10-Q 1 f10q_111402-msc.txt 4 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q |X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarter ended September 30, 2002 |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 33-83524 MERIT SECURITIES CORPORATION (Exact name of registrant as specified in its charter) Virginia 54-1736551 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 4551 Cox Road, Suite 300, Glen Allen, Virginia 23060 (Address of principal executive offices) (Zip Code)

(804) 217-5800 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. |_|Yes |X|No As of October 31, 2002, the latest practicable date, there were 1,000 shares of Merit Securities Corporation common stock outstanding. The registrant meets the conditions set forth in General Instructions H (1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format. ================================================================================ MERIT SECURITIES CORPORATION FORM 10-Q Index Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets at September 30, 2002 and December 31, 2001 (unaudited).......................................................1 Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2002 and 2001(as restated) (unaudited).............................2 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001 (as restated) (unaudited)..................................3 Notes to Unaudited Condensed Consolidated Financial Statements..............................4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...............................................6 Item 3. Quantitative and Qualitative Disclosures about Market Risk..................................8 PART II. OTHER INFORMATION Item 1. Legal Proceedings..........................................................................10 Item 5. Other Information..........................................................................10 Item 6. Exhibits and Reports on Form 8-K...........................................................10 SIGNATURES .......................................................................................13

PART I. FINANCIAL INFORMATION Item 1. Financial Statements MERIT SECURITIES CORPORATION Condensed CONSOLIDATED BALANCE SHEETS (UNAUDITED) (amounts in thousands except share data)

See notes to unaudited condensed consolidated financial statements. MERIT SECURITIES CORPORATION Condensed CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (amounts in thousands)

See notes to unaudited condensed consolidated financial statements. MERIT SECURITIES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (amounts in thousands)

See notes to unaudited condensed consolidated financial statements. MERIT SECURITIES CORPORATION NOTES TO UNAUDITED Condensed CONSOLIDATED FINANCIAL STATEMENTS September 30, 2002 (amounts in thousands except share data) NOTE 1 -- BASIS OF PRESENTATION The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and notes required by accounting principles generally accepted in the United States of America, hereinafter referred to as "generally accepted accounting principles" for complete financial statements. The financial statements include the accounts of Merit Securities Corporation (the "Company") and its wholly owned subsidiary, Financial Asset Securitization, Inc. (FASI). The Company is a wholly owned, limited-purpose finance subsidiary of Issuer Holding Corporation ("IHC"). IHC was formed on September 4, 1996 to acquire all of the outstanding stock of the Company and certain other affiliates of Dynex Capital, Inc. ("Dynex"). IHC is a wholly owned subsidiary of Dynex. Dynex has elected to be treated as a real estate investment trust ("REIT") for federal income tax purposes under the Internal Revenue Code of 1986. Accordingly, the Company is not subject to federal income tax. The Company was organized to facilitate the securitization of loans through the issuance and sale of collateralized bonds (the "Bonds"). All significant inter-company balances and transactions have been eliminated in the consolidation of the Company. In the opinion of management, all significant adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the condensed consolidated financial statements have been included. However, the financial statements presented are unaudited. Operating results for the nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. On March 31, 2002, the Company purchased from Dynex Capital, Inc., its parent, 10,000 shares of common stock, representing 100% ownership, of FASI. Certain reclassifications have been made to the financial statements for 2001 to conform to the presentation for 2002. NOTE 2 -- COLLATERAL FOR COLLATERALIZED BONDS Collateral for collateralized bonds consists of loans and debt securities backed primarily by adjustable-rate and fixed-rate mortgage loans secured by first liens on single family residential housing and manufactured housing installment loans secured by a UCC filing. Loans are reported at amortized cost with established provisions for estimated losses. Debt securities are available for sale and are, therefore, marked to market according to SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities." All collateral for collateralized bonds is pledged to secure repayment of the related collateralized bonds. All principal and interest (less servicing-related fees) on the collateral is remitted to a trustee and is available for payment on the collateralized bonds. The Company's exposure to loss on collateral for collateralized bonds is generally limited to the amount of collateral pledged in excess of the related collateralized bonds issued, as the collateralized bonds issued are non-recourse to the Company. The collateral for collateralized bonds can be sold by the Company, but only subject to the lien of the collateralized bond indenture. The following table summarizes the components of collateral for collateralized bonds as of September 30, 2002 and December 31, 2001. Debt securities pledged as collateral for collateralized bonds are considered available for sale, and are therefore recorded at fair value.

