property acquired by the related
Trust Fund; and
viii) such other information as specified in the related Agreement.
In addition, within a reasonable period of time after the end of each
calendar year, the applicable Trustee, unless otherwise specified in the related
Prospectus Supplement, will furnish to each Holder of record at any time during
the calendar year:
o the total of the amounts reported pursuant to clauses (i), (ii)
and (iv)(d) above for the calendar year, and
o the information specified in the related Agreement to
enable Holders to prepare their tax returns including, without
limitation, the amount of any original issue discount accrued on
the Securities.
Information in the Distribution Date Statements and annual statements
provided to the Holders will not have been examined and reported upon by an
independent public accountant. However, the Servicer will provide to the Trustee
a report by independent public accountants with respect to its servicing of the
Loans. See "Servicing of Loans--Evidence as to Compliance" in this prospectus.
If so specified in the Prospectus Supplement, the related Series of
Securities (or one or more Classes of the Series) will be issued in book-entry
form. In that event, owners of beneficial interests in those Securities will not
be considered Holders and will not receive such reports directly from the
Trustee. The Trustee will forward such reports only to the entity or its nominee
that is the registered holder of the global certificate that evidences such
book-entry securities. Beneficial owners will receive reports from the
participants and indirect participants of the applicable book-entry system in
accordance with the policies and procedures of such entities.
Events of Default; Rights upon Event of Default
Pooling and Servicing Agreement; Servicing Agreement. Unless
otherwise specified in the related Prospectus Supplement, "Events of
Default" under the Pooling and Servicing Agreement for each Series of
Certificates relating to Loans include
o any failure by the Servicer to deposit amounts in the Collection
Account and Distribution Account(s) to enable the Trustee to
distribute to Holders of Securities of the Series any required
payment, provided that this failure continues unremedied for the
number of days specified in the related Prospectus Supplement
after the giving of written notice to the Servicer by the Trustee,
or to the Servicer and the Trustee by Holders having not less than
25% of the total voting rights of the Series;
o any failure by the Servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the
Agreement provided that this failure continues unremedied for the
number of days specified in the related Prospectus Supplement
after the giving of written to the Servicer by the Trustee, or to
the Servicer and the Trustee by the Holders having not less than
25% of the total voting rights of the of the Series; and
o certain events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings and certain actions
by the Servicer indicating its insolvency, reorganization or
inability to pay its obligations.
So long as an Event of Default remains unremedied under the applicable
Agreement for a Series of Securities relating to the servicing of Loans, unless
otherwise specified in the related Prospectus Supplement, the Trustee or Holders
of Securities of the Series having not less than 51% of the total voting rights
of the Series may terminate all of the rights and obligations of the Servicer as
servicer under the applicable Agreement (other than its right to recovery of
other expenses and amounts advanced pursuant to the terms of the Agreement,
which rights the Servicer will retain under all circumstances), whereupon the
Trustee will succeed to all the responsibilities, duties and liabilities of the
Servicer under the Agreement and will be entitled to reasonable servicing
compensation not to exceed the applicable servicing fee, together with other
servicing compensation in the form of assumption fees, late payment charges or
otherwise as provided in the Agreement.
In the event that the Trustee is unwilling or unable so to act, it may
select (or petition a court of competent jurisdiction to appoint) a finance
institution, bank or loan servicing institution with a net worth specified in
the related Prospectus Supplement to act as successor Servicer under the
provisions of the Agreement. The successor Servicer would be entitled to
reasonable servicing compensation in an amount not to exceed the Servicing Fee
as set forth in the related Prospectus Supplement, together with other servicing
compensation in the form of assumption fees, late payment charges or otherwise,
as provided in the Agreement.
During the continuance of any Event of Default of a Servicer under an
Agreement for a Series of Securities, the Trustee will have the right to take
action to enforce its rights and remedies and to protect and enforce the rights
and remedies of the Holders of Securities of the Series, and, unless otherwise
specified in the related Prospectus Supplement, Holders of Securities having not
less than 51% of the total voting rights of the Series may direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee or exercising any trust or power conferred upon the Trustee. However,
the Trustee will not be under any obligation to pursue any such remedy or to
exercise any of such trusts or powers unless the Holders have offered the
Trustee reasonable security or indemnity against the cost, expenses and
liabilities that may be incurred by the Trustee as a result. The Trustee may
decline to follow any such direction if it determines that the action or
proceeding so directed may not lawfully be taken or would involve it in personal
liability or be unjustly prejudicial to the non-assenting Holders.
Indenture. Unless otherwise specified in the related Prospectus
Supplement, "Events of Default" under the Indenture for each Series of Notes
include:
o a default for thirty (30) days or more in the payment of any
principal of or interest on any Note of the Series;
o failure to perform any other covenant of the Depositor or the
Trust Fund in the Indenture, provided that the failure continues
for a period of sixty (60) days after notice is given in
accordance with the procedures described in the related Prospectus
Supplement;
o any representation or warranty made by the Depositor or the Trust
Fund in the Indenture or in any certificate or other writing
delivered pursuant to it or in connection with it with respect to
or affecting such Series having been incorrect in a material
respect as of the time made, provided that the breach is not cured
within sixty (60) days after notice is given in accordance with
the procedures described in the related Prospectus Supplement;
o certain events of bankruptcy, insolvency, receivership or
liquidation of the Depositor or the Trust Fund; and
o any other Event of Default specified with respect to Notes of
that Series.
If an Event of Default with respect to the then-outstanding Notes of
any Series occurs and is continuing, either the Indenture Trustee or the Holders
of a majority of the total amount of those Notes may declare the principal
amount of all the Notes of the Series (or, if the Notes of that Series are Zero
Coupon Securities, such portion of the principal amount as may be specified in
the related Prospectus Supplement) to be due and payable immediately. Under
certain circumstances of this type the declaration may be rescinded and annulled
by the Holders of a majority of the total amount of those Notes.
If, following an Event of Default with respect to any Series of Notes,
the related Notes have been declared to be due and payable, the Indenture
Trustee may, in its discretion, and notwithstanding such acceleration, elect to
maintain possession of the collateral securing the Notes and to continue to
apply distributions on the collateral as if there had been no declaration of
acceleration, provided that the collateral continues to provide sufficient funds
for the payment of principal of and interest on the Notes as they would have
become due if there had not been a declaration. In addition, the Indenture
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default (other than a default in the payment of
any principal of or interest on any Note of the Series for thirty (30) days or
more), unless:
(a) the Holders of 100% of the total amount of the then-
outstanding Notes of the Series consent to such
sale;
(b) the proceeds of the sale or liquidation are sufficient to pay in
full the principal of and accrued interest due and unpaid on the
outstanding Notes of the Series at the date of sale; or
(c) the Indenture Trustee determines that the collateral would not
be sufficient on an ongoing basis to make all payments on the
Notes as such payments would have become due if the Notes had
not been declared due and payable, and the Indenture Trustee
obtains the consent of the Holders of 66 2/3% of the total
amount of the then-outstanding Notes of the Series.
In the event that the Indenture Trustee liquidates the collateral in
connection with an Event of Default involving a default for thirty (30) days or
more in the payment of principal of or interest on the Notes of a Series, the
Indenture provides that the Indenture Trustee will have a prior lien on the
proceeds of any liquidation for its unpaid fees and expenses. As a result, upon
the occurrence of an Event of Default of this type, the amount available for
distribution to the Noteholders may be less than would otherwise be the case.
However, the Indenture Trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the Indenture for the benefit of the Noteholders
after the occurrence of such an Event of Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event that the principal of the Notes of a Series is declared due and payable as
described above, Holders of the Notes issued at a discount from par may be
entitled to receive no more than an amount equal to the unpaid principal amount
of those Notes less the amount of the discount that remains unamortized.
Subject to the provisions of the Indenture relating to the duties of
the Indenture Trustee, in case an Event of Default shall occur and be continuing
with respect to a Series of Notes, the Indenture Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request or direction of any of the Holders of Notes of the Series, unless the
Holders offer security or indemnity satisfactory to the Indenture Trustee
against the costs, expenses and liabilities it might incur in complying with
their request or direction. Subject to the provisions for indemnification and
certain limitations contained in the Indenture, the Holders of a majority of
amount of the then-outstanding Notes of the Series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Indenture Trustee or exercising any trust or power conferred on
the Indenture Trustee with respect to those Notes, and the Holders of a majority
of the amount of the amount of the then- outstanding Notes of the Series may, in
certain cases, waive any default with respect to the Notes, except a default in
the payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the Holders of the outstanding Notes of affected thereby.
The Trustees
The identity of the commercial bank, savings and loan association or
trust company named as the Trustee or Indenture Trustee, as the case may be, for
each Series of Securities will be set forth in the related Prospectus
Supplement. Entities serving as Trustee may have normal banking relationships
with the Depositor or the Servicer. In addition, for the purpose of meeting the
legal requirements of certain local jurisdictions, each Trustee will have the
power to appoint co-trustees or separate trustees. In the event of an
appointment, all rights, powers, duties and obligations conferred or imposed
upon the Trustee by the related Agreement will be conferred or imposed upon that
Trustee and each separate trustee or co-trustee jointly, or, in any jurisdiction
in which the Trustee shall be incompetent or unqualified to perform certain
acts, singly upon the separate trustee or co-trustee who will exercise and
perform such rights, powers, duties and obligations solely at the direction of
the Trustee. The Trustee may also appoint agents to perform any of its
responsibilities, which agents will have any or all of the rights, powers,
duties and obligations of the Trustee conferred on them by their appointment;
provided, however, that the Trustee will continue to be responsible for its
duties and obligations under the Agreement.
Duties of Trustees
No Trustee will make any representations as to the validity or
sufficiency of the related Agreement, the Securities or of any Primary Asset or
related documents. If no Event of Default (as defined in the related Agreement)
has occurred, the applicable Trustee will be required to perform only those
duties specifically required of it under the Agreement. Upon receipt of the
various certificates, statements, reports or other instruments required to be
furnished to it, the Trustee will be required to examine them to determine
whether they are in the form required by the related Agreement. However, the
Trustee will not be responsible for the accuracy or content of any such
documents furnished to it by the Holders or the Servicer under the Agreement.
Each Trustee may be held liable for its own negligent action or failure
to act, or for its own misconduct; provided, however, that no Trustee will be
personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the related
Holders in an Event of Default. No Trustee will be required to expend or risk
its own funds or otherwise incur any financial liability in the performance of
any of its duties under the related Agreement, or in the exercise of any of its
rights or powers, if it has reasonable grounds for believing that repayment of
such funds or adequate indemnity against such risk or liability is not
reasonably assured to it.
Resignation of Trustees
Each Trustee may, upon written notice to the Depositor, resign at any
time, in which event the Depositor will be obligated to use its best efforts to
appoint a successor Trustee. If no successor Trustee has been appointed and has
accepted such appointment within 30 days after the giving of such notice of
resignation, the resigning Trustee may petition any court of competent
jurisdiction for appointment of a successor Trustee. Each Trustee may also be
removed at any time (i) if that Trustee ceases to be eligible to continue as
such under the related Agreement, (ii) if that Trustee becomes insolvent or
(iii) by the Holders of Securities having more than over 50% of the total voting
rights of the Securities in the Trust Fund upon written notice to the Trustee
and to the Depositor. Any resignation or removal of a Trustee and appointment of
a successor Trustee will not become effective until the successor Trustee
accepts its appointment.
Amendment of Agreement
Unless otherwise specified in the Prospectus Supplement, the Agreement
for each Series of Securities may be amended by the Depositor, the Servicer
(with respect to a Series relating to Loans), and the Trustee, without notice to
or consent of the Holders
(i) to cure any ambiguity,
(ii) to correct any defective provisions or to correct or
supplement any provision therein,
(iii) to add to the duties of the Depositor, the applicable Trustee
or the Servicer,
(iv) to add any other provisions with respect to matters or
questions arising under such Agreement or related Enhancement,
(v) to add or amend any provisions of such Agreement as required
by a Rating Agency in order to maintain or improve the
rating of the Securities (it being understood that none of
the Depositor, the Seller, the Servicer or any Trustee is
obligated to maintain or improve such rating), or
(vi) to comply with any requirements imposed by the Code;
provided, however, that any such amendment (other than pursuant to clause (vi)
above) will not adversely affect in any material respect the interests of any
Holders of the Series, as evidenced by an opinion of counsel delivered to the
Trustee. Unless otherwise specified in the Prospectus Supplement, any such
amendment shall be deemed not to adversely affect in any material respect the
interests of any Holder if the Trustee receives written confirmation from each
applicable Rating Agency rating that the amendment will not cause the Rating
Agency to reduce its then-current rating.
Unless otherwise specified in the Prospectus Supplement, each Agreement
for each Series may also be amended by the applicable Trustee, the Servicer, if
applicable, and the Depositor with the consent of the Holders possessing not
less than 66 2/3% of the total outstanding principal amount of the Securities
of the Series (or, if only certain Classes are affected by the amendment,
66 2/3% of the total outstanding principal amount of each affected Class), for
the purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of the Agreement, or modifying in any manner the rights of
Holders of the Series. In no event, however, shall any such amendment
(a) reduce the amount or delay the timing of payments on any
Security without the consent of the Holder of the Security; or
(b) reduce the aforesaid percentage of the total outstanding principal
amount of Securities of each Class, the Holders of which are
required to consent to any such amendment, without the consent of
the Holders of 100% of the total outstanding principal amount of
each affected Class.
Voting Rights
The related Prospectus Supplement will set forth the method of
determining allocation of voting rights with respect to a Series.
List of Holders
Upon written request of three or more Holders of record of a Series for
purposes of communicating with other Holders with respect to their rights under
the Agreement, (which request is accompanied by a copy of the communication such
Holders propose to transmit), the Trustee will afford them access during
business hours to the most recent list of Holders of that Series held by the
Trustee.
No Agreement will provide for the holding of any annual or other
meeting of Holders.
Book-Entry Securities
If specified in the related Prospectus Supplement for a Series of
Securities, the Securities (or one or more Classes of the Securities) may be
issued in book-entry form. In that event, beneficial owners of those Securities
will not be considered "Holders" under the Agreements and may exercise the
rights of Holders only indirectly through the participants in the applicable
book-entry system.
REMIC Administrator
For any Series with respect to which a REMIC election is made,
preparation of certain reports and certain other administrative duties with
respect to the Trust Fund may be performed by a REMIC administrator, who may be
an affiliate of the Depositor.
Termination
Pooling and Servicing Agreement; Trust Agreement. The obligations
created by the Pooling and Servicing Agreement or Trust Agreement for a Series
will terminate upon the distribution to Holders of all amounts distributable to
them pursuant to the Agreement under the circumstances described in the related
Prospectus Supplement. See "Description of the Securities--Optional Redemption,
Purchase or Termination" in this prospectus.
Indenture. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Indenture Trustee for cancellation of all
the Notes of that Series or, with certain limitations, upon deposit with the
Indenture Trustee of funds sufficient for the payment in full of all of the
Notes of the Series.
In addition to such discharge with certain limitations, , if so
specified with respect to the Notes of any Series, the Indenture will provide
that the related Trust Fund will be discharged from any and all obligations in
respect of the Notes of that Series (except for certain obligations relating to
temporary Notes and exchange of Notes, registration of the transfer or exchange
of those Notes, replacing stolen, lost or mutilated Notes, to, maintaining
paying agencies and holding monies for payment in trust) upon the deposit with
the Indenture Trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America that, through the payment
of interest and principal in accordance with their terms, will provide money in
an amount sufficient to pay the principal of and each installment of interest on
those Notes on the Final Scheduled Distribution Date for the Notes and any
installment of interest on the Notes in accordance with the terms of the
Indenture and the Notes. In the event of any such defeasance and discharge of
Notes of a Series, Holders of Notes of that Series would be able to look only to
such money and/or direct obligations for payment of principal of and interest
on, if any, their Notes until maturity.
CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans, home improvement installment sales contracts and home
improvement installment loan agreements that are general in nature. Because
certain legal aspects are governed by applicable state law (which laws may
differ substantially), the summaries do not purport to be complete or reflect
the laws of any particular state, or encompass the laws of all states in which
the properties securing the Loans are situated.
Mortgages
The Loans for a Series will, and certain Home Improvement Contracts for
a Series may, be secured by either mortgages or deeds of trust or deeds to
secure debt (such Mortgage Loans and Home Improvement Contracts are hereinafter
referred to in this section as "mortgage loans"), depending upon the prevailing
practice in the state in which the property subject to a mortgage loan is
located. The filing of a mortgage, deed of trust or deed to secure debt creates
a lien or title interest upon the real property covered by that instrument and
represents the security for the repayment of an obligation that is customarily
evidenced by a promissory note. It is not prior to the lien for real estate
taxes and assessments or other charges imposed under governmental police powers
and may also be subject to other liens pursuant to the laws of the jurisdiction
in which the mortgaged property is located. Priority with respect to the
instruments depends on their terms, the knowledge of the parties to the mortgage
and generally on the order of recording with the applicable state, county or
municipal office. There are two parties to a mortgage: the mortgagor, who is the
borrower/property owner or the land trustee (as described below), and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the borrower/property owner is the
beneficiary; at origination of a mortgage loan, the borrower executes a separate
undertaking to make payments on the mortgage note. A deed of trust transaction
normally has three parties: the trustor, who is the borrower/property owner; the
beneficiary, who is the lender; and the trustee, a third-party grantee. Under a
deed of trust, the trustor grants the property, irrevocably until the debt is
paid, in trust, generally with a power of sale, to the trustee to secure payment
of the obligation. The mortgagee's authority under a mortgage and the trustee's
authority under a deed of trust are governed by the law of the state in which
the real property is located, the express provisions of the mortgage or deed of
trust, and, in some cases, in deed of trust transactions, the directions of the
beneficiary.
Foreclosure on Mortgages
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming and expensive. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a receiver
or other officer to conduct the sale of the property. In some states, mortgages
may also be foreclosed by advertisement, pursuant to a power of sale provided in
the mortgage. Foreclosure of a mortgage by advertisement is essentially similar
to foreclosure of a deed of trust by nonjudicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a
nonjudicial trustee's sale under a specific provision in the deed of trust that
authorizes the trustee to sell the property upon any default by the borrower
under the terms of the note or deed of trust. In certain states, foreclosure
also may be accomplished by judicial action in the manner provided for
foreclosure of mortgages. In some states, the trustee must record a notice of
default and send a copy to the borrower-trustor and to any person who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee in some states must provide notice to any other individual
having an interest in the real property, including any junior lienholders. If
the deed of trust is not reinstated within any applicable cure period, a notice
of sale must be posted in a public place and, in most states, published for a
specified period of time in one or more newspapers. In addition, some state laws
require that a copy of the notice of sale be posted on the property and sent to
all parties having an interest of record in the property. The trustor, borrower,
or any person having a junior encumbrance on the real estate may, during a
reinstatement period, cure the default by paying the entire amount in arrears
plus the costs and expenses incurred in enforcing the obligation. Generally,
state law controls the amount of foreclosure expenses and costs, including
attorney's fees, which may be recovered by a lender. If the deed of trust is not
reinstated, a notice of sale must be posted in a public place and, in most
states, published for a specified period of time in one or more newspapers. In
addition, some state laws require that a copy of the notice of sale be posted on
the property, recorded and sent to all parties having an interest in the real
property.
An action to foreclose a mortgage is an action to recover the mortgage
debt by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised its rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith,
or oppressive or unconscionable conduct such as to warrant a court of equity to
refuse affirmative relief to the mortgagee. Under certain circumstances a court
of equity may relieve the mortgagor from an entirely technical default where
such default was not willful.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, sometimes requiring
up to several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and the sale occurred while the mortgagor was insolvent and within
one year (or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law) of the
filing of bankruptcy. Similarly, a suit against the debtor on the related
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is a
public sale. However, because of the difficulty potential third party purchasers
at the sale have in determining the exact status of title and because the
physical condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for an amount that may be equal to the unpaid
principal amount of the mortgage note secured by the mortgage or deed of trust
plus accrued and unpaid interest and the expenses of foreclosure, in which event
the mortgagor's debt will be extinguished or the lender may purchase for a
lesser amount in order to preserve its right against a borrower to seek a
deficiency judgment in states where such a judgment is available. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burdens of ownership,
including obtaining hazard insurance, paying taxes and making such repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Any loss may be reduced by the
receipt of any mortgage guaranty Insurance Proceeds.
Environmental Risks
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and safety.
These include laws and regulations governing air pollutant emissions, hazardous
and toxic substances, impacts to wetlands, leaks from underground storage tanks
and the management, removal and disposal of lead- and asbestos-containing
materials. In certain circumstances, these laws and regulations impose
obligations on the owners or operators of residential properties such as those
subject to the Loans. The failure to comply with such laws and regulations may
result in fines and penalties.
Moreover, under various federal, state and local laws and regulations,
an owner or operator of real estate may be liable for the costs of addressing
hazardous substances on, in or beneath such property and related costs. Such
liability may be imposed without regard to whether the owner or operator knew
of, or was responsible for, the presence of such substances, and could exceed
the value of the property and the aggregate assets of the owner or operator. In
addition, persons who transport or dispose of hazardous substances, or arrange
for the transportation, disposal or treatment of hazardous substances, at
off-site locations may also be held liable if there are releases or threatened
releases of hazardous substances at such off-site locations.
In addition, under the laws of some states and under the Federal
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
contamination of property may give rise to a lien on the property to assure the
payment of the costs of clean-up. In several states, such a lien has priority
over the lien of an existing mortgage against such property. Under CERCLA, such
a lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, there is a possibility
that a lender may be held liable as an "owner or operator" for costs of
addressing releases or threatened releases of hazardous substances at a
property, regardless of whether or not the environmental damage or threat was
caused by a current or prior owner or operator. CERCLA and some state laws
provide an exemption from the definition of "owner or operator" for a secured
creditor who, without "participating in the management" of a facility, holds
indicia of ownership primarily to protect its security interest in the facility.
The Solid Waste Disposal Act (the "SWDA") provides similar protection to secured
creditors in connection with liability for releases of petroleum from certain
underground storage tanks. However, if a lender "participates in the management"
of the facility in question or is found not to have held its interest primarily
to protect a security interest, the lender may forfeit its secured creditor
exemption status.
A regulation promulgated by the U.S. Environmental Protection Agency
(the "EPA") in April 1992 attempted to clarify the activities in which lenders
could engage both prior to and subsequent to foreclosure of a security interest
without forfeiting the secured creditor exemption under CERCLA. The rule was
struck down in 1994 by the United States Court of Appeals for the District of
Columbia Circuit in Kelley ex rel State of Michigan v. Environmental Protection
Agency, 15 F.3d 1100 (D.C Cir. 1994), reh'g denied, 25 F.3d 1088, cert. denied
sub nom. Am. Bankers Ass'n v. Kelley, 115 S.Ct. 900 (1995). Another EPA
regulation promulgated in 1995 clarifies the activities in which lenders may
engage without forfeiting the secured creditor exemption under the underground
storage tank provisions of the SWDA. That regulation has not been struck down.
On September 30, 1996, Congress enacted the Asset Conservation, Limited
Liability and Deposit Insurance Protection Act (ACA) which amended both CERCLA
and the SWDA to provide additional clarification regarding the scope of the
lender liability exemptions under the two statutes. Among other things, the ACA
specifies the circumstances under which a lender will be protected by the CERCLA
and SWDA exemptions, both while the borrower is still in possession of the
secured property and following foreclosure on the secured property.
Generally, the ACA states that a lender who holds indicia of ownership
primarily to protect a security interest in a facility will be considered to
participate in management only if, while the borrower is still in possession of
the facility encumbered by the security interest, the lender (i) exercises
decision-making control over environmental compliance related to the facility
such that the lender has undertaken responsibility for hazardous substance
handling or disposal practices related to the facility or (ii) exercises control
at a level comparable to that of a manager of the facility such that the lender
has assumed or manifested responsibility for (a) overall management of the
facility encompassing daily decision-making with respect to environmental
compliance or (b) overall or substantially all of the operational functions (as
distinguished from financial or administrative functions) of the facility other
than the function of environmental compliance. The ACA also specifies certain
activities that are not considered to be "participation in management,"
including monitoring or enforcing the terms of the extension of credit or
security interest, inspecting the facility, and requiring a lawful means of
addressing the release or threatened release of a hazardous substance.
The ACA also specifies that a lender who did not participate in
management of a facility prior to foreclosure will not be considered an "owner
or operator," even if the lender forecloses on the facility and after
foreclosure sells or liquidates the facility, maintains business activities,
winds up operations, undertakes an appropriate response action, or takes any
other measure to preserve, protect, or prepare the facility prior to sale or
disposition, if the lender seeks to sell or otherwise divest the facility at the
earliest practicable, commercially reasonable time, on commercially reasonable
terms, taking into account market conditions and legal and regulatory
requirements.
The ACA specifically addresses the potential liability of lenders who
hold mortgages or similar conventional security interests in real property, such
as the Trust Fund does in connection with the Mortgage Loans and the Home
Improvement Contracts.
If a lender is or becomes liable under CERCLA, it may be authorized to
bring a statutory action for contribution against any other "responsible
parties," including a previous owner or operator. However, such persons or
entities may be bankrupt or otherwise judgment proof, and the costs associated
with environmental cleanup and related actions may be substantial. Moreover,
some state laws imposing liability for addressing hazardous substances do not
contain exemptions from liability for lenders. Whether the costs of addressing a
release or threatened release at a property pledged as collateral for one of the
Loans would be imposed on the Trust Fund, and thus occasion a loss to the
Holders, therefore depends on the specific factual and legal circumstances at
issue.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the trustor or mortgagor and foreclosed junior lienors are given
a statutory period in which to redeem the property from the foreclosure sale.
The right of redemption should be distinguished from the equity of redemption,
which is a non-statutory right that must be exercised prior to the foreclosure
sale. In some states, redemption may occur only upon payment of the entire
principal balance of the loan, accrued interest and expenses of foreclosure. In
other states, redemption may be authorized if the former borrower pays only a
portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The exercise
of a right of redemption would defeat the title of any purchaser at a
foreclosure sale, or of any purchaser from the lender subsequent to foreclosure
or sale under a deed of trust. Consequently, the practical effect of a right of
redemption is to force the lender to retain the property and pay the expenses of
ownership until the redemption period has run. In some states, there is no right
to redeem property after a trustee's sale under a deed of trust.
Junior Mortgages; Rights of Senior Mortgages
The Mortgage Loans comprising or underlying the Primary Assets included
in the Trust Fund for a Series will be secured by mortgages or deeds of trust,
which may be second or more junior mortgages to other mortgages held by other
lenders or institutional investors. The rights of the Trust Fund (and therefore
of the Holders), as mortgagee under a junior mortgage, are subordinate to those
of the mortgagee under the senior mortgage, including the prior rights of the
senior mortgagee to receive hazard insurance and condemnation proceeds and to
cause the property securing the mortgage loan to be sold upon default of the
mortgagor, thereby extinguishing the junior mortgagee's lien unless the junior
mortgagee asserts its subordinate interest in the property in foreclosure
litigation and, possibly, satisfies the defaulted senior mortgage. A junior
mortgagee may satisfy a defaulted senior loan in full and, in some states, may
cure the default and bring the senior loan current, in either event adding the
amounts expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed
of trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property that appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the mortgagor. All sums so expended by
the mortgagee become part of the indebtedness secured by the mortgage.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory prohibitions that limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In some states, statutes limit the right of the beneficiary or mortgagee to
obtain a deficiency judgment against the borrower following foreclosure or sale
under a deed of trust. A deficiency judgment is a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security.
However, in some of these states, the lender, following judgment on the personal
action, may be deemed to have elected a remedy and may be precluded from
exercising remedies with respect to the security. Consequently, the practical
effect of the election requirement, when applicable, is that lenders will
usually proceed first against the security rather than bringing a personal
action against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower following a foreclosure sale to
the excess of the outstanding debt over the fair market value of the property at
the time of the public sale. The purpose of these statutes is generally to
prevent a beneficiary or a mortgagee from obtaining a large deficiency judgment
against the former borrower as a result of low or no bids at the foreclosure
sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including the federal bankruptcy laws, the
Federal Soldiers' and Sailors' Relief Act of 1940 and state laws affording
relief to debtors, may interfere with or affect the ability of the secured
lender to realize upon collateral and/or enforce a deficiency judgment. For
example, with respect to federal bankruptcy law, the filing of a petition acts
as a stay against the enforcement of remedies for collection of a debt.
Moreover, a court with federal bankruptcy jurisdiction may permit a debtor
through a rehabilitation plan under chapter 13 of the federal bankruptcy code to
cure a monetary default with respect to a loan on his residence by paying
arrearages within a reasonable time period and reinstating the original loan
payment schedule even though the lender accelerated the loan and the lender has
taken all steps to realize upon its security (provided no sale of the property
has yet occurred) prior to the filing of the debtor's chapter 13 petition. Some
courts with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a loan
default by permitting the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan may be modified if the borrower has filed a
petition under chapter 13. These courts have suggested that such modifications
may include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Federal bankruptcy law and limited case law
indicate that the foregoing modifications could not be applied to the terms of a
loan secured by property that is the principal residence of the debtor. In all
cases, the secured creditor is entitled to the value of its security plus
post-petition interest, attorney's fees and costs to the extent the value of the
security exceeds the debt.
In a chapter 11 case under the federal bankruptcy code, the lender is
precluded from foreclosing without authorization from the bankruptcy court. The
lender's lien may be transferred to other collateral and/or be limited in amount
to the value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate
due-on-sale clauses through confirmed Chapter 11 plans of reorganization.
The bankruptcy code provides priority to certain tax liens over the
lender's security. This may delay or interfere with the enforcement of rights in
respect of a defaulted mortgage loan. In addition, substantive requirements are
imposed upon lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws. The
laws include the federal Truth in Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act and related statutes and regulations. These federal laws impose
specific statutory liabilities upon lenders who originate loans and who fail to
comply with the provisions of the law. In some cases, this liability may affect
assignees of the loans.
Due-on-Sale Clauses in Mortgage Loans
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases, typically involving
single family residential mortgage transactions, their enforceability has been
limited or denied. In any event, the Garn-St. Germain Depository Institutions
Act of 1982 (the "Garn-St. Germain Act") preempts state constitutional,
statutory and case law that prohibits the enforcement of due-on-sale clauses and
permits lenders to enforce these clauses in accordance with their terms, subject
to certain exceptions. As a result, due-on-sale clauses have become generally
enforceable except in those states whose legislatures exercised their authority
to regulate the enforceability of such clauses with respect to mortgage loans
that were (i) originated or assumed during the "window period" under the
Garn-St. Germain Act, which ended in all cases not later than October 15, 1982,
and (ii) originated by lenders other than national banks, federal savings
institutions and federal credit unions. FHLMC has taken the position in its
published mortgage servicing standards that, out of a total of eleven "window
period states," five states (Arizona, Michigan, Minnesota, New Mexico and Utah)
have enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of window period loans. Also, the Garn-St. Germain Act does
"encourage" lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
In addition, under federal bankruptcy law, due-on-sale clauses may not
be enforceable in bankruptcy proceedings and may, under certain circumstances,
be eliminated in any modified mortgage resulting from such bankruptcy
proceeding.
Enforceability of Prepayment and Late Payment Fees
Forms of notes, mortgages and deeds of trust used by lenders may
contain provisions obligating the borrower to pay a late charge if payments are
not timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations, upon the late charges a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid. Late charges and prepayment fees are typically retained by servicers as
additional servicing compensation.
Equitable Limitations on Remedies
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his defaults
under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon his
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in cases involving the
sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full
or in part without penalty. The regulations of the Office of Thrift Supervision
(the "OTS") prohibit the imposition of a prepayment penalty or equivalent fee
for or in connection with the acceleration of a loan by exercise of a
due-on-sale clause. A mortgagee to whom a prepayment in full has been tendered
may be compelled to give either a release of the mortgage or an instrument
assigning the existing mortgage. The absence of a restraint on prepayment,
particularly with respect to mortgage loans having higher mortgage rates, may
increase the likelihood of refinancing or other early retirements of such
mortgage loans.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. Similar federal
statutes were in effect with respect to mortgage loans made during the first
three months of 1980. The OTS, as successor to the Federal Home Loan Bank Board,
is authorized to issue rules and regulations and to publish interpretations
governing implementation of Title V.
Title V authorizes any state to reimpose interest rate limits by
adopting, before April 1, 1983, a state law, or by certifying that the voters of
such state have voted in favor of any provision, constitutional or otherwise,
which expressly rejects an application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V is not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on mortgage loans covered by
Title V.
The Home Improvement Contracts
General
The Home Improvement Contracts, other than those Home Improvement
Contracts that are unsecured or secured by mortgages on real estate, generally
are "chattel paper" or constitute "purchase money security interests," each as
defined in the Uniform Commercial Code (the "UCC") in effect in the applicable
jurisdiction. Pursuant to the UCC, the sale of chattel paper is treated in a
manner similar to perfection of a security interest in chattel paper. Under the
related Agreement, the Depositor will transfer physical possession of the Home
Improvement Contracts to the Trustee or Custodian or may retain possession of
the Contracts as custodian for the Trustee. In addition, the Depositor will make
an appropriate filing of a UCC-1 financing statement in the appropriate states
to give notice of the Trustee's ownership of the contracts. Unless otherwise
specified in the related Prospectus Supplement, the Home Improvement Contracts
will not be stamped or otherwise marked to reflect their assignment from the
Depositor to the Trustee. Therefore, if through negligence, fraud or otherwise,
a subsequent purchaser were able to take physical possession of the Home
Improvement Contracts without notice of such assignment, the Trustee's interest
in the contracts could be defeated.
Security Interests in Home Improvements
The Home Improvement Contracts that are secured by the Home
Improvements financed thereby grant to the originator of such contracts a
purchase money security interest in such Home Improvements to secure all or part
of the purchase price of such Home Improvements and related services. A
financing statement generally is not required to be filed to perfect a purchase
money security interest in consumer goods. Purchase money security interests of
this type are assignable. In general, a purchase money security interest grants
to the holder a security interest that has priority over a conflicting security
interest in the same collateral and the proceeds of such collateral. However, to
the extent that the collateral subject to a purchase money security interest
becomes a fixture, in order for the related purchase money security interest to
take priority over a conflicting interest in the fixture, the holder's interest
in the Home Improvement must generally be perfected by a timely fixture filing.
In general, under the UCC, a security interest does not exist under the UCC in
ordinary building material incorporated into an improvement on land. Home
Improvement Contracts that finance lumber, bricks, other types of ordinary
building material or other goods that are deemed to lose such characterization,
upon incorporation of such materials into the related property, will not be
secured by a purchase money security interest in the Home Improvement being
financed.
Enforcement of Security Interest in Home Improvements
So long as the Home Improvement has not become subject to the real
estate law, a creditor can repossess a Home Improvement securing a Home
Improvement Contract by voluntary surrender, by "self-help" repossession that is
"peaceful" (i.e., without breach of the peace) or, in the absence of voluntary
surrender and the ability to repossess without breach of the peace, by judicial
process. The holder of a Home Improvement Contract must give the debtor a number
of days' notice, which varies from 10 to 30 days depending on the state, prior
to commencement of any repossession. The UCC and consumer protection laws in
most states place restrictions on repossession sales, including requiring prior
notice to the debtor and commercial reasonableness in effecting such a sale. The
law in most states also requires that the debtor be given notice of any sale
prior to resale of the unit that the debtor may redeem it at or before the
resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgement from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgements, and in many cases
the defaulting borrower would have no assets with which to pay a judgement.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgement.
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade
Commission is intended to defeat the ability of the transferor of a consumer
credit contract that is the seller of goods that gave rise to the transaction
(and certain related lenders and assignees) to transfer the contract free of
notice of claims by the debtor thereunder. The effect of this rule is to subject
the assignee of the contract to all claims and defenses the debtor could assert
against the seller of goods. Liability under this rule is limited to amounts
paid under a contract; however, the obligor also may be able to assert the rule
to set off remaining amounts due as a defense against a claim brought by the
Trustee against such obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the related
contract.
Applicability of Usury Laws
Title V provides that, subject to the following conditions, state usury
limitations shall not apply to any contract that is secured by a first lien on
certain kinds of consumer goods. The Home Improvement Contracts would be covered
if they satisfy certain conditions, among other things, governing the terms of
any prepayments, late charges and deferral fees and requiring a 30-day notice
period prior to instituting any action leading to repossession of the related
unit.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision that expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
Installment Sales Contracts
The Loans may also consist of installment sales contracts. Under an
installment sales contract (each, an "Installment Sales Contract") the seller
(hereinafter referred to in this section as the "lender") retains legal title to
the property and enters into an agreement with the purchaser (hereinafter
referred to in this section as the "borrower") for the payment of the purchase
price, plus interest, over the term of such contract. Only after full
performance by the borrower of the contract is the lender obligated to convey
title to the property to the purchaser. As with mortgage or deed of trust
financing, during the effective period of the Installment Sales Contract, the
borrower is generally responsible for maintaining the property in good condition
and for paying real estate taxes, assessments and hazard insurance policy
premiums associated with the property.