The following table summarizes the amortized cost basis, gross unrealized gains and losses and estimated fair value of debt securities pledged as collateral for collateralized bonds as of September 30, 2002:

NOTE 3 -- FAIR VALUE The Company estimates fair value for its financial instruments, primarily collateral for collateralized bonds, by calculating the present value of the projected net cash flows of the instruments using estimated market discount rates, prepayment rates and credit loss assumptions. Discount rates used are those management believes would be used by willing buyers of these financial instruments at prevailing market rates. The discount rate used in the determination of fair value of the collateral for collateralized bonds at both September 30, 2002 and December 31, 2001 was 16%. Prepayment rate assumptions at September 30, 2002, and December 31, 2001, were generally at a "constant prepayment rate," or CPR. The CPR for collateral for collateralized bonds consisting of single-family mortgage loans, ranged from 35%-45% for 2002 and 35%-60% for 2001. The CPR for collateral for collateralized bonds consisting of manufactured housing loans, ranged from 11%-12% for 2002 and 9%-10% for 2001. CPR assumptions for each year are based in part on the actual prepayment rates experienced for the prior six-month period and in part on management's estimate of future prepayment activity. Credit loss assumptions vary depending on the collateral pledged, and are based in part on the actual credit losses experienced for the prior six-month period and in part on management's estimate of future credit losses based on the losses experienced on similar loans in the marketplace. The cash flows for the collateral for collateralized bonds were projected to the estimated date that the security could be called and retired by the Company if there is economic value to the Company in calling and retiring the security. Variations in market discount rates, prepayment rates and credit loss assumptions may materially impact the resulting fair values of the Company's financial instruments. Since the fair value of the Company's financial instruments is based on estimates, actual gains and losses recognized may differ from those estimates recorded in the unaudited condensed consolidated financial statements. NOTE 4 - ALLOWANCE FOR LOSSES The following table summarizes the activity for the allowance for losses on collateral for collateralized bonds and loans for the nine months ended September 30, 2002. ------------------------------------------------------ ----------------- 2002 ------------------------------------------------------ ----------------- Beginning balance $ 15,364 Provision for losses 16,120 Losses charged-off, net of recoveries (16,467) ------------------------------------------------------ ----------------- Ending balance $ 15,017 ------------------------------------------------------ ----------------- The Company has limited exposure to credit risk retained on loans, which it has securitized through the issuance of collateralized bonds. The aggregate loss exposure is generally limited to the amount of collateral in excess of the related investment-grade collateralized bonds issued (commonly referred to as "overcollateralization"), excluding price premiums and discounts and hedge gains and losses. The allowance for losses is included in collateral for collateralized bonds in the accompanying balance sheets. NOTE 5 -- RESTATEMENT OF FINANCIAL STATEMENTS Subsequent to the issuance of its financial statements for the three and nine month periods ended September 30, 2001, the Company determined that the assets previously reported as debt securities subject to the requirements of SFAS No.115, " Accounting for Certain Investments in Debt and Equity Securities" were, in fact, collateralized borrowings, where the collateral being pledged as securities were loans that should have been accounted for under the requirements of SFAS No. 5, "Accounting for Contingencies" or SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." As a result, the accompanying condensed consolidated financial statements for the three and nine month periods ended September 30, 2001 have been restated from the amounts previously reported to correct the accounting for these investments. A summary of the significant effects of the restatement is as follows:

This restatement had no effect on income (loss) before extraordinary items or net income (loss). Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations As discussed in Note 5 to the condensed consolidated financial statements included in Item 1, the Company has restated its financial statements for the three and nine month periods ended September 30, 2001. The following management discussion and analysis takes into account the effects of the restatement. The Company was organized to facilitate the securitization of loans through the issuance and sale of collateralized bonds (the "Bonds"). The Bonds will be secured primarily by: (i) mortgage loans secured by first or second liens on residential property, (ii) Federal National Mortgage Association Mortgage-Backed Certificates, (iii) Federal Home Loan Mortgage Corporation Mortgage-Backed Certificates, (iv) Government National Mortgage Association Mortgage-Backed Certificates, (v) other mortgage pass-through certificates or mortgage-collateralized obligations. In the future, the Company may also securitize other types of loans. After payment of the expenses of an offering and certain administrative expenses, the net proceeds from an offering of Bonds will be used to purchase Collateral from IHC or various third parties. IHC can be expected to use the proceeds to reduce indebtedness incurred to obtain such loans or to acquire additional Collateral. After the issuance of a series of Bonds, the Company may sell the Collateral securing that series of Bonds, subject to the lien of the Bonds. FINANCIAL CONDITION

Collateral for collateralized bonds As of December 31, 2001, the Company had 5 series of collateralized bonds outstanding. As of September 30, 2002, the Company had 4 series of collateralized bonds outstanding. The collateral for collateralized bonds decreased to $1.4 billion at September 30, 2002 compared to $1.6 billion at December 31, 2001. This decrease of $206 million is primarily the result of $324 million in paydowns on the collateral, impairment losses of $22 million, and $12 million of impaired loans reclassified to "Loans". These were partially offset by $155 million of additional collateral acquired from IHC in April 2002. Non-recourse debt - collateralized bonds Collateralized bonds decreased to $1.37 billion at September 30, 2002 from $1.54 billion at December 31, 2001 as a result of $345.5 million in paydowns during the nine months ended September 30, 2002 and the call and retirement of $430.2 million of bonds. These were partially offset by the issuance of $605.3 million in bonds in a securitization completed in April 2002. Shareholder's Equity Shareholder's equity decreased to $64.6 million at September 30, 2002 from $96.0 million at December 31, 2001. This decrease was primarily the result of an increase of $5.3 million in net unrealized loss on investments available-for-sale, a $6.0 receivable from affiliates and a $24.1 million capital distribution to IHC during the period for the nine months ended September 30, 2002, offset by net income of $4.2 million. RESULTS OF OPERATIONS

Interest income on the collateral for collateralized bonds decreased to $25.7 million from $34.6 million for the three month periods ended September 30, 2002 and 2001, respectively. Interest income on the collateral for collateralized bonds decreased to $80.5 million for the nine months ended September 30, 2002 from $119.3 million for the same period in 2001. These decreases were primarily a result of prepayments and paydowns on principal and lower interest rates between the respective periods. Interest expense on collateralized bonds decreased to $16.2 million from $24.8 million for the three month periods ended September 30, 2002 and 2001, respectively. Interest expense on collateralized bonds decreased to $50.5 million for the nine months ended September 30, 2002 from $90.3 million for the nine months ended September 30, 2001. These decreases resulted almost equally from the decline in collateralized bonds due to prepayments and paydowns on the related collateral for collateralized bonds coupled with an overall decline in the cost of funds on the collateralized bonds. Provision for losses decreased to $5.4 million from $12.2 million for the three month periods ended September 30, 2002 and 2001, respectively. Provision for losses decreased to $16.6 million for the nine month period ended September 30, 2002 from $21.3 million for the same period in 2001. Provision for losses decreased because, in 2001, a large adjustment to reserve for losses on the Company's manufactured housing loan portfolio was recorded. In both years the provision is primarily to reserve for probable losses on various loan pools pledged as collateral for collateralized bonds where the Company has retained credit risk, principally the Company's investment in manufactured housing loan pools. Net interest margin increased to $4.1 million from $(2.4) million for the three-month periods ended September 30, 2002 and 2001, respectively. Net interest margin increased to $13.4 million from $7.7 million for the nine-month periods ended September 30, 