The method of enforcing the rights of the lender under an Installment
Sales Contract varies on a state-by-state basis depending upon the extent to
which state courts are willing, or able pursuant to state statute, to enforce
the contract strictly according to the terms. The terms of Installment Sales
Contracts generally provide that upon a default by the borrower, the borrower
loses his right to occupy the property, the entire indebtedness is accelerated,
and the buyer's equitable interest in the property is forfeited. The lender in
such a situation does not have to foreclose in order to obtain title to the
property, although in some cases a quiet title action is in order if the
borrower has filed the Installment Sales Contract in local land records and an
ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
Installment Sales Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Sales Contracts from the harsh consequences of
forfeiture. Under those statutes, a judicial or nonjudicial foreclosure may be
required, the lender may be required to give notice of default and the borrower
may be granted some grace period during which the Installment Sales Contract may
be reinstated upon full payment of the default amount and the borrower may have
a post-foreclosure statutory redemption right. In other states, courts in equity
may permit a borrower with significant investment in the property under an
Installment Sales Contract for the sale of real estate to share in the proceeds
of sale of the property after the indebtedness is repaid or may otherwise refuse
to enforce the forfeiture clause. Nevertheless, generally speaking, the lender's
procedures for obtaining possession and clear title under an Installment Sales
Contract in a given state are simpler and less time-consuming and costly than
are the procedures for foreclosing and obtaining clear title to a property
subject to one or more liens.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of
all branches of the military on active duty, including draftees and reservists
in military service, (i) are entitled to have interest rates reduced and capped
at 6% per annum, on obligations (including Loans) incurred prior to the
commencement of military service for the duration of military service, (ii) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on such obligations entered into prior to
military service for the duration of military service and (iii) may have the
maturity of such obligations incurred prior to military service extended, the
payments lowered and the payment schedule readjusted for a period of time after
the completion of military service. However, the benefits of (i), (ii), or (iii)
above are subject to challenge by creditors and if, in the opinion of the court,
the ability of a person to comply with such obligations is not materially
impaired by military service, the court may apply equitable principles
accordingly. If a borrower's obligation to repay amounts otherwise due on a Loan
included in a Trust Fund for a Series is relieved pursuant to the Soldiers' and
Sailors' Civil Relief Act of 1940, none of the Trust Fund, the Servicer, the
Depositor nor any Trustee will be required to advance such amounts, and any
related loss may reduce the amounts available to be paid to the Holders of the
related Securities. Unless otherwise specified in the related Prospectus
Supplement, any shortfalls in interest collections on Loans (or Underlying
Loans), included in a Trust Fund for a Series resulting from application of the
Soldiers' and Sailors' Civil Relief Act of 1940 will be allocated to each Class
of Securities of the Series that is entitled to receive interest in respect of
such Loans (or Underlying Loans) in proportion to the interest that each such
Class of Securities would have otherwise been entitled to receive in respect of
such Loans (or Underlying Loans) had the interest shortfall not occurred.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware in June 1995,
and is a wholly-owned subsidiary of The Bear Stearns Companies Inc. The
Depositor's principal executive offices are located at 245 Park Avenue, New
York, New York 10167. Its telephone number is (212) 272-4095.
The Depositor will not engage in any activities other than to
authorize, issue, sell, deliver, purchase and invest in (and enter into
agreements in connection with), and/or to engage in the establishment of one or
more trusts, which will issue and sell, bonds, notes, debt or equity securities,
obligations and other securities and instruments ("Depositor Securities"). The
Depositor Securities must be collateralized or otherwise secured or backed by,
or otherwise represent an interest in, among other things, receivables or
pass-through certificates, (or participations or certificates of participation
or beneficial ownership in one or more pools of receivables), and the proceeds
of the foregoing, that arise in connection with loans secured by certain first
or junior mortgages on real estate or manufactured housing and any and all other
commercial transactions and commercial, sovereign, student or consumer loans or
indebtedness, In connection therewith or otherwise, the depositor may purchase,
acquire, own, hold, transfer, convey, service, sell, pledge, assign, finance and
otherwise deal with such receivables, pass-through certificates, or
participations or certificates of participation or beneficial ownership. Article
Third of the Depositor's Certificate of Incorporation limits the Depositor's
activities to the above activities and certain related activities, such as
credit enhancement with respect to such Depositor Securities, and to any
activities incidental to and necessary or convenient for the accomplishment of
those purposes.
USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds
from the sale of each Series of Securities for one or more of the following
purposes:
o to purchase the related Primary Assets,
o to repay indebtedness incurred to obtain funds to acquire such
Primary Assets,
o to establish any Reserve Funds described in the related
Prospectus Supplement and
o to pay costs of structuring and issuing the Securities,
including the costs of obtaining any Enhancement. If so specified
in the related Prospectus Supplement, the purchase of the Primary
Assets for a Series may be effected by an exchange of Securities
with the Seller of such Primary Assets.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
General
The following is a summary of certain anticipated material federal
income tax consequences of the purchase, ownership, and disposition of the
Securities and is based on the opinion of Brown & Wood LLP, special counsel to
the Depositor (in such capacity, "Tax Counsel"). The summary is based upon the
provisions of the Code, the regulations promulgated thereunder, including, where
applicable, proposed regulations, and the judicial and administrative rulings
and decisions now in effect, all of which are subject to change or possible
differing interpretations. The statutory provisions, regulations, and
interpretations on which this interpretation is based are subject to change, and
such a change could apply retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances. This summary focuses primarily upon investors who will hold
Securities as "capital assets" (generally, property held for investment) within
the meaning of Section 1221 of the Code. Prospective investors may wish to
consult their own tax advisers concerning the federal, state, local and any
other tax consequences as relates specifically to such investors in connection
with the purchase, ownership and disposition of the Securities.
The federal income tax consequences to Holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness; (ii) an
election is made to treat the Trust Fund relating to a particular Series of
Securities as a real estate mortgage investment conduit (a "REMIC") under the
Code; (iii) the Securities represent an ownership interest in some or all of the
assets included in the Trust Fund for a Series; or (iv) an election is made to
treat the Trust Fund relating to a particular Series of Certificates as a
partnership; or (v) an election is made to treat the Trust Fund relating to a
particular Series of Securities as a Financial Asset Securitization Investment
Trust ("FASIT") under the Code. The Prospectus Supplement for each Series of
Securities will specify how the Securities will be treated for federal income
tax purposes and will discuss whether a REMIC election, if any, will be made
with respect to such Series.
As used herein, the term "U.S. Person" means a citizen or resident of
the United States, a corporation, partnership or other entity created or
organized in or under the laws of the United States, any state thereof or the
District of Columbia (other than a partnership that is not treated as a United
States person under any applicable Treasury regulations), an estate whose income
is subject to U.S. federal income tax regardless of its source of income, or a
trust if a court within the United States is able to exercise primary
supervision of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust. Notwithstanding the
preceding sentence, to the extent provided in regulations, certain trusts in
existence on August 20, 1996 and treated as United States persons prior to such
date that elect to continue to be treated as United States persons shall be
considered U.S. Persons as well.
Taxation of Debt Securities
Status as Real Property Loans. Except to the extent otherwise provided
in the related Prospectus Supplement, if the Securities are regular interests in
a REMIC ("Regular Interest Securities") or represent interests in a grantor
trust, Tax Counsel is of the opinion that: (i) Securities held by a domestic
building and loan association will constitute "loans... secured by an interest
in real property" within the meaning of Code section 7701(a)(19)(C)(v); and (ii)
Securities held by a real estate investment trust will constitute "real estate
assets" within the meaning of Code section 856(c)(4)(A) and interest on
Securities will be considered "interest on obligations secured by mortgages on
real property or on interests in real property" within the meaning of Code
section 856(c)(3)(B).
Interest and Acquisition Discount. In the opinion of Tax Counsel,
Regular Interest are generally taxable to Holders in the same manner as
evidences of indebtedness issued by the REMIC. Stated interest on the Regular
Interest Securities will be taxable as ordinary income and taken into account
using the accrual method of accounting, regardless of the Holder's normal
accounting method. Interest (other than original issue discount) on Securities
(other than Regular Interest Securities) that are characterized as indebtedness
for federal income tax purposes will be includible in income by Holders thereof
in accordance with their usual methods of accounting. Securities characterized
as debt for federal income tax purposes and Regular Interest Securities will be
referred to hereinafter collectively as "Debt Securities."
Tax Counsel is of the opinion that Debt Securities that are Compound
Interest Securities will, and certain of the other Debt Securities issued at a
discount may, be issued with "original issue discount" ("OID"). The following
discussion is based in part on the rules governing OID, which are set forth in
Sections 1271-1275 of the Code and the Treasury regulations issued thereunder on
February 2, 1994 and amended on June 11, 1996 (the "OID Regulations"). A Holder
should be aware, however, that the OID Regulations do not adequately address
certain issues relevant to prepayable securities, such as the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. In the
opinion of Tax Counsel, a Holder of a Debt Security must include such OID in
gross income as ordinary interest income as it accrues under a method taking
into account an economic accrual of the discount. In general, OID must be
included in income in advance of the receipt of the cash representing that
income. The amount of OID on a Debt Security will be considered to be zero if it
is less than a de minimis amount determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that Class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular Class of Debt Securities is sold for cash on
or prior to the Closing Date, the issue price for such Class will be treated as
the fair market value of such Class on the Closing Date. The issue price of a
Debt Security also includes the amount paid by an initial Debt Security Holder
for accrued interest that relates to a period prior to the issue date of the
Debt Security. The stated redemption price at maturity of a Debt Security
includes the original principal amount of the Debt Security, but generally will
not include distributions of interest if such distributions constitute
"qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as described
below); provided, that such interest payments are unconditionally payable at
intervals of one year or less during the entire term of the Debt Security. The
OID Regulations state that interest payments are unconditionally payable only if
a late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Certain Debt Securities may provide for default
remedies in the event of late payment or nonpayment of interest. In the opinion
of Tax Counsel, the interest on such Debt Securities will be unconditionally
payable and constitute qualified stated interest, not OID. However, absent
clarification of the OID Regulations, where Debt Securities do not provide for
default remedies, the interest payments will be included in the Debt Security's
stated redemption price at maturity and taxed as OID. Interest is payable at a
single fixed rate only if the rate appropriately takes into account the length
of the interval between payments. Distributions of interest on Debt Securities
with respect to which deferred interest will accrue, will not constitute
qualified stated interest payments, in which case the stated redemption price at
maturity of such Debt Securities includes all distributions of interest as well
as principal thereon. Where the interval between the issue date and the first
Distribution Date on a Debt Security is either longer or shorter than the
interval between subsequent Distribution Dates, all or part of the interest
foregone, in the case of the longer interval, and all of the additional
interest, in the case of the shorter interval, will be included in the stated
redemption price at maturity and tested under the de minimis rule described
below. In the case of a Debt Security with a long first period that has non-de
minimis OID, all stated interest in excess of interest payable at the effective
interest rate for the long first period will be included in the stated
redemption price at maturity and the Debt Security will generally have OID.
Holders of Debt Securities should consult their own tax advisors to determine
the issue price and stated redemption price at maturity of a Debt Security.
Under the de minimis rule, OID on a Debt Security will be considered to
be zero if such OID is less than 0.25% of the stated redemption price at
maturity of the Debt Security multiplied by the weighted average maturity of the
Debt Security. For this purpose, the weighted average maturity of the Debt
Security is computed as the sum of the amounts determined by multiplying the
number of full years (i.e., rounding down partial years) from the issue date
until each distribution in reduction of stated redemption price at maturity is
scheduled to be made by a fraction, the numerator of which is the amount of each
distribution included in the stated redemption price at maturity of the Debt
Security and the denominator of which is the stated redemption price at maturity
of the Debt Security. Holders generally must report de minimis OID pro rata as
principal payments are received, and such income will be capital gain if the
Debt Security is held as a capital asset. However, accrual method Holders may
elect to accrue all de minimis OID as well as market discount under a constant
interest method.
Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a qualified
variable rate and not as contingent interest if, generally, (i) such interest is
unconditionally payable at least annually, (ii) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and (iii)
interest is based on a "qualified floating rate," an "objective rate," or a
combination of "qualified floating rates" that do not operate in a manner that
significantly accelerates or defers interest payments on such Debt Security. In
the case of Compound Interest Securities, certain Interest Weighted Securities,
and certain of the other Debt Securities, none of the payments under the
instrument will be considered qualified stated interest, and thus the aggregate
amount of all payments will be included in the stated redemption price.
The Internal Revenue Service (the "IRS") recently issued final
regulations (the "Contingent Payment Regulations") governing the calculation of
OID on instruments having contingent interest payments. The Contingent Payment
Regulations, represent the only guidance regarding the views of the IRS with
respect to contingent interest instruments and specifically do not apply for
purposes of calculating OID on debt instruments subject to Code Section
1272(a)(6), such as the Debt Security. Additionally, the OID Regulations do not
contain provisions specifically interpreting Code Section 1272(a)(6). Until the
Treasury issues guidance to the contrary, the applicable Trustee intends to base
its computation on Code Section 1272(a)(6) and the OID Regulations as described
in this Prospectus. However, because no regulatory guidance currently exists
under Code Section 1272(a)(6), there can be no assurance that such methodology
represents the correct manner of calculating OID.
The Holder of a Debt Security issued with OID must include in gross
income, for all days during its taxable year on which it holds such Debt
Security, the sum of the "daily portions" of such original issue discount. The
amount of OID includible in income by a Holder will be computed by allocating to
each day during a taxable year a pro rata portion of the original issue discount
that accrued during the relevant accrual period. In the case of a Debt Security
that is not a Regular Interest Security and the principal payments on which are
not subject to acceleration resulting from prepayments on the Loans, the amount
of OID includible in income of a Holder for an accrual period (generally the
period over which interest accrues on the debt instrument) will equal the
product of the yield to maturity of the Debt Security and the adjusted issue
price of the Debt Security, reduced by any payments of qualified stated
interest. The adjusted issue price is the sum of its issue price plus prior
accruals or OID, reduced by the total payments made with respect to such Debt
Security in all prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a Holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a "Pay-Through Security"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments is
to be determined on the basis of three factors: (i) the original yield to
maturity of the Pay-Through Security (determined on the basis of compounding at
the end of each accrual period and properly adjusted for the length of the
accrual period), (ii) events that have occurred before the end of the accrual
period and (iii) the assumption that the remaining payments will be made in
accordance with the original Prepayment Assumption. The effect of this method is
to increase the portions of OID required to be included in income by a Holder to
take into account prepayments with respect to the Loans at a rate that exceeds
the Prepayment Assumption, and to decrease (but not below zero for any period)
the portions of OID required to be included in income by a Holder of a
Pay-Through Security to take into account prepayments with respect to the Loans
at a rate that is slower than the Prepayment Assumption. Although OID will be
reported to Holders of Pay-Through Securities based on the Prepayment
Assumption, no representation is made to Holders that Loans will be prepaid at
that rate or at any other rate.
The Depositor may adjust the accrual of OID on a Class of Regular
Interest (or other regular interests in a REMIC) in a manner that it believes to
be appropriate, to take account of realized losses on the Loans, although the
OID Regulations do not provide for such adjustments. If the IRS were to require
that OID be accrued without such adjustments, the rate of accrual of OID for a
Class of Regular Interest Securities could increase.
Certain Classes of Regular Interest Securities may represent more than
one Class of REMIC regular interests. Unless otherwise provided in the related
Prospectus Supplement, the applicable Trustee intends, based on the OID
Regulations, to calculate OID on such Securities as if, solely for the purposes
of computing OID, the separate regular interests were a single debt instrument.
A subsequent Holder of a Debt Security will also be required to include
OID in gross income, but such a Holder who purchases such Debt Security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial Holder who pays more than a Debt Security's issue price) to offset such
OID by comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. In the opinion of Tax Counsel,
Holders will be required to report income with respect to the related Securities
under an accrual method without giving effect to delays and reductions in
distributions attributable to a default or delinquency on the Loans, except
possibly to the extent that it can be established that such amounts are
uncollectible. As a result, the amount of income (including OID) reported by a
Holder of such a Security in any period could significantly exceed the amount of
cash distributed to such Holder in that period. The Holder will eventually be
allowed a loss (or will be allowed to report a lesser amount of income) to the
extent that the aggregate amount of distributions on the Securities is reduced
as a result of a Loan default. However, the timing and character of such losses
or reductions in income are uncertain and, accordingly, Holders of Securities
should consult their own tax advisors on this point.
Interest Weighted Securities. It is not clear how income should be
accrued with respect to Regular Interest Securities or Stripped Securities (as
defined under "--Tax Status as a Grantor Trust; General" herein) the payments on
which consist solely or primarily of a specified portion of the interest
payments on qualified mortgages held by the REMIC or on Loans underlying
Pass-Through Securities ("Interest Weighted Securities"). The Trustee intends to
take the position that all of the income derived from an Interest Weighted
Security should be treated as OID and that the amount and rate of accrual of
such OID should be calculated by treating the Interest Weighted Security as a
Compound Interest Security. However, in the case of Interest Weighted Securities
that are entitled to some payments of principal and that are Regular Interest
Securities the Internal Revenue Service could assert that income derived from an
Interest Weighted Security should be calculated as if the Security were a
security purchased at a premium equal to the excess of the price paid by such
Holder for such Security over its stated principal amount, if any. Under this
approach, a Holder would be entitled to amortize such premium only if it has in
effect an election under Section 171 of the Code with respect to all taxable
debt instruments held by such Holder, as described below. Alternatively, the IRS
could assert that an Interest Weighted Security should be taxable under the
rules governing bonds issued with contingent payments. Such treatment may be
more likely in the case of Interest Weighted Securities that are Stripped
Securities as described below. See "--Tax Status as a Grantor Trust--Discount or
Premium on Pass-Through Securities."
Variable Rate Debt Securities. In the opinion of Tax Counsel, in the
case of Debt Securities bearing interest at a rate that varies directly,
according to a fixed formula, with an objective index, it appears that (i) the
yield to maturity of such Debt Securities and (ii) in the case of Pay-Through
Securities, the present value of all payments remaining to be made on such Debt
Securities, should be calculated as if the interest index remained at its value
as of the issue date of such Securities. Because the proper method of adjusting
accruals of OID on a variable rate Debt Security is uncertain, Holders of
variable rate Debt Securities should consult their own tax advisers regarding
the appropriate treatment of such Securities for federal income tax purposes.
Market Discount. In the opinion of Tax Counsel, a purchaser of a
Security may be subject to the market discount rules of Sections 1276-1278 of
the Code. A Holder that acquires a Debt Security with more than a prescribed de
minimis amount of "market discount" (generally, the excess of the principal
amount of the Debt Security over the purchaser's purchase price) will be
required to include accrued market discount in income as ordinary income in each
month, but limited to an amount not exceeding the principal payments on the Debt
Security received in that month and, if the Securities are sold, the gain
realized. Such market discount would accrue in a manner to be provided in
Treasury regulations but, until such regulations are issued, such market
discount would in general accrue either (i) on the basis of a constant yield (in
the case of a Pay-Through Security, taking into account a prepayment assumption)
or (ii) in the ratio of (a) in the case of Securities (or in the case of a
Pass-Through Security, as set forth below, the Loans underlying such Security)
not originally issued with original issue discount, stated interest payable in
the relevant period to total stated interest remaining to be paid at the
beginning of the period or (b) in the case of Securities (or, in the case of a
Pass-Through Security, as described below, the Loans underlying such Security)
originally issued at a discount, OID in the relevant period to total OID
remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination
date of the Debt Security (or, in the case of a Pass-Through Security, the
Loans), the excess of interest paid or accrued to purchase or carry a Security
(or, in the case of a Pass-Through Security, as described below, the underlying
Loans) with market discount over interest received on such Security is allowed
as a current deduction only to the extent such excess is greater than the market
discount that accrued during the taxable year in which such interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon the
sale, disposition, or repayment of the Security (or in the case of a
Pass-Through Security, an underlying Loan). A Holder may elect to include market
discount in income currently as it accrues, on all market discount obligations
acquired by such Holder during the taxable year such election is made and
thereafter, in which case the interest deferral rule will not apply.
Premium. In the opinion of Tax Counsel, a Holder who purchases a Debt
Security (other than an Interest Weighted Security to the extent described
above) at a cost greater than its stated redemption price at maturity, generally
will be considered to have purchased the Security at a premium, which it may
elect to amortize as an offset to interest income on such Security (and not as a
separate deduction item) on a constant yield method. Although no regulations
addressing the computation of premium accrual on securities similar to the
Securities have been issued, the legislative history of the 1986 Act indicates
that premium is to be accrued in the same manner as market discount.
Accordingly, it appears that the accrual of premium on a Class of Pay-Through
Securities will be calculated using the prepayment assumption used in pricing
such Class. If a Holder makes an election to amortize premium on a Debt
Security, such election will apply to all taxable debt instruments (including
all REMIC regular interests and all pass-through certificates representing
ownership interests in a trust holding debt obligations) held by the Holder at
the beginning of the taxable year in which the election is made, and to all
taxable debt instruments acquired thereafter by such Holder, and will be
irrevocable without the consent of the IRS. Purchasers who pay a premium for the
Securities should consult their tax advisers regarding the election to amortize
premium and the method to be employed.
On December 30, 1997, the IRS issued final regulations (the
"Amortizable Bond Premium Regulations") dealing with amortizable bond premium.
The regulations specifically do not apply to prepayable debt instruments subject
to Code Section 1272(a)(6). Absent further guidance from the IRS, the Trustee
intends to account for amortizable bond premium in the manner described above.
Prospective Purchasers of the Debt Securities should consult their tax advisors
regarding the possible application of the Amortizable Bond Premium Regulations.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a Holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method for Debt Securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a Debt Security with market discount, the Holder of the Debt Security
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount that
such Holder of the Debt Security acquires during the year of the election or
thereafter. Similarly, a Holder of a Debt Security that makes this election for
a Debt Security that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Holder owns or acquires. The election to
accrue interest, discount and premium on a constant yield method with respect to
a Debt Security is irrevocable.
Taxation of the REMIC and its Holders
General. In the opinion of Tax Counsel, if a REMIC election is made
with respect to a Series of Securities, then the arrangement by which the
Securities of that Series are issued will be treated as a REMIC as long as all
of the provisions of the applicable Agreement are complied with and the
statutory and regulatory requirements are satisfied. Securities will be
designated as "Regular Interests" or "Residual Interests" in a REMIC, as
specified in the related Prospectus Supplement.
Except to the extent specified otherwise in a Prospectus Supplement, if
a REMIC election is made with respect to a Series of Securities, in the opinion
of Tax Counsel (i) Securities held by a domestic building and loan association
will constitute "a regular or a residual interest in a REMIC" within the meaning
of Code Section 7701(a)(19)(C)(xi) (assuming that at least 95% of the REMIC's
assets consist of cash, government securities, "loans secured by an interest in
real property," and other types of assets described in Code Section
7701(a)(19)(C)); and (ii) Securities held by a real estate investment trust will
constitute "real estate assets" within the meaning of Code Section 856(c)(4)(A),
and income with respect to the Securities will be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Code Section 856(c)(3)(B) (assuming, for both
purposes, that at least 95% of the REMIC's assets are qualifying assets). If
less than 95% of the REMIC's assets consist of assets described in (i) or (ii)
above, then a Security will qualify for the tax treatment described in (i) or
(ii) in the proportion that such REMIC assets are qualifying assets.
REMIC Expenses; Single Class REMICs
As a general rule, in the opinion of Tax Counsel, all of the expenses
of a REMIC will be taken into account by Holders of the Residual Interest
Securities. In the case of a "single class REMIC," however, the expenses will be
allocated, under Treasury regulations, among the Holders of the Regular Interest
Securities and the Holders of the Residual Interest Securities on a daily basis
in proportion to the relative amounts of income accruing to each Holder on that
day. In the case of a Holder of a Regular Interest Security who is an individual
or a "pass-through interest holder" (including certain pass-through entities but
not including real estate investment trusts), such expenses will be deductible
only to the extent that such expenses, plus other "miscellaneous itemized
deductions" of the Holder, exceed 2% of such Holder's adjusted gross income. In
addition, for taxable years beginning after December 31, 1990, the amount of
itemized deductions otherwise allowable for the taxable year for an individual
whose adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation for taxable years beginning after 1990) will be reduced
by the lesser of (i) 3% of the excess of adjusted gross income over the
applicable amount, or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. The reduction or disallowance of this deduction
may have a significant impact on the yield of the Regular Interest Security to
such a Holder. In general terms, a single class REMIC is one that either (i)
would qualify, under existing Treasury regulations, as a grantor trust if it
were not a REMIC (treating all interests as ownership interests, even if they
would be classified as debt for federal income tax purposes) or (ii) is similar
to such a trust and that is structured with the principal purpose of avoiding
the single class REMIC rules. Unless otherwise specified in the related
Prospectus Supplement, the expenses of the REMIC will be allocated to Holders of
the related residual interest securities.
Taxation of the REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, in the opinion of Tax Counsel, a REMIC is not generally subject to
entity-level tax. Rather, the taxable income or net loss of a REMIC is taken
into account by the Holders of residual interests. As described above, the
regular interests are generally taxable as debt of the REMIC. Qualification as a
REMIC requires ongoing compliance with certain conditions. Although a REMIC is
not generally subject to federal income tax, failure to comply with one or more
of the ongoing requirements of the Code for REMIC status during any taxable
year, including the implementation of restrictions on the purchase and transfer
of the residual interests in a REMIC as described below under "Taxation of
Owners of Residual Interest Securities", the Code provides that the Trust will
not be treated as a REMIC for such year and thereafter. In that event, such
entity may be taxable as a separate corporation and the related certificates may
not be accorded the status or given the tax treatment described below.
Calculation of REMIC Income. In the opinion of Tax Counsel, the taxable
income or net loss of a REMIC is determined under an accrual method of
accounting and in the same manner as in the case of an individual, with certain
adjustments. In general, the taxable income or net loss will be the difference
between (i) the gross income produced by the REMIC's assets, including stated
interest and any original issue discount or market discount on loans and other
assets, and (ii) deductions, including stated interest and original issue
discount accrued on Regular Interest Securities, amortization of any premium
with respect to Loans, and servicing fees and other expenses of the REMIC. A
Holder of a Residual Interest Security that is an individual or a "pass-through
interest holder" (including certain pass-through entities, but not including
real estate investment trusts) will be unable to deduct servicing fees payable
on the loans or other administrative expenses of the REMIC for a given taxable
year, to the extent that such expenses, when aggregated with such Holder's other
miscellaneous itemized deductions for that year, do not exceed two percent of
such Holder's adjusted gross income.
For purposes of computing its taxable income or net loss, the REMIC
should have an initial aggregate tax basis in its assets equal to the aggregate
fair market value of the regular interests and the residual interests on the
Startup Day (generally, the day that the interests are issued). That aggregate
basis will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated
on or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which Holders of Pay-Through Securities
accrue original issue discount (i.e., under the constant yield method taking
into account the Prepayment Assumption). The REMIC will deduct OID on the
Regular Interest Securities in the same manner that the Holders of the Regular
Interest Securities include such discount in income, but without regard to the
de minimis rules. See "Taxation of Debt Securities" above. However, a REMIC that
acquires loans at a market discount must include such market discount in income
currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before such date, it is possible that
such premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be
subject to a 100% tax on any net income derived from a "prohibited transaction."
For this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include: (i) subject to limited exceptions, the sale or other
disposition of any qualified mortgage transferred to the REMIC; (ii) subject to
a limited exception, the sale or other disposition of a cash flow investment;
(iii) the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or (iv) the receipt of any fees or other
compensation for services rendered by the REMIC. It is anticipated that a REMIC
will not engage in any prohibited transactions in which it would recognize a
material amount of net income. In addition, subject to a number of exceptions, a
tax is imposed at the rate of 100% on amounts contributed to a REMIC after the
close of the three-month period beginning on the Startup Day. The Holders of
Residual Interest Securities will generally be responsible for the payment of
any such taxes imposed on the REMIC. To the extent not paid by such Holders or
otherwise, however, such taxes will be paid out of the Trust Fund and will be
allocated pro rata to all outstanding Classes of Securities of such REMIC.
Taxation of Holders of Residual Interest Securities
In the opinion of Tax Counsel, the Holder of a Certificate representing
a residual interest (a "Residual Interest Security") will take into account the
"daily portion" of the taxable income or net loss of the REMIC for each day
during the taxable year on which such Holder held the Residual Interest
Security. The daily portion is determined by allocating to each day in any
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC for such quarter, and by allocating that amount among the Holders (on such
day) of the Residual Interest Securities in proportion to their respective
holdings on such day.
In the opinion of Tax Counsel, the Holder of a Residual Interest
Security must report its proportionate share of the taxable income of the REMIC
whether or not it receives cash distributions from the REMIC attributable to
such income or loss. The reporting of taxable income without corresponding
distributions could occur, for example, in certain REMIC issues in which the
loans held by the REMIC were issued or acquired at a discount, since mortgage
prepayments cause recognition of discount income, while the corresponding
portion of the prepayment could be used in whole or in part to make principal
payments on REMIC Regular Interests issued without any discount or at an
insubstantial discount (if this occurs, it is likely that cash distributions
will exceed taxable income in later years). Taxable income may also be greater
in earlier years of certain REMIC issues as a result of the fact that interest
expense deductions, as a percentage of outstanding principal on REMIC Regular
Interest Securities, will typically increase over time as lower yielding
Securities are paid, whereas interest income with respect to loans will
generally remain constant over time as a percentage of loan principal.
In any event, because the Holder of a residual interest is taxed on the
net income of the REMIC the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
Limitation on Losses. In the opinion of Tax Counsel, the amount of the
REMIC's net loss that a Holder may take into account currently is limited to the
Holder's adjusted basis at the end of the calendar quarter in which such loss
arises. A Holder's basis in a Residual Interest Security will initially equal
such Holder's purchase price, and will subsequently be increased by the amount
of the REMIC's taxable income allocated to the Holder, and decreased (but not
below zero) by the amount of distributions made and the amount of the REMIC's
net loss allocated to the Holder. Any disallowed loss may be carried forward
indefinitely, but may be used only to offset income of the REMIC generated by
the same REMIC. The ability of Holders of Residual Interest Securities to deduct
net losses may be subject to additional limitations under the Code, as to which
such Holders should consult their tax advisers.
Distributions. In the opinion of Tax Counsel distributions on a
Residual Interest Security (whether at their scheduled times or as a result of
prepayments) will generally not result in any additional taxable income or loss
to a Holder of a Residual Interest Security. If the amount of such payment
exceeds a Holder's adjusted basis in the Residual Interest Security, however,
the Holder will recognize gain (treated as gain from the sale of the Residual
Interest Security) to the extent of such excess.
Sale or Exchange. In the opinion of Tax Counsel a Holder of a Residual
Interest Security will recognize gain or loss on the sale or exchange of a
Residual Interest Security equal to the difference, if any, between the amount
realized and such Holder's adjusted basis in the Residual Interest Security at
the time of such sale or exchange. A Holder's adjusted basis in a Residual
Certificate generally equals the cost of such Residual Certificate increased by
the taxable income of the REMIC that was included in the income of such Residual
Certificate Holder and decreased by distributions received thereon by such
Residual Certificateholder. Except to the extent provided in regulations, which
have not yet been issued, any loss upon disposition of a Residual Interest
Security will be disallowed if the selling Holder acquires any residual interest
in a REMIC or similar mortgage pool within six months before or after such
disposition. In that event, the loss will be used to increase such Residual
Interest Security Holders adjusted basis in the newly acquired asset.
Excess Inclusions. In the opinion of Tax Counsel, the portion of the
REMIC taxable income of a Holder of a Residual Interest Security consisting of
"excess inclusion" income may not be offset by other deductions or losses,
including net operating losses, on such Holder's federal income tax return.
Further, if the Holder of a Residual Interest Security is an organization
subject to the tax on unrelated business income imposed by Code Section 511,
such Holder's excess inclusion income will be treated as unrelated business
taxable income of such Holder. In addition, under Treasury regulations yet to be
issued, if a real estate investment trust, a regulated investment company, a
common trust fund, or certain cooperatives were to own a Residual Interest
Security, a portion of dividends (or other distributions) paid by the real
estate investment trust (or other entity) would be treated as excess inclusion
income. If a Residual Security is owned by a foreign person, excess inclusion
income is subject to tax at a rate of 30%, which may not be reduced by treaty,
is not eligible for treatment as "portfolio interest" and is subject to certain
additional limitations. See "Tax Treatment of Foreign Investors." The Small
Business Job Protection Act of 1996 has eliminated the special rule permitting
Section 593 institutions ("thrift institutions") to use net operating losses and
other allowable deductions to offset their excess inclusion income from Residual
Interest Securities that have "significant value" within the meaning of the
REMIC Regulations, effective for taxable years beginning after December 31,
1995, except with respect to Residual Interest Securities continuously held by a
thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides
three rules for determining the effect on excess inclusions on the alternative
minimum taxable income of a residual Holder. First, alternative minimum taxable
income for such residual Holder is determined without regard to the special rule
that taxable income cannot be less than excess inclusions. Second, a residual
Holder's alternative minimum taxable income for a tax year cannot be less than
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December 31,
1986, unless a residual Holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to
the excess, if any, of REMIC taxable income for the quarterly period allocable
to a Residual Interest Security, over the daily accruals for such quarterly
period of (i) 120% of the long term applicable federal rate on the Startup Day
multiplied by (ii) the adjusted issue price of such Residual Interest Security
at the beginning of such quarterly period. The adjusted issue price of a
Residual Interest at the beginning of each calendar quarter will equal its issue
price (calculated in a manner analogous to the determination of the issue price
of a Regular Interest), increased by the aggregate of the daily accruals for
prior calendar quarters, and decreased (but not below zero) by the amount of
loss allocated to a Holder and the amount of distributions made on the Residual
Interest Security before the beginning of the quarter. The long-term federal
rate, which is announced monthly by the Treasury Department, is an interest rate
that is based on the average market yield of outstanding marketable obligations
of the United States government having remaining maturities in excess of nine
years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Securities may be disregarded. See "--Restrictions on Ownership and
Transfer of Residual Interest Securities" and "--Tax Treatment of Foreign
Investors" below.
Restrictions on Ownership and Transfer of Residual Interest Securities.
As a condition to qualification as a REMIC, reasonable arrangements must be made
to prevent the ownership of a REMIC residual interest by any "Disqualified
Organization." Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in Section 1381(a)(2)(C) of the
Code, or any entity exempt from the tax imposed by Sections 1-1399 of the Code,
if such entity is not subject to tax on its unrelated business income.
Accordingly, the applicable Pooling and Servicing Agreement will prohibit
Disqualified Organizations from owning a Residual Interest Security. In
addition, no transfer of a Residual Interest Security will be permitted unless
the proposed transferee shall have furnished to the Trustee an affidavit
representing and warranting that it is neither a Disqualified Organization nor
an agent or nominee acting on behalf of a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
Interest Security at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
Residual Interest Security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all federal
tax purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. A Residual Interest Security is a "noneconomic
residual interest" unless, at the time of the transfer (i) the present value of
the expected future distributions on the Residual Interest Security at least
equals the product of the present value of the anticipated excess inclusions and
the highest rate of tax for the year in which the transfer occurs and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes. If a
transfer of a Residual Interest is disregarded, the transferor would be liable
for any federal income tax imposed upon taxable income derived by the transferee
from the REMIC. The REMIC Regulations provide no guidance as to how to determine
if a significant purpose of a transfer is to impede the assessment or collection
of tax. A similar type of limitation exists with respect to certain transfers of
residual interests by foreign persons to United States persons. See "--Tax
Treatment of Foreign Investors."
Mark to Market Rules. Prospective purchasers of a REMIC Residual
Interest Security should be aware that the IRS recently finalized regulations
(the "Final Mark-to-Market Regulations"), which provide that a REMIC Residual
Interest Security acquired after January 3, 1995 cannot be marked-to-market.
Prospective purchasers of a REMIC Residual Interest Security should consult
their tax advisors regarding the possible application of the Mark to Market
Regulations.
Administrative Matters
The REMIC's books must be maintained on a calendar year basis and the
REMIC must file an annual federal income tax return. The REMIC will also be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit, by the IRS in a
unified administrative proceeding.
Tax Status as a Grantor Trust
General. As further specified in the related Prospectus Supplement, if
a REMIC election is not made and the Trust Fund is not structured as a
partnership, then, in the opinion of Tax Counsel, the Trust Fund relating to a
Series of Securities will be classified for federal income tax purposes as a
grantor trust under Subpart E, Part 1 of Subchapter J of the Code and not as an
association taxable as a corporation (the Securities of such Series,
"Pass-Through Securities"). In some Series there will be no separation of the
principal and interest payments on the Loans. In such circumstances, a Holder
will be considered to have purchased a pro rata undivided interest in each of
the Loans. In other cases ("Stripped Securities"), sale of the Securities will
produce a separation in the ownership of all or a portion of the principal
payments from all or a portion of the interest payments on the Loans.
In the opinion of Tax Counsel, each Holder must report on its federal
income tax return its share of the gross income derived from the Loans (not
reduced by the amount payable as fees to the applicable Trustee and the Servicer
and similar fees (collectively, the "Servicing Fee")), at the same time and in
the same manner as such items would have been reported under the Holder's tax
accounting method had it held its interest in the Loans directly, received
directly its share of the amounts received with respect to the Loans, and paid
directly its share of the Servicing Fees. In the case of Pass-Through Securities
other than Stripped Securities, such income will consist of a pro rata share of
all of the income derived from all of the Loans and, in the case of Stripped
Securities, such income will consist of a pro rata share of the income derived
from each stripped bond or stripped coupon in which the Holder owns an interest.
The Holder of a Security will generally be entitled to deduct such Servicing
Fees under Section 162 or Section 212 of the Code to the extent that such
Servicing Fees represent "reasonable" compensation for the services rendered by
the applicable Trustee and the Servicer (or third parties that are compensated
for the performance of services). In the case of a noncorporate Holder, however,
Servicing Fees (to the extent not otherwise disallowed, e.g., because they
exceed reasonable compensation) will be deductible in computing such Holder's
regular tax liability only to the extent that such fees, when added to other
miscellaneous itemized deductions, exceed 2% of adjusted gross income and may
not be deductible to any extent in computing such Holder's alternative minimum
tax liability. In addition, for taxable years beginning after December 31, 1990,
the amount of itemized deductions otherwise allowable for the taxable year for
an individual whose adjusted gross income exceeds the applicable amount (which
amount will be adjusted for inflation in taxable years beginning after 1990)
will be reduced by the lesser of (i) 3% of the excess of adjusted gross income
over the applicable amount or (ii) 80% of the amount of itemized deductions
otherwise allowable for such taxable year.