2002 and 2001, respectively. These increases were primarily a result of a decrease in provision for losses and reduced borrowing costs on collateralized bonds outstanding partially offset by a decline in interest earning assets during these periods. Credit Exposures With collateralized bond structures, the Company retains credit risk relative to the amount of over-collateralization required in conjunction with the bond issuance. Losses are generally first applied to the over-collateralized amount, or in some instances surplus cash and then the over-collateralized amount, with any losses in excess of that amount borne by the bond insurer or the holders of the collateralized bonds. The Company only incurs credit losses to the extent that losses are incurred in the repossession, foreclosure and sale of the underlying collateral. Such losses generally equal the excess of the principal amount outstanding, less any proceeds from mortgage or hazard insurance, over the liquidation value of the collateral. To compensate the Company for retaining this loss exposure, the Company generally receives an excess yield on the collateralized loans relative to the yield on the collateralized bonds. At September 30, 2002, the Company retained $105 million in aggregate principal amount of over-collateralization. The Company had reserves, or otherwise had provided coverage for credit losses in the amount of $14.9 million at September 30, 2002. During the first nine months of 2002, the Company provided for additional reserves of $16.6 million and incurred credit losses of $16.8 million. Other forms of credit enhancement that benefit the Company, based upon the performance of the underlying loans, may provide additional protection against losses. These additional protections include loss reimbursement guarantees with a remaining balance of $30.2 and a remaining deductible aggregating $1.5 million on $100 million of securitized single family mortgage loans which are subject to such reimbursement agreements and $305.7 million of securitized single family mortgage loans which are subject to various mortgage pool insurance policies whereby losses would need to exceed the remaining stop loss of at least 42% on such policies before the Company would incur losses. Other Matters At September 30, 2002, the Company had securities of approximately $308.6 million remaining for issuance under a registration statement filed with the Securities and Exchange Commission. The Company anticipates issuing additional Bonds in the future. Item 3. - Quantitative and Qualitative Disclosures about Market Risk Market risk generally represents the risk of loss that may result from the potential change in the value of a financial instrument due to fluctuations in interest and foreign exchange rates and in equity and commodity prices. Market risk is inherent to both derivative and non-derivative financial instruments, and accordingly, the scope of the Company's market risk management extends beyond derivatives to include all market risk sensitive financial instruments. Net interest income comprises the primary component of the Company's earnings. As a result, the Company is subject to risk resulting from interest rate fluctuations to the extent that there is a gap between the amount of the Company's interest-earning assets and the amount of interest-bearing liabilities that are prepaid, mature or re-price within specified periods. The Company and IHC monitor the aggregate cash flow, projected net yield and market value of the collateral for collateralized bonds under various interest rate and prepayment assumptions. Approximately $555 million of the Company's collateral for collateralized bonds as of September 30, 2002, are comprised of loans or securities that have coupon rates which adjust over time (subject to certain periodic and lifetime limitations) in conjunction with changes in short-term interest rates. Approximately 74% and 15% of these ARM loans underlying the Company's collateral for collateralized bonds are indexed to and reset based upon the level of six-month LIBOR and one-year CMT, respectively. Generally, during a period of rising short-term interest rates, the Company's net interest spread earned on its collateralized bonds will decrease. The decrease of the net interest spread results from (i) the lag in resets of the ARM loans underlying the collateral for collateralized bonds relative to the rate resets on the collateralized bonds and (ii) rate resets on the ARM loans which are generally limited to 1% every six months or 2% every twelve months and subject to lifetime caps, while the associated borrowings have no such limitation. As short-term interest rates stabilize and the ARM loans reset, the net interest margin may be