Discount or Premium on Pass-Through Securities. In the opinion of Tax
Counsel, the Holder's purchase price of a Pass-Through Security is to be
allocated among the Loans in proportion to their fair market values, determined
as of the time of purchase of the Securities. In the typical case, the Trustee
(to the extent necessary to fulfill its reporting obligations) will treat each
Loan as having a fair market value proportional to the share of the aggregate
Principal Balances of all of the Loans that it represents, since the Securities,
unless otherwise specified in the related Prospectus Supplement, will have a
relatively uniform interest rate and other common characteristics. To the extent
that the portion of the purchase price of a Pass-Through Security allocated to a
Loan (other than to a right to receive any accrued interest thereon and any
undistributed principal payments) is less than or greater than the portion of
the Principal Balance of the Loan allocable to the Security, the interest in the
Loan allocable to the Pass-Through Security will be deemed to have been acquired
at a discount or premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Loan with OID in excess of a
prescribed de minimis amount or a Stripped Security, a Holder of a Security will
be required to report as interest income in each taxable year its share of the
amount of OID that accrues during that year in the manner described above. OID
with respect to a Loan could arise, for example, by virtue of the financing of
points by the originator of the Loan, or by virtue of the charging of points by
the originator of the Loan in an amount greater than a statutory de minimis
exception, in circumstances under which the points are not currently deductible
pursuant to applicable Code provisions. Any market discount or premium on a Loan
will be includible in income, generally in the manner described above, except
that in the case of Pass-Through Securities, market discount is calculated with
respect to the Loans underlying the Certificate, rather than with respect to the
Security. A Holder that acquires an interest in a Loan originated after July 18,
1984 with more than a de minimis amount of market discount (generally, the
excess of the principal amount of the Loan over the purchaser's allocable
purchase price) will be required to include accrued market discount in income in
the manner set forth above. See "--Taxation of Debt Securities Market Discount"
and "--Premium" above.
In the case of market discount on a Pass-Through Security attributable
to Loans originated on or before July 18, 1984, the Holder generally will be
required to allocate the portion of such discount that is allocable to a loan
among the principal payments on the Loan and to include the discount allocable
to each principal payment in ordinary income at the time such principal payment
is made. Such treatment would generally result in discount being included in
income at a slower rate than discount would be required to be included in income
using the method described in the preceding paragraph.
Stripped Securities. A Stripped Security may represent a right to
receive only a portion of the interest payments on the Loans, a right to receive
only principal payments on the Loans, or a right to receive certain payments of
both interest and principal. Certain Stripped Securities ("Ratio Strip
Securities") may represent a right to receive differing percentages of both the
interest and principal on each Loan. Pursuant to Section 1286 of the Code, the
separation of ownership of the right to receive some or all of the interest
payments on an obligation from ownership of the right to receive some or all of
the principal payments results in the creation of "stripped bonds" with respect
to principal payments and "stripped coupons" with respect to interest payments.
Section 1286 of the Code applies the OID rules to stripped bonds and stripped
coupons. For purposes of computing original issue discount, a stripped bond or a
stripped coupon is treated as a debt instrument issued on the date that such
stripped interest is purchased with an issue price equal to its purchase price
or, if more than one stripped interest is purchased, the ratable share of the
purchase price allocable to such stripped interest.
Servicing fees in excess of reasonable servicing fees (the "excess
servicing fee") will be treated under the stripped bond rules. If the excess
servicing fee is less than 100 basis points (i.e., 1% interest on the Loan's
Principal Balance) or the Securities are initially sold with a de minimis
discount (assuming no prepayment assumption is required), any non-de minimis
discount arising from a subsequent transfer of the Securities should be treated
as market discount. The IRS appears to require that reasonable servicing fees be
calculated on a Loan by Loan basis, which could result in some Loans being
treated as having more than 100 basis points of interest stripped off.
The Code, OID Regulations and judicial decisions provide no direct
guidance as to how the interest and original issue discount rules are to apply
to Stripped Securities and other Pass-Through Securities. Under the method
described above for Pay-Through Securities (the "Cash Flow Bond Method"), a
prepayment assumption is used and periodic recalculations are made that take
into account with respect to each accrual period the effect of prepayments
during such period. However, the 1986 Act does not, absent Treasury regulations,
appear specifically to cover instruments such as the Stripped Securities, which
technically represent ownership interests in the underlying Loans, rather than
being debt instruments "secured by" those loans. Nevertheless, it is believed
that the Cash Flow Bond Method is a reasonable method of reporting income for
such Securities, and it is expected that OID will be reported on that basis
unless otherwise specified in the related Prospectus Supplement. In applying the
calculation to Pass-Through Securities, the Trustee will treat all payments to
be received by a Holder with respect to the underlying Loans as payments on a
single installment obligation. The IRS could, however, assert that original
issue discount must be calculated separately for each Loan underlying a
Security.
Under certain circumstances, if the Loans prepay at a rate faster than
the Prepayment Assumption, the use of the Cash Flow Bond Method may accelerate a
Holder's recognition of income. If, however, the Loans prepay at a rate slower
than the Prepayment Assumption, in some circumstances the use of this method may
decelerate a Holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted
Security, the applicable Trustee intends, absent contrary authority, to report
income to Holders as OID, in the manner described above for Interest Weighted
Securities.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the Internal Revenue
Service could contend that (i) in certain Series, each non-Interest Weighted
Security is composed of an unstripped undivided ownership interest in Loans and
an installment obligation consisting of stripped principal payments; (ii) the
non-Interest Weighted Securities are subject to the contingent payment
provisions of the Proposed Regulations; or (iii) each Interest Weighted Stripped
Security is composed of an unstripped undivided ownership interest in Loans and
an installment obligation consisting of stripped interest payments.
Given the variety of alternatives for treatment of the Stripped
Securities and the different federal income tax consequences that result from
each alternative, potential purchasers are urged to consult their own tax
advisers regarding the proper treatment of the Securities for federal income tax
purposes.
Character as Qualifying Loans. In the case of Stripped Securities,
there is no specific legal authority existing regarding whether the character of
the Securities, for federal income tax purposes, will be the same as the Loans.
The IRS could take the position that the Loans character is not carried over to
the Securities in such circumstances. Pass-Through Securities will be, and,
although the matter is not free from doubt, Stripped Securities should be
considered to represent "real estate assets" within the meaning of Section
856(c)(4)(A) of the Code, and "loans secured by an interest in real property"
within the meaning of Section 7701(a)(19)(C)(v) of the Code; and interest income
attributable to the Securities should be considered to represent "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Section 856(c)(3)(B) of the Code. Reserves or
funds underlying the Securities may cause a proportionate reduction in the
above-described qualifying status categories of Securities.
Sale or Exchange
Subject to the discussion below with respect to Trust Funds as to which
a partnership election is made, in the opinion of Tax Counsel, a Holder's tax
basis in its Security is the price such Holder pays for a Security, plus amounts
of original issue or market discount included in income and reduced by any
payments received (other than qualified stated interest payments) and any
amortized premium. Gain or loss recognized on a sale, exchange, or redemption of
a Security, measured by the difference between the amount realized and the
Security's basis as so adjusted, will generally be capital gain or loss,
assuming that the Security is held as a capital asset and will generally be
long-term capital gain or loss if the holding period of the Security is one year
or more and short-term capital gain or loss if the holding period of the
Security is less than one year. Non-corporate taxpayers are subject to reduced
maximum rates on long-term capital gains and are generally subject to tax at
ordinary income rates on short-term capital gains. The deductibility of capital
losses is subject to certain limitations. Prospective investors should consult
their own tax advisors concerning these tax law provisions.
In the case of a Security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or loss realized
on the sale or exchange of a Regular Interest Security will be taxable as
ordinary income or loss. In addition, gain from the disposition of a Regular
Interest Security that might otherwise be capital gain will be treated as
ordinary income to the extent of the excess, if any, of (i) the amount that
would have been includible in the Holder's income if the yield on such Regular
Interest Security had equaled 110% of the applicable federal rate as of the
beginning of such Holder's holding period, over the amount of ordinary income
actually recognized by the Holder with respect to such Regular Interest
Security.
Miscellaneous Tax Aspects
Backup Withholding. Subject to the discussion below with respect to
Trust Funds as to which a partnership election is made, a Holder, other than a
Holder of a REMIC Residual Security, may, under certain circumstances, be
subject to "backup withholding" at a rate of 31% with respect to distributions
or the proceeds of a sale of certificates to or through brokers that represent
interest or original issue discount on the Securities. This withholding
generally applies if the Holder of a Security (i) fails to furnish the
applicable Trustee with its taxpayer identification number (the "TIN"); (ii)
furnishes the applicable Trustee an incorrect TIN; (iii) fails to report
properly interest, dividends or other "reportable payments" as defined in the
Code; or (iv) under certain circumstances, fails to provide the applicable
Trustee or such Holder's securities broker with a certified statement, signed
under penalty of perjury, that the TIN provided is its correct number and that
the Holder is not subject to backup withholding. Backup withholding will not
apply, however, with respect to certain payments made to Holders, including
payments to certain exempt recipients (such as exempt organizations) and to
certain Nonresidents (as defined below). Holders should consult their tax
advisers as to their qualification for exemption from backup withholding and the
procedure for obtaining the exemption.
The applicable Trustee will report to the Holders and to the Servicer
for each calendar year the amount of any "reportable payments" during such year
and the amount of tax withheld, if any, with respect to payments on the
Securities.
New Withholding Regulations
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations"), which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New Regulations
attempt to unify certification requirements and modify reliance standards. The
New Regulations will generally be effective for payments made after December 31,
2000, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
Tax Treatment of Foreign Investors
Subject to the discussion below with respect to Trust Funds as to which
a partnership election is made, under the Code, unless interest (including OID)
paid on a Security (other than a Residual Interest Security is considered to be
"effectively connected" with a trade or business conducted in the United States
by a nonresident alien individual, foreign partnership or foreign corporation
("Nonresidents"), in the opinion of Tax Counsel, such interest will normally
qualify as portfolio interest (except where (i) the recipient is a holder,
directly or by attribution, of 10% or more of the capital or profits interest in
the issuer, or (ii) the recipient is a controlled foreign corporation to which
the issuer is a related person) and will be exempt from federal income tax. Upon
receipt of appropriate ownership statements, the issuer normally will be
relieved of obligations to withhold tax from such interest payments. These
provisions supersede the generally applicable provisions of United States law
that would otherwise require the issuer to withhold at a 30% rate (unless such
rate were reduced or eliminated by an applicable tax treaty) on, among other
things, interest and other fixed or determinable, annual or periodic income paid
to Nonresidents. Holders of Pass-Through Securities and Stripped Securities,
including Ratio Strip Securities, however, may be subject to withholding to the
extent that the Loans were originated on or before July 18, 1984.
Interest and OID of Holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the Holder. They will, however, generally be subject to the regular
United States income tax.
Payments to Holders of Residual Interest Securities who are foreign
persons will generally be treated as interest for purposes of the 30% (or lower
treaty rate) United States withholding tax. Holders should assume that such
income does not qualify for exemption from United States withholding tax as
"portfolio interest." It is clear that, to the extent that a payment represents
a portion of REMIC taxable income that constitutes excess inclusion income, a
Holder of a Residual Interest Security will not be entitled to an exemption from
or reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed
(or when the Residual Interest Security is disposed of). The Treasury has
statutory authority, however, to promulgate regulations that would require such
amounts to be taken into account at an earlier time in order to prevent the
avoidance of tax. Such regulations could, for example, require withholding prior
to the distribution of cash in the case of Residual Interest Securities that do
not have significant value. Under the REMIC Regulations, if a Residual Interest
Security has tax avoidance potential, a transfer of a Residual Interest Security
to a Nonresident will be disregarded for all federal tax purposes. A Residual
Interest Security has tax avoidance potential unless, at the time of the
transfer the transferor reasonably expects that the REMIC will distribute to the
transferee residual interest Holder amounts that will equal at least 30% of each
excess inclusion, and that such amounts will be distributed at or after the time
at which the excess inclusions accrue and not later than the calendar year
following the calendar year of accrual. If a Nonresident transfers a Residual
Interest Security to a United States person, and if the transfer has the effect
of allowing the transferor to avoid tax on accrued excess inclusions, then the
transfer is disregarded and the transferor continues to be treated as the owner
of the Residual Interest Security for purposes of the withholding tax provisions
of the Code. See "--Excess Inclusions."
Tax Characterization of the Trust Fund as a Partnership
Tax Counsel is of the opinion that a Trust Fund structured as a
partnership will not be an association (or publicly traded partnership) taxable
as a corporation for federal income tax purposes. This opinion is based on the
assumption that the terms of the Trust Agreement and related documents will be
complied with, and on counsel's conclusions that the nature of the income of the
Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the Certificates has
been structured as a private placement under an IRS safe harbor, so that the
Trust Fund will not be characterized as a publicly traded partnership taxable as
a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, in the opinion of Tax Counsel, the Trust Fund would be subject to
corporate income tax on its taxable income. The Trust Fund's taxable income
would include all its income, possibly reduced by its interest expense on the
Notes. Any such corporate income tax could materially reduce cash available to
make payments on the Notes and distributions on the Certificates, and
Certificateholders could be liable for any such tax that is unpaid by the Trust
Fund.
Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and
the Noteholders will agree by their purchase of Notes, to treat the Notes as
debt for federal income tax purposes. In such a circumstance, Tax Counsel is,
except as otherwise provided in the related Prospectus Supplement, of the
opinion that the Notes will be classified as debt for federal income tax
purposes. The discussion below assumes this characterization of the Notes is
correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities or Strip Notes. Moreover, the discussion assumes that the
interest formula for the Notes meets the requirements for "qualified stated
interest" under the OID Regulations, and that any OID on the Notes (i.e., any
excess of the principal amount of the Notes over their issue price) does not
exceed a de minimis amount (i.e., 0.25% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID regulations. If these conditions are not satisfied with respect to any given
Series of Notes, additional tax considerations with respect to such Notes will
be disclosed in the applicable Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, in the opinion of Tax Counsel, the Notes
will not be considered issued with OID. The stated interest thereon will be
taxable to a Noteholder as ordinary interest income when received or accrued in
accordance with such Noteholder's method of tax accounting. Under the OID
Regulations, a Holder of a Note issued with a de minimis amount of OID must
include such OID in income, on a pro rata basis, as principal payments are made
on the Note. It is believed that any prepayment premium paid as a result of a
mandatory redemption will be taxable as contingent interest when it becomes
fixed and unconditionally payable. A purchaser who buys a Note for more or less
than its principal amount will generally be subject, respectively, to the
premium amortization or market discount rules of the Code.
A Holder of a Note that has a fixed maturity date of not more than one
year from the issue date of such Note (a "Short-Term Note") may be subject to
special rules. An accrual basis Holder of a Short-Term Note (and certain cash
method Holders, including regulated investment companies, as set forth in
Section 1281 of the Code) generally would be required to report interest income
as interest accrues on a straight-line basis over the term of each interest
period. Other cash basis Holders of a Short-Term Note would, in general, be
required to report interest income as interest is paid (or, if earlier, upon the
taxable disposition of the Short-Term Note). However, a cash basis Holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
Sale or Other Disposition. In the opinion of Tax Counsel, if a
Noteholder sells a Note, the Holder will recognize gain or loss in an amount
equal to the difference between the amount realized on the sale and the Holder's
adjusted tax basis in the Note. The adjusted tax basis of a Note to a particular
Noteholder will equal the Holder's cost for the Note, increased by any market
discount, acquisition discount, OID and gain previously included by such
Noteholder in income with respect to the Note and decreased by the amount of
bond premium (if any) previously amortized and by the amount of principal
payments previously received by such Noteholder with respect to such Note. Any
such gain or loss will be capital gain or loss if the Note was held as a capital
asset, except for gain representing accrued interest and accrued market discount
not previously included in income. Capital losses generally may be used only to
offset capital gains.
Foreign Holders. In the opinion of Tax Counsel, interest payments made
(or accrued) to a Noteholder who is a nonresident alien, foreign corporation or
other non-United States person (a "foreign person") generally will be considered
"portfolio interest," and generally will not be subject to United States federal
income tax and withholding tax, if the interest is not effectively connected
with the conduct of a trade or business within the United States by the foreign
person and the foreign person (i) is not actually or constructively a "10
percent shareholder" of the Trust Fund or the Seller (including a Holder of 10%
of the outstanding Certificates) or a "controlled foreign corporation" with
respect to which the Trust Fund or the Seller is a "related person" within the
meaning of the Code and (ii) provides the Trustee or other person who is
otherwise required to withhold U.S. tax with respect to the Notes with an
appropriate statement (on Form W-8 or a similar form), signed under penalties of
perjury, certifying that the beneficial owner of the Note is a foreign person
and providing the foreign person's name and address. If a Note is held through a
securities clearing organization or certain other financial institutions, the
organization or institution may provide the relevant signed statement to the
withholding agent; in that case, however, the signed statement must be
accompanied by a Form W-8 or substitute form provided by the foreign person that
owns the Note. If such interest is not portfolio interest, then it will be
subject to United States federal income and withholding tax at a rate of 30
percent, unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax; provided, that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each Holder of a Note (other than an exempt Holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the Holder's name,
address, correct federal taxpayer identification number and a statement that the
Holder is not subject to backup withholding. Should a nonexempt Noteholder fail
to provide the required certification, the Trust Fund will be required to
withhold 31 percent of the amount otherwise payable to the Holder, and remit the
withheld amount to the IRS as a credit against the Holder's federal income tax
liability.
The New Regulations described herein make certain modifications to the
backup withholding and information reporting rules. The New Regulations
generally will be effective for payments made after December 31, 1999, subject
to certain transition rules. Prospective investors are urged to consult their
own tax advisors regarding the New Regulations.
Possible Alternative Treatments of the Notes. If, contrary to the
opinion of Tax Counsel, the IRS successfully asserted that one or more of the
Notes did not represent debt for federal income tax purposes, the Notes might be
treated as equity interests in the Trust Fund. If so treated, the Trust Fund
might be taxable as a corporation with the adverse consequences described above
(and the taxable corporation would not be able to reduce its taxable income by
deductions for interest expense on Notes recharacterized as equity).
Alternatively, and most likely in the view of Tax Counsel, the Trust Fund might
be treated as a publicly traded partnership that would not be taxable as a
corporation because it would meet certain qualifying income tests. Nonetheless,
treatment of the Notes as equity interests in such a publicly traded partnership
could have adverse tax consequences to certain Holders. For example, income to
certain tax-exempt entities (including pension funds) would be "unrelated
business taxable income," income to foreign Holders generally would be subject
to U.S. tax and U.S. tax return filing and withholding requirements, and
individual Holders might be subject to certain limitations on their ability to
deduct their share of the Trust Fund's expenses.
Tax Consequences to Holders of the Certificates
Treatment of the Trust Fund as a Partnership. The Trust Fund and the
Servicer will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust Fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
Trust Fund, the partners of the partnership being the Certificateholders, and
the Notes being debt of the partnership. However, the proper characterization of
the arrangement involving the Trust Fund, the Certificates, the Notes, the Trust
Fund and the Servicer is not clear because there is no authority on transactions
closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series of
Securities includes a single Class of Certificates. If these conditions are not
satisfied with respect to any given Series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
Partnership Taxation. If the Trust Fund is a partnership, in the
opinion of Tax Counsel, the Trust Fund will not be subject to federal income
tax. Rather, in the opinion of Tax Counsel, each Certificateholder will be
required to separately take into account such Holder's allocated share of
income, gains, losses, deductions and credits of the Trust Fund. The Trust
Fund's income will consist primarily of interest and finance charges earned on
the Loans (including appropriate adjustments for market discount, OID and bond
premium) and any gain upon collection or disposition of Loans. The Trust Fund's
deductions will consist primarily of interest accruing with respect to the
Notes, servicing and other fees, and losses or deductions upon collection or
disposition of Loans.
In the opinion of Tax Counsel, the tax items of a partnership are
allocable to the partners in accordance with the Code, Treasury regulations and
the partnership agreement (here, the Trust Agreement and related documents). The
Trust Agreement will provide, in general, that the Certificateholders will be
allocated taxable income of the Trust Fund for each month equal to the sum of
(i) the interest that accrues on the Certificates in accordance with their terms
for such month, including interest accruing at the Pass-Through Rate for such
month and interest on amounts previously due on the Certificates but not yet
distributed; (ii) any Trust Fund income attributable to discount on the Loans
that corresponds to any excess of the principal amount of the Certificates over
their initial issue price (iii) prepayment premium payable to the
Certificateholders for such month; and (iv) any other amounts of income payable
to the Certificateholders for such month. Such allocation will be reduced by any
amortization by the Trust Fund of premium on Loans that corresponds to any
excess of the issue price of Certificates over their principal amount. All
remaining taxable income of the Trust Fund will be allocated to the Depositor.
Based on the economic arrangement of the parties, in the opinion of Tax Counsel,
this approach for allocating Trust Fund income should be permissible under
applicable Treasury regulations, although no assurance can be given that the IRS
would not require a greater amount of income to be allocated to
Certificateholders. Moreover, in the opinion of Tax Counsel, even under the
foregoing method of allocation, Certificateholders may be allocated income equal
to the entire Pass-Through Rate plus the other items described above even though
the Trust Fund might not have sufficient cash to make current cash distributions
of such amount. Thus, cash basis Holders will in effect be required to report
income from the Certificates on the accrual basis and Certificateholders may
become liable for taxes on Trust Fund income even if they have not received cash
from the Trust Fund to pay such taxes. In addition, because tax allocations and
tax reporting will be done on a uniform basis for all Certificateholders but
Certificateholders may be purchasing Certificates at different times and at
different prices, Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to them
by the Trust Fund.
In the opinion of Tax Counsel, all of the taxable income allocated to a
Certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
Holder under the Code.
In the opinion of Tax Counsel, an individual taxpayer's share of
expenses of the Trust Fund (including fees to the Servicer but not interest
expense) would be miscellaneous itemized deductions. Such deductions might be
disallowed to the individual in whole or in part and might result in such Holder
being taxed on an amount of income that exceeds the amount of cash actually
distributed to such Holder over the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income
and allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Loan, the Trust Fund
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Loans were not issued
with OID, and, therefore, the Trust Fund should not have OID income. However,
the purchase price paid by the Trust Fund for the Loans may be greater or less
than the remaining Principal Balance of the Loans at the time of purchase. If
so, in the opinion of Tax Counsel, the Loan will have been acquired at a premium
or discount, as the case may be. (As indicated above, the Trust Fund will make
this calculation on an aggregate basis, but might be required to recompute it on
a Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium,
the Trust Fund will elect to include any such discount in income currently as it
accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
Section 708 Termination. In the opinion of Tax Counsel, under Section
708 of the Code, the Trust Fund will be deemed to terminate for federal income
tax purposes if 50% or more of the capital and profits interests in the Trust
Fund are sold or exchanged within a 12-month period. Pursuant to final Treasury
regulations issued May 9, 1997 under Section 708 of the Code, if such a
termination occurs, the Trust Fund (the "old partnership") would be deemed to
contribute its assets to a new partnership (the "new partnership") in exchange
for interests in the new partnership. Such interests would be deemed distributed
to the partners of the old partnership in liquidation thereof, which would not
constitute a sale or exchange.
Disposition of Certificates. Generally, in the opinion of Tax Counsel,
capital gain or loss will be recognized on a sale of Certificates in an amount
equal to the difference between the amount realized and the seller's tax basis
in the Certificates sold. A Certificateholder's tax basis in a Certificate will
generally equal the Holder's cost increased by the Holder's share of Trust Fund
income (includible in income) and decreased by any distributions received with
respect to such Certificate. In addition, both the tax basis in the Certificates
and the amount realized on a sale of a Certificate would include the Holder's
share of the Notes and other liabilities of the Trust Fund. A Holder acquiring
Certificates at different prices may be required to maintain a single aggregate
adjusted tax basis in such Certificates, and, upon sale or other disposition of
some of the Certificates, allocate a portion of such aggregate tax basis to the
Certificates sold (rather than maintaining a separate tax basis in each
Certificate for purposes of computing gain or loss on a sale of that
Certificate).
Any gain on the sale of a Certificate attributable to the Holder's
share of unrecognized accrued market discount on the Loans would generally be
treated as ordinary income to the Holder and would give rise to special tax
reporting requirements. The Trust Fund does not expect to have any other assets
that would give rise to such special reporting requirements. Thus, to avoid
those special reporting requirements, the Trust Fund will elect to include
market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a Holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust Fund were to file an election under
Section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the Trust Fund will not make such
election. As a result, Certificateholders might be allocated a greater or lesser
amount of Trust Fund income than would be appropriate based on their own
purchase price for Certificates.
Administrative Matters. The Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust Fund will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust Fund and will report each Certificateholder's allocable share of items of
Trust Fund income and expense to Holders and the IRS on Schedule K-1. The Trust
Fund will provide the Schedule K-l information to nominees that fail to provide
the Trust Fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
Certificates. Generally, Holders must file tax returns that are consistent with
the information return filed by the Trust Fund or be subject to penalties unless
the Holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (a) the name, address and identification number of such person,
(b) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization or any wholly owned agency or
instrumentality of either of the foregoing, and (c) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund information
as to themselves and their ownership of Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Trust Fund. The information referred to above
for any calendar year must be furnished to the Trust Fund on or before the
following January 31. Nominees, brokers and financial institutions that fail to
provide the Trust Fund with the information described above may be subject to
penalties.
The Depositor will be designated as the tax matters partner in the
related Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the Certificateholders, and,
under certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the Trust Fund. An
adjustment could also result in an audit of a Certificateholder's returns and
adjustments of items not related to the income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a failure
to withhold. The Trust Fund expects to withhold on the portion of its taxable
income that is allocable to foreign Certificateholders pursuant to Section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign Holders that are taxable as corporations
and 39.6% for all other foreign Holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the Trust Fund to change its withholding procedures. In determining a Holder's
withholding status, the Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the
Holder's certification of nonforeign status signed under penalties of perjury.
Each foreign Holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Trust Fund's income. Each foreign Holder must
obtain a taxpayer identification number from the IRS and submit that number to
the Trust Fund on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign Holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the Trust Fund taking the
position that no taxes were due because the Trust Fund was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a
Certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Trust Fund. If these interest payments are properly
characterized as guaranteed payments, then the interest will not be considered
"portfolio interest." As a result, Certificateholders will be subject to United
States federal income tax and withholding tax at a rate of 30 percent, unless
reduced or eliminated pursuant to an applicable treaty. In such case, a foreign
Holder would only be entitled to claim a refund for that portion of the taxes in
excess of the taxes that should be withheld with respect to the guaranteed
payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the Holder is an exempt recipient under
applicable provisions of the Code. The New Regulations described herein make
certain modifications to the backup withholding and information reporting rules.
The New Regulations will generally be effective for payments made after December
31, 1999, subject to certain transition rules. Prospective investors are urged
to consult their own tax advisors regarding the New Regulations.
STATE TAX CONSIDERATIONS
In addition to the federal income tax considerations described in
"Certain Federal Income Tax Considerations," potential investors should consider
the state and local income tax consequences of the acquisition, ownership, and
disposition of the Securities. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in the
Securities.
FASIT SECURITIES
General. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory vehicle
for the issuance of mortgage-backed and asset-backed securities ("FASIT
Securities"). Although the FASIT provisions of the Code became effective on
September 1, 1997, no Treasury regulations or other administrative guidance has
been issued with respect to those provisions. Accordingly, definitive guidance
cannot be provided with respect to many aspects of the tax treatment of Holders
of FASIT Securities. Investors also should note that the FASIT discussions
contained herein constitutes only a summary of the federal income tax
consequences to Holders of FASIT Securities. With respect to each Series of
FASIT Securities, the related Prospectus Supplement will provide a detailed
discussion regarding the federal income tax consequences associated with the
particular transaction.
FASIT Securities will be classified as either FASIT Regular Securities,
which generally will be treated as debt for federal income tax purposes, or
FASIT Ownership Securities, which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect to
the taxable income or loss of the related Series. The Prospectus Supplement for
each Series of Securities will indicate whether one or more FASIT elections will
be made for such Series, and which Securities of such Series will be designated
as Regular Securities, and which, if any, will be designated as Ownership
Securities.
Qualification as a FASIT. The Trust Fund underlying a Series (or one or
more designated pools of assets held in the Trust Fund) will qualify under the
Code as a FASIT in which the FASIT Regular Securities and the FASIT Ownership
Securities will constitute the "regular interests" and the "ownership
interests," respectively, if (i) a FASIT election is in effect, (ii) certain
tests concerning (a) the composition of the FASIT's assets and (b) the nature of
the Holders' interest in the FASIT are met on a continuing basis and (iii) the
Trust Fund is not a regulated company as defined in Section 851(a) of the Code.
Asset Composition. In order for a Trust Fund (on one or more designated
pools of assets held by a Trust Fund) to be eligible for FASIT status,
substantially all of the assets of the Trust Fund (or the designated pool) must
consist of "permitted assets" as of the close of the third month beginning after
the Closing Date and at all times thereafter (the "FASIT Qualification Test").
Permitted assets include (i) cash or cash equivalents, (ii) debt instruments
with fixed terms that would qualify as REMIC regular interests if issued by a
REMIC (generally, instruments that provide for interest at a fixed rate, a
qualifying variable rate, or a qualifying interest-only type rate, (iii)
foreclosure property, (iv) certain hedging instruments (generally, interest and
currency rate swaps and credit enhancement contracts) that are reasonably
required to guarantee or hedge against the FASIT's risks associated with being
the obligor on FASIT interests, (v) contract rights to acquire qualifying debt
instruments or qualifying hedging instruments, (vi) FASIT regular interests and
(vii) REMIC regular interests. Permitted assets do not include any debt
instruments issued by the Holder of the FASIT's ownership interest or by any
person related to such Holder.
Interests in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT also must meet certain requirements. All
of the interests in a FASIT must belong to either of the following: (i) one or
more Classes of regular interests or (ii) a single Class of ownership interest
that is held by a fully taxable domestic corporation. In the case of Series that
include FASIT Ownership Securities, the ownership interest will be represented
by the FASIT Ownership Securities.
A FASIT interest generally qualifies as a regular interest if (i) it is
designated as a regular interest, (ii) it has a stated maturity no greater than
thirty years, (iii) it entitles its Holder to a specified principal amount, (iv)
the issue price of the interest does not exceed 125% of its stated principal
amount, (v) the yield to maturity of the interest is less than the applicable
Treasury rate published by the IRS plus 5% and (vi) if it pays interest, such
interest is payable at either (a) a fixed rate with respect to the principal
amount of the regular interest or (b) a permissible variable rate with respect
to such principal amount. Permissible variable rates for FASIT regular interests
are the same as those for REMIC regular interest (i.e., certain qualified
floating rates and weighted average rates). See "Certain Federal Income Tax
Considerations--Taxation of Debt Securities--Variable Rate Debt Securities."
If a FASIT Security fails to meet one or more of the requirements set
out in clauses (iii), (iv) or (v) above, but otherwise meets the above
requirements, it may still qualify as a type of regular interest known as a
"High-Yield Interest." In addition, if a FASIT Security fails to meet the
requirements of clause (vi), but the interest payable on the Security consists
of a specified portion of the interest payments on permitted assets and that
portion does not vary over the life of the Security, the Security also will
qualify as a High-Yield Interest. A High-Yield Interest may be held only by
domestic corporations that are fully subject to corporate income tax ("Eligible
Corporations"), other FASITs and dealers in securities who acquire such
interests as inventory, rather than for investment. In addition, Holders of
High-Yield Interests are subject to limitations on offset of income derived from
such interest. See "Certain Federal Income Tax Considerations--FASIT
Securities--Tax Treatment of FASIT Regular Securities--Treatment of High-Yield
Interests."
Consequences of Disqualification. If a Series of FASIT Securities fails
to comply with one or more of the Code's ongoing requirements for FASIT status
during any taxable year, the Code provides that its FASIT status may be lost for
that year and thereafter. If FASIT status is lost, the treatment of the former
FASIT and the interests therein for federal income tax purposes is uncertain.
The former FASIT might be treated as a grantor trust, as a separate association
taxed as a corporation, or as a partnership. The FASIT Regular Securities could
be treated as debt instruments for federal income tax purposes or as equity
interests. Although the Code authorizes the Treasury to issue regulations that
address situations where a failure to meet the requirements for FASIT status
occurs inadvertently and in good faith, such regulations have not yet been
issued. It is possible that disqualification relief might be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of the
FASIT's income for a period of time in which the requirements for FASIT status
are not satisfied.
Tax Treatment of FASIT Regular Securities. Payments received by Holders
of FASIT Regular Securities generally should be accorded the same tax treatment
under the Code as payments received on other taxable corporate debt instruments
and on REMIC Regular Securities. As in the case of Holders of REMIC Regular
Securities, Holders of FASIT Regular Securities must report income from such
Securities under an accrual method of accounting, even if they otherwise would
have used the case receipts and disbursements method. Except in the case of
FASIT Regular Securities issued with original issue discount or acquired with
market discount or premium, interest paid or accrued on a FASIT Regular Security
generally will be treated as ordinary income to the Holder and a principal
payment on such Security will be treated as a return of capital to the extent
that the Holder's basis is allocable to that payment. FASIT Regular Securities
issued with original issue discount or acquired with market discount or premium
generally will treat interest and principal payments on such Securities in the
same manner described for REMIC Regular Securities. See "Certain Federal Income
Tax Considerations--Taxation of Debt Securities,""--Market Discount," and
"--Premium" above. High-Yield Securities may be held only by fully taxable
domestic corporations, other FASITs, and certain securities dealers. Holders of
High-Yield Securities are subject to limitations on their ability to use current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from those Securities.
If a FASIT Regular Security is sold or exchanged, the Holder generally
will recognize gain or loss upon the sale in the manner described above for
REMIC Regular Securities. See "Certain Federal Income Tax Considerations--Sale
or Exchange." In addition, if a FASIT Regular Security becomes wholly or
partially worthless as a result of Default and Delinquencies of the underlying
assets, the Holder of such Security should be allowed to deduct the loss
sustained (or alternatively be able to report a lesser amount of income). See
"Certain Federal Income Tax Considerations--Taxation of Debt
Instruments--Effects of Default and Delinquencies."
FASIT Regular Securities held by a REIT will qualify as "real estate
assets" within the meaning of section 856(c) (4)(A) of the Code, and interest on
such Securities will be considered Qualifying REIT Interest to the same extent
that REMIC Securities would be so considered. FASIT Regular Securities held by a
Thrift Institution taxed as a "domestic building and loan association" will
represent qualifying assets for purposes of the qualification requirements set
forth in Code Section 7701(a)(19) to the same extent that REMIC Securities would
be so considered. See "Certain Federal Income Tax Considerations--Taxation of
Debt Securities--Status as Real Property Loans." In addition, FASIT Regular
Securities held by a financial institution to which Section 585 of the Code
applies will be treated as evidences of indebtedness for purposes of Section
582(c)(1) of the Code. FASIT Securities will not qualify as "Government
Securities" for either REIT or RIC qualification purposes.
Treatment of High-Yield Interests. High-Yield Interests are subject to
special rules regarding the eligibility of Holders of such interests, and the
ability of such Holders to offset income derived from their FASIT Security with
losses. High-Yield Interests may be held only by Eligible Corporations other
FASITs, and dealers in securities who acquire such interests as inventory. If a
securities dealer (other than an Eligible Corporation) initially acquires a
High-Yield Interest as inventory, but later begins to hold it for investment,
the dealer will be subject to an excise tax equal to the income from the
High-Yield Interest multiplied by the highest corporate income tax rate. In
addition, transfers of High-Yield Interests to disqualified Holders will be
disregarded for federal income tax purposes, and the transferor still will be
treated as the Holder of the High-Yield Interest.
The Holder of a High-Yield Interest may not use non-FASIT current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from the High-Yield Interest, for either regular federal income tax
purposes or for alternative minimum tax purposes. In addition, the FASIT
provisions contain an anti-abuse rule that imposes corporate income tax on
income derived from a FASIT Regular Security that is held by a pass-through
entity (other than another FASIT) that issues debt or equity securities backed
by the FASIT Regular Security and that have the same features as High-Yield
Interests.
Tax Treatment of FASIT Ownership Securities. A FASIT Ownership Security
represents the residual equity interest in a FASIT. As such, the Holder of a
FASIT Ownership Security determines its taxable income by taking into account
all assets, liabilities and items of income, gain, deduction, loss and credit of
a FASIT. In general, the character of the income to the Holder of a FASIT
Ownership Interest will be the same as the character of such income of the
FASIT, except that any tax-exempt interest income taken into account by the
Holder of a FASIT Ownership Interest is treated as ordinary income. In
determining that taxable income, the Holder of a FASIT Ownership Security must
determine the amount of interest, original issue discount, market discount and
premium recognized with respect to the FASIT's assets and the FASIT Regular
Securities issued by the FASIT according to a constant yield methodology and
under an accrual method of accounting. In addition, Holders of FASIT Ownership
Securities are subject to the same limitations on their ability to use losses to
offset income from their FASIT Security as are the Holders of High-Yield
Interests. See "Certain Federal Income Tax Considerations--Treatment of
High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Securities. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where,
within six months before or after the disposition, the seller of such Security
acquires any other FASIT Ownership Security or, in the case of a FASIT holding
mortgage assets, any interest in a Taxable Mortgage Pool that is economically
comparable to a FASIT Ownership Security. In addition, if any security that is
sold or contributed to a FASIT by the Holder of the related FASIT Ownership
Security was required to be marked-to-market under Code section 475 by such
Holder, then section 475 will continue to apply to such securities, except that
the amount realized under the mark-to-market rules will be a greater of the
securities' value under present law or the securities' value after applying
special valuation rules contained in the FASIT provisions. Those special
valuation rules generally require that the value of debt instruments that are
not traded on an established securities market be determined by calculating the
present value of the reasonably expected payments under the instrument using a
discount rate of 120% of the applicable federal rate, compounded semiannually.
The Holder of a FASIT Ownership Security will be subject to a tax equal
to 100% of the net income derived by the FASIT from any "prohibited
transactions." Prohibited transactions include (i) the receipt of income derived
from assets that are not permitted assets, (ii) certain dispositions of
permitted assets, (iii) the receipt of any income derived from any loan
originated by a FASIT and (iv) in certain cases, the receipt of income
representing a servicing fee or other compensation. Any Series for which a FASIT
election is made generally will be structured in order to avoid application of
the prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration. Holders of FASIT
Securities will be subject to backup withholding to the same extent Holders of
REMIC Securities would be subject. See "Certain Federal Income Tax
Considerations--Miscellaneous Tax Aspects--Backup Withholding." For purposes of
reporting and tax administration, Holders of record of FASIT Securities
generally will be treated in the same manner as Holders of REMIC Securities.
Due to the complexity of the federal income tax rules applicable to
Holders and the considerable uncertainty that exists with respect to many
aspects of those rules, potential investors should consult their own tax
advisors regarding the tax treatment of the acquisition, ownership, and
disposition of the securities.