restored to its former level as the yields on the ARM loans adjust to market conditions. Conversely, net interest margin may increase following a fall in short-term interest rates. This increase may be temporary as the yields on the ARM loans adjust to the new market conditions after a lag period. In each case, however, the Company expects that the increase or decrease in the net interest spread due to changes in the short-term interest rates to be temporary. The net interest spread may also be increased or decreased by the proceeds or costs of interest rate swap and cap agreements, to the extent that the Company has entered into such agreements. The remaining portion of the Company's collateral for collateralized bonds as of September 30, 2002, approximately $894 million, is comprised of loans that have coupon rates that are fixed. The Company has limited its interest rate risk on such collateral primarily through the issuance of fixed-rate collateralized bonds. Overall, the Company's interest rate risk is primarily related to the rate of change in short-term interest rates and to the level of short-term interest rates. The Company focuses on the sensitivity of its cash flow, and measures such sensitivity to changes in interest rates. Changes in interest rates are defined as instantaneous, parallel, and sustained interest rate movements in 100 basis point increments. The Company estimates its net interest margin cash flow for the next twenty-four months assuming no changes in interest rates from those at period end. Once the base case has been estimated, cash flows are projected for each of the defined interest rate scenarios. Those scenario results are then compared against the base case to determine the estimated change to net interest income. The following table summarizes the Company's net interest margin cash flow sensitivity analysis as of September 30, 2002. This analysis represents management's estimate of the percentage change in net interest margin cash flow given a parallel shift in interest rates. The "Base" case represents the interest rate environment as it existed as of September 30, 2002. The analysis is heavily dependent upon the assumptions used in the model. The effect of changes in future interest rates, the shape of the yield curve or the mix of assets and liabilities may cause actual results to differ from the modeled results. In addition, certain financial instruments provide a degree of "optionality." The most significant option affecting the Company's portfolio is the borrowers' option to prepay the loans. The model applies prepayment rate assumptions representing management's estimate of prepayment activity on a projected basis for each collateral pool in the investment portfolio. The model applies the same prepayment rate assumptions for all five cases indicated below. The extent to which borrowers utilize the ability to exercise their option may cause actual results to significantly differ from the analysis. ------------------------- -------------------- Basis Point % Change in Net Increase (Decrease) Interest Margin in Interest Rates From Base Case ------------------------- -------------------- +200 (15.7)% +100 (8.0)% Base - -100 10.5% -200 23.1% ------------------------ --------------------- PART II. OTHER INFORMATION Item 1. Legal Proceedings: None Item 4. Controls And Procedures (a) Evaluation of disclosure controls and procedures. As required by Rule 13a-15 under the Exchange Act, within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"), the Company carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of the Company's management. Based upon that evaluation, the Company's management concluded that the Company's disclosure controls and procedures are effective. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Company's reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the Company's reports filed under the Exchange Act is accumulated and communicated to management, including the Company's management, as appropriate, to allow timely decisions regarding required disclosures. (b) Changes in internal controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's internal controls subsequent to the Evaluation Date, nor any significant deficiencies or material weaknesses in such internal controls requiring corrective actions. Item 5. Other Information: None Item 6. Exhibits and Reports on Form 8-K: (a) Exhibits 3.1 Articles of Incorporation of the Registrant (Incorporated herein by reference to the Exhibits to Registrant's Registration Statement No. 33-83524 on Form S-3 filed August 31, 1994). 3.2 Bylaws of the Registrant (Incorporated herein by reference to the Exhibits to Registrant's Registration Statement No. 33-83524 on Form S-3 filed August 31, 1994). 