ERISA CONSIDERATIONS
The following describes certain considerations under the Employment
Retirement Security Act of 1974, as amended ("ERISA"), and the Code, which apply
only to Securities of a Series that are not divided into subclasses. If
Securities are divided into subclasses, the related Prospectus Supplement will
contain information concerning considerations relating to ERISA and the Code
that are applicable to such Securities and such subclasses of Securities.
ERISA imposes requirements on employee benefit plans (and on certain
other retirement plans and arrangements, including certain individual retirement
accounts and annuities, Keogh plans and collective investment funds and separate
accounts in which such plans, accounts or arrangements are invested)
(collectively "Plans") subject to ERISA and on persons who are fiduciaries with
respect to such Plans. Generally, ERISA applies to investments made by Plans.
Among other things, ERISA requires that the assets of Plans be held in trust and
that the trustee, or other duly authorized fiduciary, have exclusive authority
and discretion to manage and control the assets of such Plans. ERISA also
imposes certain duties on persons who are fiduciaries of Plans. Under ERISA, any
person who exercises any authority or control respecting the management or
disposition of the assets of a Plan is considered to be a fiduciary of such Plan
(subject to certain exceptions not here relevant). Certain employee benefit
plans, such as governmental plans (as defined in ERISA Section 3(32)) and, if no
election has been made under Section 410(d) of the Code, church plans (as
defined in ERISA Section 3(33)), are not subject to ERISA requirements.
Accordingly, assets of such plans may be invested in Securities without regard
to the ERISA considerations described above and below, subject to the provisions
of applicable law. Any such plan that is qualified and exempt from taxation
under Code Sections 401(a) and 501(a), however, is subject to the prohibited
transaction rules set forth in Code Section 503.
In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA and Section 4975 of the Code
prohibit a broad range of transactions involving Plan assets and persons
("Parties in Interest") having certain specified relationships to a Plan, and
impose additional prohibitions where Parties in Interest are fiduciaries with
respect to such Plan. Certain Parties in Interest that participate in a
prohibited transaction may be subject to an excise tax imposed pursuant to
Section 4975 of the Code, or a penalty imposed pursuant to Section 502(i) of
ERISA, unless a statutory, regulatory or administrative exemption is available.
On November 13, 1986, the United States Department of Labor (the "DOL")
issued final regulations (Labor Reg. Section 2510.3-101) concerning the
definition of what constitutes the assets of a Plan (the "Plan Asset
Regulation"). Under this regulation, the underlying assets and properties of
corporations, partnerships and certain other entities in which a Plan acquires
an "equity" interest could be deemed for purposes of ERISA to be assets of the
investing Plan in certain circumstances, unless certain exceptions apply.
Under the Plan Asset Regulation, the term "equity" interest is defined
as any interest in an entity other than an instrument that is treated as
indebtedness under "applicable local law" and which has no "substantial equity
features." If the Trust Fund issues Notes that are not treated as equity
interests in the Trust Fund for purposes of the Plan Asset Regulation, a Plan's
investment in such Notes would not cause the assets of the Trust to be deemed
Plan assets. However, the Seller, the Servicer, the Special Servicer, the Backup
Servicer, the Indenture Trustee, the Owner Trustee, the Underwriter and the
Depositor may be the sponsor of or investment advisor with respect to one or
more Plans. Because such parties may receive certain benefits in connection with
the sale of the Notes, the purchase of Notes using Plan assets over which any
such parties (or any affiliates thereof) has investment authority might be
deemed to be a violation of the prohibited transaction rules of ERISA and the
Code for which no exemption may be available. Accordingly, Notes may not be
purchased using the assets of any Plan if the Seller, the Servicer, the Special
Servicer, the Backup Servicer, the Indenture Trustee, the Owner Trustee, the
Underwriter, the Depositor or any of their affiliates (a) has investment or
administrative discretion with respect to such Plan assets; (b) has authority or
responsibility to give, or regularly gives, investment advice with respect to
such Plan assets for a fee and pursuant to an agreement of understanding that
such advice (i) will serve as a primary basis for investment decisions with
respect to such Plan assets and (ii) will be based on the particular investment
needs for such Plan; or (c) is an employer maintaining or contributing to such
Plan.
In addition, the Trust Fund, any underwriter, trustee, servicer,
administrator or producer of credit support or their affiliates might be
considered or might become Parties in Interest with respect to a Plan. Also, any
holder of Notes, because of its activities or the activities of its respective
affiliates, may be deemed to be a Party in Interest with respect to certain
Plans, including but not limited to Plans sponsored by such holder. In either
case, the acquisition or holding of Notes by or on behalf of such a Plan could
be considered to give rise to a prohibited transaction within the meaning of
ERISA and the Code, unless it is subject to one or more exemptions such as:
Prohibited Transaction Class Exemption ("PTCE") 84-14, which exempts certain
transactions effected on behalf of a Plan by a "qualified professional asset
manager"; PTCE 90-1, which exempts certain transactions involving insurance
company pooled separate accounts; PTCE 91-38, which exempts certain transactions
involving bank collective investment funds; PTCE 95-60, which exempts certain
transactions involving insurance company general accounts; or PTCE 96-23, which
exempts certain transactions effected on behalf of a Plan by certain "in-house
asset managers." There can be no assurance that any of these class exemptions
will apply with respect to any particular Plan investment in Notes, or, even if
it did apply, that any exemption would apply to all prohibited transactions that
may occur in connection with such an investment. Each prospective purchaser or
transferee of a Note that is a Plan or a person acting on behalf or investing
the assets of a Plan shall be required to represent (or, with respect to any
transfer of a beneficial interest in a Global Note, shall be deemed to
represent) to the Indenture Trustee and the Note Registrar that the relevant
conditions for exemptive relief under at least one of the foregoing exemptions
have been satisfied.
The Plan Asset Regulation provides that, generally, the assets of a
corporation or partnership in which a Plan invests will not be deemed for
purposes of ERISA to be assets of such Plan if the equity interest acquired by
the investing Plan is a publicly-offered security, of if equity participation by
benefit plan investors is not significant. A publicly-offered security, as
defined in the Plan Asset Regulation, is a security that is widely held, freely
transferable and registered under the Exchange Act. Equity participation in an
entity by benefit plan investors is not significant if, after the most recent
acquisition of an equity interest in the entity, less than 25% of the value of
each class of equity interest in the entity is held by "benefit plan investors,"
which include benefit plans described in ERISA or under section 4975 of the
Code, whether or not they are subject to ERISA, as well as entities whose
underlying assets include plan assets by reason of a plan's investment in the
entity.
If no exception under the Plan Asset Regulation applies, then if a Plan
(or a person investing Plan assets, such as an insurance company general
account) acquires an equity interest in the Trust Fund, then the assets of the
Trust Fund would be considered to be assets of the Plan. Because the Loans held
by the Trust Fund may be deemed Plan assets of each Plan that purchases
Securities, an investment in the Securities by a Plan might be a prohibited
transaction under ERISA Sections 406 and 407 and subject to an excise tax under
Code Section 4975 and may cause transactions undertaken in the course of
operating the Trust Fund to constitute prohibited transactions, unless a
statutory or administrative exemption applies.
In Prohibited Transaction Class Exemption 83-1 ("PTCE 83-1"), the DOL
exempted from ERISA's prohibited transaction rules certain transactions relating
to the operation of residential mortgage pool investment trusts and the
purchase, sale and holding of "mortgage pool pass-through certificates" in the
initial issuance of such certificates. PTCE 83-1 permits, subject to certain
conditions, transactions that might otherwise be prohibited between Plans and
Parties in Interest with respect to those Plans related to the origination,
maintenance and termination of mortgage pools consisting of mortgage loans
secured by first or second mortgages or deeds of trust on single-family
residential property, and the acquisition and holding of certain mortgage pool
pass-through certificates representing an interest in such mortgage pools by
Plans. If the general conditions (discussed below) of PTCE 83-1 are satisfied,
investments by a Plan in Securities that represent interests in a Pool
consisting of Loans conforming to these requirements ("Single Family
Securities") will be exempt from the prohibitions of ERISA Sections 406(a) and
407 (relating generally to transactions with Parties in Interest who are not
fiduciaries) if the Plan purchases the Single Family Securities at no more than
fair market value and will be exempt from the prohibitions of ERISA Sections
406(b)(1) and (2) (relating generally to transactions with fiduciaries) if, in
addition, the purchase is approved by an independent fiduciary, no sales
commission is paid to the pool sponsor, the Plan does not purchase more than 25%
of all Single Family Securities, and at least 50% of all Single Family
Securities are purchased by persons independent of the pool sponsor or pool
trustee. PTCE 83-1 does not provide an exemption for transactions involving
Subordinated Securities. Accordingly, unless otherwise provided in the related
Prospectus Supplement, no transfer of a Subordinated Security or a Security that
is not a Single Family Security may be made to a Plan.
The discussion in this and the next succeeding paragraph applies only
to Single Family Securities The Depositor believes that, for purposes of PTCE
83-1, the term "mortgage pass-through certificate" would include: (i) Securities
issued in a Series consisting of only a single Class of Securities; and (ii)
Securities issued in a Series in which there is only one Class of those
particular Trust Securities; provided, that, in either case, the Securities,
evidence the beneficial ownership of both a specified percentage of future
interest payments (greater than 0%) and a specified percentage (greater than 0%)
of future principal payments on the Loans. It is not clear whether a Class of
Securities that evidences the beneficial ownership in a Trust Fund divided into
Loan groups, beneficial ownership of a specified percentage of interest payments
only or principal payments only, or a notional amount of either principal or
interest payments, or a Class of Securities entitled to receive payments of
interest and principal on the Loans only after payments to other Classes or
after the occurrence of certain specified events would be a "mortgage
pass-through certificate" for purposes of PTCE 83-1.
PTCE 83-1 sets forth three general conditions that must be satisfied
for any transaction to be eligible for exemption: (i) the maintenance of a
system of insurance or other protection for the pooled mortgage loans and
property securing such loans, and for indemnifying Holders against reductions in
pass-through payments due to property damage or defaults in loan payments in an
amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan; (ii) the existence of a pool trustee who
is not an affiliate of the pool sponsor; and (iii) a limitation on the amount of
the payment retained by the pool sponsor, together with other funds inuring to
its benefit, to not more than adequate consideration for selling the mortgage
loans plus reasonable compensation for services provided by the pool sponsor to
the Pool. The Depositor believes that the first general condition referred to
above will be satisfied with respect to the Securities in a Series issued
without a subordination feature, or the unsubordinated Securities only in a
Series issued with a subordination feature; provided, that the subordination and
Reserve Account, subordination by shifting of interests, the pool insurance or
other form of credit enhancement described herein (such subordination, pool
insurance or other form of credit enhancement being the system of insurance or
other protection referred to above) with respect to a Series of Securities is
maintained in an amount not less than the greater of one percent of the
aggregate Principal Balance of the Loans or the Principal Balance of the largest
Loan. See "Description of the Securities" herein. In the absence of a ruling
that the system of insurance or other protection with respect to a Series of
Securities satisfies the first general condition referred to above, there can be
no assurance that these features will be so viewed by the DOL. The Trustee will
not be affiliated with the Depositor.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold Single Family
Securities must make its own determination as to whether the first and third
general conditions, and the specific conditions described briefly in the
preceding paragraph, of PTCE 83-1 have been satisfied, or as to the availability
of any other prohibited transaction exemptions. Each Plan fiduciary should also
determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the Securities is appropriate for the
Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
The DOL issued to Bear, Stearns & Co. Inc., an individual exemption
(Prohibited Transaction Exemption 90-30; Exemption Application No. D-8207, 55
Fed. Reg. 21461 (1990)) (the "Underwriter Exemption"), which applies to certain
sales and servicing of "certificates" that are obligations of a "trust" with
respect to which Bear, Stearns & Co. Inc. is the underwriter, or the manager or
co-manager of an underwriting syndicate. The Underwriter Exemption provides
relief generally similar to that provided by PTCE 83-1, but is broader in
several respects.
The Underwriter Exemption contains several requirements, some of which
differ from those in PTCE 83-l. The Underwriter Exemption contains an expanded
definition of "certificate," which includes an interest that entitles the Holder
to pass-through payments of principal, interest and/or other payments. The
Underwriter Exemption contains an expanded definition of "trust," which permits
the trust corpus to consist of secured consumer receivables. The definition of
"trust," however, does not include any investment pool unless, inter alia, (i)
the investment pool consists only of assets of the type that have been included
in other investment pools, (ii) certificates evidencing interests in such other
investment pools have been purchased by investors other than Plans for at least
one year prior to the Plan's acquisition of certificates pursuant to the
Underwriter Exemption and (iii) certificates in such other investment pools have
been rated in one of the three highest generic rating categories of the four
credit rating agencies noted below. Generally, the Underwriter Exemption holds
that the acquisition of the certificates by a Plan must be on terms (including
the price for the certificates) that are at least as favorable to the Plan as
they would be in an arm's length transaction with an unrelated party. The
Underwriter Exemption requires that the rights and interests evidenced by the
certificates not be "subordinated" to the rights and interests evidenced by
other certificates of the same trust. The Underwriter Exemption requires that
certificates acquired by a Plan have received a rating at the time of their
acquisition that is in one of the three highest generic rating categories of
Standard & Poor's, a division of The McGraw-Hill Companies, Inc., Moody's
Investors Service, Inc., Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc. The
Underwriter Exemption specifies that the pool trustee must not be an affiliate
of the pool sponsor, nor an affiliate of the Underwriter, the pool servicer, any
obligor with respect to mortgage loans included in the trust constituting more
than five percent of the aggregate unamortized principal balance of the assets
in the trust, or any affiliate of such entities. Finally, the Underwriter
Exemption stipulates that any Plan investing in the certificates must be an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of the
Commission under the Securities Act.
On July 21, 1997, the DOL published in the Federal Register an
amendment to the Underwriter Exemption, which extends exemptive relief to
certain mortgage-backed and asset-backed securities transactions using
pre-funding accounts for trusts issuing pass-through certificates. The amendment
generally allows mortgage loans or other secured receivables (the "Obligations")
supporting payments to certificateholders, and having a value equal to no more
than twenty-five percent (25%) of the total principal amount of the certificates
being offered by the trust, to be transferred to the trust within a 90-day or
three-month period following the closing date (the "Specified Funding Period"),
instead of requiring that all such Obligations be either identified or
transferred on or before the Closing Date. The relief is available when the
following conditions are met:
(1) The ratio of the amount allocated to the pre-funding
account to the total principal amount of the certificates
being offered (the "Specified Funding Limit") must not
exceed twenty-five percent (25%).
(2) All Obligations transferred after the Closing Date (the
"Additional Obligations") must meet the same terms and
conditions for eligibility as the original Obligations
used to create the trust, which terms and conditions have
been approved by an Exemption Rating Agency.
(3) The transfer of such Additional Obligations to the trust
during the Specified Funding Period must not result in the
certificates to be covered by the Exemption receiving a
lower credit rating from an Exemption Rating Agency upon
termination of the Specified Funding Period than the
rating that was obtained at the time of the initial
issuance of the certificates by the trust.
(4) Solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate for all of the
Obligations in the trust at the end of the Specified
Funding Period must not be more than 100 basis points
lower than the average interest rate for the Obligations
transferred to the trust on the Closing Date.
(5) In order to insure that the characteristics of the
Additional Obligations are substantially similar to the
original Obligations which were transferred to the Trust
Fund:
(i) the characteristics of the Additional Obligations
must be monitored by an insurer or other credit
support provider that is independent of the
depositor; or
(ii) an independent accountant retained by the depositor
must provide the depositor with a letter (with copies
provided to each Exemption Rating Agency rating the
certificates, the related underwriter and the
related trustee) stating whether or not the
characteristics of the Additional Obligations conform
to the characteristics described in the related
prospectus or Prospectus Supplement and/or pooling and
servicing agreement. In preparing such letter, the
independent accountant must use the same type of
procedures as were applicable to the Obligations
transferred to the trust as of the Closing Date.
(6) The period of pre-funding must end no later than three
months or 90 days after the Closing Date or earlier in
certain circumstances if the pre-funding account falls
below the minimum level specified in the pooling and
servicing agreement or an Event of Default occurs.
(7) Amounts transferred to any pre-funding account and/or
capitalized interest account used in connection with the
pre-funding may be invested only in certain permitted
investments ("Permitted Investments").
(8) The related prospectus or Prospectus Supplement must describe:
(i) any pre-funding account and/or capitalized interest
account used in connection with a pre-funding account;
(ii) the duration of the period of pre-funding;
(iii) the percentage and/or dollar amount of the Specified
Funding Limit for the trust; and
(iv) that the amounts remaining in the pre-funding
account at the end of the Specified Funding
Period will be remitted to certificateholders as
repayments of principal.
(9) The related pooling and servicing agreement must describe
the Permitted Investments for the pre-funding account
and/or capitalized interest account and, if not disclosed
in the related prospectus or Prospectus Supplement, the
terms and conditions for eligibility of Additional
Obligations.
Neither PTCE 83-1 nor the Underwriter Exemption applies to a trust
which contains unsecured obligations.
Any Plan fiduciary that proposes to cause a Plan to purchase Securities
should consult with counsel concerning the impact of ERISA and the Code, the
applicability of PTCE 83-1, the Underwriter Exemption, or any other exemption
and the potential consequences in their specific circumstances, prior to making
such investment. Moreover, each Plan fiduciary should determine whether under
the general fiduciary standards of investment procedure and diversification an
investment in the Securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
LEGAL MATTERS
The legality of the Securities of each Series, including certain
material federal income tax consequences with respect thereto, will be passed
upon for the Depositor by Brown & Wood LLP, One World Trade Center, New York,
New York 10048.
FINANCIAL INFORMATION
A new Trust Fund will be formed for each Series of Securities. No Trust
Fund will engage in any business activities or have any assets or obligations
prior to the issuance of the related Series of Securities. Accordingly, no
financial statements with respect to any Trust Fund will be included in this
prospectus or in the related Prospectus Supplement.
AVAILABLE INFORMATION
The Depositor has filed with the SEC a Registration Statement under the
Securities Act of 1933, as amended, with respect to the Securities. This
Prospectus, which forms a part of the Registration Statement, and the Prospectus
Supplement relating to each Series of Securities contain summaries of the
material terms of the documents referred to herein and therein, but do not
contain all of the information set forth in the Registration Statement pursuant
to the Rules and Regulations of the SEC. For further information, reference is
made to such Registration Statement and the exhibits thereto. Such Registration
Statement and exhibits can be inspected and copied at prescribed rates at the
public reference facilities maintained by the SEC at its Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional
Offices located as follows: Midwest Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and Northeast Regional Office, 7 World
Trade Center, Suite 1300, New York, New York 10048. In addition, the SEC
maintains a Web site at http://www.sec.gov containing reports, proxy and
information statements and other information regarding registrants, including
the Depositor, that file electronically with the Commission.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
This Prospectus incorporates by reference all documents and reports
filed on behalf of the Depositor with respect to a Trust Fund pursuant to
Section 13(a), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
prior to the termination of the offering the related Securities. Upon request by
any person to whom this prospectus is delivered in connection with the offering
of one or more Classes Securities, the Depositor will provide or cause to be
provided without charge a copy of any of the documents and/or reports
incorporated herein by reference, in each case to the extent the documents or
reports relate to such Classes of Securities, other than the exhibits to such
documents (unless those exhibits are specifically incorporated by reference in
such documents). Requests to the Depositor should be directed in writing to:
Bear Stearns Asset Backed Securities Inc., 245 Park Avenue, New York, New York
10167, Telephone number (212) 272-4095 . The Depositor has determined that its
financial statements are not material to the offering of any Certificates.