3.3 Amended and Restated Articles of Incorporation of the Registrant, effective April 19, 1995 (Incorporated herein by reference to Exhibit to the Registrant's Current Report on Form 8-K, filed April 21, 1995). 4.1 Indenture between Registrant and Trustee, dated as of August 1, 1994 (Incorporated herein by reference to the Exhibits to Registrant's Registration Statement No. 33-83524 on Form S-3 filed August 31, 1994). 4.2 Form of Supplement Indenture between Registrant and Trustee (Incorporated herein by reference to the Exhibits to Registrant's Registration Statement No. 33-83524 on Form S-3 filed August 31, 1994). 4.3 Copy of the Indenture, dated as of November 1, 1994, by and between the Registrant and Texas Commerce Bank National Association, as Trustee (Incorporated herein by reference to Exhibit to the Registrant's Current Report on Form 8-K, filed December 19, 1994). 4.4 Copy of the Series 4 Indenture Supplement, dated as of June 1, 1995, by and between the Registrant and Texas Commerce Bank National Association, as Trustee (including schedules and exhibits) (Incorporated herein by reference to Exhibit to the Registrant's Current Report on Form 8-K, filed July 10, 1995). 4.5 Copy of the Series 10 Indenture Supplement, dated as of December 1, 1997, by and between the Registrant and Texas Commerce Bank National Association, as Trustee (related schedules and exhibits available upon request of the Trustee). (Incorporated herein by reference to Exhibit of Registrant's Current Report on Form 8-K, filed January 6, 1998). 4.6 Copy of the Series 11 Indenture Supplement, dated as of March 1, 1998, by and between the Registrant and Texas Commerce Bank National Association, as Trustee (related schedules and exhibits available upon request of the Trustee). (Incorporated herein by reference to Exhibit of Registrant's Current Report on Form 8-K, filed June 12, 1998). 4.7 Copy of the Series 12 Indenture Supplement, dated as of March 1, 1999, by and between the Registrant and Texas Commerce Bank National Association, as Trustee (related schedules and exhibits available upon request of the Trustee). (Incorporated herein by reference to Exhibit of Registrant's Current Report on Form 8-K, filed April 12, 1999). 4.8 Copy of the Series 13 Indenture Supplement, dated as of August 1, 1999, by and between the Registrant and Texas Commerce Bank National Association, as Trustee (related schedules and exhibits available upon request of the Trustee). (Incorporated herein by reference to Exhibit of Registrant's Current Report on Form 8-K, filed September 13, 1999). 4.9 Copy of the Series 14 Indenture Supplement, dated as of November 1, 1999, by and between the Registrant and Texas Commerce Bank National Association, as Trustee (related schedules and exhibits available upon request of the Trustee). (Incorporated herein by reference to Exhibit of Registrant's Current Report on Form 8-K, filed November 12, 1999). 99.1 Standard Provisions to Servicing Agreement (Incorporated herein by reference to the Exhibits to Registrant's Registration Statement No. 33-83524 on Form S-3 filed August 31, 1994). 99.2 Form of Servicing Agreement (Incorporated herein by reference to the Exhibits to Registrant's Registration Statement No. 33-83524 on Form S-3 filed August 31, 1994). 99.3 Standard Terms to Master Servicing Agreement (Incorporated herein by reference to the Exhibits to Registrant's Registration Statement No. 33-83524 on Form S-3 filed August 31, 1994). 99.4 Form of Master Servicing Agreement (Incorporated herein by reference to the Exhibits to Registrant's Registration Statement No. 33-83524 on Form S-3 filed August 31, 1994). 99.5 Form of Prospectus Supplement of Bonds secured by adjustable-rate mortgage loans (Incorporated herein by reference to Exhibits to Registrant's Pre-Effective Amendment No. 4 to Registration Statement No. 33-83524 on Form S-3 filed December 5, 1994). 99.6 Form of Financial Guaranty Assurance Policy (Incorporated herein by reference to the Exhibits to Registrant's Registration Statement No. 33-83524 on Form S-3 filed August 31, 1994). 99.7 Form of GEMICO Mortgage Pool Insurance Policy (Incorporated herein by reference to the Exhibits to Registrant's Registration Statement No. 33-83524 on Form S-3 filed August 31, 1994). 99.8 Form of PMI Mortgage Insurance Co. Pool Insurance Policy (Incorporated herein by reference to the Exhibits to Registrant's Registration Statement No. 33-83524 on Form S-3 filed August 31, 1994). 99.9 Form of Prospectus Supplement of Bonds secured by fixed-rate mortgage loans (Incorporated herein by reference to Exhibits to Registrant's Pre-Effective Amendment No. 4 to Registration Statement No. 33-83524 on Form S-3 filed December 5, 1994). 99.10 Copy of the Saxon Mortgage Funding Corporation Servicing Guide for Credit Sensitive Loans, February 1, 1995 Edition (Incorporated herein by reference to Exhibit to the Registrant's Current Report on Form 8-K, filed March 8, 1995). 99.11 Copy of Financial Guaranty Insurance Policy No. 50364-N issued by Financial Guaranty Assurance Inc., dated April 7, 1995, with respect to the Series 3 Bonds (Incorporated herein by reference to Exhibit to the Registrant's Current Report on Form 8-K, filed April 21, 1995). 99.12 Copy of Financial Guaranty Insurance Policy No. 50382-N issued by Financial Guaranty Assurance Inc., dated June 29, 1995, with respect to the Series 4 Bonds (Incorporated herein by reference to Exhibit to the Registrant's Current Report on Form 8-K, filed July 10, 1995). 99.13 Copy of the Standard Terms to Master Servicing Agreement, June 1, 1995 Edition (Incorporated herein by reference to Exhibit to the Registrant's Current Report on Form 8-K, filed July 10, 1995). 99.14 Copy of Financial Guaranty Insurance Policy No. 19804 issued by MBIA Insurance Corporation (Incorporated herein by reference to Exhibit to the Registrant's Current Report on Form 8-K, filed November 15, 1995). 99.15 Copy of Financial Guaranty Insurance Policy No. 20596 issued by MBIA Insurance Corporation (Incorporated herein by reference to Exhibit to the Registrant's Current Report on Form 8-K, filed March 21, 1996). 99.16 Copy of Financial Guaranty Insurance Policy No. 21296 issued by MBIA Insurance Corporation (Incorporated herein by reference to Exhibit to the Registrant's Current Report on Form 8-K, filed June 19, 1996). 99.17 Copy of Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Incorporated herein by reference to Exhibit to the Registrant's Current Report on Form 8-K, filed August 28, 2002). 99.18 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.19 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K Current report on Form 8-K as filed with the Commission on August 28, 2002, regarding Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Item 9 Regulation FD disclosure for in connection with the Quarterly Report of Merit Securities Corporation on Form 10-Q for the quarter ended June 30, 2002. Current report on Form 8-K as filed with the Commission on September 19, 2002, regarding Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Item 9 Regulation FD disclosure for in connection with the Annual Report of Merit Securities Corporation on Form 10-K/A for the fiscal year ended December 31, 2001. Current report on Form 8-K as filed with the Commission on October 4, 2002, regarding Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Item 9 Regulation FD disclosure for in connection with the Quarterly Report of Merit Securities Corporation on Form 10-Q/A for the quarter ended March 31, 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MERIT SECURITIES CORPORATION By: /s/ Stephen J. Benedetti ----------------------------------------- Stephen J. Benedetti President (Principal Executive Officer, Principal Financial Officer) /s/ Kevin J. Sciuk ----------------------------------------- Kevin J. Sciuk Controller (Principal Accounting Officer) Dated: November 14, 2002 CERTIFICATION PURSUANT TO 17 CFR 240.13a-14 PROMULGATED UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Stephen J. Benedetti, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Merit Securities Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Stephen J. Benedetti ----------------------------- Stephen J. Benedetti Principal Executive Officer CERTIFICATION PURSUANT TO 17 CFR 240.13a-14 PROMULGATED UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Stephen J. Benedetti, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Merit Securities Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Stephen J. Benedetti Stephen J. Benedetti Chief Financial Officer Exhibit 99.18 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Merit Securities Corporation (the "Company") on Form 10-Q for the quarter ending September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Stephen J. Benedetti, the Principal Executive Officer of the Company, certify, pursuant to and for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Stephen J. Benedetti Stephen J. Benedetti Principal Executive Officer November 14, 2002 Exhibit 99.19 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Merit Securities Corporation (the "Company") on Form 10-Q for the quarter ending September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Stephen J. Benedetti, the Chief Financial Officer of the Company, certify, pursuant to and for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Stephen J. Benedetti Stephen J. Benedetti Chief Financial Officer November 14, 2002

MERIT SECURITIES CORP 10-Q