Investors may read and copy the documents and/or reports incorporated
herein by reference at the Public Reference Room of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Investors may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding issuers, including each Trust Fund, that file
electronically with the SEC.
RATING
It is a condition to the issuance of the Securities of each Series
offered hereby and by the Prospectus Supplement that they shall have been rated
in one of the four highest rating categories by the nationally recognized
statistical rating agency or agencies (each, a "Rating Agency") specified in the
related Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of
the value of the Trust Fund assets and any credit enhancement with respect to
the related Class and will reflect such Rating Agency's assessment solely of the
likelihood that the related Holders will receive payments to which such Holders
are entitled under the related Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments on the related Loans
will be made, the degree to which the rate of such prepayments might differ from
that originally anticipated or the likelihood of early optional termination of
the Series of Securities. Such rating should not be deemed a recommendation to
purchase, hold or sell Securities, inasmuch as it does not address market price
or suitability for a particular investor. Such rating will not address the
possibility that prepayment at higher or lower rates than anticipated by an
investor may cause such investor to experience a lower than anticipated yield or
that an investor purchasing a Security at a significant premium might fail to
recoup its initial investment under certain prepayment scenarios.
There is also no assurance that any such rating will remain in effect
for any given period of time or that it may not be lowered or withdrawn entirely
by the Rating Agencies in the future if in their judgment circumstances so
warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Trust Fund assets or any credit enhancement with
respect to a Series, such rating might also be lowered or withdrawn because of,
among other reasons, an adverse change in the financial or other condition of a
credit enhancement provider or a change in the rating of such credit enhancement
provider's long term debt.
The amount, type and nature of credit enhancement, if any, established
with respect to a Series of Securities will be determined on the basis of
criteria established by each Rating Agency rating Classes of such Series. Such
criteria are sometimes based upon an actuarial analysis of the behavior of
mortgage loans in a larger group. Such analysis is often the basis upon which
each Rating Agency determines the amount of credit enhancement required with
respect to each such Class. There can be no assurance that the historical data
supporting any such actuarial analysis will accurately reflect future experience
nor any assurance that the data derived from a large pool of mortgage loans
accurately predicts the delinquency, foreclosure or loss experience of any
particular pool of Loans. No assurance can be given that values of any
Properties have remained or will remain at their levels on the respective dates
of origination of the related Loans. If the residential real estate markets
should experience an overall decline in property values such that the Principal
Balances of the Loans in a particular Trust Fund and any secondary financing on
the related Properties become equal to or greater than the value of such
Properties, the rates of delinquencies, foreclosures and losses could be higher
than those now generally experienced in the mortgage lending industry. In
additional, adverse economic conditions (which may or may not affect real
property values) may affect the timely payment by mortgagors of scheduled
payments of principal of and interest on the Loans and, accordingly, the rates
of delinquencies, foreclosures and losses with respect to any Trust Fund. To the
extent that such losses are not covered by credit enhancement, such losses will
be borne, at least in part, by the Holders of one or more Classes of the
Securities of the related Series.
LEGAL INVESTMENT
Unless otherwise specified in the related Prospectus Supplement, the
Securities will not constitute "mortgage-related securities" within the meaning
of the Secondary Market Mortgage Enhancement Act. Accordingly, investors whose
investment authority is subject to legal restrictions should consult their own
legal advisors to determine whether and to what extent the Securities constitute
legal investments for them.
PLAN OF DISTRIBUTION
The Depositor may offer each Series of Securities through Bear, Stearns
& Co. Inc. ("Bear Stearns") or one or more other firms that may be designated at
the time of each offering of such Securities. The participation of Bear Stearns
in any offering will comply with Schedule E to the By-Laws of the National
Association of Securities Dealers, Inc. The Prospectus Supplement relating to
each Series of Securities will set forth the specific terms of the offering of
such Series of Securities and of each Class within such Series, the names of the
underwriters, the purchase price of the Securities, the proceeds to the
Depositor from such sale, any securities exchange on which the Securities may be
listed, and, if applicable, the initial public offering prices, the discounts
and commissions to the underwriters and any discounts and concessions allowed or
reallowed to certain dealers. The place and time of delivery of each Series of
Securities will also be set forth in the Prospectus Supplement relating to such
Series. Bear Stearns is an affiliate of the Depositor.
<PAGE>
Index of Defined Terms
Additional Obligations:............................84
Advances...........................................27
Agreements..........................................8
Amortizable Bond Premium Regulations...............59
Asset Value........................................10
Available Interest Amount..........................11
Capitalized Interest Account.......................22
Cash Flow Bond Method..............................67
CERCLA.............................................45
Certificates........................................8
Class...............................................9
Closed-End Loans...................................14
Code 12
Collection Account.................................26
Contingent Payment Regulations.....................56
Custodian..........................................33
Debt Securities....................................55
Deleted Primary Asset..............................35
Depositor...........................................8
Depositor Securities...............................53
Distribution Account................................9
Distribution Date...................................9
Eligible Investments...............................22
Enhancement....................................13, 22
ERISA..............................................80
Escrow Account.....................................26
Events of Default..............................37, 38
FASIT..............................................54
FASIT Qualification Test...........................77
FASIT Securities...................................76
FHA 17
Final Mark-to-Market Regulations...................64
Final Scheduled Distribution Date..................11
Holder..............................................9
Home Improvement Contracts.....................10, 16
Home Improvements..............................10, 16
HUD.............................................. 17
Indenture...........................................8
Installment Sales Contract.........................52
Insurance Proceeds.................................27
IRS 56
Liquidation Proceeds...............................27
Loans..............................................10
Mortgage...........................................33
Mortgage Loans.....................................10
New Regulations....................................68
Nonresidents.......................................69
Notes...............................................8
Obligations:.......................................84
OID.............................................. 55
OID Regulations....................................55
Parties in Interest................................80
Pass-Through Securities............................65
Pay-Through Security...............................57
Plan Asset Regulation..............................80
Plans..............................................80
Pool Insurance Policy..............................23
Pooling and Servicing Agreement.....................8
Pre-Funded Amount..................................22
Pre-Funding Account................................22
Pre-Funding Period.................................22
Prepayment Assumption..............................57
Primary Assets......................................9
Private Securities.................................10
Property...........................................16
PS Agreement.......................................19
PS Servicer........................................20
PS Sponsor.........................................20
PS Trustee.........................................20
PTCE 81
PTCE 83-1..........................................82
Qualifying Substitute Primary Asset................35
Rating Agency...................................9, 86
Ratio Strip Securities.............................66
Regular Interest Securities........................55
REMIC..........................................12, 54
REO Property.......................................13
Reserve Fund....................................9, 24
Residual Interest Security.........................62
Revolving Credit Line Loans........................14
Revolving Mortgage Loans...........................14
Scheduled Payments.................................26
Securities..........................................8
Servicing Fee..................................27, 65
Short-Term Note....................................70
Single Family Property.............................15
Single Family Securities...........................82
Special Redemption Date............................11
Specified Funding Limit............................84
Specified Funding Period...........................84
Stripped Securities................................65
Tax Counsel........................................54
TIN 68
Trust Agreement.................................8, 14
Trust Fund..........................................8
Trustee.............................................8
U.S. Person........................................54
UCC 50
Underlying Loans...............................10, 19 VA 17
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.*
The following table sets forth the estimated expenses to be incurred in
connection with the offering of the Securities, other than underwriting
discounts and commissions:
<TABLE>
<CAPTION>
<S> <C>
SEC Registration Fee............................................................ $ 556,000**
Trustee's Fees and Expenses..................................................... 95,000
Printing and Engraving.......................................................... 237,000
Legal Fees and Expenses......................................................... 713,000
Blue Sky Fees................................................................... 116,000
Accounting Fees and Expenses.................................................... 238,000
Rating Agency Fees.............................................................. 578,000
Miscellaneous................................................................... 116,000
Total........................................................................... $2,649,000
</TABLE>
- ------------------------
* All amounts, except the SEC Registration Fee, are estimates of aggregate
expenses incurred or to be incurred in connection with the issuance and
distribution of Securities in an aggregate principal amount assumed for these
purposes to be equal to $2,377,230,000 of Securities registered hereby.
** This amount relates to the additional $2,000,000,000 registered hereby.
The remaining $377,230,000 of Asset Backed Securities relates to Registration
Statement No. 333-9532, and the registration fee with respect thereto has been
previously paid.
Item 15. Indemnification of Directors and Officers.
Article TWELFTH of the Certificate of Incorporation of the Depositor
provides for the indemnification of any person who is or was an officer or
director of the Depositor with respect to actions taken or omitted by such
person in any capacity in which such person serves or served the Depositor, to
the full extent authorized or permitted by Section 145 of the Delaware General
Corporation Law.
Under the proposed form of Underwriting Agreement, the Underwriters are
obligated under certain circumstances to indemnify certain controlling persons
of the Depositor against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Act").
Section 145 of the Delaware General Corporation Law provides, in
substance, that Delaware corporations shall have the power, under specified
circumstances, to indemnify their directors, officers, employees and agents in
connection with actions, suits or proceedings brought against them by a third
party or in the right of the corporation, by reason of the fact that they are
or were such directors, officers, employees or agents, against expenses
incurred in any such action, suit or proceeding.
Under the proposed form of Pooling and Servicing Agreement, no director,
officer, employee or agent of the Depositor is liable to the Trust Fund or the
Certificateholders, except for such person's own willful misfeasance, bad
faith, gross negligence in the performance of duties or reckless disregard of
obligations and duties.
Under the proposed form of Purchase Agreement, under certain
circumstances, the directors, officers and controlling persons of the
Depositor are entitled to be indemnified by the seller thereunder against any
loss, claim, damage or liability or action in respect thereof to which any of
them may become subject, under the Securities Act of 1933, as amended, or
otherwise.
Under the proposed form of Sale and Servicing Agreement, the Depositor is
entitled to be indemnified by the servicer thereunder against any costs,
expenses, losses, claims, damages and liabilities to the extent arising from
the negligence, willful misfeasance or bad faith of the servicer or reckless
disregard of its obligations.
Item 16. Exhibits.
(a) Financial Statements:
None.
(b) Exhibits:
1.1 -- Form of Underwriting Agreement.*
4.1 -- Form of Indenture.*
4.2 -- Form of Pooling and Servicing Agreement.*
4.3 -- Form of Purchase Agreement.*
4.4 -- Form of Trust Agreement.*
5.1 -- Opinion of Brown & Wood LLp with respect to the
securities being registered.
8.1 -- Opinion of Brown & Wood LLp with respect to tax matters.
10.1 -- Form of Sale and Servicing Agreement.*
23.1 -- Consent of Brown & Wood LLp (included as part of Exhibit
5.1).
23.2 -- Consent of Brown & Wood LLp (included as part of Exhibit
8.1).
24.1 -- Power of Attorney of Directors and Officers of Issuer
(included on signature page).
25.1 -- Statement of Eligibility and Qualification of Trustee.**
- ---------------------
* Incorporated by reference to Registration Statement No. 33-93574.
** To be filed on Form 8-K, as applicable.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933, as amended;
(ii) To reflect in the Prospectus any facts or events
arising after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered that remain unsold at the termination
of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended (and, where
applicable, each filing of an employee benefit plan's annual report pursuant
to Section 15(d) of the Securities Exchange Act of 1934, as amended), that is
incorporated by reference in the registration statement shall be deemed a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933, as amended, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act of 1933, as
amended, and will be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York, on the
21st day of July, 1999.
BEAR STEARNS ASSET BACKED
SECURITIES, INC.
By: /s/ Patricia A. Jehle
-----------------------------------
Patricia A. Jehle
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Patricia Jehle and Samuel L.
Molinaro, Jr. or any of them, his or her true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him or her and
his or her name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or their substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Patricia A. Jehle President, Chief Executive Officer and July 21, 1999
- ------------------------------- Director (Principal Executive Officer)
Patricia A. Jehle
/s/ Samuel L. Molinaro, Jr. Treasurer (Principal Financial and July 21, 1999
- ------------------------------- Accounting Officer)
Samuel L. Molinaro, Jr.
/s/ Thomas F. Marano Director July 21, 1999
- -------------------------------
Thomas F. Marano
/s/ Jeffrey Mayer Director July 21, 1999
- -------------------------------
Jeffrey Mayer
/s/ Juliana C. Johnson Director July 21, 1999
- -------------------------------
Juliana C. Johnson
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
1.1 Form of Underwriting Agreement.*
4.3 Form of Indenture.*
4.4 Form of Pooling and Servicing Agreement.*
4.3 Form of Purchase Agreement.*
4.4 Form of Trust Agreement.*
5.1 Opinion of Brown & Wood LLP with respect to the securities being
registered.
8.1 Opinion of Brown & Wood LLP with respect to tax matters.
10.1 Form of Sale and Servicing Agreement.*
23.3 Consent of Brown & Wood LLP (included as part of Exhibit 5.1).
23.4 Consent of Brown & Wood LLP (included as part of Exhibit 8.1).
24.1 Power of Attorney of Directors and Officers of Issuer (included on
signature page).
25.1 Statement of Eligibility and Qualification of Trustee.**
- ----------------------
* Incorporated by reference to Registration Statement No. 33-93574.
** To be filed on Form 8-K, as applicable.
EXHIBIT 5.1
July 23, 1999
Bear Stearns Asset Backed Securities, Inc.
245 Park Avenue
New York, New York 10167
Re: Bear Stearns Asset Backed Securities, Inc.
Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as counsel for Bear Stearns Asset Backed Securities,
Inc., a Delaware corporation (the "Company"), in connection with the
preparation of the registration statement on Form S-3 (the "Registration
Statement") relating to the Securities (defined below) and with the
authorization and issuance from time to time in one or more series (each, a
"Series") of up to $2,377,230,000 aggregate principal amount of asset-backed
securities (the "Securities"). As set forth in the Registration Statement,
each Series of Securities will be issued under and pursuant to the conditions
of a separate pooling and servicing agreement, master pooling and servicing
agreement, pooling agreement, trust agreement or indenture (each, an
"Agreement") among the Company, a trustee (the "Trustee") and, where
applicable, a servicer (the "Servicer"), each to be identified in the
prospectus supplement for such Series of Securities.
We have examined copies of the Company's Certificate of
Incorporation, the Company's By-laws and forms of each Agreement, as
incorporated by reference as exhibits to the Registration Statement, and the
forms of Securities included in any Agreement so incorporated by reference in
the Registration Statement and such other records, documents and statutes as
we have deemed necessary for purposes of this opinion.
Based upon the foregoing, we are of the opinion that:
1. When any Agreement relating to a Series of Securities has been
duly authorized by all necessary action on the part of the Company and has
been duly executed and delivered by the Company, the Servicer, if any, the
Trustee and any other party thereto, such Agreement will constitute a legal,
valid and binding agreement of the Company, enforceable against the Company in
accordance with its terms, except as enforcement thereof may be limited by
bankruptcy, insolvency or other laws relating to or affecting creditors'
rights generally or by general equity principles.
2. When a Series of Securities has been duly authorized by all
necessary action on the part of the Company (subject to the terms thereof
being otherwise in compliance with applicable law at such time), duly executed
and authenticated by the Trustee for such Series in accordance with the terms
of the related Agreement and issued and delivered against payment therefor as
described in the Registration Statement, such Series of Securities will be
legally issued, fully paid and nonassessable, and the holders thereof will be
entitled to the benefits of the related Agreement.
In rendering the foregoing opinions, we express no opinion as to the
laws of any jurisdiction other than the laws of the State of New York
(excluding choice of law principles therein) and the federal laws of the
United States of America.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the references to this firm under the heading
"Legal Matters" in each Prospectus forming a part of the Registration
Statement, without admitting that we are "experts" within the meaning of the
Securities Act of 1933, as amended, or the Rules and Regulations of the
Commission issued thereunder, with respect to any part of the Registration
Statement, including this exhibit.
Very truly yours,
/s/ Brown & Wood LLP
EXHIBIT 8.1
July 23, 1999
Bear Stearns Asset Backed Securities, Inc.
245 Park Avenue
New York, New York 10167
Re: Bear Stearns Asset Backed Securities, Inc.
Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as special tax counsel for Bear Stearns Asset Backed
Securities, Inc., a Delaware corporation (the "Company"), in connection with
the preparation of the registration statement on Form S-3 (the "Registration
Statement") relating to the Securities (defined below) and with the
authorization and issuance from time to time in one or more series (each, a
"Series") of up to $2,377,230,000 aggregate principal amount of asset-backed
securities (the "Securities"). The Registration Statement is being filed with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended. As set forth in the Registration Statement, each Series of Securities
will be issued under and pursuant to the conditions of a separate pooling and
servicing agreement, master pooling and servicing agreement, pooling
agreement, trust agreement or indenture (each an "Agreement") among the
Company, a trustee (the "Trustee") and, where applicable, a servicer (the
"Servicer"), each to be identified in the prospectus supplement for such
Series of Securities.
We have examined the prospectus and forms of prospectus supplement
related thereto contained in the Registration Statement (each, a "Prospectus")
and such other documents, records and instruments as we have deemed necessary
for the purposes of this opinion.
In arriving at the opinion expressed below, we have assumed that each
Agreement will be duly authorized by all necessary corporate action on the
part of the Company, the Trustee, the Servicer (where applicable) and any
other party thereto for such Series of Securities and will be duly executed
and delivered by the Company, the Trustee, the Servicer and any other party
thereto substantially in the applicable form incorporated by reference as an
exhibit to the Registration Statement, that each Series of Securities will be
duly executed and delivered in substantially the forms set forth in the
related Agreement incorporated by reference as an exhibit to the Registration
Statement, and that Securities will be sold as described in the Registration
Statement.
As special tax counsel to the Company, we have advised the Company
with respect to certain material federal income tax aspects of the proposed
issuance of each Series of Securities pursuant to the related Agreement. Such
advice has formed the basis for the description of selected federal income tax
consequences for holders of such Securities that appear under the heading
"Certain Federal Income Tax Considerations" in each Prospectus forming a part
of the Registration Statement. Such description does not purport to discuss
all possible federal income tax ramifications of the proposed issuance of the
Securities, but with respect to those federal income tax consequences
described therein, such description is accurate in all material respects.
This opinion is based on the facts and circumstances set forth in the
Registration Statement and in the other documents reviewed by us. Our opinion
as to the matters set forth herein could change with respect to a particular
Series of Securities as a result of changes in facts or circumstances, changes
in the terms of the documents reviewed by us, or changes in the law subsequent
to the date hereof. Because the Prospectuses contemplate Series of Securities
with numerous different characteristics, you should be aware that the
particular characteristics of each Series of Securities must be considered in
determining the applicability of this opinion to a particular Series of
Securities.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the references to this firm under the heading
"Certain Federal Income Tax Considerations" in each Prospectus forming a part
of the Registration Statement, without admitting that we are "experts" within
the meaning of the 1933 Act or the Rules and Regulations of the Commission
issued thereunder, with respect to any part of the Registration Statement,
including this exhibit.
Very truly yours,
/s/ Brown & Wood LLP
